You are on page 1of 119


•Lean Mfg:g Principles p •Basic tools and Techniques •Definition of lean manufacturing •Assessment tools •Implementing Lean Mfg •Science behind lean manufacturing •Capacity utilization •Variability and Delivery

Lean Manufacturing Principles

The basic lean manufacturing principles can be explained with some keywords used in lean manufacturing. manufacturing . By y understanding g these key y words y you will understand the basics of lean manufacturing, which is very important in success



Lean manufacturing defines the value of a product or a service with the customer point of view. Customers do not mind how hard you work or what is the technology you used to create the product or service you are selling to them. They will evaluate your product or the service by looking at how well this is going to fulfill their requirements. Customers do not need to p pay y for the quality q y defects you y have removed from your production lines. They also do not need to pay for the huge amounts of Over Head costs you have back in your facility facility. They will pay for the fulfillment of their requirements with the product or service you are providing to them.

i ti Knowing the scale of the wastes. In lean manufacturing the wastes are defined as anything which does not add value to the end product. it is very much h fair f to define d f a waste in this h way. Even the best lean manufacturers waste up to 30% of their resources. So it is obvious that there are serious wastes that are hidd or yet hidden t to t be b discovered di d in i your organization. it is worthy to know exactly a waste according to lean manufacturing.Waste: Each and every organization wastes up to 95% of their resources. 4 . while most commonly this value exceeds 70%. If customer sees the value with the end product.

causes then it is time to find out the solutions. This process will be continuous until there are wastes to be removed. When you clearly understand the problems and their causes. One root cause even can contribute for more than one problem.. finding solutions and implementing will go on and on again and again. Sometimes it is one or more root causes for a problem. Lean manufacturing believes that each and every activity is interconnected. Therefore one advancement in one place will increase the system as a whole. When you find the solution to the problem. Therefore this cycle of identifying. finding root causes. Lean manufacturing is the way to never ending continuous improvement. The cycle will never end. Therefore you will have increments in your total productivity everyday. g 5 .Root Cause: Every problem in the system has a cause for it. This kind of problem solving requires people who can think differently or creatively. Lean manufacturing solutions are more often very simple and very effective. then it is the time to implement the solution and to make sure that you achieve your objectives. This is also known as the Kaizen in lean manufacturing.

Good team means better future. Therefore departmental thinking will not be good in lean manufacturing. i ti They Th all ll lead l d to t the th ultimate lti t objective bj ti of f the th organization. competitive world. Therefore no organization can succeed if the workers are only concentrated about themselves. and play individually. lean manufacturing treats the organization as a single unit. This is applicable to individuals working in the organization. 6 . They are made into teams sometimes cross functional teams to accomplish p the objectives j of the organization.Team building: It is one of the most important aspects of lean manufacturing manufacturing. g Every job has to be supported by many other people. This is why almost all the organizations around the globe are trying to build team working culture in their organization. with various job functions. So it is crucial to learn the art of team building to survive in today’s tough.

In a team working environment there is a strong possibility of talented people getting demotivated. people tend to relax and go flat. For an example they will not look to satisfy their esteem needs until their basic requirements like food food. So learn how to motivate yourself and people working with you. According to this hierarchy people have an order of requirements where only when the lower a level need is satisfied they will look into higher level needs.Motivate: When organization is changed from conventional to lean manufacturing. So how do we refresh them continuously and get the best out of them? You Yo ha have e to moti motivate ate them contin continuously. o sl Understand the requirements of the people. So it is necessary to give some attention to individuals with very high talents. Maslow’s hierarchy of needs is one way to understand the requirement of the people better better. water and shelter is satisfied. 7 . and talk to their requirements and fulfill them.

) 8 .BASIC TOOLS OF LEAN MANUFACTURING 5s workplace organization Work cell Primary tools Total Productive Maintenance Process / Value stream Mapping app g (Also known as Primary tools of Lean Mfg.

Identifying the fact that there are wastes to be removed 2. There are four steps in implementing lean manufacturing. Lean manufacturing is based on continuous finding and removal of the wastes. Application of these solutions and achieving the objective 9 . They are. Analyzing the wastes and finding the root causes for these wastes 3. Therefore all the tools in lean manufacturing aim to identify and remove wastes from the system continuously continuously. 1. Finding g the solution for these root causes 4.

2 2. 4. 3. 5S work p place organization: g One of the very important standardization tools used in lean manufacturing is the concept of f 5S 1. 5. Seiri Seiton Seiso Seiketsu Shitsuke Seiri refers to the sorting items according to their importance of use and discarding the items which are not useful. 10 .

. . Seiton refers to the arranging g g of the selected items in a well organized and meaningful manner. This is like keeping the tools used frequently near to the worker worker. Seiketsu is continuously following the above three rules to achieve a good and organized work place place. In the bigger picture this might be equivalent of having a continuous process of identification and removal of wastes wastes. Seiso refers to keeping the workplace clean clean. . life. Shitsuke is training and motivating the people to follow these g good p practices simply p y as a p part of their day to day life. . 11 . manner .

areas. facility . They are Preventive maintenance Corrective maintenance Maintenance prevention 12 . In lean manufacturing one machine breakdown will not be just another breakdown since it can hold the entire production flow as there is no WIP to consume in the time of the machine b kd breakdown.Total Productive Maintenance (TPM): Maintenance function is very important aspect which ensures smooth running of a production facility. TPM has h three th main i areas. breakdown .

This process might include decisions like buying correct machinery for the job. training people to overcome most common p problems etc. This is the process where the decisions are made in order to prevent maintenance. Correction of the problems when they occur is very important to run the production units smoothly. This is done after the machine breaks down Maintenance prevention is one of the key aspects which makes the path to become lean. i t Regular checkups are planned and carried over at regular intervals. Preventive maintenance is continuous checking and prevention ti of f major j maintenance. 13 .

the process map includes all ll the h activities i i i from f the h point i of f development d l or order inquiry to making and shipping the goods and up to the point where customer collects the goods. Irrelevant of the value they add to the final product or the service. goods.Process Mapping: pp g Process map simply maps all the processes and the activities which are carried out in bringing a specific product or a service in to a reality. reality. 14 .

you have to create the process map for the future. Value added and 2. When you map the process. activities After understanding these clearly. 15 . Non value added activities You will also have better idea of what are the h avoidable. you will start to see the 1. id bl non value l added dd d activities i ii and what are the non value added unavoidable activities.

– It provides only the major steps in the process and thus acts as g point p of any y process p study y the real starting – It helps in establishing the scope of the process – Helps to identify the significant issues. Detailed p process map: p 16 . If one is ignorant of his current situation. he cannot set any goals for improvement Types of process maps: – It gives a bird’s eye view of the entire process. – This is prepared after having a brain storming session among the participants. Process maps p are prepared p p before starting g any y improvement program. High level process map: – it shows each and every step involved in the process.

cell People who are in this cell are multi skilled and d can perform f multiple lti l tasks t k according di to the requirement 17 .Work Cell Work cell concept is another concept developed with the JIT. In a work cell there will be 33-12 people depending on the job task performed by this cell. Work place is arranged in to a cell which is in the shape of English letter “U”.

Advantages of work cell One of the main advantages of the work cell is less movement and lesser transportation. considerably This will also give very high flexibility to th entire the ti production d ti system t since i changing from one product to another is very easy. 18 . transportation Also this will reduce the over production considerably.

The technique often decreases the time between a customer order and shipment. throughput time. 19 .DEFINITION OF LEAN MANUFACTURING Lean Manufacturing g is an operational p strategy gy oriented toward achieving the shortest possible cycle time by eliminating waste. and it is designed to radically improve profitability. It is derived from the Toyota Production System and its key thrust is to increase the valuevalue-added work by eliminating waste and reducing incidental work. customer satisfaction. time and employee morale morale.

and shorter lead times. 20 . half the manufacturing space. higher quality. and half the engineering hours to develop a new product in half the time. The benefits generally are lower costs costs. half the investment in tools. The term "lean manufacturing" is coined to represent half the human effort in the company.

equipment.The characteristics of lean processes are: – – – – – – – – – – – – · · · · · · · · · · · · Single Single-piece production Repetitive order characteristics Just-In JustIn-Time materials/pull scheduling Short cycle times Quick changeover Q g Continuous flow work cells Collocated machines. tools and people C Compressed d space Multi Multi-skilled employees Flexible workforce Empowered employees High first first-pass yields with major reductions in defects 21 .

When we know which secondary tools need to be used with which primary tools its easy to solve problems quickly Assessment tools are also known as secondary tools 22 .ASSESSMENT TOOLS Many a times small tools will help overcome big problems with least effort.

Secondary tools help the organization to Identify areas requiring further study Identify causes for the problems Construct a p performance indicator Achieve better products Improve productivity Develop p communication Spider chart P k yoke Poka k Kanban Autonomation SMED DFMA Workplace visuals The secondary tools that are used are 23 .

The chart displays the important categories of Performance and makes visible concentrations of strengths and weaknesses. Spider Chart: This is also Known as radar chart A radar chart graphically shows h the h size i of f the h gaps among five to ten organizational performance areas. 24 .

t 25 . is a simple method to prevent defects from occurring in your business processes Lean manufacturing understands that large portion of these mistakes is due to the problems in the system itself. also called mistake proofing. Poka yoke: Poka Yoke. Therefore lean manufacturing calls for a system which hi h is i mistake i t k proof f by b nature.

So at the end of the p process you y can trust that you have a good quality parts on your hand. 26 . Pokayoke systems reduce the cost of failure dramatically. Poka yoke is one of the critical steps in the lean journey. No defective part will be passed to the next p process.

It is used in manufacturing to mean a visual signal that tells when it is time to get or make more of something. if sized properly • Tells when and where there is a problem in the process • Assures A there th is i always l just j t enough h material t i l on hand h d to t make k what is needed Types Of Kanbans Kanbans: : Raw Material Kanban In In-Process Kanban Finished Goods Kanban 27 . What Kanbans Do: • Controls the amounts of raw material amounts and of material in W k In Work I Process P • Smoothens out flow. Kanban: Kanban : Kanban is Japanese for sign or designated place.

The idea was to reduce the setup time of the machinery. This is why SMDE was born born. e 28 . With the aid of careful planning and coordination it was possible to reduce the time taken to change h the th line li into i t minutes i t from f days. line This took days and therefore made the production lines inflexible. d This made an immense flexibility in the production p oduct o line. Single g Minute Die Exchange g ( (SMDE) ) One of the most complicated problems this industry faced was overcoming the time taken to change the style in the production line.

This has something to do with – strategic planning. – choosing correct machinery – having correct layouts. Achieving SMDE require very good analysis l and d creative solution l making. k 29 . machinery. – having trained people and – correct mindset of the people.


31 .

Visual management helps you: • • • • • • • • • Understand and indicate work priorities See whether performance (usually daily) was met Identify the flow of work and what is being done Identify when something is going wrong or not happening Show what standards of work should be Communicate to everyone what performance measures are in place Demonstrate all the elements required for safe and effective work P id real Provide l time ti feedback f db k to t everyone involved i l d in i the th whole process Cut down on meetings to discuss work issues. 32 .

or combination of both When everything is ok the green light is in on condition When Wh the th machine hi has h a problem bl it shows h a red d light. Autonomation: Autonomation : An automatic signal that indicates the status of any machine. automated The signal can be in the form of light. This helps the operator to look after multiple machines at a time. sound. 33 . quality parameter or any other things that need to be measured. There is no manual intervention and everything is automated.

DFMA: While designing any component the designers concentrate only on the end use of the product. 34 . While designing a component many issues have to be taken up – – – – – – Raw materials Customer requirements Manufacturing process Quality Qua y pa parameters a Ease of assembly Safety etc. They are habituated to thinking only about the functional point of view.

mfg Rules of lean mfg implementation Stability Standardized work Pull system Level Production Continuous improvement 35 .Implementation of lean mfg.

When the top p management g decides to go g ahead with lean transformation they pp a consulting g organization g and approach the following steps have to be complied with – Lean champion has to be selected – Lean leaders and associates are chosen – Meeting between leaders and associates to be arranged g – CEO will explain the necessary training and implementation process 36 .

– A training and implementation schedule is prepared in collaboration with the consultant – Leaders and associates are trained – Brainstorming takes place – Leaders for each project have to be identified – A project charter has to be prepared – Leaders select the associates – Again brainstorming takes place between leaders and associates for each project – Project implementation commences – Projects are reviewed at regular intervals 37 .

– Saving through implementation is calculated – Train employees in 5s implementation – Start 5s implementation – Measure results of 5s p and processes. p – Sustain the improvements



Variability is the consistency of each step to ensure that each cycle y of the p process is identical

Strategies g for Variability: y

Manufacturers can either
1) reduce variability or 2) cope with it.

Almost ost e every eye element e e to of Lean ea Manufacturing a u actu g aims at reduction, coping or both. Most variability y is unnecessary, y, unproductive p and indicative of an underlying problem.

For these reasons, variability reduction is the first line of defense defense. . TQM/Six Sigma is an example of variability reduction. reduction. Occasionally, variability is irreducible for t h i l reasons or desirable technical d i bl for f marketing k ti reasons. reasons . In these cases, cases systems can be designed to cope with it. it. CNC processing equipment is an example of coping with variability variability. . However, However coping with variability (as opposed to reducing it) is often expensive p and may y p produce undesirable consequences. consequences .

a factory or production line "chokes chokes up" up well below theoretical capacity. With high variability. i bilit Some S elements l t of fL Lean reduce variability while others attempt to cope with irreducible variability. l h The amount of variability also limits capacity. The amount of variability shapes the curve that defines this relationship. 41 . Almost every aspect of Lean Manufacturing i involves l variability. variability Variability y is the reason that inventory y rapidly p y rises with increasing utilization.

services.CAPACITY UTILIZATION Extent or level to which the productive capacity of a plant. utilized. Expressed usually as a percentage. it is computed t d by b dividing di idi th total the t t l capacity it with the portion being utilized. firm. 42 . or country is being used in generation of goods and services.

It is a good indicator of business and market conditions as when times are good most plants are able to run at close to 70 7080% 80 % capacity utilization and in some cases all the way up to 100% 100 %. . 43 .Another way of defining it is… is Capacity utilization is a percentage measure or KPI which indicates the amount of available capacity that is being used to supply current demand demand.

Capacity utilization is a widely used KPI and operational measure in many industries in the strategic capacity and business planning functions of many organizations. 44 .

market exits cost curves for different manufacturers exits. overtime costs. the split between fixed and variable costs. manning. 45 . along with other information. inventory. can also be used in operations and production management to calculate the average marginal cost of production. entry into new markets. and profitability. Capacity utilization. and engineering / maintenance costs costs. . It can be used as a measure which helps d t determine i optimum ti timing ti i of f capacity it expansions. profitability.

A firm’s productive capacity is the total level of output or production that it could produce in a given time period.A. Capacity utilization is the percentage of the firm’s total possible production capacity that is actually being used. Capacity utilization is calculated as follows: Capacity utilization (%) = actual output per month (or per annum) x 100% _______________________________________ maximum i possible ibl output t t per month th (or ( P.) PA) 46 .

example if a firm could produce 1200 units per month.For example. its capacity utilization is as follows: Capacity utilization % = 600 units per month x 100% / 1200 units per month = 50% 47 . but is actually producing 600 per month month.

It th therefore f f follows ll th that t a fi firm should h ld be b most efficient if it is running at 100% capacity it utilization.Financial implications of capacity i utilization ili i A firm firm’s s level of capacity utilization determines how much fixed costs should be allocated per unit. the fixed costs (and therefore also also. total costs) per unit will decrease. unit As a firm’s capacity utilization increases. tili ti 48 .

. However. so machine breakdowns may y occur more frequently and orders will be delayed – It may not be possible to meet new or unexpected orders so the business cannot grow without ith t expanding di it its scale l of f production 49 . there are a number of potential drawbacks: drawbacks : – There may not be enough time for routine maintenance. if a firm is running at full capacity.

leading to increased mistakes. increasing l b labour costs 50 . Staff may y feel under excessive pressure. p . work may become less efficient due to the untidy working conditions It may be b necessary to spend d more on staff overtime to satisfy orders. absenteeism and labour turnover If the factory space is overcrowded overcrowded.

general businesses would feel most comfortable at something between 80 % to 90 90% % capacity utilization because fixed costs per unit are relatively low and there is some scope to meet new orders or carry out maintenance and training 51 . In general.


com 53 .com/group/lea nmanufacturingvitGroup nmanufacturingvit Group email: il leanmanufacturingvit@yahoogroups l f t i it@ h .yahoo. leanmanufacturingvitGroup home page: http://groups.

III Strategic issues: .Leadership .Management of teams – Training.Actions . Lean accounting: Activity based costing Product costing Volume adjusted costing Focused factory concept B ildi strategic Building t t i advantage d t th through h enterprise t i wide.Issues .Focus . id .UNIT .

55 .

ACTIONS Lean Implementation Process Plan Do Check Adjust j 56 .

step tools and methods guide leaders in aligning strategy. 57 . goals. strategy.Plan Align goals. and actions. and actions Step 1: Policy deployment In this step. a o This alignment minimizes waste and increases the impact of business activities.

Step 3: Value Stream Mapping – A value stream map represents the flow of materials and information through a business syste system. 58 . assigned. and implemented. action plans p are designed. p. Step 2: Action plans – Once the actions have been identified in the policy p y deployment p y step.

Current state map: the as‐is process 2. Future state map: the improved process 3. There are three tangible. detailed end products of a value stream map exercise: 1. Implementation plan: how to get from the current state to the future state Implementation n Current state Future state 59 .

Most of the improvements that are developed by the t e kaizen a e workshop o s op tea team a are e implemented p e e ted immediately for immediate return.Do Implement Lean according to plan – Kaizen workshops Kaizen workshops are focused process improvement workshops. 60 . Process improvements in the range of 50% are typical in kaizen workshops.

61 . system – Go do’s do s Go‐do’s are simple improvement activities that do not need to be a kaizen workshop or project.– Projects Projects are improvement activities that cannot be achieved within the time scope of a kaizen workshop. An example of this might be implementing a new computing system.

changes .Measure and analyze progress Systematically measuring and analyzing progress is one of the most important aspects of sustaining and improving on changes. the changes will not be maintained maintained. Without this discipline. . Th There are two t categories t i of f measures measures: : – Process metrics – Management metrics 62 .

level and that help everyone understand how a process is doing doing. system. time. These are the measures that guide behavior at a local level. . Management metrics help managers make business decisions. decisions. 63 . Process metrics let employees and managers k know th status the t t of f a particular ti l process at t any particular time. An example of a process metric is the cycle time for an order to be entered into the system.

Changes are sustained and improved 64 . phase two important things happen: – 1.Standardize and sustain change In this phase. 1 Process improvements are adjusted and standardized based on the measures and analysis a a ys s – 2.

Measurements and analysis help make the inevitable adjustments to the process more effective. and help remove obstacles preventing progress. make it a priority. and those that plan p for it are more likely to succeed in their efforts to sustain change. B Because modern d b business i systems t are so complex. 65 . Very few improvements run perfectly out of the chute. l there th are unanticipated consequences that require a response. it is advisable to make decisions that have some connection to data. Leaders keep continuous improvement on the agenda. Whenever possible. Sustaining and improving these changes requires commitment from leadership leadership. This is a normal occurrence. .

Resistance to change Lean cannot be learnt by reading a book Recognize lean as a whole philosophy Failure to empower people Lean is not limited to manufacturing Cultural issues 66 .ISSUES The most common challenges manufacturing businesses face when implementing Lean.

FOCUS The primary focus of lean manufacturing is to eliminate waste The second focus is to empower workers and allow them to make production decisions. and delivery. continual improvement in cost. significant environmental l benefits b f typically ll occur as a result l of these productionproduction-focused efforts. quality. 67 . The focus of lean manufacturing g extends on to driving rapid. service.

68 . The focus needs to be on improving processes and d not t operations. ti In the past the focus was on getting equipment to run at maximum speeds to produce the highest volume of products products— —creating mountains of inventory without considering the exact needs of customers. The want was on both machines and people to work correctly. but with the wrong emphasis putting p g energies g in the wrong g direction.



The team in an organization is like the family in a society. i t It is i the th fundamental f d t l building b ildi block bl k of f trust and competence. The te team mi is the he heart t of the social o i l system tem both at the front line level and at all levels of management. management Three characteristics a group are required to be considered a real team, and to maximize its potential:
A meaningful and common purpose Adaptable skills Mutual accountability


The most effective organizations are all built on the f foundation d ti of f effective ff ti t teams. The majority j y of companies p implementing p g lean organization are not achieving the results they could achieve because they are primarily focused on the technical things which form only half the organization. organization The other half is the human side, the culture of the organization. This is the hard part because it is about you – how you think, feel and behave. It is about the relationships between team members, between different functions and levels in the organization It is about trust. organization. trust This is the hard part part.

Lean Team Management for most companies is a change in culture. It is a culture of responsibility for performance at every level l l of f the h organization. It is a culture that is very focused on data, the f t of facts f performance. f It requires everyone to know and serve their customers internally and externally customers, Lean is not a set of problemproblem-solving techniques. L Lean is i a culture lt that th t is i practiced ti d toptop t -to t -bottom, tob tt leftleft -to to-right, in the organization.

Results in better work with innovative ideas. Employee job satisfaction gets boosted. but also provides practical techniques for you to try in different settings Benefits: Team management helps to remove bottle necks. 73 . ideas It reduces time wastage and increases production. Effective team management helps not only how to establish a productive environment and exploit group dynamics.

– organize and assign prepre-planned work – act t as a subject bj t matter tt expert t or coach h to t less l experienced or less knowledgeable employees 74 . scope with accountability limited to its two main functions which are to functions.Team Management role Role 1: The Team Coach A team coach is an entry level team leader role. The role has a narrow scope. role .

. . training and performance monitoring monitoring. rather than on developing their people leadership capabilities. – Small highly technical teams where a subject matter expert can add considerable value value. People in these jobs tend to focus on their technical skill development. justified. recruitment. This type of role is suited to – Small teams of 8 employees or less completing repetitive tasks. capabilities. – Large g teams of employees p y who complete p highly g y repetitive tasks where others are responsible for planning the work. . – Small business where the next level manager retains performance management responsibilities responsibilities. where a full time team leader is not warranted or justified. 75 .

full time Th core functions The f ti of f this thi role l are to t – Planning and assign the work that needs to b completed be l d – Rosters employees to meet forecast demand. role. id tifi identifies resource gaps and d resolves l both b th technical and performance coaching – Managing planned and unplanned leave 76 .Role 2: The Team Supervisor The team supervisor is a management/leadership role.

77 . . Thi role This l has h a far f greater t emphasis h i on leading l di people than on developing the incumbent’s technical capabilities capabilities. .Role 3: The Team Leader A team leader is someone who is wholly accountable for their team’s performance performance. They participating fully in the hiring and firing process and they have a high level of involvement in the planning processes that affect their team team. .

Typical Team Leader Tasks Preparing for and the Facilitation of meetings Building effective teams Developing and coaching team members Managing g g – – – – – – – One on ones Fire side chat Performance feedback Performance Appraisal M Managing i poor performance f Managing undesirable behavior Managing unplanned absence 78 .

Managing budgets or costs Planning work Planning Resources Driving for results Making M ki decisions d i i Analysis and problem solving Managing change Managing quality Managing safety Personal Pe sonal development de elopment 79 .

TRAINING The term training refers to the acquisition of knowledge. and competencies as a result of the teaching of vocational or practical skills and knowledge that relate to specific useful competencies As technology changes and employees are obligated to learn to use new equipment that keeps the competition on their toes toes. companies find that they must offer training programs that often times can be quite sophisticated 80 . skills.

or watching others for a while and imitating them 81 .Training g and developing p g employees p y for optimum performance is crucial to g success organizational On On-the the-job training is the most fundamental type of training. OJT is the easiest kind of training to implement and can be effective where the job is relatively simple As an employee gets hired they immediately begin to be trained by doing.

OJT has some advantages – such as when the employee is being trained. materials or instructor fees and easy transfer of learning back to the job. as the learning site is the work site. the trainer has the opportunity to build good relationship with that employee. facilities materials. – The training can have positive effects on employee p y morale as it teaches them not only y have skills related to the specific tasks they do at work but also trains them with the ability to think h k critically ll and d solve l problems bl 82 . employee – OJT also has few outout-of of-pocket costs for training facilities.

(3) lack of defined job performance criteria. (2) poor training skills of management. environment.There are some drawbacks to OJT. 83 . as it is one of the most poorly implemented training methods and has these shortcomings: (1) lack of a structured training .

C Conducting d ti a task t k analysis. l i Implementing the training program. Evaluating E l i the h training i i program. One abridged approach to the framework of an OJT system is discussed below. A self explanatory picture representation of the framework would look something like this: 84 . It contains four steps: – 1) – 2) – 3) – 4) Conducting an organizational analysis.

85 .

86 .

services . each h. 87 . C an organization can soundly dl estimate the cost elements of entire products and services. With h ABC.ACTIVITY BASED COSTING ActivityActivity -based costing (ABC) is a special costing model that identifies activities in an organization and assigns the cost of each activity with resources to all products and services according to the actual consumption by each.

88 . initiatives. outsourcing. ABC methodology assigns an organization's resource costs through activities to the products and services provided to its customers customers. . ABC is generally used as a tool for understanding product and customer cost and profitability based on the production or performing p gp processes. processes . identification and measurement of process improvement initiatives. ABC is predominantly p y used to support pp strategic g decisions such as pricing.

but rather the activities that are performed in planning.Principle of ABC "The The Activity Based Costing paradigm is based on the principle that it is not the products that a company produces that generate costs. 89 . planning procuring and producing the products. It is the resources that are necessary to support the activities performed during the course of business that result in costs being incurred.

Traditional systems always use volume volume-related measures.Traditional Manufacturing Costing Systems S t Vs V ABC Manufacturing companies operate with – the simple job order costing systems – and p process costing g systems. such as direct labor hours or machine hours. 90 . y These systems assign – direct di t labor l b – and direct materials costs to products. to allocate overheads to products products.

Expenses Scheduling QC Purchasing Supervision Maintenance 91 .Indirect expenses termed as support dept expenses M/C Expense • Depreciation p • Insurance • Utilities Gen.

costs. Information I f ti processing i costs t were hi high. h and it was therefore difficult to justify more sophisticated hi ti t d cost t allocation ll ti methods. Traditional systems were designed for a narrow range of products.Assume that products consume all resources in proportion to their production volumes thus report distorted product volumes. and direct labor and materials costs were the dominant factory costs. th d 92 .

and thus ascertain what causes overhead h d costs t and d how h they th relate l t to t products ABC assumes that activities cause costs and also that products/ services create demands for activities 93 .ABC Systems Emphasize the need to obtain a better understanding d t di of f the th behavior b h i of f overhead h d costs.

• • • • • ABC seeks to understand the forces that cause o e head costs to change o overhead over e time A link is made between activities and products by assigning costs of activities to products based on an individual product’s consumption or demand for each activity ABC systems simply recognizes that businesses must understand the factors that drive each major activity. e. the costs of activities and how activities relate products Redesign or improve processes.g. rationalize costs Eliminations of less value added activity or 94 support services costs (strategic purpose) .

The design g of ABC systems y involves the following stages: Identify the major activities that take place in an organizations. Determine the cost driver for each major activity. Create a cost pool/cost center for each activity. Assigning the cost activities to product’s product s according to the product’s demand for activities 95 .

ABC helps to allocate more resources on profitable products. ABC is applicable throughout company financing. ti iti ABC helps to control the costs at any perper-productproduct-level level and on a departmental level. costing and accounting: ABC is i a modeling d li process applicable li bl for f full f ll scope as well as for partial views.Application in routine business ABC has p proven its applicability pp y beyond y academic discussion. 96 . d t d departments t t and d activities. ABC helps to identify inefficient products. departments and activities.

resolution 97 . ABC helps fixing the price of a product or service with any desired analytical resolution.ABC helps to find unnecessary costs that may be eliminated.

performance measurement Calculating costs more accurately Ensuring product /customer profitability Evaluating and justifying investments in new technologies Improving product quality via better product and process design Increasing competitiveness or coping with more competition titi 98 .Reasons for implementing ABC Better Management Budgeting.

Managing costs Providing behavioural incentives by creating cost consciousness among employees Responding to an increase in overheads Responding to increased pressure from regulators l Supporting other management innovations such as TQM and JIT systems 99 .

management in an operational context Product costing is intended accurately to d t determine i the th cost t of f a unit it of f production d ti (or of a service delivered) by study of every resource used d in i its it creation.PRODUCT COSTING Product costing is a methodology associated with managerial accounting. ti 100 . i e accounting intended to serve i.e..

redesign redesign. retooling retooling. packaging. and other interventions by the management at whatever stage needed. reengineering. 101 . It is a way of identifying cost components that can be addressed specifically in order to take cost out of the product by – – – – – purchasing.

– For precise pricing of goods goods. 102 . kfl – Influence the purchase of tooling. Product costing evolved by assigning an appropriate percentage of total overhead and also measuring g additional costs upstream— upstream p —such as packaging. are used in manufacturing management to – Identify d f ideal d l workflow. and delivery to the ultimate buyer. Product costing data act as feedback to designers. warehousing.

b i some level l l of product costing is practiced in that managements t usually ll know k the th costs t associated with important functions id tifi d with identified ith different diff t products. including service occupations E Even i in quite it small ll businesses. d t 103 . Product costing is used in most routine production activities.

PROBLEMS OF MEASUREMENT In product costing much emphasis is placed on capturing all costs. even those that do not immediately spring to mind costs of developing good relations with suppliers. l t d 104 . suppliers is difficult to measure Warranty service is yet another area that d does not ti immediately di t l spring i to t mind: i d it is i typically handled long after a sale is completed.

" The business is actually selling information and judgments acquired by interviews.PRODUCT COSTING IN SERVICE OPERATIONS The "product" product of a sales consultancy may be a printed report to a client accompanied by a Microsoft PowerPoint presentation. d data searches. d and consultations some of which may have required extensive travel. l discussions. h reading. d analysis. travel 105 . focus groups. Here the real cost of the product will have little relationship to costs of tangible "deliverables.

but the work may have required extensive groundwater sampling based on geological l i l maps of f the th site it and d extensive t i searches of old real estate transactions. operation specializing in carpet cleaning operations. In yet a third operation. the deliverables may again be a report. 106 . engaged in evaluating sites for the presence of hazardous waste dumped in the past. the product is a visit in the course of which equipment is used and labor applied.Other examples In another operation.

which which. 107 .Volume adjusted costing ABC . in the opinion of many. became the biggest nonnon-value added activity activity.Too Many Cost Drivers Many people became fed up with the cost and effort required to keep up the level of detail information required to maintain the credibility of ABC ABC.

assembly. complex. 108 . This adjustment results in – the overhead cost of a high volume part being decreased – the overhead cost of a low volume part being increased.VAC . VAC has only two components: 1) a well maintained standard cost system 2) a mathematical adjustment to each part’s standard overhead cost on – an operation by operation. and difficult to maintain. p .A New Solution A id the Avoids th mistake i t k of f identifying id tif i hundreds h d d of f cost t drivers and activities.g. painting) by comparing the annual volume of the individual part to the average volume of all parts going through each process.. which becomes too costly. machining. – process by process basis (e.

Adjustment 109 . (Sh d) Adjustment. Determine the Experience Curve percentage (the relationship between production costs and production quantity.) 3 Primary 3.Steps to Volume Adjusted Costs VAC differs from traditional standard costing by an additional calculation that credits high volume parts and charges low volume parts in such a way that the total budgeted overhead to be absorbed remains the same.Develop the traditional Standard Overhead Cost 2. 1. P ima Volume Vol me Adj Adjustment stment to traditional t aditional overhead 4 Total Overhead Proration (Shared) 4.

The p purpose p of volume adjusting j g is not just j to provide more accurate costs. t VAC can change a cost system from being passive to active. from looking backward to a powerful tool used to help chart the forward course of the company 110 . from being reactive to proactive. It is an integral part of the h entire i business b i strategy VAC can only be an enhancement to a wellwellmaintained i t i d cost t system. It is to provide a tool for decisiondecision-making.

. simpler and totally focused on one or two Key Manufacturing Tasks 111 .Focused factory concept Production facility organized around a specific. to provide a narrow range of services or operations in manufacture of a few p products at lowlow-cost and highhigh-throughput A Focused Factory strives for a narrow range of products. narrowlynarrowly -limited set of resources resources. The result is a factory that is smaller. customers and processes.

satisfaction lower cost less frustration frustration. 112 . A factory cannot perform well on every measure. Simplicity & repetition bring competence Benefits customer satisfaction.The Focused Factory y rests on three underlying concepts: There are many ways to compete besides low cost.

Several forces and factors diff diffuse the h original i i lf focus Inconsistent Policies Professional Isolation Gradual G d l Mission Mi i Change Ch Failure To Design The Task Unrecognized Inconsistencies Product Proliferation Market Proliferation 113 .

Their always have the lowest prices. These advantages g or disadvantages g are generated by the companies actions actions. For Example: – WalWal-Mart strategic advantage is their low prices.Building strategic advantage through enterprise wide. wide Strategic advantage is the most fundamental and persistent advantage that the target companies p possess over it's competitors p p over the very long term term. . 114 . . which puts any competitor at a disadvantage when compared directly to WalWal-Mart (aka: Kmart).

the traditional travel brokers were at a strategic disadvantage to low cost online alternatives. Coca-Cola has their brand name. Travel services are cheaper and more convenient for most people. which always Cocamakes k th them t to charge h hi higher h prices i for f similar i il products. therefore. 115 . An example of a strategic disadvantage is the travel brokerage industry after the development of online travel services.

116 . y you can beat industry y rivals rivals. originally from the world of military y doctrine. favour. . . When you g advantage g and y your hold the strategic opponents do not. The term 'strategic advantage'.when you have one. refers to gaining of overall advantage. preserve . . advantage. it has significance .A company can outperform rivals only if it can establish a difference that it can preserve. In the world of business. situations start unfolding g in y your favour.

The external behaviour helps a business to think 'what to do' while the internal environment helps it to decide 'what what it can do'.How a business can gain a strategic Advantage? It derives from an organisation organisation's s inbuilt capacity to use its strengths and overcome its weaknesses in order to use opportunities and face threats. 117 .

The elements of the framework required q for developing a strategic advantage include the following: g – Resources g behaviour – Organizational – Strengths and weaknesses – Synergistic effects – Competency – Organizational capabilities – Competitive advantage 118 .