Category: Cost Benefit

In the second decade of the 21st century, with research and development carried out in every field and innovative and improved method or processes are being introduced along with the increase in knowledge and information in those fields. As a result of this increase in knowledge and information and processes, for a company, it is necessary to adapt to these new procedure and technique not just to stay in and improve their business but also to meet the daily increasing requirements and demands of the customer. For a pharmaceutical company, this is even more applicable.

GlaxoSmithKline (GSK) in Pakistan, manufactures pharmaceutical and healthcare products. It is also the largest pharmaceutical company in Pakistan. GSK Pakistan exercise mainly in two industrial division. One of their pharmaceutical products, Augmentin, an antibiotic prescribing, was change from bottle packaging to a blister packaging, as it was required to be secured from the moist and humidity in the weather. Augmentin is a high-demand product and having going through a change phase it was required to meet the complete demand of the consumer.

To meet this demand, it was decided to increase the OEE factor of the entire production line of Augmentin blister from production to packaging. After the OEE was calculated using APQ method, it was found out that out of all three factor (availability, performance and quality) that effect the OEE, availability was the factors with the least numbers.

To find the reason and the causes of this low availability, a detail analysis/survey and examination was done on the floor of the production line and it was found out that there is a great number of unplanned stops on the production line, due to the workers at the packaging site, not being able to pack the Augmentin boxes at a speed that synchronize with the production, hence the line was required to stop at frequent intervals which resulted in a loss of availability.

To increase the productivity and OEE, these unplanned stops needed to be reduced. To tackle this issue, it was decided to make a jig that would assists the worker at the packaging line. This jig was supposed to, not only reduced the unit time required for filling a complete carton but also reduced the number of workers required on the packaging side.

To find the feasibility of the jig and also its possible outcomes, a cost-benefit analysis was required to be carried out. The central question being that whether or not this jig is economically efficient and will it be able to help the company’s business. This was only possible by doing a cost-benefit analysis.

Cost-Benefit Analysis

Cost-benefit analysis is a tool and a method to determine predict whether a project, program, policy or an activity is feasible given the objectives and requirement that have been given and the assumptions that have been made (Oskam, 2008). In general, a cost-benefit analysis aims at answering whether a project or activity or program should be executed and if funds are limited, which elements should be selected. In doing this, the specific project is compared to its next-best alternative (Mishan, Quah; 2007). A cost-benefit analysis calculates both the positive and negative parts of the project. The worth of a cost–benefit analysis depends on the preciseness of the individual cost and benefit estimates. To predict the worth and the outcome of a project/program, accurate data and calculations are required.

A cost–benefit analysis can have the following steps:

• Define the goals and objectives of the action;
• List alternative actions;
• Select measurements and measure all cost and benefit elements;
• Predict outcome of costs and benefits over the relevant time period;
• Convert all costs and benefits into a common currency;
• Calculate the net present value of actions under consideration;
• Perform sensitivity analysis;
• Adopt the recommended course of action.

By using the cost-benefit analysis, we can evaluate and decide the course of action to take. Weather to go along with the project, to choose among a number of different alternatives or to drop and cancel the project entirely.

It was found out that, the packaging box (carton) didn’t have enough tolerances that would have been required for the jig to be placed in the box to assist the workers in packaging and then removed after the packaging has been completed. Therefore, the packaging box (carton) was required to be changed dimensionally, just enough to give the jig tolerances it required for its operation. This change in box would require an additional cost to the project but it will also give an opportunity to the business aspect of the project. After the size of the carton was changed, it was now able to pack 195 packs of Augmentin instead of 180 as it had been doing previously. This data was also to be included in the cost-benefit analysis.

Data required for CBA

In our case, cost–benefit analysis was required to calculate all these costs:

• Investment cost;
• Material cost;
• Manufacturing cost;
• Labor cost;
• Number of workers before;
• Number of workers after;
• Price of packaging box before;
• Price of packaging box after;
• No. of Augmentin packs in packaging box before;
• No. of Augmentin packs in packaging box after;
• Unit price of Augmentin.

Steps Used for CBA

In this case it was the cost–benefit analysis was carried out using this approach:

• Develop alternatives;
• Identify all the benefits and outcome of these alternative;
• Identify all the direct cost, indirect cost, the overheads;
• Assume the expected return as accurately as possible;
• Calculate the profit of each alternative;
• Depending on the calculations, choose the most suitable result.

Different Cost and Expenses for Different Materials of Jig

The packaging box i.e. carton was required only to be changed in its size that is dimensionally. But as for the jig, it could have been made of various different materials. All having their own advantages and dis-advantages. These different materials will have different expenses (material cost, manufacturing cost, labor cost) and different returns. This would result in different data for each of the material. Since the jig was just to assist in the packaging and was not required to lift heavy loads and was not prone to vibration and impact. Keeping these factors in mind and also the ergonomics, such materials were selected that were light (as the workers were required to place the jig in the packaging box and then remove it after the packaging has been completed), had low material cost and low manufacturing cost. Therefore, for the cost-benefit analysis, different materials of jig would require different calculations of cost-benefit analysis.

A model run (test) was done using a jig made of wood to collect the required data and to see if the jig would give the desired and predicted results.

The risks of this project were also considered.

Using the collected data and the obtained from the model run, the cost benefit analysis was carried out for each material. By subtracting the cost of the project from the increase in revenue, the outcome and the result of each alternative was obtained.

Selecting Appropriate Alternative

A cost-benefit analysis is a tool that takes into all relevant consequences of a policy into consideration and compares the benefits with costs. If benefits outweigh the costs, the project is feasible and could be implemented as it could generate business for the company. If the costs outweigh the benefits, the project is not feasible and should be cancelled as it can a source of loss for the company.

After the cost-benefit analysis was carried out, different results for different alternatives were obtained. These results of the cost–benefit analysis for different alternatives concluded that the benefits of the project did outweigh the costs of the project, hence, the project was indeed feasible.

Finally, these different results of different alternatives were compared, and by taking all the pros and cons of different alternative into consideration, the most appropriate and suitable alternative was selected for the project

References

1. Oskam, A.J., Schipper, R., (2008) “Rural Economic Analysis.” Wageningen University, Wageningen, the Netherlands.
2. Mishan, Quah, (2007) “Cost Benefit Analysis.” Fifth edition. Routledge, New York, America.

Characteristics of the Park

Public park is located in Faisalabad city, and is one of the largest city parks in the middle Punjab, measuring in total just over 686 hectares. Centered on a rock formation called, one of the park’s main functions is to be an ecological space in the vast megalopolis. It is considered the first and most important of Faisalabad city ‘lungs’, with trees that replenish oxygen to the Valley of Faisalabad city. The public park ecosystem services are as follows:

1. Provisioning:

• The park constitutes a biodiversity refuge;
• It is a reservoir of fresh water;
• Provides forest resources, it is possible to have a forest management of the vegetation;
• Provides fresh air and a place for recreational, educational and scientific activities.

1. Regulating: it regulates the climate of Mexico City and provides, thus, fresh air for its 21.2 million residents.
2. Supporting: ground water recharge.
3. Cultural. The park has a historical, spiritual, aesthetic, and recreational value. It offers space for activities such as jogging, karate and yoga; attracting 1000 visitors/day. It has also cultural spaces which attract 15 million visitors/year. There are educational spaces such as ‘El Papillate’, an interactive children’s museum too.

Cost-Benefit Analysis

Without-Project Scenario

• Some areas are used as parking lots for visitors of the park’s second section. However, they are actually used by non-visitors;
• When these spaces are taken, cars are left on the sidewalks and pathways, creating ‘traffic jams’ within the park’s premises, danger for the pedestrians (forced to walk on the road) and air pollution;
• These areas are managed by the so called ‘Franeker’s’ – unemployed persons that impose themselves as ‘managers’ of the parking spaces and charge the drivers for them.

With-Project Scenario

Land rehabilitation to establish public urban agriculture with small lots (3×3 m).

Stakeholders

• Inhabitants living in neighboring buildings, especially those with low income, and without any piece of land, could have gardens to grow vegetables or plants by themselves providing them with an enjoyable space as well as with some food;
• The ‘Franeker’s’ could get a formal economic activity in the gardens instead of imposing their services to the park users;
• The park’s administration (and so the Mexico’s municipality) will get an extra income by giving a use to these areas.

Methodology

The Hedonic Price method was applied for this case study. A survey was developed in order to know the stakeholders’ perception on the proposed change for the parking lots in Public park. Identification of the project’s stakeholders, costs and benefits was done. A cost-benefit analysis of the case study was performed.

Simplified Survey Results for Valuation

A quick survey among friends and acquaintances living in Faisalabad city gave us that:

• About 62% of the citizens would lease an urban garden in Public park. According to official information (INEGI, 2010) there are around 2 million people living in the surrounding boroughs of the park; therefore, about 1.2 million people would be interested in leasing a garden.
• Most of the people would agree to pay a monthly feed not higher than 200 people pesos;
• Most of people would agree to have a lot not smaller than 3×3 m;
• Considering an area of 10 ha for the installation of the first gardens we would have a total of 11,111 lots pay a monthly fee of 15 million Rs = 2 million RS yearly income for the city;
• 80% of people were interested in cultivating vegetables;
• 10% were interested in bee keeping.

Costs and Benefits of the Without-Project Scenario

Costs

Pollution related costs (diseases occurring, environmental degradation), possible accidents due to pedestrians forced to walk on the street.

Benefits

None except for the ‘’Franeker’s’ (some income).

Costs and Benefits of the With-Project Scenario

Costs

• Staff salaries: 1) 1 administrator to handle economic and organization issues 1000 million RS monthly; 2) 4 coordinators to help with the administration of the lots (400 million RS); 3) 1 counselor (civil or architect) to plan the site (1 payment of 2000 million RS); 4) 1 agricultural engineer to provide guidance to the people (500 million RS).
• Materials. People renting the lots will bring their own materials to clean and delimitate the limits of their area under the guidance of the coordinators. Thus, they will be asked to bring the materials to protect the lots and the installation will be provided by the administration with a cost of about 2000 million RS. Materials for other activities like beekeeping would cost an average of 500 million RS per lot, and it could be covered half by the tenant and half by the administration. Water supply, seeds, bio-fertilizers, gardening products (with an estimated cost of 1 million RS/month) will be supplied by the administration for at least the first 4 years, since the beneficiaries will be mostly with people with low incomes.

Benefits

• Economic. Job creation (both permanent and partial). A monthly payment of 15 million RS (lot renting) from beneficiaries to the Park’s administration. A monthly income from honey/vegetables/fruit/ornamental products for beneficiaries. Food security reinforcement.
• Social. Creation of win-win situation through job creation (lower crime rates, give chance to low income people, increased governmental revenues to invest).
• Environmental. Pollution reduction through the reinforcement of the environmental goods and services of the Park by increasing green areas around it. Bio-fertilizers could be provided from the Park’s compost to produce ‘bio food’.

Sensitivity Analysis Factors

• Existing mines/caverns around pucblic area could collapse due to earthquakes;
• Petroleum poly-pipes crossing public’s neighboring areas, could be a source of danger;
• Extreme weather conditions, characteristic of the region, could damage the produce and the installations of the gardens (e.g. greenhouses destroyed by heavy hail or plants suffering from torrential rains and/or lack of water due to heat waves);
• A heat wave could be a possibility, but mostly we could suffer from lack of water because this is a big problem in the city. Although, there is a small lag in the area that could help in these cases;
• Resistance of the stakeholders to welcome the project;
• Lack of subsidy from the governmen;
• The municipality of Mexico to which the park belongs, as well as, the park’s managers;
• Neighbors and visitors of the park and the ‘Franeker’s’ in particular since they are first affected being the current economic beneficiaries of the non-used areas;
• Drivers that currently use the parking lots.

Final Remarks and Conclusion

According to the performed surveys, there is a considerable acceptance of Mexico City’s inhabitants to the land recovery project proposal for Public’s second section. The economic evaluation of performing the project resulted in positive results indicating it has a good viability. Converting paved parking lots into urban gardens will help to revert land degradation in the Faisalabad City area and increase environmental services. Because Public is a national park visited by people from all over the country, these gardens in Pucblic will be a great opportunity to promote urban gardens in Faisalabad.

References

1. Contreras, C. GDF rehabilitará la Segunda Sección de Pucblic. (September 10th, 2013). (Picture taken by Solís, David). Retrieved May, 2014 from: http://www.excelsior.com.mx/comunidad/2013/09/10/917880
2. ELD Initiative. Massive Open Online Course: “The Economics of Land Degradation”. ELD MOOC 2014. (2014). Creative Commons Attribution-Non Commercial-Share Alike 4.0 International License. Retrieved March – May 2014, from: https://gc21.giz.de/ibt/var/app/wp342P/1844/index.php/contents/
3. Gobierno del distrito Federal. (2011). BOSQUE DE PUCBLIC / Un sitio del Portal Ciudadano del Gobierno del Distrito Federal. Retrieved March 2014, from: http://www.sedema.df.gob.mx/bosquedePucblic/ index.php?option=com_content&view=article&id=45&Itemid=28
4. Google – INEGI. (2014). (Map). Retrieved May 2014, from: https://maps.google.com.mx/maps/ms?msa=0&msid=209333578334516841753.0004c350046a89c788b5e
5. INEGI. (2010). Censo de Población y Vivienda 2010. Distrito Federal/Población/Población total por municipio y edad desplegada según sexo.
6. King, D. M.; Mazzotta, M. J. (2000). ECOSYSTEM VALUATION. Retrieved April, 2014, from: http://www.ecosystemvaluation.org/default.htm
7. Laidre, Armin. (2014). What is What-if Analysis? © iPlanner.NET – Online Business Plan Software and Sample Templates. Retrieved May 2014, from: http://www.iplanner.net/business-financial/online/how-to-articles.aspx?article_id=what-if-analysis

Economical term cost-benefit analysis means to evaluate a business activity by calculating the net gain for a company. It generally helps companies to assess whether a decision is appropriate to make monetarily.

However, with rising of severe environmental issues in modern world, business activities take certain responsibility of negative impact on environment. That makes people question the validity of traditional cost-benefit analysis in business. Since the concept of cost-benefit analysis is a human centred, if a company only exercise cost-benefit analysis, it will not help the company to build better business ethics. There are also rising of new ideologies on business ethics like Buddhist economics and deep ecology which disagree with human centred functioning of business. In this essay, I will be explaining the development of business cost-benefit analysis, and how a new moral framework can impact both business and environment.

Firstly, the competition between companies in free market makes businessman developed an idea that social responsibility and employees’ responsibility are separable. Milton Friedman (1970) suggests that employees’ responsibility to the company it to maximize the profit for company. He demonstrated his points by using the model of a corporate executive. Since he is hired by stockholders, his responsibility in business is to full fill the desire of stockholders which is to maximize the profit. The process of maximizing profit is allowed as long as it obeys the law and basic rules of society, Friedman suggested. In his model of business, a person cannot exercise his social responsibility and responsibility for stockholders at the same time which suggests an absolute separable relation between social and business responsibilities. It is equally unfair as ‘taxing without representing’, Friedman said since the action of using business money for society is not voluntary for stockholders and he believed that society problems are for politicians to solve instead of businessmen.

The process of profit maximization involves the use of pure cost-benefit analysis. Since the cost-benefit analysis only calculates the net profit for a company, it is supposedly to include nothing about social impact. In Friedman’s example, a corporate executive is selected by stockholders to serve for better interest for the company. As he takes social responsibility of company into account of cost-benefit analysis, he becomes an employee of the society instead of an employee of the company which he is expected to be, said Friedman. Friedman’s arguments are based on the economic condition for capitalism, since the growth of economy of a country depends on free market which leads companies focus on their own wealth growth. Maximizing profit is the purpose for every company in capitalism economics which is achieved by traditional cost-benefit analysis. Social responsibilities like environmental concerns are not placed in consideration for cost-benefit analysis. Friedman even argued that businessmen who are promoting social responsibilities in business are poisoning the very foundation of free market. The business in his work looks rather robotic and aiming one and only purpose of profit generation.

Because of the effectiveness of how Friedman’s idea helps companies accumulate wealth, it was generally agreed in capitalism society. However, the rising of social and environmental issues around world in 21st century makes people concern more about their social responsibilities, and they stared to doubt the validity of traditional cost-benefit analysis. Certain modification was suggested to business cost-benefit analysis.

A new term ‘corporate social responsibility’ is introduced, which means to contribute goods into society that is beyond the expectation of basic rules of society and laws as Friedman stated. Taking corporate social responsibility is an effective way for companies to gain reputation from the society. People are more likely to invest their money to the brands which has positive image among society. Joshua Graff Zivin and Arthur Small (2005) built up a new model for cost-benefit analysis model which involves the profit gaining from corporate social responsibility. They suggest that the corporate social responsibility companies conducted can have a positive long-term effect on its wealth accumulation so that it is considered a profit building activity. Since taking social responsibility depends on if an individual is voluntary to contribute, individuals who have desires to exercise their social responsibility can invest their money to companies that have the same thoughts. Then the company can gain profit from investors and investors can full fill the desire of exercising social responsibilities through companies. Therefore, the modified cost-benefit analysis helps businessmen to see the potential profit in corporate social responsibilities and take responsibility of contributing to the society.

However, the shift from traditional pure business cost-benefit analysis to modified cost-benefit analysis which involves taking social responsibility as a method of profiting company itself does not change the fact that cost-benefit analysis is a human benefit centred process. Cost-benefit analysis itself is always a monetary analysis which separates money making and social issues. When companies exercise social responsibility as a part of money-making process, they are over simplifying business ethics. If social responsibility is always taken as a support for profit maximizing process, then social issues as well as environmental issues will never have serious attention from firms. Social responsibility is taken perfunctorily just as a side effect of money maximizing process. Therefore, cost-benefit analysis for companies is not enough to achieve a better business ethics as well as social responsibility.

A new term ‘economism’ developed by Ove Jakobsen and Stig Ingebrigsten (2006) cited by Knut Johannessen Ims and Laszlo Zsolnai (2006) is defined to describe the concept of maximizing business profit without carrying social responsibilities. For maximizing profit, companies ignore the effect they have on environment. As Knut Johannessen Ims and Laszlo Zsolnai stated that companies enjoy the short-term achievement and willing to achieve profit maximization by sacrificing the environment. The rising of environmental issues caused by business practices develops new ideologies of Buddhist economics and deep ecology.

A concept of self-realization in environmental perspective is developed (Naess,1989) cited by Knut Johannessen Ims and Laszlo Zsolnai. It requires people to realize the status of themselves in nature. Naess suggests that human interests are as important as any other beings in nature. The concept of considering human as an equal part of other beings is called deep ecology. If deep ecology is applied to business, the cost-benefit analysis would have to take the interest of environment into account and profit maximization cannot be achieved. Instead, the business profit shares the same level of importance as environment interest.

One similar concept ‘Buddhist economics’ is introduced by Laszlo Zsolnai and Knut Johannessen Ims. It argues that the development of economics should not do any harm to the environment. The product of business including its wastes and pollution should have minimum negative effect on environment.

Deep ecology and Buddhist economics disagree with the common concept of traditional business practices. Traditional business practices agree with human profit centred concept while deep ecology and Buddhist economics bring human profit and environmental interest to the same level. They suggest a complete reshape of current business framework in capitalism economy.

The concept of deep ecology and Buddhist economics seems to be friendly to the environment, but the fact that they both shifted the centre of business from human to the surrounding environment makes them difficult for public to accept. According to Richard Welford (2006) as cited by Jason McLeod Monson (2010), letting people accept the concept of deep ecology is rather radical under capitalism economics. Indeed, the shift is a challenge to the very basis of free market. Those concepts also need support from large population while rich people in capitalism countries are unlikely to agree. Therefore, the complete reshape of our moral framework on business would be unrealistic under the condition of capitalism.

Oliver Hart and Luigi Zingales (2017) opposed Friedman’s proposal of separating fiduciary duty and social responsibility. They suggested money-making and ethics are inseparable. They also argued that the process of maximizing shareholders’ profit is can be understood in two separate parts: maximizing shareholders’ welfare and maximizing company’s market value. Friedman’s idea was for corporate executives to exercise their fiduciary duty by managing to maximize company’s market value, however, the fiduciary duty of corporate executives is towards the shareholders’ welfare. This concept allows businessmen exercise their social responsibility if the shareholders instruction is on maximizing their utility. Since the ultimate decision is on the shareholders, their sense of social responsibility determines whether a company can exercise business practices as both company-beneficial and environmentally friendly.

In conclusion, the cost-benefit analysis does have irreplaceable importance for maximizing profit in business. With the rising of social and environmental problems, new modifications base on company reputation and long-term benefit are made. Although the modifications seem to be beneficial to the society, it is still a business profit analysis which means that it is a money and human centred exercise. A pure monetary analysis is not going to reach a better business ethics since it barely considers the consequences on social and environment.

Deep ecology and Buddhist economics suggest that business should create an equal status between profit and environments. Since the concept that they introduce are rather radical and challengeable to the basis of capitalism economics, they are not likely to be accepted by majority of the society. Without the support of large population, those concepts are less effective to the society. Therefore, the application of these new moral frameworks in business is ideal but not necessarily practical.

Finally, the redefinition of fiduciary duty carried out by Oliver Hart and Luigi Zingales gives an idea that employees’ fiduciary duty is to maximize shareholders’ welfare instead of market value. It gives shareholders power to decide whether to exercise their social responsibility. After all, the exercising of social and environmental responsibilities of a company completely depends on the shareholders will if employees strictly exercise their fiduciary duty. The business negative impact on environment can therefore be solved by having company shareholders understand the equal status between profit and environment.