Managerial Accounting, Chapter 1

1: Lean production
Lean production is an approach to management that focuses on cutting out waste, whilst ensuring
quality.
This approach can be applied to all aspects of a business, from design, through production to
distribution. Lean production aims to cut costs by making the business more efficient and responsive to
market needs.

Lean production aims to cut costs by making the business more efficient and responsive to market needs.

This approach sets out to cut out or minimize activities that do not add value to the production
process, such as holding of stock, repairing faulty product and unnecessary movement of people
and product around the business.

Lean production originated in the manufacturing plants of Japan, but has now been adopted well beyond
large and sophisticated manufacturing activities.

The lean approach to managing operations is really about:

 Doing the simple things well

 Doing things better
 Involving employees in the continuous process of improvement
 And as a result, avoiding waste

Why? Because waste = cost

Less waste therefore means lower costs, which is an essential part of any business being competitive.

1. Over-production: making more than is needed which leads to excess stocks

2. Waiting time: equipment and people standing idle waiting for a production process to be
completed or resources to arrive
3. Transport: moving resources (people, materials) around unnecessarily
4. Stocks: often held as an acceptable buffer, but should not be excessive
5. Motion: a worker who appears busy but is not actually adding any value
6. Defects: output that does not reach the required quality standard ,often a significant cost to an
uncompetitive business

The pioneering work of Toyota (a leader in lean production) identified different kinds of waste which can
be applied to any business operation. These are.

The key aspects of lean production that you should be aware of are:

a) Time based management

b) Simultaneous engineering
c) Just in time production (JIT)
d) Kaizen (Continuous improvement)
e) Quality improvement and management
 What is Lean Thinking?

Lean is about focus, removing waste, and increasing customer value. Lean is about smooth process
flows, doing only those activities that add customer value and eliminating all other activities that don’t.

Process Flow Thinking

There are five basic steps in assessing lean operations:

1. Identify the activities that create value
2. Determine the sequence of activities (also called the value stream)
3. Eliminate activities that do not add value
4. Allow the customer to “pull” products/services
5. Improve the process (start over)

2: Theory of Constraints

What Is a Constraint?
A constraint is anything that stops you from achieving your goal, and a constraint can show itself in
various ways.

However, the theory of constraints maintains that there are not an endless number of constraints, but at
least one and at most only a few.

Internal & External Constraints

Constraints can be internal or external.

Some examples of internal constraints are equipment, such as the way the equipment is currently being
used limits your ability to produce more. People is another internal constraint, which can reveal itself by
lack of skills, personnel and behavioral issues. Finally, policy, whether written or unwritten, can prevent
you from making more product or expanding services.

Thinking Process in the Theory of Constraints

The theory of constraints is a way to solve problems inherent in your project that are preventing you from
achieving more of your goals. Part of the theory of constraints is the methodology called the thinking
process, which is made for complex projects with many interdependencies.

The thinking process is a cause-and-effect tool, which helps you to identify the root cause of undesirable
effects and remove them without creating new ones. To do this, ask yourself these three questions:

1. What needs changing?

2. How should it change?

3. What action will change it?

Theory of Constraints

According to the theory of constraints, the best way for an organization to achieve its goals is to
reduce operating expenses, reduce inventory, and increase throughput.

The theory of constraints includes three core principles, six steps for implementation, and a five
step thinking process.

Theory of Constraints is a broadly applicable approach to managing business operations within

an organization. Basically, the theory of constraints is a management philosophy designed to
help organizations achieve their goals.

The idea is to identify the goals of the organization, identify the factors that hinder the achievement of
those goals, and then improve the business operations by continuously striving to mitigate or eliminate
the limiting factors.

The limiting factors are called bottlenecks or constraints. At any given time, an organization is faced with
at least one constraint that limits business operations. Typically, as one constraint is eliminated another
constraint will arise. The organization should then focus its attention on the new constraint. And
this process repeats itself continuously.

Dr Goldratt’s Theory of Constraints

The theory of constraints was formalized and introduced by Dr Eliyahu Goldratt in the 1980s in his book

Theory of Constraints Core Principles

The theory of constraints has three principles. These three principles are: convergence, consistency, and
respect.

The convergence principle implies that a complex system is simpler to manage because an adjustment or
correction to one aspect of the system will impact the whole system.

The consistency principle implies that any internal conflict must be the result of at least one flawed
assumption.

And the respect principle implies that humans are inherently good and deserving of respect even when
they make mistakes.

Theory of Constraints 6 Step Implementation

TOC Six Steps

1. Identify the goal

2. Identify the constraint
 3. Exploit the constraint
4. Subordinate operations to the constraint
5. Increase constraint capacity
6. Repeat with a new constraint

Step 1: Identify the goal

The first one is to identify a measurable goal. This is typically defined as throughput, or the amount
of products or services produced and sold to customers. Basically, the goal is some concrete objective that
involves the company’s success and profitability.

Step 2: Identify the constraint

The second step is to identify the bottleneck. This is any constraint that limits the production process. The
constraint can be internal, such as a flaw or shortcoming in the production process, or it can be an external
hindrance, such as a competitor or some other influential market force.

Step 3: Exploit the constraint

The third step is to exploit the bottleneck. This means making sure the bottleneck is being put to its
most profitable use. If the bottleneck is some slow machine that cranks out two types of products, a very
profitable product and a less profitable product, you should make sure the machine is always working on
the more profitable product.

Step 4: Subordinate operations to the constraint

The fourth step is to subordinate all other factors in the operation to the bottleneck. This means
optimizing the production process to the pace of the bottleneck. If the production process involves three
machines, one can crank out 10 products per hour, another can crank out 20 products per hour, and the
third can only crank out 3 products per hour, then you must operate the first machines.This reduces
excess inventory.

Step 5: Increase constraint capacity

The fifth step is to increase the capacity of the bottleneck. For example, referring to the previous
paragraph, if the bottleneck can only produce 3 products per hour, then you should try to increase that
output rate. Perhaps by outsourcing that phase of production, or by purchasing two more of those
machines to increase output. Basically, you’ve identified the constraint, and this is the step where you
mitigate or eliminate it – alter the process so this factor is no longer a constraint.

Step 6: Repeat with a new constraint

And the sixth step is to start the process over with the next bottleneck. There is always at least one factor
limiting the process. When you successfully manage that factor, another bottleneck will arise as the
constraint. Implementing the theory of constraints method of process improvement is a never-ending
endeavor.
Theory of Constraints Thinking Process

The theory of constraints also includes a 5-step theory of constraints thinking process designed to
organize the thought process involved in approaching a bottleneck and trying to resolve
the problem relating to the constraint.

The five steps are as follows:

1: First, the people involved must agree on the problem. That is, they must all agree which factor is the
bottleneck.

2: Second, the people involved must agree on what sort of solution is required. This could be something
like increasing the output of machine number three in the production process.

3: The third step is to get everyone to agree that the solution will resolve the problem. That is, the
proposed solution is the correct action for eliminating the bottleneck in question.

4: The fourth step is to look past potential negative ramifications of the process.

5: Finally, the fifth step is to overcome any hindrances to the implementation of the solution to the
problem.

What is Six Sigma?

The Greek letter “Sigma” a statistical term; measures how much a given process deviates from perfection.
Sigma is also known as standard deviation of the process from its mean.

Six Sigma process enables an organization to measure the number of “defects” in a process, methods to
eliminate them and get close to “zero defects” as much as possible.

Managers face challenges in improving the quality and efficiency of the business. To overcome, they need
to implement the best methodology and tools to analyze and control the process. The best way to improve
the result is to improve the process.

Six Sigma is a measurement-based strategy for process improvement. It’s a methodology, which aims at
improving process and increasing customer satisfaction (Both internal & external). The concept behind this
approach is to reduce the variation in processes. This reduction leads to consistent and desired outcomes
from processes. Hence, Continuous process improvement with low defects is the goal of this method.

3: Six Sigma Model (DMAIC Model) for process quality improvement:

Six Sigma follows the DMAIC model for quality improvement and problem reduction (For existing
processes). This well-defined process approach consists of five phases in order:
  Define
 Measure
 Analyze
 Improve
 Control

It is an integral part of Lean Six Sigma process, but can be implemented as a standalone quality
improvement process. Indeed, it is the most preferred tool that can help improving the efficiency and the
effectiveness of any organization. Within the DMAIC framework, Six Sigma can utilize several quality
management tools.

Seven Basic Quality Tools (Quality core tools):

Below is the list of some quality management tools, popularly known as seven basic quality tools –

1. Cause and effect diagram or Ishikawa diagram

2. Flow Chart
3. Pareto Chart
4. Histogram
5. Check Sheet
6. Scatter Plot
7. Control Chart
4: The Importance of Business Ethics

The system of moral and ethical beliefs that guides the values, behaviors, and decisions of a
business organization and the individuals within that organization is known as business ethics.
Some ethical requirements for businesses are codified into law; environmental regulations, the minimum
wage, and restrictions against insider trading and collusion are all examples of the government setting
forth minimum standards for business ethics.

Business Ethics Benefits

The importance of business ethics reaches far beyond employee loyalty and morale or the strength of a
management team bond. As with all business initiatives, the ethical operation of a company is directly
related to profitability in both the short and long term. The reputation of a business in the surrounding
community, other businesses, and individual investors is paramount in determining whether a company is
a worthwhile investment. If a company is perceived to not operate ethically, investors are less inclined to
buy stock or otherwise support its operations.

Companies have more and more of an incentive to be ethical as the area of socially
responsible and ethical investing keeps growing. The increasing number of investors seeking out ethically
operating companies to invest in is driving more firms to take this issue more seriously.

With consistent ethical behavior comes an increasingly positive public image, and there are few other
considerations as important to potential investors and current shareholders. To retain a positive image,
businesses must be committed to operating on an ethical foundation as it relates to the treatment of
employees, respecting the surrounding environment and fair market practices in terms of price and
consumer treatment.