Financial models and tools for managing lean manufacturing

207 Pages·2007·2.142 MB·English

by  Sameer Kumar, David Meade

AU9185_title page 7/3/06 11:43 AM Page 1
Financial Models
and Tools for
Managing Lean
Manufacturing
Sameer Kumar • David Meade
Boca Raton New York
Auerbach Publications is an imprint of the
Taylor & Francis Group, an informa business
Auerbach Publications
Taylor & Francis Group
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© 2007 by Taylor & Francis Group, LLC
Auerbach is an imprint of Taylor & Francis Group, an Informa business
No claim to original U.S. Government works
Printed in the United States of America on acid‑free paper
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International Standard Book Number‑10: 0‑8493‑9185‑7 (Hardcover)
International Standard Book Number‑13: 978‑0‑8493‑9185‑9 (Hardcover)
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Library of Congress Cataloging‑in‑Publication Data
Kumar, Sameer.
Financial models and tools for managing lean manufacturing / Sameer Kumar and
David Meade.
p. cm. ‑‑ (Supply chain integration‑‑modeling, optimization and applications ;
no. 1:2)
Includes bibliographical references and index.
ISBN‑13: 978‑0‑8493‑9185‑9 (alk. paper)
ISBN‑10: 0‑8493‑9185‑7 (alk. paper)
1. Business logistics. 2. Production management. I. Meade, David.
II. Title. III. Series.
HD38.5.K849 2006
658.5‑‑dc22 2006008335
Visit the Taylor & Francis Web site at
http://www.taylorandfrancis.com
and the Auerbach Web site at
http://www.auerbach‑publications.com
AU9185_C000.fm Page vii Wednesday, July 12, 2006 9:42 AM
Contents
Key Features of This Book.......................................................................xi
Preface.....................................................................................................xv
Acknowledgments.................................................................................xvii
About the Authors..................................................................................xix
Contribution of This Book.....................................................................xxi
1 Introduction .................................................................................. 1
Historical Background of the Problem.....................................................2
Objectives of the Study.............................................................................5
Important Questions for the Study...........................................................6
Importance of This Study..........................................................................7
References ................................................................................................8
2 Impact of Management Accounting Methods on Lean
Implementation .......................................................................... 11
Management Accounting.........................................................................11
Transition in Focus from Internal to External........................................14
Difficulties Presented by the Current Forms of Financial Reporting....16
JIT and Lean Manufacturing Practices....................................................18
Related Studies and Missing Elements....................................................20
Problems with Previous Studies.............................................................23
Contributions of This Study....................................................................23
References...............................................................................................24
3 Multi-Period Simulation Model of a Factory with Lean
Manufacturing ............................................................................. 27
Experimental Design, Statistical Hypotheses,
and Data Analysis..................................................................................28
Experimental Design...............................................................................28
Proposed Hypotheses.............................................................................29
Data Analysis............................................................................................30
Methods Diagrams...................................................................................30
vii
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viii (cid:1) Contents
Experimental Factors..............................................................................32
Generation of a Random Sales Demand.................................................32
Inventory Policy......................................................................................33
Management Accounting Method...........................................................34
Full Absorption...............................................................................34
Direct (Variable).............................................................................35
ABC.................................................................................................35
TPC.................................................................................................36
Order Activity.................................................................................36
Detailed Description of Data Generation Process..................................37
Simulation Model Design........................................................................48
Simulated Factory Parameters.................................................................49
Model Manufacturing Operation.............................................................49
Production Planning Tool........................................................................56
Calculation of the Coming Month Production Schedule.......................57
Tracking of On-Hand Inventories...........................................................57
Calculation of Income Statements by Accounting Method....................58
Model Execution — Data Generation....................................................59
Technical Issues with the Simulation Model..........................................60
References...............................................................................................61
4 Analytical Findings fr om Lean Manufacturing Factory
Operation .................................................................................... 63
Raw Data and Descriptive Statistics.......................................................63
Tests of Hypotheses................................................................................64
Hypothesis 1...........................................................................................66
Hypothesis 2...........................................................................................66
Hypothesis 3...........................................................................................68
Hypothesis 4...........................................................................................68
Hypothesis 5...........................................................................................69
Hypothesis 6...........................................................................................69
Hypothesis 7...........................................................................................70
Hypothesis 8...........................................................................................70
Hypothesis 9...........................................................................................70
Results by Performance Measure and Period.........................................71
Gross Profit..............................................................................................71
ANOVA Results...............................................................................71
Evaluation of Gross Profit Mean Values.........................................72
Net Profit.................................................................................................78
ANOVA Results...............................................................................78
Evaluation of Net Profit Mean Values............................................79
Sensitivity to Sales Variability..................................................................85
Service Level...........................................................................................85
Sensitivity Analysis...................................................................................87
References...............................................................................................90
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Contents (cid:1) ix
5 Conclusions and Implications of Lean Manufacturing
Factory Operation ...................................................................... 93
Summary of Research Findings...............................................................93
Comparison to Previous Studies.............................................................97
Implications for Practice.........................................................................98
Limitations.............................................................................................101
Suggestions for Future Research...........................................................102
Expansion of Time Horizon..................................................................103
Expansion of the Number of Inventory Reduction Policies
Modeled per Dataset.............................................................................103
Customer Service Level Measures........................................................103
Reduction in Reporting Cycle..............................................................103
Expansion of Income Statements.........................................................104
Use of Distributions Other Than Normal.............................................104
Further Development of the Order-Activity Product Costing
Method..................................................................................................105
References.............................................................................................105
6 Impact of the Par eto Distribution on Pr oduct Cost
Calculations ............................................................................... 107
Definition of Problem...........................................................................109
Research Questions...............................................................................111
Methods.................................................................................................112
Results...................................................................................................114
Discussion.............................................................................................116
Conclusions and Implications of This Research...................................119
References.............................................................................................121
Appendices
1 Simulation Data: Inventory Reduction Policy 1 —
No-Reduction; Maintain Finished Goods Inventory Levels
throughout the 12-Month Evaluation Period ........................ 123
2 Simulation Data: Inventory Reduction Policy 2 — Moderate-
Reduction; 50 Per cent Reduction in On-Hand Finished
Goods Inventory Levels over a 12-Month Period ................. 145
3 Simulation Data: Dataset 3 — Inventory Reduction
Policy 3 — Aggr essive-Reduction; 50 Per cent Reduction in
On-Hand Finished Goods Inventory Levels over a 6-Month
Period and No Further Reduction thr ough the Remainder
of the Evaluation Period .......................................................... 167
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x (cid:1) Contents
4 Simulation Data: Dataset 4 — Sample Income Statements
Utilizing the Mean V alues of the 35-Replication Datasets
under Each Accounting System and 25 Per cent Sales
Stochasticity .............................................................................. 189
Index .................................................................................................. 195
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Key Features of This Book
The aim of the book is to elevate the level of understanding of the
impact that traditional accounting practices have on operational improve-
ment programs that lead to a rapid lowering of any or all inventories.
Without a thorough understanding of the dynamics of the impact on
the profit and loss statements, existing accounting practices can have
a stifling effect on improvement programs that, if allowed to continue,
would lead to improved firm competitiveness.
In summary, this book explains how existing accounting practices
have a tendency to report the results of operational improvement
programs in a negative light. Other authors have identified this issue
but have not attempted to quantify the impact to a firm’s profit and
loss nor have they shown the impact over a period of reporting periods.
The key selling points of this book that distinguish it from others
on the topic include:
(cid:1) It supports lean manufacturing efforts and programs.
(cid:1) It provides information to operations management and finance
that will enable them to successfully manage operational
improvement programs.
(cid:1) It provides data that will enable firm management to predict
the impact to the profit-and-loss statement that will result from
a lean manufacturing implementation effort.
(cid:1) It identifies issues with traditional accounting practices used in
the United States leading to poor operational decisions with
respect to improved international competitiveness.
xi
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xii (cid:1) Key Features of This Book
Organization of the Book
Chapter 1 — Introduction
A brief review of the issues surrounding the reason to analyze the
problem is presented. It includes the historical background of the
problem, objectives of the analysis, questions to be answered, and the
importance of this analysis.
Chapter 2 — Impact of Management Accounting Methods
on Lean Implementation
The interactions of various management accounting systems with the
dominant production planning systems are the focus of this chapter.
In particular, this chapter provides a detailed overview of (1) the origin
and the intended purpose of management accounting, (2) the transition
in the focus of financial reporting from internal to the business to external,
(3) the difficulties presented to operations management, in regard to
making operational improvements, by the current forms of financial
reporting, and (4) the concepts and attributes of just-in-time (JIT) and
lean manufacturing practices.
Chapter 3 — Multi-Period Simulation Model of a Factory
with Lean Manufacturing
This chapter provides a description of the tools, methods, and assump-
tions employed in the development of a simulated repetitive manufac-
turing environment used to conduct this analysis.
Chapter 4 — Analytical Findings from Lean Manufacturing
Factory Operation
This chapter reviews the analysis of the dataset created using the modeling
tools. The analysis is designed to answer the research questions posed
in Chapter 3 by providing the essential analysis to test a series of research
hypotheses.
Chapter 5 — Conclusions and Implications from Lean
Manufacturing Factory Operation
In this chapter, the results of the statistical analysis of Chapter 3 and
Chapter 4 are interpreted in terms of the application to real-world
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Key Features of This Book (cid:1) xiii
manufacturing operations. Limitations of business analysis and sugges-
tions for future work are also highlighted.
Chapter 6 — Impact of the Pareto Distribution on Product
Cost Calculations
This chapter identifies and evaluates a new allocation base that is
better matched to the consumption rate of the indirect costs being
allocated. Using multi-period simulation, the relationship between allo-
cated cost categories and production or sales order activity through
the operations is explored. Results show that at the aggregate reporting
level (e.g., income statement), the use of sales order or production
order activity as an allocation base track closely with performance
levels experienced using other traditional bases. This approach toward
cost calculation would be equal to other enterprise resource planning
systems–based solutions in terms of simplicity of maintenance while
offering more accurate costs than ABC systems requiring substantially
more resources for maintenance.
References
A comprehensive list of up-to-date references on the chapter topic is
included at the end of each chapter.
Appendices
Appendix 1 through Appendix 3 contain a complete 35-replication
dataset for each of the five accounting systems under evaluation.
Appendix data was created under an environment of moderate sales
stochasticity. Appendix 4 contains sample income statements for each
of the five accounting systems under evaluation.
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Preface
Lean manufacturing principles have been revolutionizing American
manufacturing for more than 20 years. The principles, born in the days
of Henry Ford and perfected by Toyota’s Taiichi Ohno in post–World
War II Japan, call for the relentless pursuit of the elimination of waste
throughout the manufacturing operation.
Roadblocks to lean manufacturing, introduced by the accounting
methods employed in American accounting practice, have only recently
come under scrutiny in the realm of applied research. Unfortunately,
past studies have failed to quantify the significance of the problem in
terms of the short- and long-term impact to a firm’s profitability.
The results of a multi-month analysis of the impact on a firm’s
reported profit, stemming from the implementation of lean manufac-
turing strategies, enable us to address these issues. Armed with this
knowledge, a lean program manager will be in a position to defend
the lean program through the months when the income statements
indicate a decline in profitability. The analysis identifies how the
decline in income is the result of past poor manufacturing practices
that are being “cleaned-up” by the operational improvements brought
by the lean program.
In summary, this book evaluates issues with accounting practices
that have been in use in the United States since the early 1900s. At
present, there is no indication that these practices will be changing in
the foreseeable future. In addition, lean manufacturing practices are
being adopted at an ever-increasing rate in the United States as the threat
of foreign competition increases. The indication is that the information
contained in this book will be valid for explaining profitability problems
in a firm’s profit-and-loss reports for many years to come, 10 to 20 years
conservatively.
xv