CHAPTER EIGHT

MODERN MANAGEMENT OF COSTS

AND QUALTY

Prepared By: Dr. Fitsum Kidane

Department of Accounting and Finance
Sundaero College

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 Kaizen
• Kaizen is a Japanese term meaning "change for
the better."
• Kaizen- “kai’ means “little” or “ongoing”. “Zen”
means “for the better” or “good.”
• Kaizen , or ‘Continuous Improvement’ is a
policy of constantly introducing small
incremental changes in a business in order to
improve quality and/or efficiency.

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 Continued
• Improvements are based on many, small
changes rather than the radical changes that
might arise from Research and Development
• As the ideas come from the workers
themselves, they are less likely to be radically
different, and therefore easier to implement
• Small improvements are less likely to require
major capital investment than major process
changes
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 Continued
• Kaizen uses the Japanese logic of bringing
improvements internally from within the
workplace.
• This approach assumes that employees are the
best people to identify room for improvement,
since they see the processes in action all the
time.
• A firm that uses this approach therefore has to
have a culture that encourages and rewards
employees for their contribution to the process.
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 Continued
• Kaizen can operate at the level of an individual,
or through Kaizen Groups or Quality Circles
which are groups specifically brought together
to identify potential improvements.
• It involves making the work environment more
efficient and effective by creating a team
atmosphere, improving everyday
procedures, ensuring employee satisfaction ,
and making a job more fulfilling, less tiring and
safer
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 Continued
• It helps encourage workers to take ownership
for their work, and can help reinforce team
working, thereby improving worker motivation
• Kaizen can be applied to any kind of work, but
it is perhaps best known for being used in lean
manufacturing and lean programming.
• If a work environment practices kaizen,
continuous improvement is the responsibility
of every worker, not just a selected few.
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 Continued
• Kaizen provides one simple principle: look at how
things can be improved, improve them, and then
improve them again and again.
• You can do this by using Plan-Do-Check-Act
(PDCA), empowering workers to find problems,
develop solutions and apply solutions in a
continuous cycle.
• Its not unusual for Kaizen to result in 25 to 30
suggestions per employee, every year, and to
have over 90% of those implemented
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 Principle in Kaizen implementation

• human resources are the most important

company asset,
• processes must evolve by gradual improvement
rather than radical changes,
• improvement must be based on statistical/
quantitative evaluation of process
performance.

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 Lean Manufacturing
• is a management philosophy derived mostly
from the Toyota Production System (TPS) and
identified as "lean“ in the 1990s. 
• Lean manufacturing or lean production, often
simply "lean", is a systematic method for the
elimination of waste ("Muda") within a
manufacturing system.
• Understanding of friction, waste, or muda is
the foundation of the lean Manufacturing.
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 Continued
• “A systematic approach to identifying and
eliminating waste(non-value-added activities)
through continuous improvement by flowing the
product at the pull of the customer in pursuit of
perfection.”
• Lean manufacturing involves never ending
efforts to eliminate or reduce 'muda' (Japanese
for waste or any activity that consumes resources
without adding value) in design, manufacturing,
distribution, and customer service processes.
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 Continued
• Lean applies in every business and every process.
• The purpose of lean is to remove all forms of
waste from the value stream.- Waste includes cycle
time, labor, materials, and energy.
• The chief obstacle is the fact that waste often
hides in plain sight, or is built into activities.
• We cannot eliminate the waste of material, labor,
or other resources until we recognize it as waste.-
A job can consist of 75 percent waste (or even
more).
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 Continued
• Views every enterprise activity as an operation and
applies its waste reduction concepts to each
activity - from Customers to the Board of Directors
to Support Staff to Production Plants to Suppliers.
• It is not a tactic or a cost reduction program, but a
way of thinking and acting for an entire
organization.
• The word transformation or lean transformation is
often used to characterize a company moving from
an old way of thinking to lean thinking.
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 Continued
• This takes a long-term perspective and perseverance.
• “Lean manufacturing is not a collection of best
practices from which manufacturers can pick and
choose.
• It is a production philosophy, a way of conceptualizing
the manufacturing process from raw material to
finished goods and from design concept to customer
satisfaction.
• Lean is truly a different way of thinking about
manufacturing.”
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 Just in time inventory
• also known as JIT inventory, is the reduced
amount of inventory owned by a business
after it installs a just-in-time manufacturing
system.
• The intent of a JIT system is to ensure that the
components and sub-assemblies used to
create finished goods are delivered to the
production area exactly on time.

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 Continued
• eliminates a considerable amount of investment in
inventory, thereby reducing the working capital
needs of a business.
• is an inventory strategy companies employ to
increase efficiency and decrease waste by receiving
goods only as they are needed in the production
process, thereby reducing inventory costs.
• This method requires producers to forecast
demand accurately.

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 Continued
• This inventory supply system represents a shift
away from the older just-in-case strategy, in which
producers carried large inventories in case higher
demand had to be met.
• A good example would be a car manufacturer that
operates with very low inventory levels, relying on
its supply chain to deliver the parts it needs to
build cars.
• The parts needed to manufacture the cars do not
arrive before or after they are needed; instead,
they arrive just as they are needed.
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 Continued
• A popular modification of the JIT system is for
suppliers to "store" their inventory at the
manufacturer's physical location.
• This enables the manufacturer to "buy" raw
materials directly from the supplier's stock
located within the same physical location.

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 Continued
• Just-in-time inventory control has several
advantages over traditional models.
– Production runs remain short, which means
manufacturers can move from one type of product to
another very easily.
– This method reduces costs by eliminating warehouse
storage needs.
– Companies also spend less money on raw
materials because they buy just enough to make the
products and no more.

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 Continued
• The disadvantages of just-in-time inventories
involve disruptions in the supply chain.
• If a supplier of raw materials has a breakdown
and cannot deliver the goods on time, one
supplier can shut down the entire production
process.
• A Japanese term that is associated with JIT is
"Kanban," which means some form of signal that
a particular inventory is ready for replenishment.
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 Total Quality Management
• TQM was developed by William Deming, a
management consultant whose work had
great impact on Japanese manufacturing.
• TQM is a management philosophy that seeks
to integrate all organizational functions
(marketing, finance, design, engineering, and
production, customer service, etc.) to focus on
meeting customer needs and organizational
objectives.
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 Continued
• TQM views an organization as a collection of
processes.
• It maintains that organizations must strive to
continuously improve these processes by
incorporating the knowledge and experiences
of workers.
• The simple objective of TQM is “Do the right
things, right the first time, every time.”

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 Continued
• a system of management based on the
principle that every member of staff must be
committed to maintaining high standards of
work in every aspect of a company's
operations.
• also known as total productive maintenance,
describes a management approach to long-
term success through customer satisfaction.

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 Continued
• In a TQM effort, all members of an organization
participate in improving processes, products,
services, and the culture in which they work.
• TQM can be applied to any type of
organization; it originated in the manufacturing
sector and has since been adapted for use in
almost every type of organization, including
schools, highway maintenance, hotel
management, and churches.

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 Continued  
 

• While TQM shares much in common with the Six

Sigma improvement process, it is not the same as Six
Sigma.
• TQM focuses on ensuring that internal guidelines
and process standards reduce errors, while Six
Sigma looks to reduce defects.
• There is now a globally recognized organization, The
International Organization for Standardization, that
provides standards and guidelines relating to
processes that drive the production of quality
outputs.
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 Six Sigma
• Six Sigma is a management philosophy developed by
engineer Bill Smith at Motorola in 1986 that utilizes a
set of tools and techniques to improve business
processes.
• The philosophy emphasizes setting extremely high
objectives, collecting data and analyzing results to a
fine degree as a way to reduce defects in products and
services.
• At many organizations, the Six Sigma process is used
as a way to measure quality and strive for perfection.
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 Continued
• Six Sigma is a disciplined, data-driven approach
and methodology for eliminating defects (driving
toward six standard deviations between the
mean and the nearest specification limit) in any
process – from manufacturing to transactional
and from product to service.
• Six Sigma seeks to improve the quality of the
output of a process by identifying and removing
the causes of defects and minimizing variability
in manufacturing and business processes.
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 Continued
• It uses a set of quality management methods,
mainly empirical, statistical methods, and
creates a special infrastructure of people
within the organization, who are experts in
these methods.
• A Six Sigma defect is defined as anything
outside of customer specifications.

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 Continued
• The fundamental objective of the Six Sigma
methodology is the implementation of a
measurement-based strategy that focuses on
process improvement and variation
reduction through the application of Six
Sigma improvement projects.
• This is accomplished through the use of two
Six Sigma sub-methodologies: DMAIC and
DMADV.
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 Continued
• The Six Sigma DMAIC process (define, measure,
analyze, improve, control) is an improvement
system for existing processes falling below
specification and looking for incremental
improvement.
• The Six Sigma DMADV process (define,
measure, analyze, design, verify) is an
improvement system used to develop new
processes or products at Six Sigma quality
levels. Department of Accounting and Finance,
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 Continued
• Six Sigma quality is a term generally used to
indicate a process is well controlled (within
process limits ±3s from the center line in
a control chart, and requirements/tolerance
limits ±6s from the center line).
• The philosophy behind Six Sigma is that if you
measure how many defects are in a process,
you can figure out how to systematically
eliminate them and get as close to perfection
as possible.
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 Continued
• In order for a company to achieve Six Sigma, it
cannot produce more than 3.4 defects per
million opportunities

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 Reflection on modern cost management

• The Management accountant is not solely

focused on cost cutting, but must also be
mindful of measuring and instituting controls
that drive an efficiently produced product of
high quality.

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