Chapter 7

Chapter 7
The Conversion Cycle

(for online classes Part 4)
Principles of Lean Manufacturing
Evolved from Toyota Production System (TPS) which is
based on the just-in-time (JIT) production model.
This topic had been
Goal is improved efficiency and effectiveness in every area.
discussed in other subjects
Pull processing involves pulling products from consumer
suchthan
end (demand) rather as ProdMan
pushing from andproduction
Cost end
Accounting.
(supply). (Companies Discussion
should not just produce without information
here
as to what is the demand fromisthe
supposed to should be a
market. There
correspondence between demand and production output)
supplement what you have
Perfect quality (zero inventory defects) is required for pull
processing success.
been earlier taught.
Waste minimization requires activities that do not add
value or maximize the use of scarce resources be eliminated.
Involves financial, human, inventory and fixed assets.
3
Principles of Lean Manufacturing
Inventory reduction is the hallmark of lean manufacturing.
Inventories cost money, camouflage production problems and can
precipitate overproduction. (Inventory stored in a warehouse is “money
sleeping”. It also incurs expenses like storage and insurance. Having also large
inventories may give a false sense that everything is alright since it does not signal
if there are already problems in the production process)
Production flexibility strives to reduce setup time to a minimum, allowing
for the production of a greater diversity of products quickly, without
sacrificing efficiency. (This means that should changes in customer demand
happens, a company can readily change the product by changing the related
manufacturing processes)
Established supplier relations are mandatory as late deliveries, defective
raw materials, or incorrect orders will shut down production due to lack of
inventory reserves. (There is a need for companies to do extensive supplier accreditation and
as much as possible forge partnerships with reliable suppliers for major requirements)
Team attitude requires each employee to be vigilant of problems that
threaten the continuous flow of production line. (Company personnel should have
good personal skills to enable them to efficiently work in teams) 4
Techniques and Technologies that
Promote Lean Manufacturing
1. Physical reorganization
The product goes of production
through the circuitousfacilities:
dotted lines.
Simplified facility arrangement shortens the physical distance
The flow of the product should be streamlined.
between activities
Minimal reduces
distance travelled by setup andon
the product processing
the time,
production
handling floor
costs and inventories.
5
Physical Reorganization of the
Production Facilities
Inefficiencies in traditional plant layouts increase
handling costs, conversion time, and excess
inventories.
Employees tend to feel ownership over their
stations, contrary to the team concept.
Reorganization is based on flows through cells
which shorten the physical distance between
activities.
This reduces setup and processing time, handling costs,
and inventories.
Techniques and Technologies that
Promote Lean Manufacturing
2. Automation of the manufacturing process:
By replacing labor with automation, firm can reduce waste,
improve efficiency, increase quality and improve flexibility.
Traditional manufacturing consists of a range of different
machines each controlled by a single operator.
Islands of technology is an environment where automation
exists in islands of computer numerical controlled
machines that perform multiple operations with little
human involvement.
7
Progression of Automation in the
Manufacturing Process
Traditional Islands of Computer

(manual or Technology Integrated
mechanical (stand alone
operation)
Manufacturing
Automated (automated machines
Equipment are Are connected)
Used)
Progression of Automation toward World-Class Status
Automating Manufacturing
Traditional Approach to Automation
Consists of many different types of
machines which require a lot of setup
time
Machines and operators are organized
in functional departments
WIP follows a circuitous route through
the different operations
Islands of Technology
Stand alone islands which employ computer
numerical controlled (CNC) machines that can
perform multiple operations with less human
involvement
Computer Numerical Controlled (CNC ) Machines
 Reduce the complexity of the physical layout
 Arranged in groups and in cells to produce an entire
part from start to finish
 Need less set-up time
Computer Integrated Manufacturing (CIM)
A completely automated environment which
employs automated storage and retrieval
systems (AS/RS) and robotics
Automated Storage and Retrieval Systems (AS/RS)
 Replaces traditional forklifts and their human
operators with computer-controlled conveyor
systems (similar to airport carousels for baggages; products
are transported on “wide moving belts”. Please watch https://
www.youtube.com/watch?v=rAfY-fU56kQ . Gardenia’s factory
uses a lot of AS/RS systems)
 Reduce errors, improved inventory control, and
lower storage costs
Computer-Integrated Manufacturing
(CIM) System
Automating

Manufacturing
Robotics
Use special CNC machines that are useful in
performing hazardous, difficult, and monotonous
tasks (Japanese car manufacturers use extensive robotics in the
assembly of cars. Please watch
https://www.youtube.com/watch?v=s-yne8xTNM0)
Computer-Aided Design (CAD) (used by architects and
industrial designers to have a 3D model of products being designed)
Increases engineers’ productivity (as opposed to manual
design; they can produce much more)
Improves accuracy
Allows firms to be more responsive to market
demands (when product changes are required by customers,
designers can readily come up with the new design using technology)
Interfaces with CAM and MRPII systems (discussed
in next slides)
Computer Aided
Manufacturing (CAM)
Uses computers to control the physical
manufacturing process
Output of the CAD system is fed to the
CAM system.
Benefits include improved process
productivity, cost and time estimates,
process monitoring and quality, and
decreased setup and labor costs.
Value Stream Mapping
Essential activities add value; nonessential
activities do not and should be eliminated.
Company’s value stream includes all steps
essential to producing a product.
Companies pursuing lean manufacturing use a
value stream map (VSM) to identify business
process aspects that are wasteful and should be
eliminated.
Works best in focused, high-volume processes which
benefit from reducing repetitive processes by even small
amounts of time.
Less effective in low-volume processes in which
employees frequently switch between multiple tasks.
15
Each process in the value stream is
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Learning. Allas to reserved.
rights their elements so that
it can
May not be copied, be analyzed
scanned, or duplicated,what
in element of a
whole or in part, except for use as permitted in a
process
license distributed can product
with a certain be improved
or or removed
service or otherwise on a password-protected
website for classroom use. 16
Achieving World-Class Status
The world-class firm needs new accounting
methods and new information systems that:
show what matters to its customers
identify profitable products
identify profitable customers
identify opportunities for improving operations
and products
encourage the adoption of value-added
activities and processes and identify those that
do not add value
efficiently support multiple users with both
financial and nonfinancial information
What’s Wrong with Traditional
Accounting Information?
Inaccurate cost allocations occur because overhead is
assumed to be directly related to direct labor.
 Automation changes the relationship between direct labor, direct materials, and
overhead costs which becomes more significant.
 Using standard costs leads to distortions in a lean environment.
Promotes non-lean behavior due to incentives to produce

large inventories and conceal waste in overhead allocations.
Time lags as standard cost data are historic in nature.
 After-the-fact info is too late to be useful in a lean environment. (before you can
compute variances, you have to wait for the end of the period for the information to be finalized)
Financial orientation is not always suitable for evaluations
pertaining to functionality and improvements. (Traditional accounting
tends to quantify by using amounts such as dollars or pesos rather than other units)
18

Activity Based Costing (ABC)
Method that allocates costs to facilitate planning
and control by assigning costs to activities and
cost objects.
Activities describe work performed in a firm.
Cost objects are the reasonsThis
for performing activities.
topic is discussed
Assumes that activities cause
in Cost Accounting
costs and thatas
well so I would
products (and other cost objects) createassume
a demand
for activities. you are familiar with
the topic.
First step is to determine the cost of an activity
and an appropriate activity driver that measures
consumption.
ABC uses multiple activity drivers, whereas traditional
accounting has only one, e.g. machine or labor hours.
19
ABC – Pros and Cons
Advantages
 More accurate costing of products/services, customers, and distribution
channels
 Identifying the most and least profitable products and customers (we can
generate mini income statements per product as well as per customer. Having such information, a company
can focus on the products and customers which can generate the most profits)
 Accurately tracking costs of activities and processes
 Equipping managers with cost intelligence to drive continuous
improvements
 Facilitating better marketing mix (i.e., combination of products in terms of sales
percentages)
 Identifying waste and non-value-added activities
Disadvantages
 Too time-consuming and complicated to be practical. (ABC can only be
implemented if a company uses an ERP such as SAP or Oracle. Non integrated systems do not
allow the use of ABC)
 Promotes complex bureaucracies in conflict with lean manufacturing
philosophy
Value Stream Accounting
(related to Value Stream Mapping discussed in Slide 15)
Captures costs by value stream rather than by

department or activity making it simpler than ABC
accounting.
Value streams cut across functional and departmental
lines and includes non-manufacturing costs.
Essential aspect is defining the product family.
Makes no distinction between direct and indirect costs.
 Raw materials based on purchases and all employee labor
costs of employees in the value stream are included.
Typically only allocated cost is a charge for the facility
 Overhead costs which cannot be controlled are not
allocated.
22
Cost Assignment to Value Stream
Product incurred
Sales Expenses are allocated
Warehousing to the different product
Manufacturing Shipping
Planning
families or product lines. The allocated expenses are
accumulated and charged to the product family.
Production Production Cell
Materials Labor Machines
Value Stream Product Family A
Marketing and Product Support Facilities Rent &

Design Labor Distribution Expenses
Selling Expenses Maintenance
Value Stream Product Family B
Production Production Cell

Materials Labor Machines
In this table, the costs are allocated per process to the
product families identified. The costs are represented
by “X”.
© 2015 Cengage Learning. All rights reserved.

May not be copied, scanned, or duplicated, in
whole or in part, except for use as permitted in a
license distributed with a certain product or
service or otherwise on a password-protected
website for classroom use. 24
Information Systems that Support
Lean Manufacturing
Materials Requirement Planning (MRP) is an
automated production planning and control system used
to support inventory management. (in other words,
automated system for managing inventories only)
Ensures adequate raw materials for production process.
Maintains the lowest possible level of inventory on hand.
Produce production and purchasing schedules and other
information needed to control production.
25
Information Systems that
Support Lean Manufacturing
Manufacturing Resource Planning (MRP II) is an
extension of MRP that has evolved beyond inventory
management.
Coordinates a wide range of manufacturing activities.
Benefits include improved customer service and cash flow,
reduced inventory, increase productivity, help in achieving
long-term goals and managing change and production
flexibility. (Bigger in scope than MRP)
Enterprise Resource Planning (ERP) Systems are software
suites that integrate the entire organization into one system
connected to a single common database.
An electronic data interchange (EDI) communication
link allows firm to interact with customers and suppliers
via Internet or direct connection.
26

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The Conversion Cycle

Traditional Islands of Computer

Promotes non-lean behavior due to incentives to produce

Captures costs by value stream rather than by

Value Stream Product Family A

Marketing and Product Support Facilities Rent &

Value Stream Product Family B

Production Production Cell

© 2015 Cengage Learning. All rights reserved.

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