# Presentation: 823967

## Financial Measures Training for the Annual Self Assessments (ASAs)

- Office of Business Systems and Finance
- Office of Research Services
- National Institutes of Health
- August 2002

## Training Objectives
Unit Cost Measures
Asset Utilization Measures
Questions

- Unit Cost Measures
- Asset Utilization Measures
- Questions

**Agenda**

## Training Objectives

- Understand unit cost and asset utilization measures
- Discuss calculation of unit cost and asset utilization measures

## Financial Perspective in the ASA Template

- The first common measure for the Financial Perspective is analyzing and understanding changes in the unit cost for each Discrete Service in your Service Group.

**Financial Perspective in the ASA Template**

- The second common measure in the Financial Perspective is analyzing actual assets utilized compared to planned asset utilization for each Discrete Service.

## Unit Cost Measures

## Why Care About Unit Costs?  

- Consider this example......
- Spent about $14.00 on gas – was that good?  It depends.
-   9 gallons
- 12 gallons
- Require number of gallons to determine whether high or low price
-   9 gallons @ $1.55 per gallon
- 12 gallons @ $1.15 per gallon
- Number of gallons is the unit of output
- Without knowing the unit cost, customer cannot evaluate the price they are paying

## Change in Total Cost of Services

**Notes:**
The costs for “Collect and dispose of recyclables” are going up 60%.    Does that mean management should beat up on them for costs being out of control?

How do we know?

## Analysis of Change in Total Cost

- How much will be due to change in demand?
- How much will be due to change in cost each time to perform the service?
- ORS will use unit cost to understand why service providers’ total costs are changing
- Due to changes in demand volume?
- Or due to changes in the cost of one unit of service delivery?

**Notes:**
It could be that they are going to recycle 60% more metric tons in 2004.  Or it could be a mix.  The costs may go up some while the tons processed increase also.  The unit of output provides a means to look at one unit – to isolate changes in cost from changes in quantity.

## Unit Cost = Total Cost / Number of Units of Output
“Output” means product and services generated from the consumption of resources
“Total cost” is the sum of all resources (direct and indirect) consumed
Use actual cost data if available, or 
Use cost from the ORS Business Plan
Forecasted costs
Available for FY01, FY02, FY03, FY04

- “Output” means product and services generated from the consumption of resources
- “Total cost” is the sum of all resources (direct and indirect) consumed
- Use actual cost data if available, or
- Use cost from the ORS Business Plan
- Forecasted costs
- Available for FY01, FY02, FY03, FY04

**Calculating Unit Cost Measures**

## Choosing Unit Cost Measures

- “Unit of output” is
- Single quantity regarded as a whole
- A determinate quantity adopted as a standard or basis for comparison
- What constitutes one more unit of output?
- On what dimension is one unit of the product or service equivalent to another?
- Number of procedures
- Most procedures are around the same number of hours or days
- Number of procedure hours
- Procedures can vary from one hour to one day
- The number of hours drives the cost

**Notes:**
The calculation is actually quite simple.  It’s deciding what should go into the calculation that can be challenging.  
A simple one is “Process and dispatch outgoing mail. “  The unit of measure is volume in pieces.   While there are certain to be exceptions, processing one piece of mail will be like processing another piece of mail.  Not all activities are going to be as straightforward.  
For example, what if you provide technical assistance in radiation safety?  What is your output?  Assistance?
If each time you provide assistance is like every other time (e.g., you spend 3 days on site providing training or clean up), then the number of sessions may be the unit of output.  But what if one time you spend 5 minutes on the phone and the next time you spend a week on site?  Does it make sense to have a unit cost for each time assistance is provided?
For each ASA, you will have to look carefully at what you will consider to be output for all of the products or service covered by that ASA and determine the best output measure.  
Service: provide technical assistance in radiation safety
Unit of measure:  number of workers using radionuclides = 8,370
Costs:  $4,549,430    Unit cost = 543.54

## May have multiple unit cost measures
One unit cost for each product
One unit cost for a group of products
One unit cost for all products
Select unit costs that are strategically important
Focus on the most important aspects of your business
Highlight areas of management focus

- One unit cost for each product
- One unit cost for a group of products
- One unit cost for all products
- Select unit costs that are strategically important
- Focus on the most important aspects of your business
- Highlight areas of management focus

**Choosing Unit Cost Measures**

## Sample Units of Output

## Sample Units of Output

- Number of maintenance hours [or number of stations]

- Maintain scientific equipment and workstations

- Number of design hours

- Design and fabricate custom instruments

- Number of collaborative hours

- Conduct collaborative physical science and bio-engineering research

- Number of personnel hours [or event hours]

- Coordinate and provide security for events

- Number of planning hours

- Plan emergency preparedness strategies

## Sample Units of Output - A Tiered Approach

- Number of personnel hours

- Special public event

- Number of event hours

- Employee social event

- Number of press conferences

- Press conference

- Coordinate and provide security for events:

## ExampleCalculating Unit Cost Measures

- Service: collect and dispose of hazardous waste
- Unit of output:  number of metric tons = 250,000 in FY02
- Cost of resources in FY02:

## Example (cont.)Calculating Unit Cost Measures

- Service: collect and dispose of hazardous waste
- Unit Cost = $5,690,520 / 250,000
- Unit Cost = $22.76 per metric ton

## Example (cont.)Graphing Unit Cost Measures

- $22.76

- $23.21

- 250,000

- 280,000

- Data might be displayed using bar chart to allow for comparisons.

**Example ****(cont.)****Graphing Unit Cost Measures**

**Notes:**
This graph shows the advantage of using unit cost to isolate how the cost of collecting a metric ton of hazardous waste will change from how many tons are expected to be collected next hear.  

## Example (cont.)Graphing Unit Cost Measures

**Example ****(cont.)****Graphing Unit Cost Measures**

## Analyzing Unit Cost Measures

- Benchmarking
- Compare unit cost to others in similar industry/business
- Are your costs above or below others?  Why?
- Trend analysis
- Study unit cost over time
- Are your costs going up or down?  Why?
- Cost projection
- Use unit cost data to make cost projections for the future
- This year’s unit cost was $22.76.  Assume that costs are expected to increase by 2% to $23.21
- Next year will process 280,000 metric tons
- 280,000 x $23.21 = $6,498,800
- Increase in total cost of 14%

**Notes:**
With caveat
How do costs behave?
Is use of unit cost valid?

## Step 1:  Analyze need for unit cost information
Step 2:  Choose unit cost measures
Step 3:  Complete the unit cost measure portion of your data collection plan (see Data Analysis and Graphing Training for guidance)
Step 4:  Gather unit cost data
Step 5:  Graph unit cost data and interpret findings.  Possible techniques include
Analyzing trends (historical and forecasted)
Evaluating causes and cost drivers
Comparing to benchmarks
Identifying improvements

**Step 2:**  Choose unit cost measures
**Step 3:**  Complete the unit cost measure portion of your data collection plan (see Data Analysis and Graphing Training for guidance)
**Step 4:**  Gather unit cost data
**Step 5:**  Graph unit cost data and interpret findings.  Possible techniques include
- Analyzing trends (historical and forecasted)
- Evaluating causes and cost drivers
- Comparing to benchmarks
- Identifying improvements

**Steps to Prepare Unit Cost Measures**

## Asset Utilization Measures

## Capacity and Asset Utilization

- Who is responsible for capacity management?
- How can we obtain more capacity without buying it?
- What are the sources of idle capacity?
- How much unused capacity is assigned to product/service cost?
- Where will we find hidden, unused capacity?

**Notes:**
What do you do if you need more resources but the budget doesn’t allow for it.  It may be that some resources are not being fully utilized.  The asset utilization ratio can provide insight.  

## Why Care About Asset Utilization? 

- To measure the difference between what an asset is capable of producing and what it actually produces
- To calculate the “opportunity gap”

## Causes of Loss in Asset Utilization

- Standard operating procedures
- Planned shutdowns
- Sales demand
- Raw materials shortages
- Product quality
- Equipment failure
- Acts of nature

## Calculating Asset Utilization

- The ratio of actual output to the output that could be achieved if an asset operated at maximum capacity
- Asset utilization = (actual output / maximum output capacity)
- Opportunity gap = maximum output capacity – actual output
- ORS is basing maximum output capacity on planned utilization

## Determining Planned Utilization

- Planned utilization can be based on
- Theoretical capacity:  asset at its maximum output capacity when operating for 365 days per year while producing 100% quality product
- Practical capacity:  allows for normal downtime
- Historical capacity:  risks institutionalizing inefficiencies

## Determining Planned Utilization (cont.)

- Practical capacity is attainable through reasonable, though highly efficient, efforts
- Arbitrary estimate:  specified percentage of theoretical capacity
- Normal volume:  May be used to approximate until evidence is available to obtain a better estimate.  Only an issue when normal volume is substantially below practical capacity.
- Time series analysis:  review past activity levels and adjust for delays, poor quality, overtime, or other stresses
- Analytical approach:  deduct maintenance, repairs, startups, shutdowns, and protective (or surge) capacity from theoretical capacity

## Example *Calculating Asset Utilization

- Service:  review extramural construction projects
- Actual output = 128 reviews
- Maximum output capacity
- Assume each review takes one week (40 hours) when operating at maximum capacity with 100% quality product
- Assume practical capacity of 1,840 hours per year per FTE
- Assume 3 FTE
- Maximum capacity = (3 x 1,840) / 40 = 138 reviews
- Asset utilization = 128/138 = 92.8%

*** Example based on hypothetical data**

**Notes:**
Calculating the asset utilization ratio includes determining what resources are need to produce one good unit of product.  For those service lines that are not sufficiently uniform to identify a standard for resources, an alternate method is available to calculate asset utilization.  This alternate method will be covered later.

## Alternate Calculation Method

- Traditional asset utilization ratio requires standard output measure
- Some activities are difficult to measure in terms of standard outputs
- Use of resources may vary significantly
- May not have single quantity that can be regarded as a whole
- Analysis may take place at an aggregated service level
- May substitute inputs for outputs when standard output is not appropriate
- Must separate productive from nonproductive inputs

## Alternate Calculation Method (cont.)

- Asset utilization = (actual productive input / maximum input capacity)
- Opportunity gap = maximum capacity – actual productive input

## Example * Alternate Calculation

- Service: provide technical assistance in radiation safety
- Maximum input capacity:
- Assume 1,840 hours per FTE and six FTEs
- Maximum input capacity = 6 x 1,840 = 11,040
- Actual nonproductive input
- Assume 160 hours standby
- Assume 192 hours duplication of effort

*** Example based on hypothetical data**

## Service: provide technical assistance in radiation safety
Asset utilization = (11,040  – 160 – 192) / 11,040
Asset utilization = 10,688 / 11,040
Asset utilization = 96.8%

- Asset utilization = (11,040  – 160 – 192) / 11,040
- Asset utilization = 10,688 / 11,040
- Asset utilization = 96.8%

**Example ****(cont.)**** ****Alternate Calculation**

## Asset Utilization As Metric

- Focuses improvement efforts on eliminating cause of business opportunity gaps
- Minimizes the level of non-productive assets within regulatory and risk tolerance constraints
- Measures ability of managers to invest in earning assets when measured as ratio of earning assets to total assets

## ExampleGraphing Asset Utilization Data

- 60%

- 67%

-  March

- 93%

- 88%

-  February

- 79%

- 75%

-  January

- Benchmark

- Discrete Service

## Example (cont.)Graphing Asset Utilization Data

## ExampleRun Chart of Asset Utilization

- Data might be displayed using a run chart showing % deviation from capacity.  Refer to the Data Analysis and Graphing Training for more information on how to construct this graph.

## Asset Utilization Hierarchy

- Productive capacity

- Nonproductive capacity

- Idle capacity

**Notes:**
If you are going to measure utilization in terms of inputs, establish criteria to evaluate whether resources were used productively. 

## Capacity Model*

- * Excerpted from Consortium of Advanced Manufacturers-International (CAM-I) Capacity Model

**Notes:**
This model, developed by CAM-I, can be adapted by your organization as a tool for setting criteria.  Modify or completely change the labels for the specific model to fit your discrete service.  

For ASA reporting purposes, you will be calculating unit cost and asset utilization this year.  But we’re not calculating these ratios just for their own sake.  The plan is to use the measures on an ongoing basis so that you can begin using trend analysis to monitor performance.  This means that once you’ve calculated the ratios for this year, it’s time to turn attention to how it can be improved next year.  There are a number of ways to begin analyzing the ratios.  One method is to look at the capacity that is not being used.  

## Step 1:  Identify appropriate asset base to include in measure
Step 2:  Determine planned capacity for FY02 if not already established
Step 3:  Complete the asset utilization measure portion of your data collection plan (see Data Analysis and Graphing Training for guidance)
Step 4:  Gather asset utilization data
Step 5:  Graph asset utilization data and interpret findings.  Possible techniques include
Analyzing trends (historical and forecasted)
Evaluating causes and cost drivers
Comparing to benchmarks
Identifying improvements
Step 6:  Determine planned capacity for FY03

**Step 2:**  Determine planned capacity for FY02 if not already established
**Step 3:**  Complete the asset utilization measure portion of your data collection plan (see Data Analysis and Graphing Training for guidance)
**Step 4:**  Gather asset utilization data
**Step 5:**  Graph asset utilization data and interpret findings.  Possible techniques include
- Analyzing trends (historical and forecasted)
- Evaluating causes and cost drivers
- Comparing to benchmarks
- Identifying improvements
**Step 6:**  Determine planned capacity for FY03

**Steps to Prepare Asset Utilization Measure **

## Conclusion

- ASA Teams will determine how to implement the two common financial measures
- Unit cost
- Asset utilization
- This data will be used both by ASA Teams and ORS-wide to gauge our performance
- Work with the financial people in your area to clarify your measures and obtain data
- For more assistance, please contact:
- Amy Vandenburg (OBSF)
- (301) 402-3827
- vandenba@ors.od.nih.gov