CHAPTER 10
both good and bad – to bring the product
Lean Manufacturing – an approach to
eliminate waste and maximize customer value
- Characterized by delivering the right
product, in the right quantity, with the
right quality (zero defect), at the exact
time the customer needs it and at the
lowest possible cost.
Firms that implement lean manufacturing
are pursuing a cost reduction strategy.
VALUE BY PRODUCT
Value is determined by the customer – at the
very least, it is an item or feature which the
customer is willing to pay.
Customer value – the difference between
REALIZATION and SACRIFICE.
Realization - what a customer receives
Sacrifice – what a customer gives up. Include
what they what they are willing to pay for
the basic and specific product, features,
quality, brand name, and reputation.
VALUE – relates to specific product and to
specific features of the product.
Waste of time and resources – (1) adding
new features and functions that are not wanted
by the customers. (2) attempting to market
features and products that customers don’t
want. (PAG AYAW NG CUSTOMER THEN
IT’S WASTE)
Assessing value is EXTERNALLY ORIENTED
not internally generates.
VALUE STREAM
Value stream – is made up of all activities,
both value-added and non-value-added,
required to bring a product group or service
from its starting point.
Most common types of value streams:
1. Order fulfillment value stream –
focuses on providing current products
to current customers.
2. New product value stream – focuses
on developing new product for new
customers.
A value stream reflects all that is done –
to a customer.
Non-value-added activities – are source
of waste.
two types:
1. Activities avoidable in the short run
2. Activities unavoidable in the short run
due to current technology of
production methods.
VALUE FLOW
Lean manufacturing reduces wait and
move times dramatically and allows the
production of small batches (low volume)
of differing products (high variety).
The key factors in achieving these
outcomes:
Reduced Setup/Changeover Times -
Reducing the time to configure equipment
to produce a different type of product
enables smaller batches in greater variety
to be produced
- also decreases the time it takes to
produce a unit of output, thus
increasing the ability to respond to
customer demand
Customers do not value changeover, and
therefore it represents waste.
Cellular Manufacturing –
Lean manufacturing: (1) uses a series of
cells to produce families of similar
products. (2) replaces the traditional plant
layout with a pattern of manufacturing
cells.
Manufacturing cells – contain all the
operations nearby that are needed to
produce a family of products. The
machines used are typically grouped in a
semicircle.
PULL VALUE
Demand-pull system – Demand pulls
products through the manufacturing process
 - Each operation produces only what is
necessary to satisfy the demand of the
succeeding operation.
- No production takes place until a
signal from a succeeding process
indicates a need to produce
Materials inventories also represent waste.
Thus, managing supplier linkages is also vital
to lean manufacturing.
JIT purchasing requires suppliers to deliver
parts and materials just in time to be used in
production.
PURSUE PERFECTION – Zero setup times,
zero defects, zero inventories, zero waste,
producing on demand, increasing a cell's
production rates, minimizing cost, and
maximizing customer value represent ideal
outcomes that a lean manufacturer seeks
Sources of Waste
Waste consumes resources without adding
value
Use the acronym DOWNTIME:
Defective Products (fail to meet specification)
Overproduction (producing more than
demanded)
Waiting (waiting for the previous step in the
process to be completed)
Non-utilized talent (not engaging employees)
Transportation (unnecessary or excessive)
Inventory (waiting for processing or
consumption)
Motion (unnecessary movement of people or
equipment)
Excess Processing (not necessary for product
or service)
Employee Empowerment – Employee
involvement is vital for identifying and
eliminating all forms of waste.
Total Quality Control - Lean manufacturing
necessarily carries with it a much stronger
emphasis on managing quality.
- A defective part brings production to a
grinding halt. Poor quality simply
cannot be tolerated in a manufacturing
environment that operates without
inventories
Lean manufacturing cannot be implemented
without a commitment to total quality control
(TQC).
TQC – essentially a never-ending quest for
perfect quality: the striving for a defect-free
product design and manufacturing process
Inventories – Overproduction of goods is
controlled by letting customers pull goods
through the system.
Activity-Based Management – Process value
analysis is the methodology for identifying and
eliminating non-value-added activities.
Process value analysis – searches for the
root causes of the wasteful activities and then,
over time, eliminates these activities.
Focused Value Streams and Traceability of
Overhead Costs
In a lean environment, many overhead costs
assigned to products using either driver tracing
or allocation are now directly traceable to
products.
Value-Stream Costing
Product Costing: Single-Product (Focused)
Value Stream – In a focused value stream, all
value-stream costs belong exclusively to the
product that the stream produces and,
therefore, are assigned to a product using
direct tracing.
Value streams increase the number of directly
traceable costs and therefore increase the
accuracy of product costing.
Focused value streams provide simple and
accurate product costing.
Typically, unit costs are calculated weekly and
are based on actual costs
Value-stream product cost = Total actual
value-stream costs/Units shipped
Product Costing: Multiple-Product Value
Stream – Many value streams are formed
around products with common processes.
Manufacturing cells within a value stream are
thus structured to make a family of products or
parts that require the same manufacturing
sequence.
Value-stream product cost = Unit materials
cost + Average conversion cost
where:
Unit materials cost (for each product) =
Actual materials cost/Units shipped
Average conversion cost = Total actual
conversion costs/Units shipped
The materials costs are assigned accurately
as they are directly traced to each product.
Features and Characteristics Costing - An
approach called features and characteristics
casting is recommended (albeit reluctantly)
- This approach recognizes that some
product components take more effort
(time) to make than others and thus
cost more.
Duration-based costing DBC uses a single
rate to assign conversion costs and
approximates a comprehensive ABC system
based on duration drivers.
First, calculate a weekly value-stream
conversion cost rate as follows:
Conversion cost rate = Total actual
conversion costs/Total net production hours
The net total production hours are the total
hours available for work whether the work is
value- or non-value-added.
Net hours mean that such things as break
times and expected stoppages are excluded
and thus correspond to practical capacity.
Conversion cost per unit = Conversion cost
rate X Cycle time
Cycle time is the time that a unit of product
spends in the value stream, from start to finish.
It is not the same as the production rate.
Value-Stream Reporting – Costs are
collected and reported by value stream.
- Costs outside the value stream
(sustaining costs) are reported in a
separate column. The revenues and
costs reported are the actual revenues
and costs for the week.
Decision Making – Using the average product
cost for a value stream means that the
individual product costs are not known.
Performance Measurement – The lean
control system uses a Box Scorecard that
compares
operational, capacity, and financial metrics
with prior week performances and with a future
desired state
- The lean control approach uses a
mixture of financial and non-financial
measures for the value stream.
PRODUCTIVE EFFICIENCY OBJECTIVE - A
key objective of lean manufacturing and
accounting is that of increasing overall
productive efficiency.
Productivity is concerned with producing
output efficiently, and it specifically addresses
the relationship between output and the inputs
used to produce the output.
Total productive efficiency is the point at
which two conditions are satisfied:
(1) for any mix of inputs that will produce a
given output, no more of any one input is used
than necessary to produce the output; and
(2) given the mixes that satisfy the first
condition, the least costly mix is chosen.
The first condition is driven by technical
relationships and, therefore, is referred to as
technical efficiency.
The second condition is driven by relative
input price relationships and, therefore, is
referred to as allocative efficiency.
Input prices determine the relative
proportions of each input that should be used.
Partial Productivity Measurement Defined
Productivity measurement – is simply a
quantitative assessment of productivity
changes.
- The objective is to assess whether
productive efficiency has increased or
decreased.
- Productivity measurement can be
actual or prospective.
Actual productivity measurement allows
managers to assess, monitor, and control
changes.
Prospective measurement is forward-
looking, and it serves as input for strategic
decision-making.
Specifically, prospective measurement allows
managers to compare relative benefits of
different input combinations, choosing the
inputs and Input mix that provide the greatest
benefit.
Partial productivity measurement
Measuring productivity for one input at a time.
Productivity of a single input is typically
measured by calculating the ratio of the output
to the input:
Productivity ratio = Output/Input
Partial productivity measure – the
productivity of only one input is being
measured.
Operational productivity measure – If both
output and input are measured in physical
quantities.
Financial productivity measure – If output or
input is expressed in dollars
Partial Measures and Measuring Changes
in Productive Efficiency
Base period – the prior period is referred to as
the and serves to set the benchmark or
standard for measuring changes in productive
efficiency. The prior period can be any
period desired.
TOTAL PRODUCTIVITY MEASUREMENT
Total productivity measurement
Measuring productivity for all inputs at once
A common multifactor approach suggested in
the productivity literature (but rarely found in
practice) is the use of aggregate productivity
indexes. Aggregate indexes are complex and
difficult to interpret and have not been
generally accepted.
Two approaches that have gained some
acceptance are:
(1) profile measurement
(2) profit-linked productivity measurement
Profile Productivity Measurement – changes.
Producing a product involves numerous critical
inputs such as labor, materials, capital, and
energy.
Profile measurement provides a series or
vector of separate and distinct partial
operational measures.
Profiles (vectors or series of measures) can be
compared over time to provide information
about productivity changes.
– Profit-Linked Productivity Measurement
Profit-linked productivity measurement -
measuring the amount of profit change
attributable to productivity change.
Linking productivity changes to profits is
described by the following rule:
Profit-Linkage Rule. For the current period,
calculate the cost of the inputs that would
have been used in the absence of any
productivity change and compare this cost
with the cost of the inputs actually used. The
difference in costs is the amount by which
profits change because of productivity
changes.
The formula to the linkage rule:
Profit-linked productivity change = ΣPQiPi –
ΣΑQiPi
Where
PQ = The amount of input I that would have
been used for the current period in the
absence of a productivity change
Pi =Current-period price of input i
– AQ = Actual amount of input I used in the
current period
To apply the linkage rule formula, the inputs
that would have been used for the current
period in the absence of a productivity change
must be calculated. To determine PQ, divide
the current-period output by the input's base-
period productivity ratio:
PQ = Current-period output/Base-period
productivity ratio for input i
Profit-linked measure – computes the
amount of profit change from the base period
to the current period attributable to productivity
Generally, this will not be equal to the total
profit change between the two periods.
Price-recovery component – The difference
between the total profit change and the profit-
linked productivity change.

This component is the change in revenue less

a change in the cost of inputs, assuming no
productivity changes. therefore, measures the
ability of revenue changes to cover changes in
the cost of inputs, assuming no productivity
change, and is calculated as follows:

Price recovery = Total profit change - Profit-

linked productivity change

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