Page 350 - Accounting Information Systems

C H A P TER 7 The Conversion Cycle 321

PERFECT QUALITY. Success of the pull processing model requires zero defects in RM, WIP,
and FG inventory. Poor quality is very expensive to a firm. Consider the cost of scrap, reworking, sched-
uling delays, and extra inventories to compensate for defective parts, warranty claims, and field service.
In the traditional manufacturing environment, these costs can represent between 25 and 35 percent of total
product cost. Also, quality is a basis on which world-class manufacturers compete. Quality has ceased to
be a trade-off against price. Consumers demand quality and seek the lowest-priced quality product.

WASTE MINIMIZATION. All activities that do not add value and maximize the use of scarce re-
sources must be eliminated. Waste involves financial, human, inventory, and fixed assets. The following
are examples of waste in traditional environments, which lean manufacturing seeks to minimize.
Overproduction of products, which includes making more than needed and/or producing earlier than
needed.
Transportation of products farther than is minimally necessary.
Bottlenecks of products waiting to move to the next production step.
Idle workers waiting for work to do as production bottlenecks clear.
Inefficient motion of workers who must walk more than necessary in the completion of their assigned
tasks.
Islands of technology created by stand-alone processes that are not linked to upstream or downstream
processes.
Production defects that require unnecessary effort to inspect and/or correct.
Safety hazards that cause injuries and lost work hours and associated expenses.

INVENTORY REDUCTION. The hallmark of lean manufacturing firms is their success in inventory
reduction. Such firms often experience annual inventory turnovers of 100 times per year. While other
firms carry weeks and even months of inventories, lean firms have only a few days or sometimes even a
few hours of inventory on hand. The three common problems outlined below explain why inventory
reduction is important.

1. Inventories cost money. They are an investment in materials, labor, and overhead that cannot be real-
ized until sold. Inventories also contain hidden costs. They must be transported throughout the factory.
They must be handled, stored, and counted. In addition, inventories lose value through obsolescence.
2. Inventories camouflage production problems. Bottlenecks and capacity imbalances in the manufac-
turing process cause WIP inventory to build up at the choke points. Inventories also build up when
customer orders and production are out of sync.
3. Willingness to maintain inventories can precipitate overproduction. Because of setup cost constraints,
firms tend to overproduce inventories in large batches to absorb the allocated costs and create the image
of improved efficiency. The true cost of this dysfunctional activity is hidden in the excess inventories.

PRODUCTION FLEXIBILITY. Long machine setup procedures cause delays in production and
encourage overproduction. Lean companies strive to reduce setup time to a minimum, which allows them
to produce a greater diversity of products quickly, without sacrificing efficiency at lower volumes of
production.

ESTABLISHED SUPPLIER RELATIONS. A lean manufacturing firm must have established and co-
operative relationships with vendors. Late deliveries, defective raw materials, or incorrect orders will shut
down production immediately because this production model allows no inventory reserves to draw upon.

TEAM ATTITUDE. Lean manufacturing relies heavily on the team attitude of all employees involved
in the process. This includes those in purchasing, receiving, manufacturing, shipping—everyone. Each
employee must be vigilant of problems that threaten the continuous flow operation of the production line.