Analysis of Value Added and Non-Value Added Activities in Purchase Order Process of an Organization and Proposal for Improvement

Submitted To: Prof. Suneel Maheshwari

Subject: Strategic Cost Management

Submitted By: Rohit Kothari C035

Objective:
The report talks about the application of lean concept in analysis an incoming purchase order process to find out the value added and non-value added activities associated with it. The report also contains a recommended solution that may help reduce the non-value added activities to optimize the process.

Introduction:
Any process, be it a manufacturing process or a service, has two types of activities associated with it. 1. Value Added: A value added activity is any activity in the whole process that adds value to the product or service by changing it to something that customer wants and for which the customer is willing to pay. It is generally done correct the first time. 2. Non Value Added: A non-value added activity is any activity that is there in the process but does not add any value to the product or service. It is by removing or optimizing these activities that the cost associated with the process be reduced. Types of Non-Value Added Activity: 1. Business Requirements: These are the activities required by the law or contract. These are out of control of the organization and have to be complied. Eg. Safety. These are also activities required for running the organization. Eg. Recruitment, training. 2. Waste: This consist all those activities that consume resources but add no value. Reworking of any kind. Unnecessary levels of approval Reports that are not important and never used Non-productive meetings Seven Fundamental Forms of Waste: 1. 2. 3. 4. 5. 6. 7. Transportation Waste: Unnecessary movement of physical items and data Inventory Waste: Stock of wrong things and shortage of right things Waste of Movement: Excess movement of people Waste of Waiting Time: People waiting for an action to continue Waste of Overproduction: Making or doing things not required Waste of Over-Processing: Designing, doing tasks not required by customer Waste of Defects: Due to errors like typos, wrong pricing, technical failure

These non-value added activities can be eliminated by applying the lean concept. Recognizing these activities and then grouping them into business requirement and waste is the first step. Then steps are taken to cut down on the waste. Below is shown an example of a purchase order process, and how some of its activities can be removed to reduce costs.

Initial State:
The purchase order process initially is shown by the flowchart below. It shows the various Value added activities as well as Non-value added activities.

Value Added Activity

Non-Value Added Activity

Flowchart
Customer: Send Purchase Order(PO) to Sales Representative

Sales Rep: Confirm receipt of PO to customers via Email/Phone (1 min)

Sales Rep: Prepare Order Entry Form (10 min)

Sales Rep: Print the entry form and PO and then sign (4 min)

Sales Rep: Send Documents to Clerk (2 min)

Clerk: Send Documents to Purchasing Department for signature (2 min)

Clerk: Wait (5 min)

Purchasing Dept.: Sign and send back the document (1 min)

Clerk: Send documents to Operation Planning Manager for signature (3 min)

Clerk: Wait (4 min)

Operation Planning Manager: Sign the documents and send them back (1 min)

Clerk: Send document to operation director for signature (5 min)

Clerk: Wait (2 min)

Operation Director: Sign and send the documents back with the Clerk (1 min)

Clerk: Load the data into the system (6 min)

Clerk: Wait for the system processing (3 min)

Clerk: Print the Sales Order and sign on it (3 min)

Clerk: Scan the Sales Order in the system (2 min)

Clerk: Send a scanned sales order copy to Sales Representative via Email (1 min)

Clerk: File the various documents (Customer PO, Order Entry Form, Sales Order) (2 min)

Sales Rep: Send a Scanned Sales Order to Customers via Email (1 min)

Total Time: 59 minutes Figure 1: Incoming Purchase Order (Initial Process) So we can see here that out of so many steps majority of them are non-value added and thus can be used to reduce costs. So after identifying these activities and then cutting down on some of these activities (Wastes), we see how much time is saved and therefore costs.

Flowchart
Customer: Send Purchase Order(PO) to Sales Representative

Sales Rep: Confirm receipt of PO to customers via Email/Phone (1 min)

Sales Rep: Prepare Order Entry Form (10 min)

Sales Rep: Print the entry form and PO and then sign (4 min)

Sales Rep: Send Documents to Clerk (2 min)

Clerk: Load the data into the system (6 min)

Clerk: Wait for the system processing (3 min)

Clerk: Print the Sales Order and sign on it (3 min)

Clerk: Scan the Sales Order in the system (2 min)

Clerk: Send a scanned sales order copy to Sales Representative via Email (1 min)

Clerk: File the various documents (Customer PO, Order Entry Form, Sales Order) (2 min)

Sales Rep: Send a Scanned Sales Order to Customers via Email (1 min)

Total Time: 35 minutes Figure 2: Incoming Purchase Order (Final Process)

Final State:
Here we see how the number of steps taken has been halved. The various wastes such as transportation, movement, waiting, etc. have been eliminated to a large extent and thus help reduce costs considerably. The over processing and some of the extra layers involved are also dealt with

without compromising on the standard or quality. In this particular case it was found to have reduced the time consumed from 59 minutes to 35 minutes (about 40%) thus contributing a lot in reducing the costs incurred.

Scope of Improvement:
The process still has a lot of chances of improvement. For starts, most of movement is still manual and thus takes up more time (Waste of Movement). This can be reduced by digitization and deploying servers where these forms can be uploaded easily. Also even the maintenance of files with print outs can be done away with by using the digital copy only and backing up. Thus a lot is saved in material cost as well as time.