P2 Chapter 2

• Modern business environment

  Highly competitive global environment where companies focus on customer satisfaction, adopt new management approaches, change manufacturing systems, and invest in new technologies
• Characteristics of the modern business environment

  • Global environment
  • Flexibility
  • Employee empowerment
  • Management accounting systems focus on continuous improvement
  • Companies operate in a world economy
  • Products made from components around the world
  • Firms have to be world class to compete
  • International regulations
  • Huge increase in demand for new, innovative products
  • Customers demand ever-improving levels of service and flexibility
• World Class Manufacturing

  1. Resolution of problems that cause poor quality

  2. Proactive prevention of problems rather than fixing them

  3. Developed under Total Quality Management
• Just-In-Time (JIT) production

  A production system driven by demand for finished products, where each component is produced only when needed for the next stage
• JIT purchasing

  A purchasing system where material purchases are contracted so that receipt and usage coincide
• JIT system

  A 'pull' system that responds to demand, in contrast to a 'push' system with inventory as a buffer
• JIT system

  1. Customer triggers final stage of production

  2. Components used trigger next production stage

  3. Cycle continues until raw material request from supplier

  4. Suppliers deliver several times a day

  5. Production lead time equals processing time
• JIT exposes problems and forces management to address and rectify them
• Aims of JIT: Produce required items, at required quality and quantity, at precise time needed
• JIT requirements

  • Versatile labour force
  • Grouped production processes by product line
  • Simple, infallible information system
  • 'Get it right first time' and 'zero defects' approach
• Total Quality Management (TQM)

  Programmes to ensure highest quality goods and services, originated in Japan
• Principles of TQM

  • Get it right first time - prevention costs less than correction
  • Continuous improvement - dissatisfaction with status quo
• Costs of quality


  Conformance costs (prevention and appraisal) and non-conformance costs (internal and external failure)
• Prevention costs

  Costs of ensuring defects do not occur, e.g. preventive maintenance, quality training
• Appraisal costs

  Costs of inspections, process control, and measuring equipment
• Internal failure costs

  Costs of scrap, rework, and correcting failed processes
• External failure costs

  Costs related to failed products reaching customers, e.g. marketing, compensation, liability
• Increased investment in prevention and appraisal reduces failure costs
• Recognising the importance of quality

  • Focus on customer priorities
  • Understand customer/supplier relationships
  • Prevent defects rather than inspect
  • Operatives responsible for defect-free work
  • Aim for zero defects
  • Introduce quality certification
  • Emphasise total cost of quality
• Commitment to TQM

  • Demonstrated by top management
  • Communicated by middle management
  • Requires full involvement of all employees
• Quality chains

  Series of customer-supplier relationships within and between organisations where each person must meet requirements
• Quality circles

  Teams of 4-12 people who voluntarily identify, investigate, analyse and solve work-related problems
• Internal customers

  The customers within an organisation
• Internal suppliers

  The suppliers within an organisation
• Quality circle

  A team of 4-12 people from the same area who voluntarily meet regularly to identify, investigate, analyse and solve work-related problems. The team presents its solutions to management and is then involved in implementing and monitoring the effectiveness of the solutions.
• The voluntary approach and the process by which the team selects and solves its own problems are key features which give the quality circle a special character: a character which is very different to other problem-solving teams.
• The problems that circles tackle may not be restricted to quality of product or service topics, but may include anything associated with work or its environment. Items such as pay and conditions and other negotiated items are, however, normally excluded.
• Steps to ensure successful implementation of TQM

  • Total commitment throughout the organisation
  • Get close to their customers to fully understand their needs and expectations
  • Plan to do all jobs right first time
  • Agree expected performance standards with each employee and customer
  • Implement a company-wide improvement process
  • Continually measure performance levels achieved
  • Measure the cost of quality mismanagement and the level of firefighting
  • Demand continuous improvement in everything you and your employees do
  • Recognise achievements
  • Make quality a way of life
• Non-financial measures

  • The strive to reduce the material price variance often led to the use of inferior quality material
  • The costs of normal losses were absorbed by good output
  • Number of defects at inspection expressed as a percentage of the number of units completed
  • Number of reworked units expressed as a percentage of total sales value
  • Number of defective units delivered to customers as a percentage of total units delivered
  • Number of customer complaints
  • Number of defective units supplied by suppliers
  • Time taken to respond to customer requests
• Throughput

  Sales revenues less Direct material cost
• The aim of throughput accounting is to maximise this measure of throughput.
• Theory of Constraints (TOC)

  The process of identifying and taking steps to remove the constraints that restrict output
• The only cost that is deemed to relate to volume of output is the direct material cost. All other costs (including labour costs) are deemed to be fixed. These fixed costs may be called total factory costs (TFC)
• Performance measures to measure throughput

  • Return per factory hour: Throughput per unit/Product time on bottleneck resource
  • Cost per factory hour: Total Factory costs/ Total time on the bottleneck resource
  • Throughput accounting ratio: Return per factory hour/cost per factory hour
• Kaizen costing

  A planning method used during the manufacturing cycle that emphasises reducing variable costs of a period below the cost level in the base period
• Continuous improvement, or 'Kaizen', is an integral part of the just-in time management philosophy.
• 'Kaizen' is a Japanese term meaning to improve processes via small, incremental amounts rather than through large innovations.
• The organisation should always seek perfection. Perfection is never achieved, so there must always be some scope for improving on current methods and procedures. Improvements should be sought all the time.
• Improvements will be small and numerous rather than occasional and far-reaching.
• Cost reduction targets are set and applied on a more frequent basis than standard costs. Typically, these targets are set on a monthly basis whereas standards within a traditional standard costing system are set annually or perhaps semi-annually.