Economy & Finance

Allocative efficiency as a tool to improve top and bottom lines fin

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  • 1. ALLOCATIVE EFFICIENCY & PRODUCTIVITY AS A TOOL TO IMPROVE TOP & BOTTOM LINES BY K.RAM MOHAN, COO, PUNJAB NATIONAL BANK. 3rd World Emerging Industries Summit WEIS2015 April, 22, 2015, 14:00-16:30, Keynote speeches JW Marriott Hotel Zhengzhou, Henan province, China
  • 2. ALLOCATIVE EFFICIENCY  BROADLY ALLOCATIVE EFFICIENCY MEANS:  Allocative efficiency has to do with the degree in which a given action leads to the production of more positive results than the creation of negative results.  This basic approach to measuring benefit derived comes into play with many different types of business functions, including the creation of a client base, the organization of a business entity, and the ultimate success or failure of that entity.  In short, allocative efficiency is all about generation of substantial benefits while producing relatively few liabilities.
  • 3. Allocative versus Productive Efficiencies  It is possible to have productive efficiency without also achieving allocative efficiency.  A firm may be producing its current level of output with the best technology and a least-cost combination of inputs; i.e., it has achieved both technological efficiency and productive efficiency. This doesn't mean, however, that the firm is maximizing profits.  It may be producing a level of output that is either too small or too large relative to what will be optimally demanded in the market.
  • 4. EFFICIENCY  There are 2 types of static efficiency; productive efficiency and allocative efficiency.  Productive efficiency occurs when production is at an output level where there is the least cost.  Allocative efficiency is concerned about whether resources are used to make goods and services that consumers want to purchase.  Static efficiency refers to efficiency at a given point in time whereas dynamic efficiency is related to the efficiency of resources used over a period of time.
  • 5. ALLOCATIVE EFFICIENCY – HOW WE LOOK AT IT IN OUR STUDY  Allocative efficiency is looked by us as the “gap” in the “need” perceived by customer/society/market, which ultimately results in generation of “demand” for the product.  The conclusions from this “AE Matrix” is equally applicable for Productive Efficiency and Allocative Efficiency.  These are two sides of the same coin and always co-exist and these two never merge.
  • 6. WHAT WE LOOK FOR IN OUR STUDY?  Like a group of blind people touching & feeling an elephant and describing the same, in literature the concept of “Allocative Efficiency” has been mostly looked from perspectives of each Academicians & Practioners.  Here for our purpose we are not taking any segmented view and take it holistically and look at the possible effective ways to allocate the resources viz., men, machines and materials to meet the Efficiency demands.
  • 7. METHODOLOGY FOR OUR STUDY  In a Multi Product Manufacturing or service Industry we plotted the top line (Sales) in Y axis versus Bottom Line (Profit) in X axis.  In case allocation of cost to each and every product, especially in a service industry like Banking is not possible, then in X axis, one can take net cost, instead of profit also.  Thus we have relatively measured the top line & Bottom lines to find out their interse productive & Allocative eficiencies.
  • 8. DATA POINTS TAKEN ALLOCATIVE EFFICIENCY - Banking Sources / Liability products Assets / Application Products Product 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 top line 25 52 86 180 115 250 165 95 135 45 59 79 194 154 195 28 68 81 net contibution -6 -9 -18 -7 -21 -22 -4 -8 -6 4 8 7 6 9 11 3 13 10 ALLOCATIVE EFFICIENCY - RODUCTION Product 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 top line 15 20 32 48 35 42 68 72 100 105 68 36 95 82 102 46 59 60 bottom line 11 8 23 28 21 27 16 7 26 21 21 16 13 24 35 18 7 10
  • 9. ALLOCATIVE EFFICIENCY - MANUFACTURING 0 20 40 60 80 100 120 0 10 20 30 40 Output Profit 3 rd Quadrant 1 Quadrant 2 nd Quadrant 4 th Quadrant
  • 10. LOW VOLUME & HIGH PROFIT ZONE  Quadrant 1 : low volume & high Profit. Right bottom  Here allocative efficiency indicates that there is limited scope to improve profit. So Prescribe for efforts to improve top line through effective marketing, rather than indulging in cost cutting as a first step.  Allocate resources for marketing & HIGHER LEVELS OF PRODUCTION.
  • 11. LOW VOLUME LOW PROFIT ZONE  Quadrant 2: Low volume, low profit zone. Bottom left.  These are the products which require immediate attention by way of cost cuttings, efficiency in production etc.,  However, if nothing works, then one has to take the view whether it is worth continuing with the product line or not.  RATION RESOURCES & FOLLOW IT UP WITH COST CUTTING. REVIEW FREQUENTLY.
  • 12. HIGH VOLUME & LOW PROFIT ZONE  Quadrant 3: high volume low profit products. Top left.  Since the volume is high, there is an existing demand for the product, despite acute competition which has resulted in low margin.  Here cost cutting, efficiency improvement through automation, better supply chain management can be attempted.  ALLOCATE CAPITAL FOR TECHNOLOGY IMPROVEMENT/AUTOMATION. MONITOR TARGETS EFFECTIVELY.
  • 13. HIGH VOLUME & HIGH PROFIT ZONE  Quadrant 4: High volume high profit products. Right top.  These are Gold mines, which has to be nourished. Since these are star performers, do not try to cut cost or capital rationing etc.,  Here further scope in the first step should lie with effective supply chain management and squeezing the surroundings rather than the system.  Since going is good, do not disturb the synergy and successful equilibrium of system but try to influence supply chain for augmenting the profit, if possible.  Negotiate with supply chain effectively to augment profitability.
  • 14. ALLOCATIVE EFFICIENCY - BANKS 0 50 100 150 200 250 300 -25 -20 -15 -10 -5 0 5 10 15 T O P L I N E Net cost/earnings Allocative efficiency Banking Allocative efficiency Banking 3 rd Quadrant 2 nd Quadrant 1 st Quadrant 4 th Quandrant 1 st Quadrant 2 nd Quadrant 3 rd Quadrant 4 th Quadrant Liability products Asset Products
  • 15. ASSUMPTIONS  When product profitability can not be easily drawn, as common resources are extensively used, say like banking, the same Allocative Efficiency chart can be prepared with the following assumptions:  1. For Liability products, calculate the service cost and add interest cost.  2. For Asset products, compute Interest earned and reduce operation costs.
  • 16. ASSUMPTIONS - CONTINUED  Since in this Allocative efficiency chart, we are not measuring any individual contributions, but only compare the products efficiency, as long as we use the same measuring technique, interse comparisons will hold good.  For Asset side the four quadrants are same as in case of production. For Liability, it will become a mirror image Right bottom will become Quadrant 1 and Left bottom Quadrant 2, Left top Quadrant 3 and Right top Quadrant 4.(On Negative side of X axis.
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