Management of manufacturing operations is a phenomenon of the 20th century. Beginning with an era of industrialisation in the second half of the 18th century, the manufacturing activity did not take firm roots until the turn of· this century and hence the need for management of manufacturing systems did not arise. lt was the Ford Production System that laid out the basic principles of Manufacturing and Management during the period 1910-1930. It was an era marked by significant contributions to this body of knowledge from stalwarts such as Fredrick Taylor (Scientific Management), Gilbreths (Motion & Time study), Schewart (Statistical Quality Control), Henry Ford (Flow line, automation, mass production etc.). Until recently, these thoughts
were the guiding philosophy for developing manufacturing management and control systems for corporate entities globally. As 20th century comes to a close, it was ironical that once again an automobile manufacturer, The Toyota Production System,
had to take upon itself the task of rewriting these principles of manufacturing management.
Proponents of the famous theories, such as "Cultural phenomenon", and "Deliberate price cutting", that seem to explain the unprecedented rise of the Japanese corporations, be it automobiles, or consumer electronics, during the late 70's and early 80's have now vanished into thin air. The reality has come to stay and many leading corporate giants such as Ford, GM, Hewlett Packard, Motorola, and Xerox seem to have understood the new rules of the game. This paper has been written with two purposes. Firstly, to help cost management professionals understand what these "new rules" are, and secondly to explore the likely fall out of these to the profession as it gears up itself for the 21st century.
World Class Manufacturing
The first shock waves of the impending changes was felt by the automobile giants Ford, Chrysler, and GM during the oil crisis in 1972 when the Toyota Production System shot into prominence. A little later, the story was similar in all the areas where the Japanese companies began to operate. Perhaps it appeared, as Taiichi Ohno, the Father of Toyota Production System commented that the strength of a manufacturing system is best tested during an era of recession. While the non-Japanese goods were of high cost and low quality, the Japanese goods were of the other way, viz., low cost and high quality. The intention in this writing is not to report such stories, since hundreds of pages have already been written on this subject matter, but to emphasise that such a phenomenon was possible only because of the "new" principles that govern manufacturing management and control.
Although several practitioners and researchers have come out with seemingly different theories of this new principles, all of them have a few things in common. These characteristics could be collectively referred to as the principles of World Class Manufacturing (WCM) (see for details Schonberger 1986). Table A lists these characteristics.
The most often misunderstood and hence misapplied of this list is the Just in Time (JIT) system. The core philosophy of JIT is to provide an organisational framework to continuously reveal opportunities for elimination of non-value added activities. JIT systems have brought to limelight the distinction between value added and non-value added activities. If due to a poor design of factory layout the jobs travel a few kilometres before being converted into saleable products, the customers may not be interested in paying for the excess transportation (Mahadevan 1994). A proper understanding of the JIT philosophy would clarify that by eliminating a lot of unwanted activities, a substantial reduction in time, be it procurement or manufacturing or distribution, could be achieved. The popular ideas that JIT is a zero inventory system or a system that uses a piece of card. (known as KANBAN) along with a few standard containers are either secondary to this or are the fallout of the waste elimination process.
An organisational framework to expose wasteful activities alone is not sufficient. It should be complemented by an equally effective organisational framework for continuously eliminating them. A Total Quality Management (TQM) system helps to achieve this purpose by organising the entire work force into small improvement groups, and creating a mind set for continuous improvement. The scope of management accountants to contribute to this continuous improvement process seems to be significant (Kaplan, 1995). The existence of a quality costing system helps to identify areas that need immediate improvement, prioritise the expenditure on such .improvement projects and evaluate the performance. WCM organisations have understood that benefits accrue only when TQM and JIT systems are implemented together.
The third distinguishing feature of a WCM is the idea of Total Productive Maintenance (TPM). Contrary. to the traditional thinking that maintenance has to be done only by" qualified" maintenance crews, WCM organisations have realised that transferring some of the routine maintenance tasks to the direct workers themselves would offer numerous benefits. The direct workers will have a sense of ownership of the process that they perform and will become aware of the problems associated with wrong usage/misuse of their facilities. It helps an organisation maintain equipment so often and so thoroughly that it hardly ever breaks down, jams, or misperforms during a production run.
In order to put the above three systems in place, it is necessary to break away from the rigid classification of the labour that is characteristic of a traditional manufacturer. The small improvement group may be performing some maintenance tasks. The group may have to be allowed to perform their own quality checks, and a certain degree of autonomy may have to be granted for scheduling and planning of their production tasks. As these may sound very unorthodox for the traditional mindset. Functional managers may have a feeling of losing control. Personnel managers may not like to brush themselves with the union. It may pose problems for the cost accountant because he may not know how to segregate the direct labour cost between the direct and the indirect components that he performs. Alternatively the cost accountant may wonder as to how to define direct labour. But the experience of the WCM organisations suggest that the net effect of this is a substantial gain to the organisation. This new prescription of the working life is defined as Employee Involvement.
The last feature which is seen to be common among WCM organisations is the simplicity with which they function. The best examples could be seen in the Toyota Production System (Ohno, 1992). The introduction of JIT, TQM, TPM, KANBAN system, fail proofing systems (Poka Yoke, And on lights etc.), and employee involvement have all contributed to the ideal of simplicity. As business grows, and as more varieties of the products are built, the manufacturing, management, and control systems will remain more or less with the same complexity.
Traditional and WCM organisations:Differing perspectives
The features of the WCM organisations have implicitly brought out the difference between the traditional organisation and a WCM organisation. These differences are fundamental and seem to affect all the functional areas including the cost management function.
Definition problems
The way a cost management professional understands some of the "common place" definitions in a traditional and a WCM organisation seem to be fundamentally different and so are the cost management systems in use. Some of them are discussed
below:
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Value added
Traditionally the term value added denotes the sum total of all the money spent on the raw materials towards converting them into "saleable" ·finished goods. It is customary to consider the WIP inventory as a sum of the basic value of the material and the degree of conversion made (value added). These expenses include the labour component and the various manufacturing overheads
On the contrary, some progressive thinkers argue that WIP can not be a value added item. In any organisation raw material has some value, the finished goods at the point of sale has value all other collect only costs. For example, due to the specific nature of the product that an organisation manufactures the WIP inventory can at best be sold on a weight basis. It is one thing to attach a value to it to write the books of accounts, and yet another to think that WIP has value.
In the opinion of the WCM organisations, any activity that finds some usefulness for the final customer is value added and all others are non-value added. The earlier example of poor layout seeks to bring this point very clearly. Table 2 has a list of items that can be normally classified as non-value added. All these share a common attribute, viz., doing more and more of these would certainly add II cost" but not necessarily value. This understanding is crucial for implementation of cost management systems that would ensure continuous improvement.
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Fixed and variable costs
The traditional cost accounting system clearly brings out the difference between fixed and variable costs. While the former includes all the costs that are incurred irrespective of the activity level (a semi-fixed costs is a special situation in which the condition holds good for a certain range of the operating level), the latter changes with the activity level. Direct material and direct labour come in the variable costs category while bulk of the overheads will be of fixed or semi-fixed nature. Such a classification scheme has a profound psychological impact on the part of the designers, planners, and controllers. It would be natural to look at the variable cost category to cut down the costs. Traditionally, that was what all the organisations were busy trying to do.
In a WCM organisation, the difference between fixed and variable costs is made by understanding the ability of a particular component of the cost to throw opportunities for improvement. All costs that do not offer much scope for improvement are under-stood to be fixed. The traditional material and labour costs may come under this category. The overheads lend themselves for improvement and hence become variable costs. Only because of this understanding, WCM organisations could bring down the set up time to a range of less than 100 seconds from a whopping 12 hours plus in some of their press and other machining operations.
This difference in understanding is crucial for a cost management professional. Newer systems of cost management could gear up the information system in such a way that it identifies opportunities for improvement. The Activity Based Cost Management Systems are, perhaps, based on an implicit understanding of this difference.
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Mind set issues
Another crucial difference lies in the fact that the traditional mind set is one which believes that standards are the guiding forces for performing, monitoring, and controlling all the activities, whether it is purchasing or setting up a machine. Once standards are set the entire work force orchestrates itself to "beating" the standards in order to get their share of incentives. Standards become
a sensitive issue as it impinges too much on the earning potential of many individuals in the organisation. Hence revision of standards is not hazarded too often. The extent to which overheads are absorbed (and the favourable and the adverse part of it) are all left to the standards to judge. Everybody in the organisation has a vested interest in matters relating to standards. There are certain areas in which standards promote complacency. If the standard time to set up a machine is 8 hours, where is the motivation for doing it in 6 Hours or in 80 seconds as some Japanese organisations have demonstrated.
On the other hand, WCM organisations have understood that organisations are in a journey towards perfection in a path called continuous improvement. For example, the perfection in quality is zero defects, the perfection in all business processes is zero non-value added activities, and the perfection in maintenance is zero breakdown. The shining example to this is the annual report of Toyota Motor company for the year 1994, which was titled "How we saved $1.5 billion: Taking destiny into our own hands". WCM organisations have understood the need for challenging the "so called" standards.
The obsession for standards and conformance to it is too damaging and the biggest challenge to the management accountant profession is to chalk out a strategy for abandoning this sooner. There is a need to device methods for measurement, primarily with a view to help improve the existing activities and progressively eliminate the unwanted ones.
Performance measures
Performance measures and standards are close cousins. The two coexist' in traditional organisations as the performance measures are tightly linked with standards. It is a well known fact that the psychology of every individual in an organisation right from the senior executives up to the direct labourers is governed by the measurement systems in place. If there is every hue and cry for quality and customer satisfaction and yet if control systems produced reports detailing out the utilisation indices of the resources, and the favourable and adverse absorption of various overheads, managers will know how to behave.
If for some reason there is a quality problem in the production line, the manufacturing managers will choose to ignore it and continue to produce. When quality control rejects the components they could be reworked later. If items required for shipping certain orders for a particular week has not arrived they would choose to load some other job on the machine to take care of utilisation and absorption issues than to stop unwanted production and look for the right materials. Purchase managers will provide lip service to quality and delivery issues, will proudly talk about the relevance of "Total Cost of Ownership", which they came to know about in a recent management seminar, but will continue to concentrate on price to post a favourable variance at the end of the reporting period. Marketing managers would continue to invoice several crores of rupees on the last day of the reporting period.
Organisational Structure
Traditional designs of organisational structure are based on the functional requirements. The typical classification includes Manufacturing, Marketing, Accounting & Control, Human Resources, Research & Development, and Commercial (Purchasing). Such classifications were based on the monumental work on specialisation done by Fredrick Taylor. The market realities, the shift iu the customer perceptions and the sophistication of the customers have all contributed to nearly decimating such organisational structures. The problems are obvious. Why should a manufacturing manager choose to load some other job if items required for shipping certain orders for a particular week has not arrived? One of the reasons could be the feeling that while marketing exists to take care of customers, manufacturing should take care of variances and standards. Similarly, everybody in the organisation may think that quality control department will take care of quality and they have "other important things" to take care of. Traditional structures have an over dose of internal focus. Conveniences of the people in the organisation have overwhelmingly preoccupied the minds of the designers than the conveniences of the customers for whom organisations seem to exist today.
How does it happen in a WCM organisation? Let us take an example of a machine tool manufacturer. In a traditional organisation every time when there is a customisation requirement from a client, the process of getting back to the client will be very time consuming. This is because, the marketing will pass the requirements to the manufacturing. The"manufacturing will in turn pass it on to the design, planning and cost estimation departments to get to know the feasibility and the cost. Each of these departments will have their own priorities in which such queries are processed.
In contrast WCM organisations are customer/product focused. The product group in charge of the query would probably have it's own team of people from all the functional areas. Alternatively the systems would provide a basis for short circuiting several paths and beat the competition on the time dimension. The implication of this is significant for all the functional areas. Management accountants, manufacturing group, marketing, and planning, for example, are not compartments linked by a complex web of information and transaction exchanges. Rather they are entities in a single compartment. Organisations may have several such compartments that may be shunted together depending on the nature of the journey that tl).ey have to undertake. Building such internal chains would mean getting to ~now intimately about each other and adopting to work well in such situations. The guiding principle for creating organisational structures has shifted from creating gangs of functional areas to marshalling teams of people from different functional areas to effectively perform a common business process.
Organisational capabilities
There seems to be a subtle message that com~s out of the features that are common across WCM organisations. The TQM programme along with the combination of the other four attributes seems to develop certain organisational capabilities, which are much more than merely the ability to stay in the chosen markets and products.
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Unity in Diversity
The principle of unity in diversity applies to the organisational work forms and the product offerings. WCM organisations have been successful in bringing together executives from different functional areas into one seamless structure. Similarly, all WCM organisations have geared up themselves for diversity in end product offerings. Simultaneously, there has been a concerted effort to achieve a certain degree of standardisation at the components level. In addition to many quality improvement projects, the small groups focus on activities that help WCM organisations realise such possibilities
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Shrinking the time line
The JIT philosophy ensures that continuous elimination of wasteful activities would result in substantial savings in time. however, JIT is only one of the many features that contribute to this phenomenon. The example of customisation cited above is just the tip of the iceberg. Imagine the savings in time that may accrue when a new product or service is to be developed and launched. In addition to the savings in time, the role of a management accountant during this process seems to be very significant because of the recent understanding that more than 90% of the costs are frozen before the regular production starts.
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Overcoming trade off obstacles
The traditional belief is that the basic parameters of competitiveness, viz., Quality, Cost, Delivery, and Flexibility are matters of trade off. In other words, it will be too costly to excel in Quality, Delivery and Flexibility and perhaps less costly to meet two out of the three attributes and so on. However, WCM organisations have mastered the art of overcoming the traditional trade off obstacles. They could develop capabilities to simultaneously outperform the competition on all the four dimensions.
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Cost reduction on a continuous basis
Part of the story of overcoming trade off obstacles is related to the ability to reduce the cost on a continuous basis. This has been possible for a WCM organisation due to understanding the difference between controlling costs and controlling causes. Traditional approach to cost reduction is by cost cutting. This is normally achieved through cutting the budgeted expenditure on least resistant paths. The typical least resistant paths include training, and research and development. Ironically for WCM organisations expenditure on these heads are very important.
Organisations perform a host of activities. Activities consume resources and these in turn drive costs. In otherg words, the activities are the sole sources of cost. This would mean that if costs are to be controlled, then there should be a good understanding between the causal relationship between activities and cost incidences. WCM organisations have geared up their systems to understand these relationships and have mastered the art of cost reduction through rationalisation of the activities. The benefits of such an activity based costing system, although appeared to be small at the beginning, seem to be enormous. The list includes identification of areas for cost reduction on a sustained basis through elimination of wasteful activities, accurate product costing, strategic planning, and facilitating reengineering activities.Table summarises some of the differences between the traditional and a world class manufacturer.
article by
Akki
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