Continuous Improvement

Continuous improvement is also known as Kaizen. The continuous

improvement model refers to a never-ending strive for perfection in
everything you do.

Kaizen originated in Japan shortly after the end of the Second World War.
It gained massive popularity in Lean manufacturing and became one of the
foundations of Toyota’s rise from a small carmaker to the largest
automobile manufacturer on the planet.

In the context of the Lean methodology, continuous improvement seeks to

improve every process in your company by focusing on enhancing the
activities that generate the most value for your customer while removing as
many waste activities as possible.
 The main types of waste in Lean are Muda, Mura and Muri.

Muda: The seven wastes

Muda consists of 7 Lean wastes: transport, inventory, motion, waiting,

overproduction, over-processing, defects.

Removing all of them completely is nearly impossible; however, focusing

on minimizing their negative effects on your work is crucial for successfully
implementing continuous improvement.

Mura: The waste of unevenness

Mura is caused by unevenness or inconsistency in your process. It is responsible

for many of the 7 wastes of Muda. Mura stops your tasks from flowing smoothly
across your work process and therefore gets in your way of reaching continuous
flow.

Muri: The waste of overburden

Muri is a major problem for companies that apply push systems. When you
assign too much work to your team, you place unnecessary stress on both
your team and the process.

Muri is usually a result of Mura, and if you want continuous improvement to

become part of your culture, you need to focus on getting rid of those
wastes.
 The 6 Benefits of Implementing the Continuous Improvement Model

There are several key benefits of applying continuous improvement in a

business context:

1. Increased efficiency: Continuous improvement helps businesses to

identify and eliminate waste, inefficiencies, and redundancies in their
processes, resulting in increased efficiency and productivity.

2. Improved quality: By continuously analyzing and refining their processes,

businesses can improve the quality of their products or services, reducing
defects, errors, and customer complaints.

3. Cost savings: Continuous improvement can help businesses reduce their

costs by eliminating waste, reducing defects, and streamlining processes,
resulting in increased profitability.

4. Employee engagement: At the heart of continuous improvement lies

feedback and assessment of the efforts, which enables employee
engagement and satisfaction, teamwork and collaboration.

5. Enabling transformation: Continuous improvement can help businesses

stay ahead of the competition by allowing them to respond quickly to
changing market conditions, customer expectations, and the emerging
need for digital transformation.

6. Supporting innovation: Continuous improvement can also drive a culture

of innovation by encouraging businesses to experiment with new ideas and
processes, leading to new or improved products or services.
 What’s an Industry Example of Continuous Improvement?

Let’s look at an industry example of continuous improvement efforts

implemented successfully in the aerospace domain.

Through establishing standards for prioritizing work based on urgency and

implementing Kanban boards, engineering teams at a global manufacturer
of aircraft parts, Aerosud, managed to visualize and address the
roadblocks in their workflow. Introducing Kanban principles and practices,
such as work-in-progress limits, has allowed the IT group to double their
throughput within days.

To further streamline their delivery processes, the teams utilized Kanban

feedback loops to exchange feedback, making continuous improvement
efforts a natural part of the process.

n addition to adopting the Kanban principles and practices, the engineering

team at Aerosud had also started to make use of the 5 Whys method to
find the root cause of problems.
 Continuous Improvement Frequently Asked Questions (FAQ)

What Is a Continuous Improvement Cycle?

One of the most widely applied techniques for continuous improvement is

the Plan-Do-Check-Act (PDCA) cycle which includes the following phases:

Plan: Continuous improvement planning involves setting goals, defining

what needs to be improved, and identifying the steps to achieve those
goals. Planning also involves analyzing data to identify areas for
improvement.

Do: Once a plan has been established, the next step is to put it into action.
This involves implementing the changes identified in the planning phase
and testing them to ensure they are effective.

Check: The third principle is to check the results of the changes that have
been implemented. This involves measuring performance against the goals
established in the planning phase, tracking progress, and analyzing data to
determine whether the changes have had the desired effect.

Act: The final principle is to act on the results of the monitoring and
evaluation process. If the changes have been successful, they should be
standardized and integrated into the production process. If they have not
been successful, the plan should be revised, and the improvement cycle
should begin again.

The cycle of continuous improvement should be ongoing, with each

iteration building on the previous one to drive further improvement over
time.
 What Are Examples of Continuous Improvement?

Anything that can be improved can be used as an example of continuous

improvement. From improving your business results and product quality to
streamlining delivery processes and encouraging collaboration and
feedback exchange across teams, departments, and suppliers, anything
can be subject to continuous improvement.

What Are the 3 Aspects of Continuous Improvement?

The three key aspects of continuous improvement efforts include process,

product and knowledge improvement.

Process improvement: Refers to identifying, analyzing, and improving the

various processes involved in delivering a product or service.

Product improvement: This involves identifying, analyzing, and improving

the product or service itself, including its features, design, and functionality.

People improvement: Through developing skills and knowledge of the

people involved in products or services delivery, you can create a culture of
continuous learning and improvement.
 What Is ‘Predictability’?

Predictability means providing exactly what the customer expects.

Unexpected surprises are only good as long as you provide what the
customer is looking for. Predictability increases the perceived quality of
your offering.

When purchasing something of value, customers want to know exactly

what they can expect — they want their experience to be predictable.
Unexpected surprises can provide a customer with a great experience, but
if you’re not able to deliver what the customer expects in a predictable
manner, it doesn’t matter how many bonuses you offer. People love
pleasant surprises, but they hate to be caught off-guard.

There are three primary factors that influence the predictability of an offer:
uniformity, consistency, and reliability.

Uniformity

Uniformity means delivering the same characteristics every time. Coca-

Cola was one of the first large companies to combine solid marketing with
product uniformity. No one wants their favorite soda to taste different every
time they drink it.

Product uniformity in the beverage industry is an astounding feat: creating,

bottling, and distributing soda is an incredibly complex logistical process. A
little too much sugar or flavoring, slightly more air, or an introduction of
unintended bacteria can drastically alter the final product.
 When you open a can of Coke, you expect exactly the same product as
you had the last time, no matter where you are. If even 1% of the cans of
Coca-Cola sold were flat, people would quickly learn and stop buying.

Consistency

Consistency means delivering the same value over time. One of the
reason’s “New Coke” failed in the mid-1980s is that customers expected
Coke to taste a certain way, and the company delivered something
completely new under the same name. Violating consistency lead to a swift
decline in sales, followed by a swift increase when the Coca-Cola
Company restored the original formula.

Violating the expectations of loyal customers is not the way to success—if

you’re offering something completely different, present it as something
new.

Reliability

Reliability means being about to count on delivery of the value without error
or delay. Ask Microsoft Windows users what they hate most about their
computers, and they’ll always tell you “system crashes.” Unreliability is a
huge frustration for a user, particularly when predictability is at a premium.
How would you feel if you’re building a house and a contractor doesn’t
show up on time?

Improving predictability has major reputation and value-perception benefits.

The more predictable your standard offering is, the more you’ll be able to
increase the perceived quality of the products and the services that you
offer.
 Lower cost of goods

is the direct cost of producing the goods or services that a business sells
during a period of time.

It is one of the most important expenses for any business, and it has a
direct impact on profitability.

It includes all of the costs that are directly associated with the production of
a good or service, such as:

Direct materials: The cost of the raw materials that are used to produce a
product.

Direct labor: The cost of the workers who are directly involved in the
production process.

Manufacturing overhead: The indirect costs associated with production,

such as rent, utilities, and insurance.

It does not include indirect expenses, such as marketing and sales costs.

Why is COGS important?

COGS is important for a number of reasons:

 It helps businesses to track their costs and profitability. By
understanding their COGS, businesses can identify areas where they can
reduce costs and improve profitability.

COGS is used to calculate a number of important financial ratios,

such as gross profit margin and net profit margin. These ratios can be
used to compare a business’s performance to other businesses in the
same industry.

COGS helps businesses to set prices. Businesses need to set their

prices high enough to cover their COGS and other expenses in order to be
profitable.

COGS is used to calculate income taxes. Businesses are able to deduct

their COGS from their revenue when calculating their taxable income.

In short, COGS is an important metric for businesses of all sizes. By

tracking and managing their COGS effectively, businesses can improve
their profitability and overall financial health.

How to reduce COGS:

There are a number of things that businesses can do to reduce their

COGS, such as:

Negotiate better prices with suppliers. This is one of the most effective
ways to reduce COGS. Businesses should regularly review their contracts
with suppliers and negotiate for the best possible prices.

Improve production efficiency. This can be done by streamlining the

production process, investing in new technologies, and training employees
on the most efficient ways to perform their jobs.

Reduce waste. This can be done by carefully monitoring inventory levels,

reducing scrap and rework, and improving quality control procedures.
 Invest in new technologies. New technologies can help businesses to
improve production efficiency, reduce waste, and improve quality control.

Outsource certain tasks. Businesses can outsource certain tasks, such

as manufacturing or customer service, to other companies. This can help to
reduce COGS if the outsourced tasks can be performed at a lower cost
than the business could do them in-house.

It is important to note that there is no one-size-fits-all approach to reducing

COGS. The best strategies for your business will depend on your specific
industry, business model, and cost structure.

Here are some additional tips for reducing COGS:

Analyze your spending. Take a close look at your expenses to identify

areas where you can cut costs. For example, you may be able to reduce
your energy costs by switching to energy-efficient appliances or by
negotiating a better rate with your energy provider.

Automate tasks. Automate tasks that are repetitive or time-consuming.

This can free up your employees to focus on more important tasks and can
also help to reduce errors.

Negotiate with vendors. Get quotes from multiple vendors for your
supplies and services. This will help you to ensure that you are getting the
best possible prices.

Take advantage of discounts. Many suppliers offer discounts for bulk

orders or for paying early. Take advantage of these discounts to reduce
your costs.
 What is Audit Sampling?

Audit sampling is an investigative tool in which less than 100% of the total
items within the population of items are selected to be audited. It is an
auditing technique that provides supporting evidence that allows auditors to
issue audit opinions without having to audit every single item and
transaction.

Auditing Explained

Auditing is the process by which a company’s financial records are verified

and examined. It is to ensure that the transactions on the financial records
are accurately and fairly represented.

Since financial statements are prepared internally by companies and

organizations, there is a high risk of manipulation and fraudulent behavior
surrounding the preparation of the statements.

Types of Auditing

Auditing is important in ensuring that companies are representing their

financial statements fairly and accurately. There are three types of auditing:

Internal audits are performed by the internal employees of an

organization, but they are usually not distributed outside of the company.

External audits are performed by external parties that are seen as having
more unbiased opinions since internal audits may be influenced by conflicts
of interest.

Government audits are performed by government entities to ensure that

financial statements have been prepared accurately. In the U.S., the
Internal Revenue Service (IRS) performs audits that verify the accuracy of
 a taxpayer’s tax returns. The IRS’s counterpart in Canada is the Canada
Revenue Agency (CRA).

Auditing Importance

Financial statements are prepared per accounting standards and are meant
to provide useful information for relevant decision-makers. However, the
information provided needs to be accurate and fairly presented.

Auditing is important to ensure that entities are not misrepresenting their

financial statements so that relevant stakeholders do not make decisions
based on faulty financial statements. It is important in establishing trust and
efficiency within the financial system.

Purpose of Audit Sampling

No matter what kind of audit is being performed – internal, external, or

government – audit sampling needs to be used so that auditors can
complete their audits without wasting resources in checking every single
item. The objectives of audit sampling are as follows:

Gather enough evidence to conclude an audit opinion

Reduce the number of resources used

Provide the basis for auditors to issue a conclusive audit opinion

Detect any errors or fraud that can occur

Prove that auditors have completed their audit fully in accordance with
auditing standards

Used as a tool for investigating

 Audit Sampling Importance

When auditing financial statements, it is not feasible to audit and check

every single item within the financial statements. It will be very costly and
will take a lot of resources and time to do so.

Audit sampling enables auditors to make conclusions and express fair

opinions based on predetermined objectives without having to check all of
the items within financial statements. The auditors will only verify selected
items, and through sampling, can infer their opinion on the entire population
of items.

There are two forms of sampling:

1. Statistical audit sampling

Statistical audit sampling involves a sampling approach where the auditor

utilizes statistical methods such as random sampling to select items to be
verified. Random sampling is used when there are many items or
transactions on record.

Consider a company with more than 100 inventory transactions on its

records. Using statistical sampling is recommended due to the high number
of transactions.

For example, with statistical sampling, ten items are selected from the total
population randomly. Every single item within the 100 has an equal
probability of being selected and tested for accuracy as a result. Again, it
benefits auditors since they can still make an audit opinion but do not have
to check all 100 transactions.
 2. Non-statistical audit sampling

In contrast to statistical audit sampling, non-statistical audit sampling items

are not chosen randomly. Instead, they are chosen based on the auditor’s
judgment, and the result of the testing from the selections is not used to
infer the conclusion for the entire population.

In the example earlier, ten inventory transactions can be used to infer the
opinion on all 100 transactions. In non-statistical audit sampling, the
auditors may choose to select items based on criteria such as:

The value of items (e.g., items greater than $100,000 or ₱5,549.111.00)

Items with specific information (e.g., items related to a certain company)