IMA

Lecture 10
Kaizen Costing
Kaizen Costing
A system of cost reduction via continuous improvement

The word kaizen is a Japanese word meaning

continuous improvement
Increase the gap between cost and price
Cost reduction is inevitably crucial in any business as it
helps to increase profitability and set a competitive
price for your product or service
Aside from prioritizing the Return on Investment (ROI),
making internal improvements, and implementing
automation to increase product quality – an
organization can apply Kaizen costing to reduce the
manufacturing cost effectively
Kaizen Costing:
It is a costing technique to reflect continuous efforts to:
• reduce product costs,
• improve product quality,
• improve the production process after manufacturing activities have
begun
Kaizen costing involves making continual, incremental improvements to
the production process during the manufacturing phase of the
product/service lifecycle, typically involving setting targets for cost
reduction
Continuous Improvement:
Continuous improvement is the continual examination
and improvement of existing processes and is very
different from approaches such as business process re-
engineering (BPR), which seeks to make radical one-off
changes to improve an organization's operations and
processes
The concepts underlying continuous
improvement are:
a) The organization should always seek perfection.
Since perfection is never achieved, there must
always be scope for improving on the current
methods
b) The search for perfection should be ingrained into
the culture and mindset of all employees.
Improvements should be sought all the time
Kaizen Costing
Kaizen costing focuses on "cost reduction" rather than
"cost control"
Asset and organization specific kaizen costing activities
planned according to the needs of each deal
Prior to kaizen costing, when the products are under
development phase, target costing is applied. After
targets have been set, they are continuously updated to
display past improvements, and projected (expected)
improvements
Application of Kaizen Costing
• Companies who want to deploy cost reduction efforts
as a part of continuous policy during manufacturing
stage
• Companies who wants to apply kaizen costing as a
method of continuous improvement through waste
management and cost reduction (or control)
• Companies where cost and management accounting is
in practice either as a statutory obligation or to
support management decision making process
Pareto Analysis
Pareto Analysis-Concept development
• Imagine that you have just been promoted to head of
department. You will be overflown with ideas about
how to improve things, so where do you start?
• Ideally, you want to focus on fixing the problems that
have the biggest impact. But how do you decide which
one to tackle first?
Rationale
• The Pareto Principle states that 80 percent of a
project's benefit comes from 20 percent of the work
• Or, conversely, that 80 percent of problems can be
traced back to 20 percent of causes
80-20 or any combination up to 51-49
• The figures 80 and 20 are not "set in stone," and should be
taken as a guide
• The Pareto Principle illustrates the lack of symmetry that
often occurs between the work you put in and the results
you achieve
• For example, you might find that 13 percent of work could
generate 87 percent of returns
• Or that 70 percent of problems could be resolved by
dealing with 30 percent of underlying causes
Benefits of Pareto Analysis
• Pareto Analysis identifies the problem areas or tasks
that will have the biggest payoff. The tool has several
benefits, including:
• Identifying and prioritizing problems and tasks
• Helping people to organize their workloads more
effectively
• Improving productivity
• Improving profitability
Pareto Analysis Steps
1. Identify and List Problems
Write out a list of all of the problems that you need to
resolve. Where possible, gather feedback from clients
and team members. This could take the form of
customer surveys, formal complaints, or helpdesk logs.
Pareto Analysis Steps
2. Identify the Root Cause of Each Problem
• Techniques such as the 5 Whys,
• Cause and Effect Analysis, and
• Root Cause Analysis are useful tools for this
3. Score Problems
• Score each problem, by importance
• For example, if we are trying to improve customer
satisfaction, we score them based on the number of
complaints
4. Group Problems Together
Use the root cause analysis that we carried out in Step
3 to group problems together by common cause
For example, if three of our problems are caused by
lack of staff, we could put these into the same group
5. Add up Scores for Each Group
Add up the scores for each group that have identified.
The one with the top score should be your highest
priority, and the group with the lowest score your
lowest priority
6. Take Action
Finally, it's time to take action! Our highest scoring
problem will likely have the biggest benefit once fixed,
so start brainstorming on how to solve this one first
We may find that our lowest-scoring problems are not
worth bothering about, particularly if they are very
costly to fix. Use our Pareto Analysis to save energy and
resources for what is important!
Real time example
• A failing computer service center, with a lot of problems
• Carry out a Pareto Analysis to assess and prioritize the
biggest issues facing the center
• Starts by listing issues
• Then identifies the underlying causes behind each issue
• Finally, scores each item by the number of customer
complaints that each has received
Items Problem Cause Score

Phones aren't answered Too few customer

1 15
quickly enough service staff

Staff seem distracted Too few customer

2 6
and under pressure service staff

Engineers aren't well

organized and often Poor organization
3 4
need to book second and preparation
visits to bring extra parts
Items Problem Cause Score
Engineers don't know what
time they will ll arrive. This
Poor organization and
4 means that customers may 2
preparation
have to be in all day for an
engineer to visit

Customer service staff don't

5 always seem to know what Lack of training 30
they are doing

Customers are often booked in

for an appointment with an
6 engineer. However, the issue Lack of training 21
could have been solved on the
phone
Apply step 5
• Using above analysis to group problems together by cause,
then adds up the scores for each group identified. Now able
to order the main causes affecting the center, starting with
the one that has attracted the highest number of customer
complaints:
• Lack of training (items 5 and 6) – 51 complaints
• Too few service center staff (items 1 and 2) – 21 complaints
• Poor organization and preparation (items 3 and 4) – 6
complaints
Result
As depicts from figure, the business will benefit most
from giving staff more training, so we should tackle this
first
We could also look to increase the number of staff in
the call center. However, it's possible that this won't be
necessary – the provision of further training may help
to reduce customer complaints and increase staff
productivity