Production management strategies The operations and production management

  • Slides: 45
Download presentation
Production management strategies The operations and production management literature suggests a number of production

Production management strategies The operations and production management literature suggests a number of production management strategies. These are: 1. materials requirement and manufacturing resources planning systems (MRP); 2. optimised production technology (OPT); 3. just-in-time (JIT) manufacturing systems.

An MRP system determines (a) the quantity and timing of finished goods demanded, (b)

An MRP system determines (a) the quantity and timing of finished goods demanded, (b) the requirements for raw materials components and (c) subassemblies prior to each stage of production.

To operate an MRP system the organisation must have (a) a master production schedule;

To operate an MRP system the organisation must have (a) a master production schedule; (b) a bills of material file; (c) an inventory file; and (d) a master parts file.

OPT philosophy contends that the primary goal of manufacturing is to make money. Three

OPT philosophy contends that the primary goal of manufacturing is to make money. Three important criteria are identified to evaluate progress towards achieving this goal. These are throughput, inventory and operating expenses. Throughput refers to the time from when a product starts along the production line until the time it becomes a finished good.

The just-in-time approach The success of Japanese firms in international markets has generated interest

The just-in-time approach The success of Japanese firms in international markets has generated interest among many western companies as to how this success was achieved. It is claimed that the implementation of JIT production methods has been one of the major factors contributing to this success. The JIT approach involves a continuous commitment to the pursuit of excellence in all phases of manufacturing systems design and operations. The aims of JIT are to produce the required items, at the required quality and in the required quantities, at the precise time they are required.

In particular, JIT seeks to' achieve the following primary goals: • elimination of non-value

In particular, JIT seeks to' achieve the following primary goals: • elimination of non-value added activities; • zero inventory; • zero defects; • batch sizes of one; • zero breakdowns; • a 100 per cent on-time delivery service.

JIT production is an evolutionary process, which aims ro produce the required items, at

JIT production is an evolutionary process, which aims ro produce the required items, at the required quality and in the required quantities, at the precise time they are required. JIT adoption promotes manufacturing excellence by focusing on quality and on the manufacturing process rather than on products.

JIT versus traditional manufacturing A JIT production system is different from a traditional manufacturing

JIT versus traditional manufacturing A JIT production system is different from a traditional manufacturing system in many ways. Traditional manufacturing Throughput time Processing time + inspection time + conveyance time + waiting time Optimum lot More than one size (production) Set-up time and Long set-up time and therefore high costs The need for A back-up exists to keep production holding flowing inventory Quality Provision for waste, scrap, rework, management etc. JIT manufacturing Processing time only One Zero set-up time and thereby no set-up costs Zero inventory Zero-defects; quality environment

JIT versus traditional manufacturing Traditional manufacturing Number of suppliers and relationships Factory layout Management

JIT versus traditional manufacturing Traditional manufacturing Number of suppliers and relationships Factory layout Management accounting systems Performance evaluation systems JIT manufacturing Large number of suppliers and short-run Fewer suppliers and longrelationships term relationships More sp. ice is needed 1 Greater emphasis on costing (short-run strategy) Greater emphasis on ttnancia indicators (e. g. RO 1) Reduces [he need for space Greater emphasis on cost management (long-term strategy) i Greater emphasis on nonfinancial indicators (e. g. customer satisfaction)

JIT and the cost accounting system. Installing a JIT system affects: • the traceability

JIT and the cost accounting system. Installing a JIT system affects: • the traceability of costs; • enhances product-costing accuracy, • diminishes the need for allocation of service-centre costs; • changes the behaviour and relative importance of direct labour costs; • impacts job-order and process costing systems

In a JIT purchasing environment, the warehouse is no longer needed and thus materials

In a JIT purchasing environment, the warehouse is no longer needed and thus materials handling costs can be reduced. Many costs formerly classified as indirect labour costs can now be directly traceable to the product line. JIT manufacturing, by reducing indirect costs and increasing direct costs, diminishes the need for detailed allocation of costs to various activities. Moreover, costs are directly traceable to each product. These increase the accuracy of product costing. In a JIT environment, many services are decentralised. These can now be directly traced to a manufacturing cell and consequently to a specific product.

JIT adoption can affect direct labour costs in the following manner: • • Direct

JIT adoption can affect direct labour costs in the following manner: • • Direct labour decreases as a percentage of total manufacturing costs. . Direct labour changes from a variable to a fixed cost. In a JIT environment, with zero inventories (or at least insignificant levels), inventory valuation is irrelevant for financial reporting purposes. Job orders are no longer needed to accumulate product costs as a result of reducing WIP and finished goods inventories. With JIT's zero inventory

An example of product cost traceability in traditional manufacturing versus JIT manufacturing Manufacturing cost

An example of product cost traceability in traditional manufacturing versus JIT manufacturing Manufacturing cost Traditional manuf. Direct labour Direct materials Materials handling Repairs and maintenance Energy Operating supplies Supervision Insurance and taxes Building depreciation Equipment depreciation Custodial services Cafeteria services JIT manuf Direct Indirect Direct Indirect Direct Indirect Indirect Direct Indirect

JIT production and automation: how do they relate? JIT production is a demand-pull system

JIT production and automation: how do they relate? JIT production is a demand-pull system that ensures that product is not moved from one process step to another until there is a requirement for that product. In contrast, the traditional push-through system of manufacturing produces significantly higher levels of finished goods inventory than a-JIT system. The underlying tenet of JIT production is quality. It is argued that implementation of a JIT production system can help managers eliminate waste by compressing time and space and thereby firms are capable of reducing costs of production significantly.

Implicit in the operation management and management accounting literature is the notion that JIT

Implicit in the operation management and management accounting literature is the notion that JIT production and automation in the factory should be considered in tandem. A successful JIT implementation gives firms the kind of flexible, balanced, yet simple production process that makes automation easier to implement. Companies should not undertake major automation until significant progress has been made to the process of moving to JIT. If automation is attempted before JIT, the outcome from automation will probably prove highly disappointing. JIT should be a first step to implementing an automated manufacturing process.

JIT production and ABC: how do they relate? Traditionally, common costs are attributed to

JIT production and ABC: how do they relate? Traditionally, common costs are attributed to products using measures of volume, frequently based on direct labour, direct material, machine time and energy. Such allocations are needed for, among other things, inventory valuation, especially in the financial accounts. This traditional cost system assumes that products consume all resources in proportion to their production volumes. But many organisational resources exist for activities that are unrelated to the physical volume of units produced. Consequently, traditional volume-based cost allocation practices may report distorted product costs.

The connection between JIT and ABC in practice is not clear. Some authors argue

The connection between JIT and ABC in practice is not clear. Some authors argue that JIT is a substitute for short-run cost accounting data and that the physicals are more important. In a JIT production, the ideal batch size is one. This means that all batch-level activities either are converted into unit-level activities or are eliminated.

Furthermore, JIT firms are capable of isolating non-valueadded costs and can eliminate them, thereby

Furthermore, JIT firms are capable of isolating non-valueadded costs and can eliminate them, thereby reducing overhead costs. JIT production is oriented toward process and time. Therefore its accounting, reporting and costing methodologies are founded on how long a product is in the process. The ultimate effect is to diminish the need for an ABC system to trace production costs to products. Following these arguments one would expect that firms with a JIT production system are more likely to place less emphasis on an ABC system.

Target costing is a cost-estimation approach which is widely used by Japanese companies. It

Target costing is a cost-estimation approach which is widely used by Japanese companies. It consists of setting a desired market price for a new product. Market forces drive this market price. A target profit margin is then deducted from the target market price to determine the target cost. The target cost numbers are used in product-pricing decisions and in decisions to introduce the , new product.

Target costing is also known as a cost reduction tool. The target costs are

Target costing is also known as a cost reduction tool. The target costs are compared with current estimates, which are almost always higher. The underlying assumption of the target costing philosophy is that market prices determine product costs.

Target costing is based on three premises: (a) orienting products to customer affordability or

Target costing is based on three premises: (a) orienting products to customer affordability or market-driven pricing, (b) treating product cost as an independent variable during the definition of a product's requirements and (c) proactively working to achieve target cost during product and process development In summing up, target costs establish what the marketplace says that it will pay and from that comes the target cost that an organisation is going to have to reach.

The difference between a traditional cost management approach and a target costing approach

The difference between a traditional cost management approach and a target costing approach

Traditional cost management approach Product requirement Product design Process design and cost estimates Make/buy

Traditional cost management approach Product requirement Product design Process design and cost estimates Make/buy analysis Supplier cost estimates Cost too high? production Period cost reduction

Target cost concept Product requirements and market analysis Target price less profit Balance target

Target cost concept Product requirements and market analysis Target price less profit Balance target cost and requirement Make/buy analysis Suppliers target costing Explore product and process design alternatives and design products and requirements production Continuous cost reduction Cost projections Value analysis

Projected life time volume Engine -1 8, 50, 000 Target average selling price Tk.

Projected life time volume Engine -1 8, 50, 000 Target average selling price Tk. 7, 500 Target average margin Tk. 1, 100 Target cost Raw materials cost Purchased components Tk. 6, 400 Tk. 2, 500 2, 200 Indirect costs Projected cost Tk. 3, 317 Tk. 8, 017

Cost Item Assembly Quality assurance Rework Materials handling Unit related cost Drive Units Driver

Cost Item Assembly Quality assurance Rework Materials handling Unit related cost Drive Units Driver Cost Assembly Tk. 35 hours Inspection Tk. 42 hours Labour hours Tk. 35 Helper hours Tk. 28 Engine 1 Total cost 7 Tk. 245 2 Tk. 84 3 5 Tk. 105 Total Unit related cost Tk. 140 Tk. 574

Batch –Related Indirect Costs Drive Units Cost Item Driver Cost Engine 1 Moving Number

Batch –Related Indirect Costs Drive Units Cost Item Driver Cost Engine 1 Moving Number of moves Tk. 50 7 Setup hours Tk. 250 8 Product –Related Indirect Costs Engine 1 Cost Item Total Cost /Unit Engineering Tk. 80 million Tk. 94 Supervisory Tk. 8 million Tk. 9 Total Cost Tk. 350 Tk. 2000

Lifetime volume Price Materials cost Raw materials cost Components cost Unit –Related Cost Assemble

Lifetime volume Price Materials cost Raw materials cost Components cost Unit –Related Cost Assemble Quality assurance Rework Materials handling Batch-Related Cost Moving Setup Product-Related Costs Engineering Supervisory Facility sustaining cost General administration General overhead Total projected costs Projected profit Target profit Engine -1 8, 50, 000 Tk. 7, 500 Tk. 2, 500 2, 200 245 84 105 140 350 2, 000 94 9 240 50 Tk. 8, 017 -517 1, 100

Value Engineering Changed Item Raw materials costs Purchased components costs Assemble hours Rework hours

Value Engineering Changed Item Raw materials costs Purchased components costs Assemble hours Rework hours Engine 1 Tk. 2, 400 2, 100 6 2

Lifetime volume Price Materials cost Raw materials cost Components cost Unit –Related Cost Assemble

Lifetime volume Price Materials cost Raw materials cost Components cost Unit –Related Cost Assemble Quality assurance Rework Materials handling Batch-Related Cost Moving Setup Product-Related Costs Engineering Supervisory Facility sustaining cost General administration General overhead Total projected costs Projected profit Target profit Excess of projected profit over target Engine -1 8, 50, 000 Tk. 7, 500 Tk. 2, 400 2, 100 210 84 70 140 350 2, 000 94 9 204 48 Tk. 7, 709 -209 1, 100 -1, 309

Functional Analysis Lifetime volume Price Materials cost Raw materials cost Components cost Unit –Related

Functional Analysis Lifetime volume Price Materials cost Raw materials cost Components cost Unit –Related Cost Assemble Quality assurance Rework Materials handling Batch-Related Cost Moving Setup Product-Related Costs Engineering Supervisory Facility sustaining cost General administration General overhead Total projected costs Projected profit Target profit Excess of projected profit over target Engine -1 8, 50, 000 Tk. 7, 200 Tk. 2, 200 2, 100 140 84 70 140 350 2, 000 94 9 234 44 Tk. 7, 387 -187 1, 100 -1, 287

Product life-cycle costing Life cycle costing is defined as the total cost throughout its

Product life-cycle costing Life cycle costing is defined as the total cost throughout its life including planning, design, acquisition & support costs & any other costs directly attributable to owning / using the asset. Category of LCC Capital assets : • Initial costs • Operating costs • Disposal costs

The stage in the product life-cycle of the organisation's products has been identified in

The stage in the product life-cycle of the organisation's products has been identified in the organisation literature as the most influential factor determining the strategy formulation process. The literature describes the stages of the product life-cycle as (1) Emerging, (2) Growth, (3) Mature and (4) Declining

The stages in the product life-cycle

The stages in the product life-cycle

Specific costs may be associated with each stage. (1) Pre-production/Product development stage A high

Specific costs may be associated with each stage. (1) Pre-production/Product development stage A high level of setup costs will be incurred in this stage (preproduction costs), including research and development (R&D), product design and building of production facilities. (2) Launch/Market development stage Success depends upon awareness and trial of the product by consumers, so this stage is likely to be accompanied by extensive marketing and promotion costs.

(3) Growth stage Marketing and promotion will continue through this stage. In this stage

(3) Growth stage Marketing and promotion will continue through this stage. In this stage sales volume increases dramatically, and unit costs fall as fixed costs are recovered over greater volumes. (4) Maturity stage Initially profits will continue to increase, as initial setup and fixed costs are recovered. Marketing and distribution economies are achieved. However, price competition and product differentiation will start to erode profitability as firms compete for the limited new customers remaining

5) Decline stage Marketing costs are usually cut as the product is phased out.

5) Decline stage Marketing costs are usually cut as the product is phased out. Production economies may be lost as volumes fall. Meanwhile, a replacement product will need to have been developed, incurring new levels of R&D and other product setup costs. Alternatively additional development costs may be incurred to refine the model to extend the life-cycle

Committed costs versus actual costs spent A committed cost is an investment that a

Committed costs versus actual costs spent A committed cost is an investment that a business entity has already made and cannot recover by any means, as well as obligations already made that the business cannot get out of. You should be aware of which costs are committed costs when you are reviewing company expenditures for possible cutbacks or asset sales.

For example, if a company buys a machine for Tk. 40, 000 and also

For example, if a company buys a machine for Tk. 40, 000 and also issues a purchase order to pay for a maintenance contract for Tk. 2, 000 in each of the next three years, all Tk. 46, 000 is a committed cost, because the company has already bought the machine, and has a legal obligation to pay for the maintenance.

In a life-cycle costing situation, an organisation needs to look at two things. One

In a life-cycle costing situation, an organisation needs to look at two things. One of them is the relationship of where the organisation commits cash in the development life-cycle to where it spends the cash. How is the timing of those different and why is that relevant in so far as the organisation is concerned?

The other is the specific type of decisions made along the way that cascade

The other is the specific type of decisions made along the way that cascade in their impact. According to Raffish (1991), 85 per cent of the cost of a new product is committed after the design phase and manufacturing can influence only about 10 to 15 per cent or so of the cost.

Thus, life-cycle costing is closely associated with the product's life-cycle timing and that timing

Thus, life-cycle costing is closely associated with the product's life-cycle timing and that timing is important if the producer intends to make reasonable decisions about products, particularly, for example, go/no-go kinds of decisions. The problem, however, here is that an organisation is not capturing and allocating research and development costs so that management can determine the true profitability of a product over its life.

Example: A company is planning a new product. Market research information suggests that the

Example: A company is planning a new product. Market research information suggests that the product should sell 10, 000 units at Tk. 21. 00/unit. The company seeks to make a mark-up of 40% product cost. It is estimated that the lifetime costs of the product will be as follows: Design and development costs Tk. 50, 000 Manufacturing costs $10/unit End of life costs Tk. 20, 000 The company estimates that if it were to spend an additional Tk. 15, 000 on design, manufacturing costs/unit could be reduced. Required: (a) What is the target cost of the product? (b) What is the original lifecycle cost per unit and is the product worth making on that basis? (c) If the additional amount were spent on design, what is the maximum manufacturing cost per unit that could be tolerated if the company is to earn its required mark-up?

(a) The target cost of the product can be calculated as follows: Cost 100%

(a) The target cost of the product can be calculated as follows: Cost 100% Tk. 15 + Mark-up 40% Tk. 6 = Selling price 140% Tk. 21 (b) The original lifecycle cost per unit = {Tk. 50, 000 + (10, 000 x Tk. 10) + Tk. 20, 000}/10, 000 = Tk. 17 This cost/unit is above the target cost per unit, so the product is not worth making.

(c) Maximum total cost per unit =Tk. 15. Some of this will be caused

(c) Maximum total cost per unit =Tk. 15. Some of this will be caused by the design and end of life costs: ($50, 000 + $15, 000 + $20, 000)/10, 000 = $8. 50 Therefore, the maximum manufacturing cost per unit would have to fall from $10 to ($15 – $8. 50) = $6. 50.