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Robert S. Kaplan Harvard Business School
Harvard Business School Press
ISBN 0-87584-229-1 (alk.5. 4 5 6 7 8 9 10 9998979695 The paper used in this publication meets the requirements of the American National Standard for Permanence of Paper for Printed Library Materials Z39.© 1990 by tbe President and Fellows of Harvard College All rights reserved. Robert S. Manufactures-Management-Congresses. Kaplan. ern. Kaplan. I.M43 1990 658-dc20 88-77840 CIP . Printed in the United States of America. HD9720. LIBRARY OF CONGRESS CATALOGING-IN-PUBLICATION DATA Measures for manufacturing excellence I edited by Robert S. paper) 1. II. p. -(Harvard Business School series in accounting and control) Includes bibliographical references. Series.49-1984.
Armitage and Anthony A. Kaplan PART I Measures of Organizational Improvement 1. Clark 129 . Measures to Facilitate Organizational Learning Measurement. Limitations of Cost Accounting in Advanced Manufacturing Environments Robert S. 4. and Learning in a Multiplant Network W Bruce Chew. Kaplan 15 2. Performance Measurement for Competitive Excellence H.Contents Introduction Robert S. The Influence of Factory Automation on Management Accounting Practices: A Study of Japanese Companies Michiharu Sakurai 39 3. Coordination. Thomas johnson The Choice of Productivity Measures in Organizations Howard M. and Kim B. Atkinson 63 91 PART II 5. Timothy F Bresnahan.
and James M.6. Srikant M. Activity Accounting: An Electronics Industry Implementation George Foster and Mahendra Gupta 9. Managing for Cost Improvement in Automated Production Anders Gronlund and Sten Jonsson 7. Michael Harrison. the Semiconductor Industry j. Holloway. Turney 163 193 225 269 291 PART IV Measures for Production Planning and Evaluation Measuring Delivery Performance: A Case Study from 11. Banker. and Tridas Mukhopadhyay 10. An Architecture for a Process Control Costing System Ramcbandran Jaikumar PART III Measures for Product Design Improvements 8. Costs of Product and Process Complexity Rajiv D. Karmarkar. Charles A. 309 Choosing Manufacturing Production Control and Cost Accounting Systems Uday S. Patell 12. Phillip j. and Jerold L. Datar. Sunder Kekre. Internally Focused Activity-Based Cost Systems Robin Cooper and Peter B. Zimmerman About the Contributors Index 353 397 404 . B. Lederer.
1989. As inflationary demand subsided in the early 1980s. Kaplan January 25-26. however. Many companies did make enormous strides during the 1980s to incorporate total quality management (TQM). That decade shocked Western manufacturers into a new paradigm for competitive success. primarily Japan. The colloquium. consultants. just-in-time (JIT) manufacturing and distribution processes. design for manufacturabilitv (DFM). a colloquium was held at the Harvard Business School to discuss contemporary trends in measuring manufacturing performance. were much slower to adapt their financial and managerial accounting systems to the new operating en- ON . manufacturing firms saw how companies from East Asia. was particularly timely and important. and academics. were achieving enormous gains because of their ability to design high-performance. Many companies. by a total of twenty-four professors from business schools around the world.Introduction Robert S. 1 Twelve papers. were presented to and discussed by an audience of eighty-five manufacturing and finance executives. highquality products that could be manufactured reliably and efficiently. Western companies realized they had to make fundamental changes in their design and manufacturing processes if they were to survive in the new global competition. held in the last year of the 1980s decade. and flexible manufacturing systems (FMS) into their operations.
The companies studied are leading manufacturers in North America. all with prior field study experience. DFM. Measures for Product Design Improvements 4. The authors represented both the accounting and operations management areas. companies were starting to develop and implement new approaches for motivating manufacturing and design excellence. Japan. and Japan. which were considerable. JIT. and computer manufacturers) or in the automobile industry-a representation that is not surprising given the technology changes and vigorous global competition taking place in both industries.2 INTRODUCTION vironrnent. J By the closing years of the decade. Existing systems for cost and performance measurement provided little motivation to support companies' attempts to incorporate TQM. The twelve papers presented at the colloquium have been grouped into four categories for this volume: 1. The contributors to the colloquium. Canada. and Europe. Measures for Production Planning and Evaluation Papers in the first category document the new measures being used by organizations to motivate and evaluate their continuous improve- . Thus. were asked to investigate important changes in measuring manufacturing performance at innovative companies. Many are in the electronics industry (including semiconductor. In some instances. The colloquium documented the status of these approaches in leading organizations in the United States. the colloquium highlighted the value of multi. the traditional financial-performance measures actually inhibited the improvement activities. and several papers were co-authored by faculty from the two areas. and FMS concepts into ongoing. Europe. Several companies joined a consortium to document their frustration with existing performance-measurement systems and to attempt to establish a framework for a new generation of cost management systems. instrument. were not being tracked well by traditional financial performance-measurement systems. Measures to Facilitate Organizational Learning 3. continuous improvement activities. Measures of Organizational Improvement 2.and interdisciplinary research in addressing the important questions that arise as companies attempt to attain manufacturing excellence.? As a consequence. operating improvements.
despite improvements in operating performance. information is not used to control operations but to improve operations. The locus of information shifts from summarizing shop-floor performance for higherlevel managers (the traditional role for manufacturing performance measurement) to summarizing local (shop-floor) performance and reporting it back to the local managers and employees to guide their learning and improvement activities. In the fourth category. and flexibility. costs. These papers examine the appropriate roles for traditional financial measures-standard costs and variances. and by the somewhat arbitrary allocation of plant-level . Yet. The papers in the last category highlight the value of treating these two tasks in a more systemic and integrated fashion. all had made substantial progress along these dimensions. In this role. production planning and performance measurement have been treated as separate and independent tasks. the papers investigate the interaction between production-planning models and systems of performance measurement and evaluation. In the second category.INTRODUCTION 3 ment activities. the papers study measures used for motivating organizational learning. the financial summaries of each department's operations revealed level. Attempts to achieve manufacturing efficiencies after products have been designed and large-scale production is already underway may provide only limited opportunity for cost and productivity improvements. delivery time. To a considerable extent. All three departments had instituted programs to improve quality and to reduce total cycle time and inventory. Historically. More-detailed investigation revealed that the cost summaries had been adversely affected by the failure to adjust departmental performance for decreased volume of activity and for increased complexity in the activity mix. MEASURES OF ORGANIZATIONAL IMPROVEMENT The paper by Kaplan reports on a study of performance measures in the printed circuit board departments of three electronics companies. or higher. The third set of papers explores how companies use activity-based cost systems to provide product designers with more accurate information on the manufacturing cost consequences of their decisions. and labor and machine efficiency measures-and for operational measures of quality.
Sakurai points out that Japanese systems do not differ greatly from those found in Western companies. The Sakurai paper contrasts U. value engineering. Investment in working capital is minimized by commitment to just-in-time OIT) production procedures and direct measures of success in achieving JIT goals. for a variety of reasons. and perhaps trade-offs on functionality. new procedures have been instituted for measuring the costs of software development projects. Target costing develops product cost information by working back from market-based pricing and subtracting a standard returnon-sales percentage to yield an allowable cost for new products. Investments in fixed capital are controlled directly by formal capital-budgeting procedures. Japanese companies prefer. As Japanese companies introduce more factory automation (their term for robots.S. and computer-integrated manufacturing). Tom Johnson studies two innovating divisions of large U. even at the expense of accuracy. stimulating them to reduce costs by improved cost designs. They have also been reluctant to embrace some of the more complex (activity-based) cost systems now being adopted by several U. S. This allowable cost then establishes a cost reduction target for engineers.S. flexible manufacturing systems. and Japanese management accounting systems. a higher percentage of capital costs must be devoted to developing sophisticated software. Kaplan concludes by questioning whether the variances reported by even a well-functioning standard cost model are meaningful when direct measures of operating performance are available. which is not surprising since many of the systems were derived from those of Western firms. Sakurai describes innovative Japanese practices in three areas. Consequently. to use return on sales rather than return on investment (ROI) for measuring divisional and product performance. com- .4 INTRODUCTION costs. Japanese companies. companies. They want a simple. however. preferring simple and easy-to-understand overhead allocation systems. A final innovation is really not a new idea at all. not by ex post ROI measures. relatively unambiguous measure of profitability that neither encourages companies to underinvest in new technology nor requires allocations of fixed capital to departments or products. He suggests that relegating cost reports to a more analytic role and relying on timely and frequent reports on actual trends in operating performance can assess the success of departments' continuous improvement activities. have been quicker to abandon standard cost systems for variance analysis and control in the new manufacturing environment.
They notice an increased trend for direct. Armitage and Atkinson study the productivity measurement programs of seven Canadian companies that had been singled out for distinguished accomplishment in productivity improvement. nevertheless yields some important common insights. Both divisions were committed to achieving world-class manufacturing capability and had successfully implemented considerable improvements in their quality and cycle time performance. the authors find that variances from standard cost systems are not an effective tool for motivating improvements in operations.INTRODUCTION 5 panies. were obscured by the financial system. Despite the similarity of operation. operational measures of process improvements-in quality. Johnson believes that in the future there will be a greatly reduced reliance on financial summary measures as managers rely on direct operating measures of actual performance to guide their continuous improvement activities. Still to be resolved by future experience and research is the appropriate balance between financial and operational measures of performance. This paper concludes. which tracked only . This group of four papers. none found its financial or cost accounting system useful in the productivity-enhancing program. delivery time. productivity differences among the plants ranged as high as 3: I. as does Tom Johnson's. that traditional financial summary measures playa small role in companies attempting to improve performance. They relied on direct operating measures of performance but were still using traditional cost accounting systems to evaluate their continuous improvement activities. Primarily. each of which differs in several respects. however. Bresnahan. These differences. MEASURES TO FACILITATE ORGANIZATIONAL LEARNING The paper by Chew. None of the seven companies used comprehensive productivity measurement programs. and productivity-to motivate and evaluate process improvements. and Clark examines productivity variation across 40 similar plants in a food-preparation organization. And each company had chosen to measure the performance of that key activity (or activities) and highlight improvement along that particular measure. Each company had identified one or more key activities that it had to perform well in order to produce substantial improvements in productivity.
and Clark that local innovation is best done by independent production units and that active centralized management of the process can inhibit the development of new ideas. Resolving this tension requires fundamental decisions on how a general manager sets the degree of competition and cooperation among various plants and on which functions in the information flow management should be centralized or decentralized. Bresnahan. The differences were significant. not just materials flows. as in the study by Chew. Strong cultural forces.6 INTRODUCTION profitability and failed to distinguish profitability caused by higher selling prices from that caused by higher productivity. First. embedded in the beliefs and values of the managers. The information systems for the less successful teams were too complex and may have precluded the teams from getting timely. it demonstrates that managers of multiplant organizations need to concentrate on leveraging local innovations to all plants in the network and need to manage knowledge and information flows. accurate feedback on their experimental activities. Gronlund and Jonsson agree with the observations of Chew.or average-productivity ones. employees felt that conditions at each site were unique and that they had unique informational needs that precluded sharing of ideas or information systems across organizational units. it demonstrates the tension between rewarding local plant performance (thereby encouraging local efforts and innovation) and rewarding overall divisional performance to encourage sharing and dissemination of knowledge throughout the network. Jaikumar's paper provides powerful insights on the role of financial information in guiding and setting priorities for organizational learning and improvement activities. and Clark. Despite the incentives for disseminating innovations from highproductivity sites to low. precluded the organization from capturing the benefits from its innovative sites. The Gronlund and Jonsson paper studies organizational learning at a micro level through clinical observations over extended periods at manufacturing work stations. the various plants shared virtually no information. The paper provides vivid examples of how continuous improvement activities are actually carried out by local production teams. Flexible and responsive information systems played a vital role for the successful teams. Interestingly. Second. since merely raising the below-average plants to the average level of productivity would have increased overall profits by more than 20%. He presents a six-epoch model . Bresnahan. The paper raises several extremely important questions about managing complex organizations.
engineers in Western companies have designed products for functionality and product performance. MEASURES FOR PRODUCT DESIGN IMPROVEMENTS The three papers in this section present how companies have developed more accurate cost models of products in order to guide engineers' product design activities. over a 200-year period. is also needed to provide rapid. as the other papers in this section state. The three papers in this section point to the use of cost-based information to provide feedback to employees and managers about the consequences of their activities for process improvement. with the manufacturing function relegated to merely producing the products. The information system. however complex. (Jaikumar considers the manager an omniscient observer. that emerged from the . applied to a computer-controlled wire-drawing facility. accurate feedback on the consequences of local process-improving experimental activities. In technologically advanced companies. Little attention was paid to the manufacturing consequences of product design decisions.INTRODUCTION 7 of manufacturing process control. a three-year clinical observation in an automobile components factory. The present epoch enables a manager to have complete information about production processes. The settings and analyses of the papers are radically different: a statistical crosssectional analysis of kitchen productivity. and a conceptual theorizing of manufacturing development. The concepts are illustrated by activities currently underway in a technologically advanced wire-drawing factory. Historically.) The manager in this environment needs cost information to determine which contingencies are most expensive to the organization so that projects to determine how to alleviate or avoid these events can be given the highest priority. starting with the English system that introduced machine tools and mechanization in the early 1800s and culminating with today's world of intelligent systems and computer-integrated manufacturing (CfM). product design engineers and marketing experts were dominant. guide. But none of the organizations' existing financial systems normally produced the appropriate cost-based information. This diversity only makes the commonality of the message from the three papers all the more striking: cost-based information can playa powerful role to motivate. and implement process-improvement activities.
cost. Foster and Gupta describe the implementation of a comprehensive activity accounting system in a division of an electronics instruments company. The division produced a huge variety of lamps that made widely different demands on the plant's critical resource-the injection-molding process. It produced dramatically different product costs-with complex. it had been widely accepted by engineers and managers. Despite the increased complexity of the activity accounting system. Datar. Traditional cost systems had led the firms to great proliferation of parts counts and products and to complex manufacturing processes.. Product designers.. commonality. The costs of these complexity factors could now be signaled to help product engineers to make trade-offs among cost.versus high-volume products and about the actual drivers of the costs of individual production and support departments.g. low-volume products experiencing the largest cost increases. cycle time and setup time variables). The existing cost system. the number of functions for the lamp. number of part numbers) and on the efficiency of the product's production process (e. no longer trusted numbers produced by a cost system that used only a few simple drivers. Kekre. Banker. failed to signal the great differences between simple and complex lamps in the resources required for setup. functionality. The use of activity-based cost systems has enabled companies to better inform engineers about the manufacturing cost consequences of their product design decisions. and supervision. In addition to obtaining better information for product designers. and hence prIce. and Mukhopadhyay describe ongoing research in estimating an activity-based cost model in the lamp division of an automobile company.g. The new system incorporated cost drivers based on the complexity of products (e. Statistical analysis of resource requirements indicated that design parameters such as the number of moving parts in a mold. and esthetics. Cooper and Turney describe the experiences of three electronics companies attempting to gain control of their product design and manufacturing processes. Marketing personnel preferred seeing the explicit trade-offs among functionality. recognizing the complexity of their task. and the use of two different colors contributed significantly to the indirect manufacturing resources required to mold a lamp. based on direct labor and machine-processing times.8 INTRODUCTION lengthy design process. complexity. quality control. Rather than conduct a detailed study of the . the division felt it needed to get morc accurate information about the relative costs of low.
The model shows the complexity introduced to the order quotation process by statistical variation in order arrival and processing times. It encourages researchers and managers to confront the highly interactive nature of production systems design. and production scheduling-that link the three units' functions. and local performance evaluation and incentive systems. papers). They find weak correlations between production control systems and the production environment-materials requirement planning (MRP) systems are more likely found in batch than continuous production processes-but. performance measures. Previous attempts to model complex production settings have typically focused on only one of the three determining factors (information. they do not find associ a- . the three companies had loaded many overhead costs directly on to the two cost drivers that they knew would get the immediate attention of product designers: number of unique parts and cycle time. The paper is a fascinating exercise in explicating the interactive roles of information systems. Harrison. incentives. inventory tracking. in general. and production control-and the three information systemsorder entry.3tems. and Patell study the productionscheduling process of a large semiconductor company. Lederer. Cooper and Turney discuss the circumstances that cause companies to use cost drivers that will influence behavior in a desired way rather than estimate a more accurate model so that their strategy can be influenced by the model's results. scheduling algorithms.INTRODUCTION 9 primary drivers of materials and manufacturing overhead costs (as described in the Foster and Gupta and Banker et a1. Karmarkar. They provide a model of three interacting organizational units-sales. This paper highlights the difficulty (perhaps the impossibility) of obtaining an "optimal" systems design. MEASURES FOR PRODUCTION PLANNING AND EVALUATION The final section contains two papers that explicitly recognize the interaction between performance measurement and production planning. Holloway. or algorithms). manufacturing. and scheduling rules in producing difficult-toanticipate consequences. and Zimmerman perform a cross-sectional sta~istical analysis to determine whether they can explain why individ~companies use particular production control and cost accounting ~~:.
relevant information to local workers. Physical. The study indicates the difficulty of studying crosssectionally the match between a firm's environment and its management practices in a situation in which environmental change is rapid but significant lags may exist between the need for and the actual adoption of new procedures.10 INTRODUCTION tions among the adoption of particular costing and production control systems and characteristics of the firms' environment and production processes. motivating. operational measures were playing a much more important role and were starting to replace cost system variance reports as a source of information for managers and employees. and the company. Whether such faith is well placed will be answered by the experiences of innovating companies in the years ahead. Emphasis had shifted from controlling operations to providing timely. departmental and plant measures. managers. by this time. that long-run financial success will follow improvements in these operational performance measures. No longer can performance measured at a local level be aggregated into the performance measures of the plant. . Just how to design a hierarchical. and evaluating manufacturing performance. but only preliminary steps had been taken to implement a new set of measurement procedures. throughput. Clearly. and on-time delivery-and to accept. But increased use of physical measures leads to new problems. and engineers for their continuous improvement activities. Companies that have abandoned or greatly reduced their reliance on local financial measures are asking their higher-level managers to deemphasize traditional short-run financial controls-by allowing plants to be guided by measures on quality. and divisional performance measures remains a task for future research and experimentation. the division. The papers capture companies at a relatively early stage of transition: problems with the old measurement system had been recognized and a vision for improvement adopted. comprehensive system of local shop-floor measures. companies had recognized the limitations of traditional cost accounting systems for measuring. cycle times. SUMMARY These twelve papers present an excellent summary of performance measurement in manufacturing organizations in the late 1980s. perhaps on faith.
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