7. Operational Efficiency and Business Process Performance (JIT, TOC ..)

Question 1

JIT

Answer 1

• Is a modern inventory planning
• Advantages of JIT
  1) Reduction in inventory levels
  2) Reduction in storage space
  3) Lower inventory taxes
  4) Lower obsolescence risk
  5) Lower manufacturing lead time
  6) Lower rework cost
• Lower setup cost is not an advantage.
• JIT INCREASES stockout costs and DECREASES carrying costs
• JIT resulted in shorter product life cycle and greater consumer demand
• JIT requires lower number of suppliers but greater quality of materials - Materials goes directly into production without being inspected
• JIT is characterized by lower amount of waste and inventory. The main concern in JIT would be material variance due to lower quality which results in reworks
• Under JIT the focus of quality shifts from the discovery of defective parts to the prevention of quality programs, ZERO machine breakdown and ZERO defects.
• JIT DOESN’T affect DL cost, it ONLY impact DM
• Safety stock undercut the whole philosophy of JIT
• Inspection costs and details of cost tracked to jobs will reduce using JIT
• JIT is a system of purchasing, production and inventory control
• Kanban was developed by Toyota motors - it ISN’T characteristic of whole Japanese industry
• Kanban means tickets also described as cards or markers that control the flow of production. The card is authorization to release inventory to next step. US companies have not been comfortable with tickets, they used computerized information systems
• A basic Kanban includes:
  1) WITHDRAWAL of quantity from the later process
  2) PRODUCTION of preceding process
  3) VENDOR Kanban that tells, what, how, where and when to deliver
• JIT is a PULL system i;e items are pulled through production by current demand
• Using JIT will eliminate the following:
  1) Due to lower inventory system, INTERNAL CONTROL will be reliminated
  2) Elimination of receiving areas, hard copies and storage areas
  3) The quality of the parts received by suppliers is verified by use of statistical controls rather than inspection of coming goods
• To implement JIT or lean production system, the factory is organized around what are called manufacturing cells often grouped in Semicircles. Each worker in a cell MUST be able to operate ALL machines - workers might often be idle if they are NOT multi-tasking. Higher trained cost is disadvantage as the worker is required to operate all machines.
• A cellular organization required workers to operate as effective teams

Question 2

Enterprise Resource Planning and Outsourcing

Answer 2

• Master Production Schedule (MPS) is a statement of what a company expects to produce and purchase - related demand forecasts to SPECIFIC DATES for completion
• Material Requirement Planning (MRP) is a production planning and inventory control system based on forecast demand to schedule raw material deliveries of quantities - enables a company to efficiently fulfill goals of MPS.
• MRP is a PUSH system i;e the demand of raw materials is driven by forecast and have 3 overriding goals:
  1) Arrival of the right PART
  2) In the right QUANTITY
  3) At the right TIME
• MRP consults the bill of material (BOM) - BOM is a system that generates a list of every part and component needed that is required to build a product
• Lead time is the amount of time between a process starts and when it is completed
• MRP benefits is similar to JIT
• MRP II is a closed loop manufacturing system that is used for both financial and managerial reporting - MRP is a component of MRP II
• Enterprise Recourse Planning (ERP) is a software platform intended to integrate enterprise wide information system by creating ONE DATABASE to ALL of an organization’s application
• ERP eliminate the redundancy through the use of a central data base and improves business process
• Companies with legacy ERP systems are moving to cloud-based system, advantages:
  1) Flexibility and agility
  2) Sharing of data processing
  3) Internet based access
• MRP is a common function in ERP - ERP and MRP are similar but are NOT interchangable. A company that merely needs to maintain inventory, ONLY needs MRP
• ERP allows company to determine what hiring decisions might need to be made and whether a company should invest in a new capital assets.
• Outsourcing allows the company to focus on its core competencies
• Benefits of outsourcing: RRAA
  1) Reliable service
  2) Reduce cost
  3) Avoidance of the risk of obsolescence
  4) Access to technology
• Limitations of outsourcing:
  1) Dependence on a third party
  2) Loss of control over necessary functions

Question 3

Theory Of Constraints (TOC)

Answer 3

• Is a system to improve human thinking about solving problems
• The basic premise of TOC is that improving any process is best done not by trying to maximize the efficiency in EVERY part of the process BUT by focusing on the slowest part which is called CONSTRAINTS
• Steps in a TOC analysis: IDMIRE
  1) Identify the constraint - the bottleneck operation where work in process backs up the most
  2) Determine the most profitable product mix given the constraint - basic and immediate principle of TOC is maximizing SHORT TERM profit that required maximizing the contribution margin through the constraints, called throughput margin. The manager should maximize the product with the highest throughput margin per unit
  3) Maximize the flow through the constraint - is managed through Drum-Buffer-Rope
  a. Drum is the bottleneck operation
  b. Buffer is a minimal amount of WIP to ensure that work is always in operation
  c. Rope is the sequence of activities preceding the bottleneck
  4) Increase capacity at the constraint - In the SHORT run manager is encouraged to make the best use of the bottleneck, in the MEDIUM term improving the process to increase capacity at the constraint
  5) Redesign the manufacturing process - through value engineering that balances product cost and customer satisfaction.
• TOC have SHORT term focus while ABC have LONG term focus
• The constraint is the slowest part of the process, usually identified as the one were WIP backs up the most

Question 4

Capacity Management

Answer 4

• Theoretical capacity is the optimal level of output - will result in lower inventory value per unit hence assets will be the lower
• Practical capacity is the highest level of output
• Producing at full capacity can have a cost in the form of opportunity cost
• Capacity expansion is also referred to as market penetration because it involves increasing the amount of an existing product in an existing market
• The key forecasting problems in capacity expansion are long term demand and behavior of competitors.
• Undercapacity is a SHORT term problem, Overcapacity is a LONG term problem.
• The formal capital budgeting process entails predicting future cash flows related to the expansion project, discounting them at an appropriate interest rate.
• Porter’s model of decision process for capacity expansion: IF APT
  1) Identify the market size, type and possible response by competitors
  2) Forecast demand, input costs and technology developments. Expansion itself may put pressure upward on input prices
  3) Analyze competitors to determine when each will expand
  4) Predict total industry capacity and firms market share
  5) Test for inconsistencies

Question 5

Value Chain Analysis

Answer 5

• Customer relationship management is best defines as maximizing customer royalty by managing customer touch point.
• Customer satisfaction is related to the degree of loyalty, higher customer royalty depends on the effectiveness of the firm core business process
• Customer retention through customer satisfaction is a key profitability. The firm should emphasize customer retention because the customer base is an important INTANGIBLE ASSETS.
• Rework of defective goods to bring them up to quality standards are NOT value added activities
• Value chain is a model for depicting the way in which every functions in a company adds value to the final product
• Value chain financial statements treats customer service as part of value chain and therefore associated as PRODUCT COST
• Value chain activities are 2:
  1) Primary activity deal with PRODUCT directly - Logistics, Operation,Marketing and Distribution, Service
  2) Support activity lend aid to primary activities - HR, IT, Finance
• A firm should estimate life time value with the net present value of his cash flow
• Process engineering is SIMILAR to value chain in which BOTH are designed to improve customer service, reduce cost and become more competitive
• The variability of manufacturer demands on suppliers may be greater than the variability of retailer on manufacturer
• Two types of costs under Value Engineering:
  1) Cost incurrence is the actual use of resources
  2) Locked in (Designed in) costs will result in use of resources in the future as a result of past decision
• Value engineering emphasizes controlling costs at the design stage, that is BEFORE they are locked in
• Life cycle costing used as a basis for cost planning and product pricing

Question 6

Other Process Improvement Tools

Answer 6

• Degree of interdependence among stages on process is referred to as tightness
• Tight process in which a breakdown in one stage will bring the succeeding to halt. This is characteristic of Continuous Process that DON’T have buffer WIP inventory
• Loose process in which subsequent process may continue working after a breakdown in previous stage. This is characteristic of Batch Process
• Kazien is the Japanese word for the Continuous pursuit of improvement in EVERY aspect of the organizational operations
• Features of Kazien:
  1) Improvement are based on many small changes
  2) Ideas comes from the workers themselves - talents of existing workers
  3) Small improvements are less likely to acquire major capital.
  4) All employees including management should continually see ways to improve their performance
  5) Workers are encouraged to take ownership of their work
• Most types of DL would be considered as value added
• The cost of DM, DL on products that fails inspection would be considered as nonvalue added costs
• Financial and Nonfinancial measures of activity performance address efficiency, quality and time
• Three common measures on process analysis:
  1) Product development time
  2) Break even time
  3) Customer response time
• Business Process Reengineering (BPR) focuses on new technology innovation rather than improving current process and internal control (Radical chance instead of small improvements)
• To do BOR the accountant must determine:
  1) The cost of reenginering
  2) The expected savings
• Benchmarking involves continuously evaluating the practices of best in class organizations
• Benchamrking is an ongoing process that entails QUANTITATIVE and QUALITATIVE measurement. Involve setting HIGH standards, normal or regular standards are NOT acceptable.
• The ideal benchmarking partner should be similar in Size and Structure. The benchmark organization NEED NOT be a competitor
• A company may use benchmarks to evaluate employees or unit performance
• Benchmarking steps: PRIME
  1) Prioritize the benchamrking and select organizing teams
  2) Record and document the internal process
  3) Identify and search best in class performance - MOST DIFFICULT step
  4) Make gap assessment and root cause analysis report
  5) Execute and evaluate
• Leadership is the MOST IMPORTANT to implement benchmarking
• Cost of Quality entails: Amount of money spend to avoid failure
  1) Conformance costs - Financial measure for internal performance
  2) Nonconformance costs
• Conformance costs types:
  1) Preventive - avoid defective output which includes preventive maintenance, employees training, review of equipment design, evaluation of supplier and process reengineering
  2) Appraisal - activities as statistical quality control programs, inspection, testing and testing finished product. Is the cost of detecting Nonconforming products
• Nonconformance costs types:
  1) Internal Failure - Detect before shipment which includes scrap, rework, downtime, retesting, reinspection, lost learning oppurtunities, unplanned manufacturing machine repairs and abnormal spoilage
  2) External Failure - lost profit from a decline in market share as dissatisfied customers, return products for refunds, cancel orders. Environmental costs such as fines for non adherence to environmental law and loss of customer goodwill