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Cost system in quick response manufacturing industry

As previously defined Quick Response Manufacturing (QRM) is a strategy for reducing lead-times
across all functions of an organization. The resulting improvements in speed and responsiveness increase
the organization’s agility and responsiveness, resulting in competitive advantage. Many well-known Lean
Manufacturing tools have been developed for high volume/low variety, or ‘mass production’
environments. Think of techniques such a Pull Systems, Kanban, Line Balancing and Heijunka for
instance, often applied to fast moving production lines. However, these tools often do not translate well to
low volume/high variety environments, which require short batch runs, higher levels of customization and
fast response to changes in customer demand. For businesses facing the challenge of meeting increased
customisation and speed, QRM is a strategy which relentlessly focuses on reducing lead-time both on the
shop floor and in the office operations.[1]

Figure.1: volume verse variety [1]

Quick Response Manufacturing relentlessly pursues the reduction of lead time in all aspects of
your operations. Externally, Quick Response Manufacturing means responding to your
customers' needs by rapidly designing and manufacturing products customized to those needs.
Equally important is what Quick Response Manufacturing means internally to your organization.
Whereas
JIT (or lean manufacturing) focuses on the relentless pursuit (continuous improvement) of
eliminating non-value-added waste to improve quality, reduce cost (and reduce lead time), Quick
Response Manufacturing focuses on the relentless pursuit of reducing lead times throughout your
operation to improve quality, reduce cost, and eliminate non-value added waste.

With its focus on reducing lead times, manufacturing critical-path time is one of the key metrics
used to measure success. This is the total time from when a customer creates an order, through
the critical path, until the first part of the order is delivered. Notice that the clock starts when the
customer creates an order. How quickly that ordered is received, processed, and moved into the
manufacturing process is a part of the critical path. If orders come through an order desk, that
includes sales people manually entering the order, manufacturing may not start until the next
day. If the customer enters the order directly into an automated online system, manufacturing
may start within minutes after the order was created. By focusing on reducing the manufacturing
critical-path lead time, waste is identified with the result that overhead costs are significantly
reduced. The goals of the organization become unified around reducing lead time, with activities
that increase lead-time being eliminated or redesigned.

In fact, as a strategic weapon, time is the equivalent of money, productivity, quality, even
innovation. Managing time has enabled top Japanese companies not only to reduce their costs
but also to offer broad product lines, cover more market segments, and upgrade the
technological sophistication of their products. These companies are time-based competitors.

In manufacturing, costs fall into two categories:

 Scale-related costs
 Variety-related costs

Scale-related costs decline as volume increases, usually falling 15% to 25% per unit each time
volume doubles. Variety-related costs, on the other hand, reflect the costs of complexity in
manufacturing: setup, materials handling, inventory, and many of the overhead costs of a factory.
In most cases, as variety increases, costs increase, usually at a rate of 20% to 35% per unit each
time variety doubles. The sum of the scale- and variety-related costs represents the total
cost of manufacturing. With effort, managers can determine the optimum cost point for their
factories—the point where the combination of volume and variety yields the lowest total
manufacturing cost for a particular plant. When markets are good, companies tend to edge
toward increased variety in search of higher volumes, even though this will mean increased
costs. When times are tough, companies pare their product lines, cutting variety to reduce
costs. In a flexible factory system, variety-driven costs start lower and increase more slowly as
variety grows. Scale costs remain unchanged. Thus the optimum cost point for a flexible factory
occurs at a higher volume and with greater variety than for a traditional factory. A gap
emerges between the costs of the flexible and the traditional factory-a cost/ variety gap that
represents the competitive advantage of flexible production. Very simply, a flexible factory
enjoys more variety with lower total costs than traditional factories, which are still forced to
make the trade-off between scale and variety.[2]

Figure.2: volume verse variety [2]

Quick Response Manufacturing (QRM), is a companywide strategy for reducing lead times, both
internally and externally. The external aspect involves rapidly designing and manufacturing
products for specific customer needs. The internal aspect focuses on reducing lead times for
tasks with in the enterprise. Examples of internal lead times are the time to approve an
engineering change or the time to issue a purchase order to a supplier. Such lead times are not
directly observed by the customer. However, QRM implementations have shown that reducing
both external and internal lead times results not only in quick response, but also in improved
quality and lower operating costs. Companies with high-variety and custom products have been
able to reduce their lead times by 80-90%, gaining substantial competitive advantage. [3]

Companies have also found that the lead time and cost reductions through QRM have enabled
them to compete effectively against low-wage countries. What if you have already invested in
other strategies such as Six Sigma or Kaizen? Adopting QRM does not require you to back
away from them; QRM builds on these strategies and unifies them under one
overarching/encompassing goal reducing lead time. If you are already implementing Lean, again
QRM will enhance your Lean program and take it to the next level. The origins of Lean are in
high-volume, repetitive production, and the core tools in Lean such as Takt times and level
scheduling are designed to eliminate variability in operations.

However, eliminating variability may not be the right strategy for all companies. There are two
types of variability; Dysfunctional variability caused by errors and poor systems. Strategic
Variability introduced by a company to maintain its competitive edge QRM suggests that an
enterprise wide focus on reducing lead times will result in improvements in both quality and
cost.

Eliminating the time-consuming - and often self-reinforcing -practices described above can lead
to large cost savings while improving product quality and customer responsiveness. Hence, on a
management level, QRM advocates a mindset change from cost-based to time-based thinking,
making short lead times the yardstick for organizational success.

For reduction of lead time two types of cost approaches are there:

I. Traditional cost accounting Approach

II. Non Traditional Cost Accounting Approach
 Traditional cost accounting Approach

Traditional cost accounting methods typically underestimate the benefits of reduced lead Times.
In traditional cost system, the main cost benefits of QRM projects come from two areas. The first
is that via the revised organizational structures that QRM uses, there is greater employee
ownership of work and thus higher quality and productivity. The second, which is often the
greater
impact, is that when lead times are dramatically reduced, many dysfunctional dynamics
disappear and overhead costs related to managing these problems are eliminated.[5]

Suri (1998) gives numerous examples of these dysfunctional items but a simple example is that
of schedule changes and expediting: most companies spend a lot of organizational resources on
forecasting, planning, re-planning, and expediting, as a result of long lead times and late
deliveries. If the lead times are short and predictable, many of the resources used for these
activities can be eliminated. This is just one of many such items. Taken together, when a QRM
program is put in place, many such costs are reduced. In traditional costing system we use the
quantification way called activity-based costing (ABC)

 Non Traditional Cost Accounting Approach

This method includes a set of metrics that help overcome most of the problems faced with traditional
accounting systems. The study states that usually companies calculate the cost of a product as:

Allocated Product Cost = f (Direct Labor, Direct Material Used, Machine Hours)

It is shown that the basic problem with this approach is that companies often fail in the process
of accurately identifying the change on overhead costs due to changes in the manufacturing
and/or operating processes. Furthermore, lead time reduction projects normally have a
considerable impact in overhead allocated resources.
 Figure3: Impact of LT Reduction on Overall Product Costs (Theoretical and empirical data)

Referance:

1. https://industryforum.co.uk/consultancy/quick-response-manufacturing/
2. Stalk, G. Jr.. July-August 1988. Time-The Next Source of Competitive Advantage,
Harvard Business Review, pp. 41-51.
3. Quality Management Journal, 2000. Quick Response: Managing the Supply Chain. 7(4),
pp.62-62.
4. Schluter, Chris. 1999. Framework for Manufacturing Cycle Time Reduction Cost
Accounting, Technical Report, Manufacturing System Engineering Program, University
of Wisconsin-Madison, pp. 6-17.
5. Ericksen, P. 2000. “Time-Based Supply Management,” in R. Suri (Ed.), Proceedings of
the Quick Response Manufacturing 2000 Conference (Society of Manufacturing
Engineers, Dearborn, MI).