Contemporary Issues And The Impact Of Technology on MA(TOPIC 1: PART 3)*

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To balance ordering or setup costs and carrying costsDemand uncertaintyMachine failureDefective partsUnavailable partsLate delivery of partsUnreliable production processesTo take advantage of discountsTo hedge against future price increases

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*Three types of inventory costs can be readily identified with inventory:

The cost of acquiring inventory.The cost of holding inventory.The cost of not having inventory on hand when needed.Costs related to holding & managing inventoriesInventory Management

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TC = PD/Q + CQ/2TC = The total ordering (or setup) and carrying costP = The cost of placing and receiving an order (or the cost of setting up a production run)Q = The number of units ordered each time an order is placed (or the lot size for production)D = The known annual demandC = The cost of carrying one unit of stock for one year

Economic Order Quantity (EOQ)Inventory Management

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* EOQ = 2DP/C

EOQ = (2 x 25,000 x $40) / $2EOQ = 1,000,000EOQ = 1,000 units

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D = 25,000 unitsP = $40 per order

Q = 500 unitsC = $2 per unit

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Often described as push systems.Keep large inventories on handProblems:

Storage costHide qualityBottlenecks and obsolete productsSolution: Lean Productions System

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BKAM3033 Topic 1*ABC and ABM often reveal the high costs of activities such as (1) buying, storing, and moving inventories and (2) producing poor-quality products and services. Traditional systems often keep large inventories of raw materials, work in process, and finished goods on hand. The smoothing operation can continue even if the shaping or grinding operations slows or come to a halt as a result of machine break down, absence due to sick workers, or other production problems.

Why are large inventories a problem? Inventories use cash. Companies incur interest expense or forgo interest revenue on that cash. If a company has to borrow money to pay for inventory, it incurs interest expense on the loan. Even if a company uses its own cash to fund the inventory, it misses the opportunity to earn interest on that cash. Large inventories often hide quality problems, production bottlenecks, and obsolescence. Inventory may spoil, be broken or stolen, or become obsolete as it sits in storage and waits to be used or sold. Companies in the high-tech and fashion industries are particularly susceptible to inventory obsolescence. The activities of storing and taking items out of storage is very expensive. ABC and ABM have helped uncover the cost of these non-value added activities.

These are often described as push systemsproducts are pushed through manufacturing and stored in finished goods until sold.*

Philosophy and a business strategyPrimary goal is to eliminate waste and costFocus of JIT:

Purchase raw materials just in time for productionFinish goods just in time for delivery**BKAM3033 Topic 1

BKAM3033 Topic 1*Lean production is both a philosophy and a business strategy of manufacturing without waste. One primary goal of a lean production system is to eliminate the waste of time and money that accompanies large inventories.

JIT inventory focuses on purchasing raw materials just in time for production and then completing finished goods just in time for delivery to customers.

By doing so, companies eliminate the waste of storing and unstoring raw materials and finished goods*

Common characteristics

Production occurs in self-contained cellsBroad employee rolesSmall batches produced just in time demand-pull systemShortened setup timesShortened manufacturing cycle timesEmphasis on qualitySupply-chain management**BKAM3033 Topic 1

BKAM3033 Topic 1*Most companies that adopt lean production have several common characteristics that help minimize the amount of inventory that is kept on hand, yet enable the company to quickly satisfy customer demand. The goal is continuous production without interruptions or work in process inventories. These self-contained production cells minimize the time and cost involved with physically moving parts across the factory to other departments. Employees working in production cells do more than operate a single machine. They also conduct maintenance, perform setups, inspect their own work, and operate other machines.

Lean companies schedule production in small batches just in time to satisfy customer needs. As a result, they do not need to carry extra finished goods inventory. In this demand-pull system, the customer orderthe demandtriggers the start of the production process and pulls the batch through production. The demand-pull system extends back to suppliers of materials who end up making frequent, small deliveries of defect-free raw materials just in time for production. The lean pull system replaces the traditional push system in which large quantities of raw materials are pushed through the production process to be stored in finished goods inventory until sold.

Lean companies must focus on reducing the time it takes to setup the machines used for more than one product. Lean companies must also produce their products very quickly. Shorter manufacturing times also protect companies from foreign competitors whose cheaper products take longer to ship. Delivery speed has become a competitive weapon.

Lean companies focus on producing their products right the first time, every time. Why? First, they have no backup stock to give to waiting customers if they run into production problems. Second, defects in materials and workmanship can slow or shut down production.

Lean production requires close coordination with suppliers. These suppliers must guarantee on-time delivery of defect-free materials. Supply-chain management is the exchange of information with suppliers and customers to reduce costs, improve quality, and speed delivery of goods and services from the companys suppliers, through the company itself, and on to the companys end customers. *

*Complete productsjust in time toship customers.Complete partsjust in time forassembly into products.Receive materialsjust in time forproduction.Just In Time (JIT)Scheduleproduction.Receive customer orders.*BKAM3033 Topic 1

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Vulnerable when problems strike suppliers or distributors

Examples

Delays in delivery Personnel problems union strikesShortage of parts due to recalled productsWeather related issues**BKAM3033 Topic 1

BKAM3033 Topic 1*With no inventory buffers, lean producers are vulnerable when problems strike suppliers or distributors. *

*FlexibleworkforceReducedsetup timeZero productiondefectsImprovedplant layoutReduced inventoryJust In Time (JIT) ConsequencesJIT purchasingFewer, but more ultra reliable suppliers.Frequent JIT deliveries in small lots.Defect-free supplier deliveries.*BKAM3033 Topic 1

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*More rapid response to customer ordersFreed-up fundsReducedinventory costsGreater customersatisfactionBenefits of Just In Time (JIT) SystemHigher qualityproductsIncreased throughput*BKAM3033 Topic 1

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*For control purposes, performance measures should coincide with the goals of JIT

Reducing throughput time is a primary performance measurement for JIT organisation. Team effort is important in JIT environments, so performance measures should reflect cooperative goals. Accounting System Changes in Response to JIT *BKAM3033 Topic 1

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*Significantly reduced the number of accounting transactions. There is less need to worry about valuing partially completed products (WIP).

Accounting System Changes in Response to JIT *BKAM3033 Topic 1

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*The oldest manufacturing control system.MRP is an operation management tool that uses a computer to help manage materials & inventories.Components:

Bills of materials (BOM)Master production schedule (MPS)Material requirement planning system (MRPS)Nowadays MRP/MRPII is embedded in ERP.

Material Requirements Planning (MRP) *BKAM3033 Topic 1

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*Objectives of MRP:

To ensure right materials, in right quantitiesand at right time are on hand

Strength of MRP ability to determine precisely the feasibility of a schedule within capacity constraints

Material Requirements Planning (MRP) *BKAM3033 Topic 1

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*MPS:

Specifies what is to be made and whenMust be in accordance with a production plan (sets the overall level of output in broad terms)Tells what is required to satisfy demand and meet the production planMaster Production Schedule (MPS) *BKAM3033 Topic 1

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Activity-based managementJust in TimeTotal Quality Management

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*ABM focuses on the activities incurred during the production or performance process => improved the value received by a customer & profit.ABM focuses on accountability for activities rather than costs & emphasis the maximization of system-wide performance instead of individual performance => global approach to control.In ABM both financial & non-financial measures of performance are important.

Activity-Based Management (ABM) BKAM3033 Topic 1

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*Activity analysisCost driver analysisActivity-based costing

Continuous improvementOperational controlPerformance evaluationBusiness process reengineering

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*Activity analysis primary component of ABM.Activity analysis => process of studying the activities Activity => repetitive action performed in fulfillment of business functionsActivity :

Value-added (VA)Non-value-added (NVA)Activity-Based Management (ABM) *BKAM3033 Topic 1

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VA increases significantly the value of the product/services to the customers.VA are those:

Necessary or required to meet customer requirements or expectations;That enhance purchased materials of a product;That are critical steps and cannot be eliminated in a business process;That are performed to resolve or eliminate quality problems.*BKAM3033 Topic 1

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NVA consumes time, resources, or space, but adds little in satisfying customer needs.If eliminated, customer value or satisfaction remains unchanged.NVA are those that:

Can be eliminated without affecting the form, fit, or function of the product/service;Begin with prefix re (such as rework or returned goods);Result in waste and add little or no value to the product/service;Are performed due to a request of an unhappy or dissatisfied customers; If given the option, you would prefer to do less of.*BKAM3033 Topic 1

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VANVADesigning productsSetting upWaitingMovingProcessingReworkingRepairingStoringInspectingDelivering product

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*ABC/ABM helps manager understand the relationship between the firms strategy & the activities & resources needed to put strategy into place.

Cost leadership (business strategy) => ABC/ABM is critical to this strategyIdentify value-enhancement opportunitiesDevelop customer strategySupport a technology leadership strategyEstablish a pricing strategyActivity-Based Management (ABM) *BKAM3033 Topic 1

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*Total Quality Management (TQM) TQM

=> All business functions are involved in a process of continuous quality improvement

Goals of TQM

=> Customer satisfactionTQM minimizes costs by maximizing quality.TQM focuses on continuous improvement and satisfying customers.

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*Total Quality Management (TQM)

ContinuousimprovementEmployeeempowermentTotal value chain analysisCustomer satisfactionKey success factorsCost, quality, innovation

Top priority*BKAM3033 Topic 1

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Prevention costs avoid poor quality goods or services Employee trainingImproved materialsPreventive maintenanceAppraisal costs detect poor quality goods or servicesInspection throughout productionInspection of final productProduct testing**BKAM3033 Topic 1

BKAM3033 Topic 1**As part of TQM, many companies prepare cost of quality reports. Cost of quality reports categorize and list the costs incurred by the company related to quality.

Prevention and appraisal costs are sometimes referred to as conformance costs since they are the costs incurred to make sure the product or service conforms to its intended design.

3. Internal failure costs avoid poor quality goods or services before delivery to customersProduction loss caused by downtimeRejected product units4. External failure costs incurred after defective product is deliveredLost profits from lost customersWarranty costsService costs at customer sitesSales returns due to quality problems**BKAM3033 Topic 1

BKAM3033 Topic 1**The third type of quality cost is internal failure costs. These help to avoid the delivery of poor quality goods or services to customers. An example of internal failure cost is the cost incurred to rework the product to eliminate the defect before it is allowed to leave the plant.

The fourth type of quality cost is external failure cost. This type of cost happens when the company has to incur cost AFTER the defective product is delivered to the customer. It is most detrimental to a company, as it causes low customer satisfaction rating and damage to the companys reputation.

End of Topic 1*BKAM3033 Topic 1

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**ABC and ABM often reveal the high costs of activities such as (1) buying, storing, and moving inventories and (2) producing poor-quality products and services. Traditional systems often keep large inventories of raw materials, work in process, and finished goods on hand. The smoothing operation can continue even if the shaping or grinding operations slows or come to a halt as a result of machine break down, absence due to sick workers, or other production problems.

Why are large inventories a problem? Inventories use cash. Companies incur interest expense or forgo interest revenue on that cash. If a company has to borrow money to pay for inventory, it incurs interest expense on the loan. Even if a company uses its own cash to fund the inventory, it misses the opportunity to earn interest on that cash. Large inventories often hide quality problems, production bottlenecks, and obsolescence. Inventory may spoil, be broken or stolen, or become obsolete as it sits in storage and waits to be used or sold. Companies in the high-tech and fashion industries are particularly susceptible to inventory obsolescence. The activities of storing and taking items out of storage is very expensive. ABC and ABM have helped uncover the cost of these non-value added activities.

These are often described as push systemsproducts are pushed through manufacturing and stored in finished goods until sold.**Lean production is both a philosophy and a business strategy of manufacturing without waste. One primary goal of a lean production system is to eliminate the waste of time and money that accompanies large inventories.

JIT inventory focuses on purchasing raw materials just in time for production and then completing finished goods just in time for delivery to customers.

By doing so, companies eliminate the waste of storing and unstoring raw materials and finished goods**Most companies that adopt lean production have several common characteristics that help minimize the amount of inventory that is kept on hand, yet enable the company to quickly satisfy customer demand. The goal is continuous production without interruptions or work in process inventories. These self-contained production cells minimize the time and cost involved with physically moving parts across the factory to other departments. Employees working in production cells do more than operate a single machine. They also conduct maintenance, perform setups, inspect their own work, and operate other machines.

Lean companies schedule production in small batches just in time to satisfy customer needs. As a result, they do not need to carry extra finished goods inventory. In this demand-pull system, the customer orderthe demandtriggers the start of the production process and pulls the batch through production. The demand-pull system extends back to suppliers of materials who end up making frequent, small deliveries of defect-free raw materials just in time for production. The lean pull system replaces the traditional push system in which large quantities of raw materials are pushed through the production process to be stored in finished goods inventory until sold.

Lean companies must focus on reducing the time it takes to setup the machines used for more than one product. Lean companies must also produce their products very quickly. Shorter manufacturing times also protect companies from foreign competitors whose cheaper products take longer to ship. Delivery speed has become a competitive weapon.

Lean companies focus on producing their products right the first time, every time. Why? First, they have no backup stock to give to waiting customers if they run into production problems. Second, defects in materials and workmanship can slow or shut down production.

Lean production requires close coordination with suppliers. These suppliers must guarantee on-time delivery of defect-free materials. Supply-chain management is the exchange of information with suppliers and customers to reduce costs, improve quality, and speed delivery of goods and services from the companys suppliers, through the company itself, and on to the companys end customers. **With no inventory buffers, lean producers are vulnerable when problems strike suppliers or distributors. ***As part of TQM, many companies prepare cost of quality reports. Cost of quality reports categorize and list the costs incurred by the company related to quality.

Prevention and appraisal costs are sometimes referred to as conformance costs since they are the costs incurred to make sure the product or service conforms to its intended design.**The third type of quality cost is internal failure costs. These help to avoid the delivery of poor quality goods or services to customers. An example of internal failure cost is the cost incurred to rework the product to eliminate the defect before it is allowed to leave the plant.

The fourth type of quality cost is external failure cost. This type of cost happens when the company has to incur cost AFTER the defective product is delivered to the customer. It is most detrimental to a company, as it causes low customer satisfaction rating and damage to the companys reputation.