Dr. Adel Abd El-Fattah El-Mehy for accepting to be in my defense committee. I believe ...... Maskell, Brain H. and Kennedy, Frances A. (2006a), âLean Enterprise.
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Tanta University Faculty of Commerce Accounting Department
COST MANAGEMENT SYSTEM TO IMPROVE CUSTOMER VALUE IN LEAN MANUFACTURING ENVIRONMENT A Thesis Submitted in Partial Fulfillment of The Requirements For The Master Degree in Accounting By YWANA MAHER LAMEY BADROUS Demonstrator-Accounting Department Faculty of Commerce Tanta University
Supervised by
Prof. Dr. TAHANY MAHMOUD El-NASHAR Professor of Cost and Managerial Accounting Faculty of Commerce Tanta University
DR. LOTFY EL-REFAIE FARAG
DR. HATEM MOHAMED EL-SHISHINI
Associate Professor of Accounting
Associate Professor of Accounting
Faculty of Commerce Tanta University
Faculty of Commerce Tanta University 2013
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Discussion committee Prof. Dr. Zenat Mohamed Moharram
Chair and Member
Professor of Accounting Alexandria University
Prof. Dr. Tahany Mahmoud El-Nashar Professor of Cost and Managerial Accounting Tanta University
Prof. Dr. Adel Abd El-Fattah El-Mehy Professor of Accounting Vice-Dean for Academic and Students Affairs Tanta university
Supervisor and Member
Member
c
Acknowledgments
First and most thanks to GOD the most merciful gracious and compassionate, whose magnificent help is the main factor in everything we can do in our life. After that, I gratefully acknowledge the tremendous support I have received from many people during my work. I wish to express my deepest sincere gratitude to my supervisior, Prof. Dr. Tahany Mahmoud El-Nashar, for her kind help, sustained and unlimited support, and patient guidance throughout my work. I feel greatly honored to work under her supervision. I am eternally grateful to my supervisors Dr. Lotfy EL-Refaie Farag and Dr. Hatem Mohamed El-Shishini for their never-ending support and insightful comments that helped me to improve this thesis and to become a better reseacher. I am very grateful to Prof. Dr. Zenat Mohamed Moharram and Prof. Dr. Adel Abd El-Fattah El-Mehy for accepting to be in my defense committee. I believe that their comments will make my research better presented. I also gratefully thank my parents and my sister for their unconditional moral support and encouragement not only during preparation of this thesis but also all over my life. Finally, I am very thankful to the faculty members, colleagues in the accounting department and to all the workers in Toshiba El-Araby Company. Their support and help will never be forgotten.
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DEDICATION This thesis is dedicated to my father, my mother and my sister. May Allah bless them, protect them from all the bad, give them continued good health, prolonged lives and the best rewards.
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Abstract The main goal of this research was to propose a framework for cost management system that combine different cost management tools that may be appropriate to support the fulfillment of lean manufacturing requirements to improve customer value. Within the framework, the researcher determined the main limitation of current techniques which is these techniques are built in the market (external focus) to determine the customer’s preferences then take this information and turn it inward with the aim of reducing the costs (cost driven). The new cost management techniques to be adopted to overcome the limitations of the current techniques is customer driven lean cost management technique (CLCM) which link customer perspective with the firm’s spending patterns. In order to propose a framework for cost management system in lean manufacturing environment, the researcher used both descriptive approach and constructive approach. The researcher also utilized case study methodology and selected Toshiba El-Araby Washing Machines Factory as a unit of analysis. Also, the researcher conducted interviews, taking a tour inside the factory and reviewed and analyzed some written documents in order to collect the required data for this study. The researcher applied the proposed framework for cost management system on the El-Araby Washing Machines Factory to determine the most appropriate cost management tools to be applied in order to fulfill lean manufacturing requirements. After conducting the case study in Washing Machines Factory, the researcher concluded the following results: Washing Machines Factory started implementing lean manufacturing system, some cultural and technical lean manufacturing requirements are fulfilled and most of cost management tools are theoretically not practically applied. So that, the proposed framework would improve the current cost management system in Washing Machines Factory, support the fulfillment of cultural and technical lean manufacturing requirements and help the factory prepare to implement lean manufacturing system. The research limitations are as follows: 1. this study focused only on some of cost management tools that may be appropriate to support the fulfillment of lean manufacturing requirements; 2. the researcher did not highlight cost management tools from strategic perspective; 3. the researcher did not highlight how lean tools can be applied in the light of information technology; 4. in describing supplier base
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structure, the researcher focused only on the relationship between the buyer (manufacturer) and major suppliers not with common suppliers; 5. The researcher did not highlight the effects of implementing lean manufacturing system on the accounting function; 6. the researcher did not make a questionnaire in conducting case study due to the difficulty of obtaining the required data.
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Table of Content
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Table of Contents
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List of Figures
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List of Tables
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Technical Concepts Key
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CHAPTER ONE: INTRODUCTION 1-1. Overview 1-2. Research Problem 1-3. Research Objective 1-4. Research Methodology 1-5. Literature Review 1-6. Research Limitations
2 2 4 4 5 12
CHAPTER TWO: FUNDAMENTALS OF LEAN MANUFACTURING SYSTEM 2-1. Overview 2-2. Lean Manufacturing System 2-2-1. Definition of Lean Manufacturing 2-2-2. Goals of Lean Manufacturing System 2-2-3. Characteristics of Lean Manufacturing System 2-2-4. Principles of Lean Manufacturing System 2-3. Strenghts and Limitations of Implementing Lean Manufacturing System 2-3-1. Benefits Derived From Implementing Lean Manufacturing System 2-3-2. Limitations of Implementing Lean Manufacturing System 2-4. Summary
14 14 15 16 16 17
22 22 24 26
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CHAPTER THREE: THE MAIN REQUIREMENTS OF IMPLEMENTING LEAN MANUFACTURING SYSTEM 3-1. Overview 3-2. Proposed Cultural and Technical Requirements of Implementing Lean Manufacturing System 3-2-1. Proposed Cultural Requirements of Lean Manufacturing System 3-2-2. Proposed Technical Requirements of Lean Manufacturing System 3-2-3. Interrelationships Among Lean Tools
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3-3. Summary
52
29 31 34 47
CHAPTER FOUR: COST MANAGEMENT TOOLS THAT SUPPORT THE FULFILLMENT OF LEAN MANUFACTURING REQUIREMENTS TO IMPROVE CUSTOMER VALUE 4-1. Overview 4-2. Cost Management Definition 4-3. Reasons of Increasing The Need for Effective Cost Management System 4-4. A Proposed Framework for Cost Management System in Lean Manufacturing Environment
54 55 55
4-4-1. Market Analysis, Research Development and Design Stage 4-4-2. Production Stage 4-4-3. Distribution Stage 4-4-4. After- Sale Service 4-4-5. Cost Management in Extended Value Stream
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4-5. Summary
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67 77 78 78 80
CHAPTER FIVE: APPLIED STUDY 5-1. Overview 5-2. Egyptian Home Appliances Sector: Overview 5-3. Case Study Design
83 83 85
i 5-3-1. The Main Company: Toshiba El-Araby Group 5-3-2. Unit Of Analysis: Al-Araby Washing Machines Factory 5-3-3. Data Collection Methods 5-4. Data Analysis 5-4-1. Value Stream Mapping 5-4-2. Applying The Proposed Technologically Framework 5-5. Summary
85 87 91 97 97 102 109
CHAPTER SIX: CONCLUSION, RECOMMENDATIONS AND SUGGESTION FOR FUTURE RESEARCH 6-1. Conclusion 6-2. Recommendations 6-3. Suggestions For Future Research
111 113 113
REFERENCES
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APPENDIX A
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APPENDIX B
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LIST OF FIGURES Figures NO.
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Figure (2-1) Principles of lean Manufacturing
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Figure (2-2) The Relationship Between The Value and The Cost
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Figure (2-3) Costs Included in Value Stream
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Figure (2-4) Benefits Derived From Implementing Lean Manufacturing System
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Figure (2-5) Effects of Lean Initiatives on The Resource Capacity
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Figure (3-1) Proposed Lean Manufacturing Requirements and their Supported Lean Tools
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Figure (3-2) Cellular Manufacturing Tool and One-Piece Flow, Poka-Yoke and Jidoka Tools
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Figure (3-3) One-Piece Flow Tool and Standardized Work and Poka-Yoke Tools
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Figure (3-4) SMED Tool and One-Piece Flow and Total Productive Maintenance Tools
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Figure (3-5) 5S Tool and Standardized work, 5Whys, Poka-Yoke, Jidoka and TPM Tools
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Figure (3-6) Standardized Work Tool and Poka-Yoke and Jidoka Tools
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Figure (3-7) VSM Tool and Poka-Yoke and Jidoka, TPM, 5S, SMED, 5Whys,
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Standardized Work and Cellular Manufacturing and One-Piece Flow tools Figure (4-1) Proposed Framework for Cost Management System in Lean Manufacturing Environment
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Figure (4-2) Value Creation Model
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Figure (4-3) Customer-Driven Lean Cost Management
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Figure (5-1) The Organizational Chart for El-Araby Group
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Figure (5-2) The Production Layout for El-Araby Washing Machines Factory
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Figure (5-3) TPM Pillars in Washing Machines Factory
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Figure (5-4) Current Value Stream Map for El-Araby Washing Machines Factory
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Figure (5-5) Future Value Stream Map for El-Araby Washing Machines Factory
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Figure (5-6) The Proposed Framework
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LIST OF TABLES Tables
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Table (3-1) Managers versus Leaders
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Table (5-1) Cultural and Technical Lean Manufacturing Requirements Fulfilled in the Washing Machines Factory
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Technical Concepts Key اﻟﻐﻄﺎء اﻟﻤﻌﺪﻧﻰ اﻟﺨﻠﻔﻰ ﻗﺎﻋﺪة اﻟﻐﺴﺎﻟﺔ اﻟﮭﯿﻜﻞ اﻟﺨﺎرﺟﻰ ﻟﻠﻐﺴﺎﻟﺔ )ﺟﺴﻢ اﻟﻐﺴﺎﻟﺔ( وش اﻟﻔﺮاﻣﻞ اﻟﻐﻄﺎء اﻟﺴﻔﻠﻰ ﻛﺎﻣﺔ -ﺣﺪﺑﺔ ﺗﺤﻮﯾﻞ اﻟﺤﺮﻛﺔ اﻟﻜﺎﺑﯿﻨﮫ اﻟﻤﻜﺜﻒ ﻣﺼﺮف ﺧﺮﻃﻮم اﻟﺼﺮف ﻣﺼﻔﺎه اﻟﺼﺮف اﻟﺴﻠﻚ اﻻرﺿﻰ اﻟﻤﺮﺷﺢ اﻟﺔ اﻟﻠﺤﺎم ﺑﺎﻻﺣﺘﻜﺎك ﻣﻜﺒﺲ ھﯿﺪروﻟﯿﻜﻰ اﺧﺘﺒﺎر اﻟﻌﺰل ﻣﻔﺘﺎح اﻟﺘﺸﻐﯿﻞ ﻃﻨﺒﻮره اﻟﻤﺎﺗﻮر ﻣﺼﻔﺎه اﻟﻤﺎء اﻟﺰاﺋﺪ ﻟﻮﺣﺔ اﻟﺘﺤﻜﻢ اﻟﻔﯿﺸﺔ ﻃﻨﺒﻮرة ﻣﻀﺨﺔ ﺟﮭﺎز ﺣﺴﺎس ﻟﻮح اﻻﻧﺰﻻق ﺳﻠﮫ اﻟﻌﺼﺮ اﻟﻤﺼﻔﺎه ﻣﻮﺗﻮر اﻟﻌﺼﺮ وﺻﻠﮫ اﻟﻌﺼﺮ ﺗﺎﯾﻤﺮ اﻟﻌﺼﺮ اﻟﺤﻠﮫ اﻟﻤﺰدوﺟﮫ ﺻﻤﺎم ﻣﻮﺗﻮر اﻟﻐﺴﯿﻞ ﻣﺮوﺣﮫ اﻟﻐﺴﯿﻞ وﺣﺪة ﺟﺮﯾﺎن اﻟﻤﺎء ﺗﺎﯾﻤﺮ اﻟﻐﺴﯿﻞ
Back metal sheet Base Body Break face Bottom metal sheet Cam Cabin Capacitor Drain Drain hose Drain strainer Earth wire Filter Friction welding machine Hydraulic piston Insulating test Knob Motor pulley Overflow strainer Panel plate Plug Pulley Pump Sensor Slide plate Spin basket Strainer Spin motor Spin link Spin timer Twin tub Unreturn valve Washing motor Washing fan Water flow case Washing timer
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CHAPTER ONE
INTRODUCTION
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CHAPTER ONE INTRODUCTION 1-1. Overview The future of any professional business discipline lies in the development of new ideas and new methods that effectively incorporate and support technological and methodological innovations regardless of the source. Lean manufacturing and technological advances are providing organizations with means to compete. Lean manufacturing has been used by many organizations to compete on a global basis and it is considered evolutionary in the process of continuous improvement in manufacturing concepts. Also, technology has provided the means for improving organizational performance in terms of quality, cost and time. Therefore, companies are now beginning to recognize that traditional costing and accounting methods may conflict with these developments. Consequently, important questions have been raised: is a new cost management system required for companies adopt lean manufacturing system?. If so, what should the cost management tools be involved?. To answer these questions, the requirements of implementing lean manufacturing system should be firstly determined then, cost management system should be developed to remedy the limitations of current cost management techniques, be relevant in companies needs to adopt lean manufacturing system and support the fulfillment of lean manufacturing requirements.
1-2. Research Problem Cost management is a field undergoing to a rebirth. The last fifteen years had seen some standardization of methods and models within cost management. Nowdays, intense effort has renewed some important cost management practices and theories [McNair, 2007]. Because of the following reasons: a. Global Competition. The key development in business environment today is the growth of international markets and trade [Blocker, 2001: 9]. So that the companies could be able to compete not only among domestic competitors but also among global companies. Otherwise companies will
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lose their market share or shut down due to increased intense global competition. b. Technological advances. Watson (2006) indicated that advances in production technology have had a profound impact on the effectiveness of organizations to produce and distribute products. These advancements include technology that enables organizations to plan, communicate and execute to support customer demands. Technological advances involve hard and soft technologies. Hard technologies are the equipment that process materials into finished products but also include computer hardware and software like computer-integrated manufacturing (CIM), computer-aided design (CAD) and computer-aided manufacturing (CAM). Soft technologies involve the manufacturing techniques like just-in-time (JIT), six sigma and total productive maintenance (TPM). Technological advances result in greater customer satisfaction, better communications, increased productivity, reduced costs, better quality and increased responsiveness. c. New economy. It is use of the internet The internet has revolutionized the way many organizations now do business. It allows collaboration between different areas of businesses and organizations. Thus, it facilitates the linkages between the firm and its cutomers, suppliers, other organizations of business interest and other staff. Also, using internet results in better customer relations, identifying and gaining a large customer base, improved design capability and reduced inventory levels. [Watson, 2006: 30] d. Focus on the customer. Customers are the driving force of our economy. They determine which companies will achieve profit in the long term and which do not [McNair et al., 2006]. In the past years, a business typically succeeded by focusing on only a relatively small numbers of products with limited features and by organizing production into long, low cost and high volume production runs. [Blocker, 2001: 11] As a result of that this research tries to propose a framework for cost management system which combines some cost management tools that may be appropriate to support the fulfillment of lean manufacturing requirements to improve customer value. Therefore, the research problem can be summarized in the following questions:
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1. What are the main requirements of implementing lean manufacturing system to improve customer value? 2. What are the current cost management tools that may be appropriate in supporting the lean manufacturing requirements to improve customer value? 3. What are the new cost management tools that may be appropriate in supporting the lean manufacturing requirements to improve customer value? 4. How can a proposed framework for cost management system in lean manufacturing environment be constructed?
1-3. Research Objective The main goal of this research is to answer the previous questions in order to determine the different cost management tools that support the fulfillment of lean manufacturing requirements to improve the customer value. This goal can be achieved by satsifying the following sub-goals: Determining the main requirements of lean manufacturing system. Determining the current cost management tools that may be appropriate in supporting the fulfillment of lean manufacturing requirements. Determining the new cost management tools that may be appropriate in supporting the fulfillment of lean manufacturing requirements. Propose a framework for cost management system in lean manufacturing environment.
1-4. Research Methodology In order to propose a framework for cost management system in lean manufacturing environment, the researcher uses both descriptive approach and constructive approach. Descriptive approach is needed to determine the main characteristics, goals, principles and requirements of lean manufacturing system. Constructive approach is used to construct a technologically framework for cost management system in lean manufacturing environment. This approach means problem solving through the construction of models, diagrams, plans and frameworks. The constructive approach enables researchers to enter the field of relevant and useful problem solving by providing the decision-makers with a unique recommendation for action. [Kansanen et al., 1993]
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This research utilized case study methodology. A case study is a research study which focuses on understanding the dynamics present within single setting. A case study implies a single unit of analysis such as a company or group of workers, an event, a process or even an individual ( El-Araby Washing Machines factory is the unit of analysis for this study). Also, it involves gathering detailed information about the unit of analysis with a view to obtaining in depth knowledge. The methods used to collect data in a case study include documentary analysis, interviews and observation. [Hussey and Hussey, 1997: 65-66]
1-5. Literature Review Research material found in dissertations, articles in refereed journals, trade journals, books, web pages and other sources [Watson, 2006: 20] include literature on the implementation of lean manufacturing system in the light of information technology (IT), but they have minimal information on the main requirements of implementing lean manufacturing system and what is the role of the appropriate cost management tools in supporting the fulfillment of lean manufacturing requirements. So that, literature review will be divided into two sections as follows: Section one: studies related to the implementation of lean manufacturing system. 1. Shah (2002): This study provided one of the modern-day documented scholarly research studies that links IT to lean manufacturing techniques. The study explored the impact of the way lean manufacturing is implemented as a mean for its effectiveness. More emphasis was placed on just-in-time production, employee involvement and customer involvement. IT was discussed very briefly as a mean of communicating with suppliers to enhance the flow of products. 2. Papadopouloun and Ozbayrak (2005): This study investigated the evolution of the philosophy which dates back to the introduction of the Toyota Production System (TPS) and extends to its current state in the form of the lean enterprise. So that this study provided an overview of the historical development of lean manufacturing (LM) and its association with the TPS and just-in time philosophy.
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This study made two-fold contribution to the existing literature. First, a generic framework for leanness is proposed to clarify the major elements of the lean concept to identify these elements that are considered critical for its implementation. Secondly, the study established a basis to compare lean concept with the other newly emerging manufacturing practices. The term elements in this study referred to tools, techniques, methodologies or practices that can be implemented in the framework of the adoption of LM. The study proposed a table to show the classification scheme of these elements which comprises the following categories: production floor management, product/service oriented, production planning, scheduling and control, lean implementation, workforce management and supply chain management. But this classification was criticized in this study, because some elements that appeared in the table referred to the goals and objectives of the philosophy rather than its techniques and tools like waste elimination and lead time reduction. So that the question “which are the means to implement lean” was not clearly answered. 3. Alukal (2006): This study presented some lean tools as the building blocks of lean manufacturing like 5S, visual management, standard work, quality at source, batch size reduction, pull/kanban and total productive maintenance. In other words, this study considered some of lean tools as requirements of lean manufacturing like 5S and total productive maintenance (TPM). 4. Bhasin and Burcher (2006): This study examined the underlying reasons surrounding low rates of successful lean initiatives. It was found that only 10% or less of companies succeed at implementing lean manufacturing practices. Also, this study stated that organizations view lean as a process whereas they should embrace it as a philosophy. So, lean manufacturing can be defined as a philosophy that when implemented reduces the time from customer order to delivery by eliminating sources of waste in the production flow. Also, the objectives, benefits and the procedures of implementing lean manufacturing had been determined in this study.This study also provided minimal information about lean manufacturing requirements. This study presented some technical (e.g. kanban) and cultural requirements (e.g. supplier relationship).
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5. Pettersen (2009): This study investigated the definition of lean production and the methods and goals associated with the concept as well as how it differs from other popular management concepts. The study also stated that there is no consensus on a definition of lean production between the authors. The absence of a clear definition has a number of consequences that had been highlighted in this study like communication difficulties, education on the subject will be complicated, researching the subject will be difficult, defining overall goals of the concept will be difficult, the multitude of interpretations on what lean really is makes it harder to make claims towards the effects of lean and the lack of a clear definition will lead to difficulties in determining whether changes made in an organization are consistent with lean production or not and consequently difficulties in evaluating the effectiveness of the concept itself. This study also stated that the authors seem to have different opinions on which characteristics should be associated with the concept. So that the study provided a table to sort the characteristics of lean based on frequency of discussion in the reviewed literature. 6. Kocakulah et al., (2011): This study presented lean manufacturing practices in a general discussion to provide the information on the methodology, goals, benefits and limitations of using lean. Also, this study stated that lean implementation was focused on getting the right things to the right place at the right time in the right quantity to achieve perfect work flow while minimizing waste and maintaining flexibility. Also, this study stated that the success of the lean process is multifaceted and companies must consider the following dimensions like: processes, people, tools, enablers (like IT systems), strategy and leadership. 7. Azuan (2013): This study focused only on cultural requirements of lean manufacturing especially lean culture. Azuan stated that culture is considered the main piller when implementing lean manufacturing. This study stated that lean culture should involve beliefs, behaviors and characteristics of employees, identifying the company goals, understand the purposes of lean improvements, determining the necessary tools and techniques to implement these improvements and provide the freedom to do that on a regular basis. Also, this study presented the main reason of companies’ failure in achieving the transformation into lean manufacturing. This reason is that these companies focused only on tools and
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techniques without focusing on cultural changes. Therefore, this study provided an obvious picture of how relevance culture is influencing lean manufacturing transformation and provided a conceptual framework of lean culture regarding its role in lean manufacturing implementation. The researcher’s comment on the previous studies is that these studies focused on the definition, principles and goals of lean manufacturing system and also the procedures of applying it. But they did not clearly show the main requirements of implementing lean manufacturing system. Some studies presented lean tools as major elements of implementing lean manufacturing system. Also, goals and tools of lean manufacturing are not clearly separated like Papadopouloun and Ozbayrak (2005). Others mixed the technicanl and cultural requirements together. It means that there is no clear separation between them. So a technical requirement may be considered as a cultural requirement and some lean tools were considered as lean requirements like Alukal (2006) and Bhasin and Burcher (2006). Some studies like Azuan (2013) focused only on cultural requirements of lean manufacturing presenting only one cultural requirement (lean culture). Also, this study did not mention anything about technical requirements of lean manufacturing. Others did not mention anything about lean requirements like Pettersen (2009) and Kocakulah et al., (2011). Therefore, the researcher will try to propose the main cultural and technical lean manufacturing requirements in more detail. Also, the lean tools that support these requirements will be proposed. Section two: studies related to cost management tools that support lean manufacturing requirements. 1. Creese (2000): This study stated that Confrontational Cost Management is the management of costs in a confrontational environment. Confrontational environment is a highly competitive environment where companies can not develop sustainable competitive advantages of product differentiation through quality, or functionally differences, or through cost leadership. This leads to lean manufacturing which is a manufacturing philosophy to shorten lead time, reduce waste and reduce costs.
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This study also stated that lean manufacturing frequently uses techniques such as: just-in-time, total quality management, group technology and concurrent engineering. Also, this study explored the primary factors in confrontational environment as follows: cost/price, functionality and quality. So that there are three specific cost management techniques to manage the cost of future products: target costing, value engineering and interorganizational cost management systems. 2. McNair et al., (2001): This study demonstrated that understanding the relationship between the costs of the firm and the value the firm provided to its customers is the key to the ability of the firm to reach its profit potential. And advanced cost management studies and practices suggest a variety of different tools that help us understand the relationship between value and cost. Also, this study presented that the challenge of relating customer value, price and cost has been addressed by many attempts in the literature and practice to implement " new cost management techniques". These techniques were designed to improve cost allocation and improve product mix decisions like activity-based costing (ABC), increase product or firm profitability through cost reduction like activity based management (ABM), Target Costing, total quality management (TQM) and develop a competitive strategy along the value chain by using cost information like strategic cost management (SCM). While these techniques have been advocated as means of providing " value " to the customer, they have largely ignored the concept of value from the customers' perspective. For example, activity-based costing (ABC) and activity-based management (ABM) techniques were designed to improve cost allocation and improve product mix decisions and to divide the activities and costs of the firm into value added and non value added categories respectively. So that, ABC/ABM do not build from the market and do not match these activities costs with customer-defined preferences. The result is that firms can have high rates of value-added activities, but at the same time not be profitable, simply because the value provided is not the value the customer is fully willing to pay for. Another example of these techniques is strategic cost management (SCM) technique. Its unifying goal is to use cost information to create a competitve advantage and address where the firm should move in the value chain, which activities should be performed and how cost can be compressed and value
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enhanced. While they identify areas where it might be strategically convenient to focus efforts and investments, the nature of the relationships between cost and their value potential is mostly ignored or remains at a general analysis only. SCM assumes that managers can place value on the chain of activities but it does not attempt to use an external reference to assess value. In other words, SCM shows the distribution of value along the value chain, but it ignores the nature of the relationships between costs and market value changes. Also, this study presented a new tool to understand the relationship between costs and value which is " Value Creation Model ". The value creation model seeks to clarify the trade-off between what the customer is willing to pay for a product/service bundle (value) and the cost the firm bears to provide what the customer desires. The third example of these techniques is target costing (TC). Customers buy specific products or services not value chains. A company skilled at target costing clearly uses customer input in designing its products and services. Once the product is launched, through the customer focus often begins to fade replaced by an overarching concern with efficiency, costs and internal performance. While total cost management (TCM) refers to the market to determine acceptable cost targets, its objective is primarily in cost minimization. TCM does not provide information to enable managers to make value/cost trade-offs. In summary, the current cost management techniques like life cycle costing, target costing, ABC/ABM and SCM will not be able to support the identification of which activities should be emphasized and also do not provide an assessment of specific linkages between the firm’s internal cost structure and the external defined value. Therefore, the most important limitation of these techniques remains to be internally driven perspective of value. 3. Hines et al., (2004): This study stated that the origins of lean thinking can be found on the shop floors of Japanese manufacturers and in particular innovations at Toyota Motor Corporation. These innovations resulting from a scarcity of resources and intense domestic competition in the Japanese Market included the Just-in-Time production system and the Kanban method of pull production. The lean operations management design approach focused on the elimination of waste and excess from the tactical product flows and represented an alternative model to that of capital-intense mass production.
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This study also determined the lean principles as follows: the identification of customer value, the management of the value stream, developing the capability to flow production, the use of "pull" mechanism to support flow of materials constrained operations and the pursuit of perfection through reducing to zero all forms of waste in the production system. Also, this study demonstrated that a critical point in the lean thinking is the focus on value. So, when value creation is seen as equal to cost reduction, it represents a common yet critical shortcoming of the understanding of lean. Therefore, the relationship between value and cost was explained in detail. This study also referred to some approaches that can be used in conjunction with lean to provide customer value like theory of constraints or six sigma. 4. McNair et al., (2006): This study demonstrated that the pivotal role played by customers in defining value and price is not new information to any successful business person. Few companies build the customer’s value perceptions into their management systems. A company skilled at value engineering and target costing clearly uses customer input in designing its products and services. Once the product is launched, through, the customer focus often begins to fade, replaced by an overarching concern with efficiency, costs and internal performance. Also, this study presented the limitations of traditional cost management techniques like target costing, value engineering and life cycle costing in terms of failing to build a customer perspective into their calculations. They make passing mention that the customer defines value, but attention then shifts to internal applications of costing methods to improve value stream performance. From the previous studies it can be concluded that the customer value perspective is considered the dominant issue in the business environment today. In other words, to achieve and retain competitive advantage the new manufacturing philosophies should be adopted like “lean manufacturing” that begins with customer’s requirements. At the same time, these studies did not show what the appropriate cost management tools including some of lean tools that support the fulfillment lean manufacturing requirements to improve the customer value. To determine that the researcher will propose a framework for cost management system in lean manufacturing environment.
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1-6. Research Limitations This study focused only on some of cost management tools that may be appropriate to support the fulfillment of lean manufacturing requirements. The researcher did not highlight cost management tools from strategic perspective. The researcher did not highlight how the lean tools can be applied in the light of information technology. In describing supplier base structure, the researcher focused only on the relationship between the buyer (manufacturer) and major suppliers not with common suppliers. The researcher did not highlight the effects of implementing lean manufacturing system on the accounting function. The researcher did not make a questionnaire in conducting case study due to the difficulty of obtaining the required data.
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CHAPTER TWO THE FUNDAMENTALS OF LEAN MANUFACTURING SYSTEM
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CHAPTER TWO THE FUNDAMENTALS OF LEAN MANUFACTURING SYSTEM 2-1. Overview Most companies are required to change their manufacturing system in order to compete effectively in the new business environment today which characterized by intense global competition. Therefore, these companies are now adopting Lean Manufacturing and shifting away from Mass Production. The main goal of lean manufacturing system is to create value to customers without any waste. In addition, lean manufacturing system has many distinctive characteristics compared with the traditional manufacturing system. Applying lean principles results in many operational improvements, but the financial benefits can’t be seen directly. It is considered the main limitation of implementing lean manufacturing. This chaper will be divided as follows: the following section will outline the definition of lean manufacturing system explaining its principles, characteristics and goals. The third section will highlight the major benefits and limitations of lean manufacturing. The last one will summarize the chapter as a whole.
2-2. Lean Manufacturing System Todays, companies that adopt traditional manufacturing system can not be able to compete effectively because the problems associated with traditional manufacturing system. These problems are: quality problem and ineffective competition problem. a. Quality Problem. Companies adopting mass production system may produce poor quality products or out-of-specproducts. Brown et al.,(2006) indicated that out-of-specproducts seems to be inevitable in large batch manufacturing, because they are produced before the problem can be detected by downstream departments.
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So that large batches that have quality flaws create three types of waste as follows: Inventory. A company would hold large amounts of inventory to hide the delivery problems from customers. It results in raising cost of floor space and cost of holding inventories. Defects. Producing poor quality products leads to raising cost of reworks and repairs. Waiting. Poor quality products causes delays in shipping products to customers. b. Ineffective Competition Problem. Companies holding large amount of finished goods are limited in responding to rapid changes of the customers’ requirements. Therefore, these companies will not be able to compete effectively among domestic and global competitors. In this case, a customer will not be serviced properly with delivery, cost or product features resulting in customer dissatisfaction. [Brown et al.,2006: 4] To overcome these problems, these companies are required to change the manner in which they produce and deliver products and services. It can be done through moving from producing large batches of uniform products into creating individual products or small batches modified to the demand of individual customer. In other words, these companies should adopt new manufacturing system which is “Lean Manufacturing” and shifting away from “Traditional Mass Production”. In this section the definition of lean manufacturing system, its principles, goals and characteristics will be highlighted.
2-2-1. Definition of Lean Manufacturing Lean manufacturing system can be defined as a production system within which [Kalagnanam and Vaidyanathan, 2000: 608]: Production is triggered when receiving an order from a customer. Quick response to the customer’s demands. Produce defect-free products to meet the customer’s specifications. It can be noticed that Kalagnanam and Vaidyanathan focused on the customer perspective (external view) in defining lean manufacturing system.
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Maskell and Kennedy (2006a) focused on the firm perspective (internal view) in defining lean manufacturing system. They indicated that a company that adopted lean manufacturing system should produce more with less resources as possible like human resources, equipment, time and others. In this case, productivity will be enhanced and customers’ requirements will be met. It can be suggested that two views can be combined in order to define lean manufacturing system as follows: Lean manufacturing system is a manufacturing system within which production is triggered when there is a signal of need to produce exactly what customers want by using less resources and being delivered in time.
2-2-2. Goals of Lean Manufacturing System The goals of lean manufacturing system are tantamount to main reasons that lead to embrace lean manufacturing system. A company should adopt lean manufacturing system to achieve the following goals: Cope with intense global competition. Competition has increased among domestic and global competitors that requires providing more innovative, high quality and low cost products or services, improve existing products and services, reduce manufacturing costs and make a profit that only lean processes can provide. Increase customer satisfaction. Each company would create better value to customer without waste to enhance customer satisfaction. It can be achieved through meeting rapid change in customers’ needs and providing what the customer exactly wants, at the right quantity, at reasonable price and at the right time. Consequently, companies implementing lean manufacturing system would gain some benefits like improving quality, reducing costs, enhancing productivity and flexibility and others. These benefits will be discussed in detail in section (2-3). In the following section, the characteristics of the architecture of lean manufacturing system will be discussed.
2-2-3. Characteristics of Lean Manufacturing System In order to achieve lean manufacturing system’s goals, the architecture of lean manufacturing system should be characterized by the following characteristics [Kalagnanam and Vaidyanathan, 2000:609-611 with some modifications]:
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a. No Batching. There is no need for batching in a lean system because: Lean System is oriented to produce small lot sizes and strives for the ideal of “one-piece flow” through the system. It can be considered as a responsible system. Customer order does not wait to be bundled with other orders and batched for later production so that economies of scale in production can be exploited. It can be considered as a responsive system. b. Pull System. Production is triggered only when an order is received. It is called “ Kanban” which is the use of visual signaling devices. In other words, the system will produce only the required quantity at the right time. It can be considered as a reactive system. c. Flow Connectivity and Continuity. Lean systems are characterized by tight connectivity between processing stages. It is facilitated by cellular manufacturing. It means that production layout should be based on work cells rather than functional departments. In addition, the operations at each processing stages are synchronized with those of adjacent stages to avoid the occurance of bottlenecks.
2-2-4. Principles of Lean Manufacturing Maskell and Kennedy (2006a) explained the principles of lean manufacturing system. These principles represent the corner stone of lean manufacturing system. Any company moving toward implementing lean manufacturing system should follow these principles to achieve this transition successfully. There are five principles of lean manufacturing system that can be summerized in the following figure (2-1): Customer value
Flow and pull Value stream
Empowered employees
Pursuit of perfection
Figure (2-1): Principles of lean Manufacturing [Maskell and Kennedy, 2006a: 7]
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Principle (1): Customer Value Lean starts with a definition of what constitutes value from the customer’s standpoint in terms of the features and characteristics of the company’s products, services and other attributes [Maskell and Kennedy, 2006a: 3]. A critical point in lean manufacturing is the focus on value. Often however, it was believed that value creation can be achieved by cost reduction. This represents a common yet critical shortcoming of understanding lean. Lean had moved away from a merely “shop-floor-focus” on waste and cost reduction, to an approach that contingently sought to enhance value to customers by adding product or service features and/or removing wasteful activities. This was a key development, as value was linked to customer’s requirements and no longer was simply define through its opposite, waste on shop floor [Hines et al., 2004: 995]. The following figure (2-2) highlights the relationship between value and cost:
Customer perceived Value of product or Service
Cost-value equilibrium 2 1 Creating lean solutions: 1. Reduce Internal Waste. 2. Develop Customer Value.
Cost of product or service Figure (2-2): The Relationship Between The Value and The Cost [Hines et al., 2004: 997]
From the previous figure, it can be noticed how the products or services can be plotted with regards to their relative cost-value proposition to customer. The costvalue equilibrium denotes the situation whereby the product provides exactly as much value, which the customer is willing to pay for, as the product costs. Also, it can be concluded that value can be created by either eliminating internal waste
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resulting in removing wasteful activities and associated costs or by providing additional features and services which are valued by the customer. Maskell and Kennedy (2006a) indicated that creating high levels of value to customers requires: Close relationships with customers to determine the required features and functions of the products to be produced. Producing at the rate matched with the rate of the customer demand (takt time). Feedback processing methods that inform an organization what customers want and ensure that it is delivered.
Principle (2): Value Stream Value stream is the chain of value creation processes that are located one next to one another and by processing one unit at a time. Work flows smoothly from one step to another and finally to the customer [Maskell and Baggaley, 2003: 24]. So that value stream represents all the activites that can be done to create value to the customer. Maskell and Baggaley (2004) presented three kinds of value streams: order fulfillment value streams, product development value stream and different value streams. These kinds can be differentiated as follows: Order fulfillment value stream. It provides current products to current customers. Value stream flows from order to delivery into the hands of the customer and the collection of cash. Product development value stream. It addresses new products to new customers. Value stream flows from concept to launch. Different value streams. It deal with the acquisition of new customers for current products and new products for current customers. Maskell and Baggaley (2004) indicated that focusing on value streams is so vital because value stream is considered as money is made, value is created and waste is eliminated.
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Elimination of waste. Waste will be identified and eliminated through mapping value stream. In this case, the waste and any obstacles can be identified and action plans can be developed to eliminate waste and increase flow of processes. Value is created and money is made. It should be understood how value can be created to the customer, sales be increased and profits be generated. In this case, value will be created to customers and thereby, money will be made for the company through the value streams. Value stream is considered the main lean manufacturing principle because it is considered as a cost object. A company that needs to adpot lean manufacturing system should adopt value stream costing to provide real time, relevant and understandable cost information to value stream team members. [El-Helbawy and El-Nashar, 2013: 81] By adopting value stream costing, the production process is viewed as a value stream and assigning all costs associated with the value stream as direct costs. [Gordon, 2010: 12] The following figure (2-3) shows the costs that make up the total value stream cost:
Production labor
production materials
production support
machines and equipment
Value stream
Operation support
facilities and maintenance
all other VS costs
All labor, machine, materials, support services and facilities directly within the value stream. Little or no allocation Figure (2-3): Costs Included in Value Stream. [Maskell and Baggaley, 2004: 136]
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From the previous figure, it can be noticed the costs which are directly assigned to the value stream. These costs are as follows: Production labor costs. These are costs paid to employees working in the value stream whether they move materials, make the product, design the product or maintain machines. Production material costs. These costs are spent to purchase all materials required to run the value stream. Support costs. These are costs of support functions which are necessary to produce the product or family of products. These costs become direct to value stream and there is no need for allocation. Facility costs. The only allocation used regularly within value stream costing is a square footage cost for the facility. The reason for this is to motivate the value stream team members to reduce the amount of space used by the value stream. The facilities cost assigned to the value stream will be the cost per foot multiplied by the amount of square feet by the value stream. The cost per square foot is obtained by dividing the total facilities cost (the sum of the rental payment, depreciation cost for the manufacturing building, the amount for utilities and building maintenance) by the total square feet occupied by the manufacturing plant. All other costs that are incurred outside the value stream can not be considered as direct to a value stream and not allocated and be considered as sustaining costs.
Principle (3): Flow and Pull Lean organizations seek to maximize the flow of materials, information and cash. The production process is designed to maximize the flow of the product through the value stream initiated by the pull of customer demand. Pull production is a way of controlling a process and reacting quickly to changes without relying on inventory. In a pull system, each stage of a process produces exactly what the immediate downstream stage requests, in effect, material is pulled through the process by each stage producing only what is demanded of it from the downstream stage. [Maskell and Kennedy, 2006a: 10]
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Principle (4): Empowerment Empowerment involves the system of measurements and controls that provides each employee with information and authority to take necessary action at the time it is required so as to add value for the customer and eliminate waste from the process. For empowerment to be effective: a. The team members must have a clear picture of the company’s goals and strategies. b. There must be alignment of purposes. c. Team members must be well trained and educated in their own processes, in lean principles and methods and standard improvement methodologies. [Maskell and Kennedy, 2006a: 13]
Principle (5): Pursuit of perfection The pursuit of perfection is fundamental to lean thinking. The purpose is for everyone in the organization to focus on making incremental improvement in their own processes day in and day out. Everyone realizes that perfection is unlikely to be achieved, but that is the goal. [Maskell and Kennedy, 2006a: 13]
2-3. Strengths and limitations of implementing lean manufacturing system
2-3-1.
Benefits derived from implementing lean manufacturing system
The researcher will try to discuss and summarize the benefits of implementing lean manufacuring system in the following figure (2-4):
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1. Creating a manufacturing environment that is driven by customer demand.
Prioritize production from customers’ order to meet their needs.
Produce a wide varity of more innovative products at very modest additional costs to respond quickly to changes in customers’ demands.
2. Time-to-market
Create better value to customers without waste. Increase customer satisfaction and loyalty. Compete effectively among domestic and global companies.
Increase the ability grow and survive.
to
3. Enhance Productivity
Increasing outputs with the same inputs, or produce the same outputs with fewer inputs. In other words, capacity would be increased without added costs.
4. Enhance flexibility
Using technological advances in production process like computers, robotics or other devices. Workforce are multiskilled to perform multiple tasks.
5. Improve quality of products and machines
Providing products or services with features that meet customers’ needs.
6. Cost reduction
Means
Produce the right product from the first time (free of errors or defects ).
Elimination of all types of waste.
Produce a wide varity of products to meet changes in customers’ needs. Reduce production costs. Workforce will be more flexible to do multiple tasks at the same time to avoid sudden turnover of workforce. Zero defects/errors resulting in reducing costs of repairs and reworks. Zero inventory resulting in reducing costs of storage and floor space. No machines’ breakdowns. Quick changeovers. Reducing setup times. Zero delays achieving on-time delivery. Keeping smooth flow. Reducing lead time to be produced at takt time.
Results Figure (2-4): Benefits Derived From Implementing Lean Manufacturing System
From the previous figure, it can be noticed that a company implementing lean manufacturing system can gain some benefits like satisfying three critical factors to customers (cost, quality and time). It means that a company can produce more
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diverse and innovative products with high quality level, at reasonable price and be provided at the right time. Also, all sources of waste are eliminated resulting in free up resources which can be used in other productive uses to enhance productivity and efficiency. Also, customers’ satisfaction and loyalty are raised resulting in more profits to the company.
2-3-2. Limitations of implementing lean manufacturing system Lean manufacturing typically generates operating benefits, but companies frequently find that financial benefits are not immediately forthcoming to the same degree.The problem stems from differing perspectives of operations and finance. The operational people see results such as the following: reduced lead times, improved quality, improved on-time delivery, reduced floor space and reducing inventory amounts. The financial view of the same set of data is different. Their perspective is that the lean changes provide the potential for the financial improvements, but unless costs are reduced or revenue is increased, the financial picture will not change. Here are some financial results from the early stages of lean [Maskell and Baggelay, 2004: 51]: Revenue stays the same. Costs stay much the same. Operating profits may go down due to the impact of reduced inventory on cost-of-sales. Sales per employee have stayed the same. Therefore, most managers need a way of bridging the operational and financial views of lean and to display both the operating and financial views in one report. This is called “Box Score” that provides a three-dimensional perspective. It presents the key operations and financial results, together with information on how the value stream’s resources are used, in a way that both perspectives can be viewed at the same time. Also, the box score will show the following items: Current state. It provides the status of the items measured prior to completion of any planned initiatives (pre-lean improvements). Future state. It provides the status of items measured if the planned initiatives provide the expected benefits (post- lean improvements).
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Change from the current state. It shows the difference between current and future states. [Maskell and Baggelay, 2004: 59] To determine the main differences between current state (pre-lean improvements) and future state (post- lean improvements), the value stream mapping will be made at the beginning of the lean processes to achieve this purpose. The lean improvements will affect the uses of resource capacity. The resource capacity may be: productive, non-productive and available. Therefore, from the comparison between the current and future state, it can be noticed the effects of lean improvements on the way resources are used and provide the basis for planning the best ways to use the capacity freed up. The following figure (2-5) presents the effects of the lean improvements on the resource capacity [Maskell and Baggelay, 2004: 65]: Current state resource usage
future state resource usage
Freed up resources ( increased available capacity) Productive resources
available resources
Non productive resources
Figure (2-5): Effects of Lean Initiatives on The Resource Capacity [Maskell and Baggelay, 2004: 65]
From the previous figure, Maskell and Baggelay (2004) indicated that: The resource usage has shifted from non-productive in the current state to available in the future state. The volume of resources used has not changed between the current and future but the way they are used changed dramatically.
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Lean has freed up large amounts of resource capacity and these resources are now available (in the future state) to be used elsewhere- to provide for growth or to be eliminated if there is no better use. Therefore, the great challenge for lean company is to determine how much capacity has been freed up by lean initiative and show how to add this information to the box score and determine how these freed up resources will be employed. The company has two choices: eliminate these resources if there is no better use or use these resources to help the business achieving more benefits. In summary, managers must be patient at the outset of the lean implementation allowing reasonable time to acquire some successes before giving up. Larry (2005) highlighted other limitations of implementing lean manufacturing system like: Lean implementation can be carried to the point that they are no longer effective or efficient like disordered or uncleaned workplace. Applying lean only on the shop floor. If lean is successful, fewer people will be required to accomplish the mission of the organization. This results in employee resistance in executing lean initiatives. Other limitations are related to human issues like: failure to involve, motivate and participate on team works and unwillingness to make decisions. The researcher views what was indicated by Larry would be considered as mistakes in implementing lean manufacturing system not as limitations or disadvantages from implementing this system. Therefore, these mistakes should be avoided to implement lean manufacturing in a successful manar.
2-4. Summary In this chapter, the fundamentals of lean manufacturing system were highlighted. Lean manufacturing system was defined as a manufacturing system driven by the customer’s demands, starting the production when receiving an order providing exactly what the customer needs.
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Customer value, value stream, flow and pull, empowerment and pursuit of perfection are considered the basic principles for adopting lean manufacturing system. Coping with intense global competition and enhancing customer satisfaction are considered the goals of applying lean manufacturing system. To achieve these goals, the architecture of lean manufacturing system should be characterized by cellular manufacturing, pull system and keeping flow connectivity and continuity. Implementing lean manufacturing system has obvious operational improvements. But financial benefits can not be immediately observed and it is considered the main limitation from implementing it. Some authors highlighted other factors that should be considered as mistakes in the manner of implementing the lean system not as disadvantages or limitations. The next chapter, the researcher will try to discuss the main requirements of lean manufacturing system to determine the cost management tools that may be appropriate to be applied to support the fulfillment of these requirements in order to improve customer value.
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CHAPTER THREE THE MAIN REQUIREMENTS OF IMPLEMENTING LEAN MANUFACTURING SYSTEM
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CHAPTER THREE THE MAIN REQUIREMENTS OF IMPLEMENTING LEAN MANUFACTURING SYSTEM 3-1. Overview After highlighting the fundamentals of lean manufacturing system in the previous chapter, the main requirements of lean manufacturing system must be determined. Any company seeks to adopt lean manufacturing system should first determine the requirements of lean manufacturing system to enable the company implementing this system. So that in this chapter, the researcher will try to propose the main requirements of implementing lean manufacturing system. These requirements can be classified into two categories: cultural and technical requirements. The cultural requirements should be firstly satisfied in order to meet the technical requirements. After determining the lean manufacturing requirements, some of lean tools that support the fulfillment of lean manufacturing requirements and considered part of cost management tools will be determined and also the interrelationships among these tools will be explained. This chapter will be divided as follows: the following section will determine the proposed cultural and technical lean manufacturing requirements, some of lean tools supported these requirements will be identified and interrelationships among these tools will be described. After that the whole chapter will be summerized.
3-2. Proposed Cultural and Technical Requirements of Implementing Lean Manufacturing System Under this section, the main requirements of implementing lean manufacturing system will be proposed. The following figure (3-1) will highlight these requirements and lean tools that support the fulfillment of these requirements. In the following figure it can be noticed that:
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Cultural requirements Lean culture
Technical requirements Interrelationships across functions and processes
Partnerships Continuous improvment
Leadership Empowerment
Customers Suppliers
Small-lot production
Teamwork
Layout redesign
Communication
Kaizen
TPM
5S
Standardized work VSM
Stability Manpower Material Machines Methods
Poka-yoke and Jidoka
5 whys
Quality at source
Managing by value stream
One-piece flow Cellular manufacturing
Figure (3-1): Proposed Lean Manufacturing Requirements and Their Supported Lean Tools
Interrelationships among lean tools
Setup reduction
SMED
Lean Tools
Supporting lean tools of lean manufacturing requirements
Visual management
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The main requirements of lean manufacturing system that must be in place to enable companies implementing lean manufacturing system. These requirements can be classified into two categories: cultural and technical requirements. Some of lean tools that considered as part of cost management tools supporting the fulfillment of lean manufacturing requirements and the interrelationships among these tools.
3-2-1 . Proposed Cultural Requirements of Lean Manufacturing System The cultural requirements must be firstly satisfied to support fulfillment of technical requirements. Cultural requirements includes three main items: lean culture, continuous improvement and lean partnerships.
3-2-1-1. Lean Culture Companies that implement lean principles without changing the organizational culture, they fail to achieve the benefits of lean. In other words, these companies may only see short term improvements but long term improvements will not be achieved. Lean culture should include the following items: leadership, empowerment, teamworks and communication.
First: leadership Each company has to develop a leader not a manager in order to implement lean principles. It is clear that a manager’s transition from a top-down, directional role to a coaching role is not easy and can not be achieved overnight. [Kalagnanam and Vaidyanathan, 2000: 633]
Bodek (2008) presented a comparison between leadership and management. Thus, the researcher presents the following table (3-1) based on Bodek’s view.
32 Table (3-1): Managers versus Leaders [Bodek, 2008: 146, with some modification]
Managers
The boss. Avoid risks. They do not respect the workers. Workers work for the manager. They maintain power and make all decisions. They do not allow workers to express their opinions and reject any new ideas. They do not enhance their workers’ skills. They do not listen to their workers. They establish restricted rules to be followed. The workers hide the problems to avoid punishment. Workers are always crticized. They focus on how to generate profits.
Leaders
The coach. Risk takers. They respect the workers. Workers work with the leader. Workers are empowered to make decisions. They allow workers to express their opinions and suggest new ideas. They are interesting in enhancing their workers’ skills. They listen to their workers and learn from them. They break these rules. Workers are allowed to stop and fix the problems if occurred. Workers are always motivated and encouraged. They focus on how to enhance productivity, quality and profits.
From the previous table it can be noticed that the companies should work toward this transformation and facilitate it by focusing on changing the attitudes of employees and enhancing their skills in order to make a cultural change to implement lean principles.
Second: Empowerment A company should empower its employees to be involved in making decisions for the benefit of the company. [Kalagnanam and Vaidyanathan, 2000: 632] Employees will be self-inspected looking for wastes to be eliminated or fixing problems to be solved immediately without any permission from top management. But it does not mean that employees have the freedom to do what they need. They are responsible for doing specific tasks and be accountable for the results of their actions.
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Third: Teamworks Teamwork is considered an important aspect in lean company. Lean manufacturing system must be implemented by a team with indepth knowledge about the company as a whole. Teamwork will be self-directed or managed if its members are empowered. Also, each teamwork should be monitored and controlled through a leader (coach).
Fourth: Communication Communication is another important aspect in a lean company. Communication should be: among leaders of teams and members of a team, between the leader of a team and its members and among teamworks. In this case, each team can achieve its own goals that are consistent with the goals of the company as a whole.
3-2-1-2. Continuous Improvement Continuous improvement is considered a main piller of lean manufacturing system that must rely on. It is a business culture where the entire workforce of the company is involved daily in making beneficial changes to the operation that increases customer value. [Maskell and Kennedy, 2006a: 1] Lean manufacturing requires a commitment to continuous improvement and preferably a systematic process for ensuring continuous improvement, whereby the company constantly searches for non-value added activities and ways to eliminate them. The focus of continuous improvement should be on identifying the root causes of non-value added activities and eliminating them by improving the production process. [Mekong, 2004: 10] Kocakulah et al.,(2008) indicated that kaizen is considered a cultural tool of lean manufacturing which is ongoing attitude that continuous improvement can be made. But the researcher believed that kaizen culture is considered an attitude of workforce more than being a specific tool of lean manufacturing. Kocakulah et al., (2011) indicated that using kaizen for making improvements involves two elements. First, the company makes daily continuous small improvements of processes. All employees in the production or administrative process are involved. Second, breakthrough improvements of a large scale may be derived from a concentrated effort on one area of production by a kaizen team.
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3-2-1-3. Lean Partnerships A company should have good relationships with its customers and suppliers. Partnership with Suppliers. A company should have a good relationship with a good supplier to ensure that: 1. Required materials will be received in time, with high quality level and in small quantity. In this case, there is no need for inspection, no errors or defects will be occurred and costs of repairs and reworks will be reduced. 2. A company will not need to hold any type of inventories. It results in reducing costs of storage and floor space. Partnership with Customers. Also, a company should have a good relationship with its customers to determine their requirements that create value to them, determine how to deploy the resources toward meeting customers’ needs and get the feedback from customers to ensure that they are satisfied.
3-2-2. Proposed Technical Requirements of Lean Manufacturing System 3-2-2-1. Interrelationships across functions and processes The interrelations across functions or processes and the dependency of the total system on these relationships are the corner stone for companies embracing lean manufacturing principles. Logically for a lean manufacturing system to be well performed, it must be part of an overall system in which every component system is geared to help the company achieve the overarching goal of customer satisfaction. In other words, without the support of a complementary organizational infrastructure, installing a lean manufacturing system at the core of the company will be failed. [Kalagnanam and Vaidyanathan, 2000: 616]
3-2-2-2. Stability Smalley (2005) indicated that achieving stability is considered the starting point for implementing lean manufacturing system. There are some certain preconditions that must be in place before applying lean principles. These include relatively few problems in equipment uptime, available materials with no defects and strong supervision at the production line level. Stability implies general predictability and
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consistent availability in terms of: Manpower, Materials, Machines, and Methods4Ms. 1. Manpower. Basic stability in lean starts with a well trained workforce [Smalley, 2005: 10]. That is know as “creativity before capital” which taps into the experience, innovation and knowledge of the people working in the process. [Alukal, 2006: 74] A company should be prepared to answer the following five questions regarding training: 1. who needs to be trained; 2. when should the training take place; 3. what information should be covered in the training; 4. how will the training be administered and 5. who will facilitate the training [Kocakulah et al.,2011: 25]. Due to the importance of workforce or human resources as being a basic concept of a lean system, workforce should be: Flexible. It means that each worker should be well trained to acquire many different skills in order to do many different tasks in a process at the same time. In this case, each worker will have a holistic view about the part within which he or she works. Empowered and Involved. It means that employees should be respected and praised. Also, they should empowered to have enough authority to express their opinions, suggest new ideas for change and be self-inspected to find the problems to be fixed immediately by taking the corrective actions. 2. Materials. Lean system focuses on eliminating waste and reducing the time from receiving an order to delivering the product. It requires reducing the amount of the inventory in the value stream. The amount of the inventory required is composed of what is called “cycle stock” (the amount of inventory to cover average demand and lead time to replenish it), “buffer stock” (inventory to cover variations that might exist in your downstream or customer demand), and “safety stock” (inventory to cover the losses such as scrap and downtime that you currently have). Failure to account for this necessary buffer and safety stock in an unstable environment will actually harm the production line efficiency. Not all the inventories are waste. Only inventory beyond what is needed to run the process is waste. Also, inventory exists as an indicator of a problem in the process. Solving the problem leads to reduce the inventory. [Smalley, 2005: 11]
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3. Machines. When a company starts moving toward implementing lean principles, the company will be interested in machine availability and uptime. Because, unscheduled equipment downtime in lean manufacturing company without excessive amount of inventory to buffer this problem results in lost sales and delays in shipping products to the customers. Therefore, there are two lean manufacturing tools to maintain equipment effectiveness [Kocakulah et al.,2008: 20]: Total Productive Maintenance (TPM). It is a lean manufacturing tool used to attack issues with machine uptime. The main metric of TPM program is Overall Equipment Effectiveness (OEE) which described in the following Exhibit (3-1): OEE = Availability * Performance Efficiency * Rate of Quality Products Availability = (Total Available Time – Downtime) * 100 (Total Available Time) Performance Efficiency = (Ideal Cycle Time * Processed Amount) * 100 (Operating Time) Rate of Quality Products = (Processed Amount – Defect Amount) * 100 (Processed Amount)
From the previous Exhibit, it can be noticed that: Availability measures if the machine is down and can not run. Performance measures if the machine is running at its optimal speed. Rate of quality measures how many defective parts a machine produces. Also, Kocakulah et al.,(2008) demonstrated six factors cause OEE numbers to drop. These factors are: machine breakdown, machine setup, slow cycle time, slowdown or stoppage of machine, starts-up and defects and reworks. The benefits from TPM program can be concluded as follows: zero defects, zero breakdowns, zero accidents, keep OEE on levels that leads to smooth flow with minimal inventories, on-time delivery without delays and reduce inventory costs . 5S Methods. 5S is a tool used to keep the machines clean. It is also called “Visual Workplace” [Larry, 2005: 35]. 5S implementation methodology is a system to reduce workplace waste and optimize productivity by maintaining an orderly workplace. 5S methods clean up and organize the workplace
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without changing its existing configuration. This results in continuous improvement and it is never ending process. [Hough, 2008: 88] 5S refers to the words used to describe the steps in each process in both Japanese and their English translation.[Kocakulah et al.,2008: 19]
Seiri Seiton Seiso Seiketsu Shitsuke
Separate Sort Sweep Standardize Sustain
The five steps of implementing 5S methodology are as follows: 1. The first step is separate. It is an evaluation and removal of anything that is not needed for the tasks performed in any given area [Kocakulah et al.,2008: 19]. The contribution of this step is to eliminate many unnecessary items that leads to increase space available and visibility in the area. [Larry, 2005: 12] 2. The second step is sort. It involves defining a specific place or area for the remaining items that are required to perform the task in the area. They are located in an optimum place to minimize motion waste.[Kocakulah et al.,2008: 19] 3. The third is sweep. It is self-explanatory. Every thing must be kept clean and free of debris [Kocakulah et al.,2008: 19]. The cleaning aspect of 5S promotes preventive maintenance, thereby, reducing the need to wait on equipment being repaired. [Larry, 2005: 12] 4. The fourth step is standardize. It means keeping things consistent from area to area. This leads to standardized work, every one performs tasks in the same way and also supports flexibility for employees across workstations [Kocakulah et al.,2008: 19]. Also, it reduces the waste of motion due to search the department for items needed to perform the job. [Larry, 2005: 12] 5. The final step is sustain. It is maintaining the discipline to keep the area clean and in order day in and day out. [Kocakulah et al.,2008: 19] Kocakulah et al., (2008) indicated the benefits of implementing 5S methods as follows: Visibility is increased. So, all abnormalities are visible to be eliminated. Supports standardized work. Eliminating motion waste through keeping workplace ordered and cleaned.
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Keeping machines clean to promote preventive maintenance resulting in no reworks or repairs. Achieving cost reduction through eliminating inventory, motion, defects and transportation wastes. Keeping smooth and continuous flow. 4. Methods. Achieving stability requires having standard methods for manufacturing [Smalley, 2005: 12]. To have standard methods, “Standardized Work” will be used. It is also called “Standard Process” which considered a lean manufacturing tool used to maintain lean achievements and set the stage for continued improvement. [Kocakulah et al.,2008: 25] Standardized Work was defined by Whitmore (2008) as “a detailed, documented and visual system by which workers develop and follow a series of predefined process steps”. It should be used whenever the work requires completing a series of tasks. The importance of implementing standardized work can be noticed as follows [Whitemore, 2008: 172]: Standardized work provides the baseline required for continuous improvement. Because, Standardized work makes abnormalities visible and detailed steps needed can be taken to eliminate root causes of variability and resolve them. In this case, variations will be reduced resulting in no defects, less downtime, improve quality, enhance productivity and eliminating unnecessary motion, overproduction and overprocessing. Everyone within the company should have its own work methods or work sequence to do a job otherwise the outcome is unpredictable, flow and pull are impossible. Without standardized work, continuous improvement activities can not be well managed. Because, any improvement will be considered just one variation used and ignored.
3-2-2-3. Layout Redesign Brown et al., (2006) indicated that layout redesign is an essential part of transforming to lean. Companies that begin the transformation from traditional manufacturing system into lean manufacturing have to redesign their layout in terms of work cells rather than functional departments. Therefore, Cellular Manufacturing ( is manufacturing done in work cells ) is considered a lean manufacturing tool that facilitates the creation of work cells.
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Manufacturing cell is considered the basic requirement or the basic building block of implementing lean manufacturing system. Work cell is a group of dissimilar operations formed in U-shaped form to produce a product family [Maskell and Kennedy, 2006a: 7]. U-shaped cell allows work to flow counter clockwise from one worker to the next in one-piece flow. [Brown et al., 2006: 6] There are two functions that can be seen inside the work cell [Brown et al., 2006: 6]: Supermarket. It is a material storage concept. Early lean manufacturers established a single day storage area very near the production cell to provide the necessary materials to the cell as needed. The supermarkets will hold only one day’s inventory, so that they did not become overcrowded warehouses of raw in process material. Waterspider. It makes rounds once an hour providing the necessary materials from the supermarket to workers in the cells. Benefits from redesigning the layout in terms of work cells can be concluded as follows: batches’ size will be small, quality at source will be maintained to prevent the occurance of defects or errors, flexibility will be enhanced, workers and equipment are clustered together and dedicated to produce a family of products on a repetitive basis, keep smooth and continuous flow, wastes of inventory, defects, motion, waiting and others will be eliminated and finally produce at the rate of customer demand (achieve takt time).
3-2-2-4. Small-lot Production Lot sizes affects manufacturing competitive advantage because it influences the cost, quality, lead time and flexibility of manufacturing [Maskell and Kennedy, 2006a: 10]. The drawbacks of large lot sizes are concluded as follows: Increased production lead time. Hidden defects resulting in poor quality products and raising costs of repairs and reworks. Increase amount of inventories and raising costs of storage and floor space. Delays in delivering what the customers need. Unable to introduce new innovative products to respond quickly to changes in customers’ needs.
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When a manufacturing company truly converts to lean principles by rightdesigning its operations, it should first replace batch style manufacturing methods with flow manufacturing. Flow manufacturing or one-piece flow is a fundamental tool to understand lean manufacturing and right- designed systems. Flow ties an operation directly to the customer’s needs and demands. [Huntzinger, 2006: 20-21]
3-2-2-5. Quality at Source If the flow in the lean system is interrupted, the system’s goals can not be achieved. To keep continuous flow, each worker worked in the lean system should be well trained and also each technique or procedure should be well designed to prevent the occurance of defects or errors. Maskell and Kennedy (2006a) indicated that searching for the root cause of a defect or problem is an integral part of lean production. The key to discovering and eliminating defects is self-inspection procedures that give accurate and timely information about causes of defects. Manivannan (2004) stated that “quality comes not from inspection, but from improvement of the process”. Rather than looking for defects after the fact, the true goal of manufacturing engineers and managers should be to install processes that yield zero defects. [Manivannan, 2004: 99] As a result, Poka-yoke and Jidoka are more sophisticated lean tools that used to achieve this purpose. Also, lean requirement for single-piece flow is helpful because single-piece flow and self inspection ensures that problems are identified on the first occurance and can be eliminated before the error affects another product in the process [Maskell and Kennedy, 2006a: 6]. Poka-Yoke is a process improvement designed to prevent a specific defect from occuring. It prevents personal injury, promotes job safety, eliminates faulty products and prevents machine damage. [Manivannan, 2004: 100] Poka-Yoke means Error-Proofing or Mistake-Proofing. There are some authors who said that Error-Proofing and Mistake-Proofing can be used interchangeably. But Manivannan (2004) highlighted the difference between these terms that can be summarized as follows: Error-Proofing is used to prevent the assembly errors. But Mistake-Proofing is used to prevent the mistakes from the occurance in the manufacturing process,
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warn that some mistakes have been occurred and/or eliminate the mistakes when occurred before transforming into another process. Therefore, the researcher can conclude that quality can be designed into a product either in design stage or manufacturing stage. If quality is designed into the product during the design stage, it will be ensured that assembly processes will be correctly done. And it is considered the truest form for Poka-Yoke. But if it does not occur, it is possible to build the quality into manufacturing process which is Mistake-Proofing. In this case, the proper conditions exist before implementing any other process preventing the defects from the occurance at first. On the other hand, if there are some defects occurred, the detective function can be performed that is called “Jidoka”. It is a lean tool used to detect the defects to be eliminated. Manivannan (2004) demonstrated the reasons of using Poka-Yoke as a lean tool as follows: Competitive advantage. In a global market the cost of quality is part of a company’s competitive advantage. It costs far less to prevent defects from occuring in the first place than to catch them later through inspection and then find that you must rework and repair. Knowledgeable workers. When every employee understands the principles of Poka-yoke, work teams can see more easily how defects are generated and can then act effectively to eliminate them. Predictability. If our machines include error-proofing devices, then we are assured that the end product will be defect-free. Reduced variation. The devices of error-proofing also ensure that all subassemblies and completed assemblies are exactly the same. Six sigma and error-proofing are related. In a DMAIC (Define, Measure, Analyze, Improve, Control) project , error-proofing is usually performed in the control phase to prevent a specific defect from occuring. So that it is impossible to reach to Six Sigma and lean implementation without applying error-proofing concepts.
3-2-2-6. Visual Management Visual management is the lean system sensing mechanism. It provides transparency of operational reality and clarity of deviations against detailed standards of performance, work procedures, scheduling, inventory and scrap. The
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plant manager’s daily walk also builds a healthy tension of joint accountability between plant managers and shop floor operations. [Husby, 2007: 43] Visual management systems enable factory workers to be well informed about production procedures, status and other important information for them to do their jobs as effectively as possible. [Mekong, 2004: 14] Daily deviations exposed through visual management also stimulate shop floor teams to identify root cause and implement permanent solutions. So if problems occur repeatedly at an operation, shop floor team members expect the manager to resolve them. Therefore, it reinforces a positive work environment as the plant manager conveys support and respect for the shop floor team members. The lean practice for identifying root cause is the “ Five Whys”. This process starts by asking why a problem is occuring. The process continues with each successive response met with another why until the root cause is determined [Husby, 2007: 45]. Visual management can address both: Visual displays. They are reference information for production workers. Large visual displays are much more effective means of communication to workers on the factory floor than written reports and guidelines and therefore should be used as much as possible. [Mekong, 2004: 14] Visual controls. They focus on a need to act. It can address whether a production line is running according to plan, it can highlight problems. [Breyfogle, 2007: 2] Using visual system can lead to increase visibility and efficieny, enhancing productivity, improve quality through error prevention, detection and resolution resulting in no defects, reducing costs of repairs and reworks and keeping continuous and smooth flow.
3-2-2-7. Setup Reduction Simplified setup and reduced setup time permit reduced-lot-size production and result in increasing production capacity, flexibility and resource utilization as well as improved product quality and customer satisfaction. Although setup procedures vary widely with type of equipment and equipment application, the lean tool used to improve setups is called Single-Minute Exchange of Dies (SMED). This tool developed by Shingo in 1950s in response to increasing needs of smaller production lot sizes. [Maskell and Kennedy, 2006a: 11]
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Kocakulah et al., (2008) indicated that this tool also is used to improve changeover to be 10 minutes or less. Some companies that have fully embraced lean techniques are targeting “zero changeover”, which is considered three minutes or less. If a machine is not producing product during changeover it affects the flow of product through the plant. Using (SMED) are as follows: Reduced setup times. Quick changeover due to reducing planned downtime. Improve quality, smooth flow and reduce inventory.
3-2-2-8. Managing by Value Stream Kocakulah et al., (2008) indicated that managing by value streams is considered a technical requirement for implementing lean manufacturing system and value stream mapping is considered a lean tool that assists the visualization of the entire process, documenting time, waste and cost. Value stream mapping is a visual way of representing the flow of information and materials in the production of products. This creates a simple way for managers to see flow of product. There are some steps should be followed to create value stream map. These steps are as follows: Group and identify product families. Map the flow of information to and from the customer to the company and to and from the company to suppliers. Walk the process and document inventory levels and process cycle times along with changeover times. Calculate lead times and determine what ratios of the lead time are value added and nonvalue added activities. The map that results from these steps is called a current state map utilized to focus improvement efforts. All nonvalue added times are wastes and potential areas for improvement. As opportunities for improvement are identified, a new map can be created showing all potential improvements. It is referred to a future state map. [Kocakulah et al., 2008: 18] The objective of value stream mapping is to find waste, quantify throughput time, determine value-added ratio and provide baseline for a future state map. [Maskell and Kennedy, 2006a: 7] Value stream is considered a new and more useful unit of analysis than the supply chain or individual firm. So that, the value stream concept should extends
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beyond the firm’s boundary to involve both customers and suppliers to create what is called Extended Value Stream. The researcher will try to describe the linkages between the company and its customers and suppliers through the extended value stream as follows:
3-2-2-8-1. The Linkages Between The Company and Its Customers in Extended Value Stream A company adopted lean manufacturing system should have a good relationship with its external customers. It is considered a requirement for implementing lean manufacturing system. Also, these linkages between the company and its external customers can be facilitated by using the internet. Both the company and customer can obtain some advantages from using the internet. A customer can gain the following advantages: 1. Access to the company’s web site. The customer can use the internet to access the company’s web site in order to: Know its products and services, their prices and descriptions through browsing the E-catalogs. Make real-time comparisons among the competitors’ products. Search for the desired product or service, select the prefered product and place orders for the selected products. 2. Global access at any time from any place. It means that when the customer can not be able to place orders during regular business hours, he/or she can place orders in any other time. Also, customers can place orders from any place around the world. Thus, the company can attract new customers and enhance its revenues. 3. The customer will be provided 7-day/24 hour worldwide customer service. These additional services before and after sale will enhance value provided to the customer. 4. The customer can receive the orders at home instead of dealing with the retailers. If the product is digitalized, it can be downloaded from the internet immediately. 5. The customer can pay the invoices electronically by using credit cards or electronic checks.
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A company can gain the following advantages: 1. A company can conduct the market research through utilizing interactive web-based surveys and online focus groups to determine customers’ needs. 2. The company’s flexibility to change the price, types of products provided and promotion through one database entry is enhanced, instead of using traditional mail order to mail new catalogs to all customers. 3. The company’s ability to respond quickly to the changes in the customers’ needs by introducing more innovative products is raised. 4. Attracting new customers because they are likely to find product they are seeking. 5. Enabling the company to recognize the customers’ requirements through tracking online shopping behavior and histories. According to the customers’ recommendations, the company can modify its promotions. 6. By establishing a direct relationship between the company and its customers, the company will respond to the customer’s order and ship the required product without dealing with the retailers (intermediaries). 7. Shrinking the activities of the company’s value stream. It can be noticed that in the traditional value chain, the outbound logistics activities include warehousing or storing and delivering the products to the customers. But now, the company adopting lean manufacturing system will not need for the warehouses because the inventories will be eliminated. Thus, the facility and inventory costs will be reduced and the company will only bear the lower distribution costs to transport or ship the products. Also, if the required product is digital that can be downloaded from the web site such as software or songs, the distribution costs will be zero. 8. The company will enjoy higher revenues rather than sharing some revenues with retailers.
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3-2-2-8-2. The Linkages Between The Company and Its Suppliers in Extended Value Stream Also, the company adopted lean manufacturing system should have a good relationship with its suppliers because it is also considered a requirement for implementing lean manufacturing system. Using the internet in the same time will facilitate the linkages between the company and its suppliers resulting in eliminating the intermediaries. It can be concluded that both of the company and its suppliers may have some advantages from using the internet as follows: 1. Internet technology will enable the company to communicate with its suppliers through using the extranents. 2. The company will be able to search for many suppliers who use the internet and have e-catalogs in order to make real-time comparisons, then select items and place orders from the prefered supplier. It was said that the company adopted lean manufacturing system depends on a few suppliers who become “long term partners”. 3. Suppliers can deal with the manufacturers without any human contact like retailers. 4. Manufacturers can negotiate prices with suppliers on-line. 5. The company can receive only what it needs in time from the supplier. Thus, there is no need for storing activities because the inventories will be eliminated. And inbound logistics will include only the distribution activities to ship required materials to manufacturers. 6. Manufacturers can pay the invoices electronically. 7. Suppliers are conforming to their buyer’s lean manufacturing system. 8. The company will open its intranets to trusted suppliers. Thus, suppliers will be able to communicate with other partners in the company like designers to be involved to improve the way products were designed, manufactured and delivered.
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3-2-3. Interrelationships Among Lean Tools Finally, after describing lean manufacturing requirements and their supported tools, this part will highlight the interrelationships among lean tools as shown in the figure (3-1). The application of some tools supports other tools in order to facilitate the fulfillment of lean manufacturing requirements. The interrelationships among lean tools can be summarized in the following figures. The first figure (3-2) shows that cellular manufacturing tool supports two other tools (one-piece flow and poka-yoke and jidoka).
One piece flow Cellular manufacturing
Poka-yoke and Jidoka
Figure (3-2): Cellular Manufacturing Tool and One-Piece Flow, Poka-Yoke and Jidoka Tools
In the previous figure it can be noticed that cellular manufacturing tool supports the following tools: One Piece Flow. This tool can be supported by cellular manufacturing tool because, when layout is redesigned in the form of work cells it facilitates the production to be in small batch size. Batch size will be one. Poka-Yoke and Jidoka. When layout is based on work cells it guarantees the quality at source. It means that products will be produced in a right manner at first and defects will be reduced as possible. The second figure (3-3) will show that one-piece flow tool supports two other tools (standardized work and poka-yoke and jidoka). Standardized work One-piece flow
Poka-yoke and Jidoka
Figure (3-3): One-Piece Flow Tool and Standardized Work and Poka-Yoke and Jidoka Tools
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In this figure it can be noticed that one piece flow tool supports the following tools: Standardized Work. To maintain standardized work, layout would be redesigned in form of work cells and each cell is responsible for producing piece by piece or one by one, because standardized work can not be created if the batches of items are moved here and there. Poka-Yoke and Jidoka. Single piece flow is helpful because it ensures that the problems are identified on the first occurance and can be stopped/fixed and eliminated before the errors affect another product in the process. The third figure (3-4) shows that Single-Minute Exchange of Dies (SMED) tool supports one-piece flow and total productive maintenance.
One-piece Flow SMED Total productive maintenance
Figure (3-4): SMED Tool and One-Piece Flow and Total Productive Maintenance Tools
In this figure it can be noticed that SMED tool supports the following tools: One-Piece Flow. SMED tool is used in responsing to the increasing needs of smaller production lot sizes. Setup times can be reduced by using SMED tool permitting small lot size to be one. Total Productive Maintenance (TPM). Using SMED tool results in reducing setup times which considered one type of the sources of losses of TPM and causes the overall equipment effectiveness (OEE) numbers to drop. So that the application of SMED tool supports TPM to enhance OEE through reducing setup times.
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The fourth figure (3-5) shows that 5S tool supports standardized work, TPM, 5whys, poka-yoke and jidoka tools.
Standardized work TPM 5S Poka-Yoke and Jidoka 5 Whys
Figure (3-5): 5S Tool and Standardized Work, 5Whys, Poka-Yoke, Jidoka and TPM Tools
In this figure it can be noticed that 5S tool supports the following tools: Standardized Work. The fourth step of implementing 5S Methodology is “Standardize” which means that keeping things consistent from area to area. It leads to standardized work, which means that every one performs the tasks in the same way and also supports flexibility for employees across workstations. In other words, applying 5S methodology results in an ordered, cleaned and visible workplace allowing workers develop and follow series of predefined process steps. Total Productive Maintenance (TPM). The third step/aspect of 5S methodology is “ Sweep”. It means that every thing must be kept clean and free of debris. This aspect motivates preventive maintenance resulting in reducing defects and reworks which considered one of the sources of losses of TPM and consequently OEE will be enhanced. Poka-Yoke and Jidoka. Applying 5S methodology leads to an ordered, organized, cleaned and visible workplace. In this case, it will be easier to detect any abnormalities or errors occurred as early as possible to be eliminated by using Poka-Yoke and Jidoka. 5 Whys. When workplace becomes more visible, it will be easier to detect any errors or defects. By using 5 whys tool, it is easier to identify the root causes of these variations to be eliminated/ prevented.
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The fifth figure (3-6) shows that Standardized Work tool supports Poka-Yoke and Jidoka tools. Standardized Work
Poka-Yoke and Jidoka
Figure (3-6): Standardized Work Tool and Poka-Yoke and Jidoka Tools
In this figure it can be noticed that standardized work can supports poka-yoke and jidoka tools, because standardized work makes abnormalities visible. So in this case, poka-yoke tool can be used to detect any defects or errors appeared immediately before transferring into another process. The last figure (3-7) shows that value stream mapping (VSM) tool supports poka-yoke and jidoka, TPM, 5S, SMED,5Whys, standardized work and cellular manufacturing and one-piece flow tools 5Whys Poka-Yoke and Jidoka
VSM
TPM Cellular Manufacturing and One-Piece Flow Standardized Work 5S SMED
Figure (3-7): VSM Tool and Poka-Yoke and Jidoka, TPM, 5S, SMED, 5Whys, Standardized Work and Cellular Manufacturing and One-Piece Flow tools
In this figure it can be noticed that creating VSM can identify all the areas that have wastes and needed to be improved. Thus, achieving the improvement efforts
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will be through adopting the following tools. In other words, VSM supports the following tools as follows: 5 Whys tool. By using VSM tool, the flow of product and information will be visible. And also, all types of waste can be clarified. Therefore, 5 whys tool can be used to identify the root casues of the wastes occurred and be eliminated and prevented. Poka-Yoke and Jidoka. By using VSM tool, the problems are identified on the first occurance and can be stopped/fixed and eliminated before the errors affect another product in the process by using Poka-yoke and Jidoka tool. Total Productive Maintenance (TPM). By using VSM tool, all abnormalities or problems become more visible and be easily identified to be eliminated immediately. It results in reducing defects or reworks which considered one type of the sources of losses of TPM and consequently, the overall equipment effectiveness (OEE) will be enhanced. Cellular Manufacturing and One Piece Flow. Through VSM, all the areas that are designed in terms of functional departments and having large amounts of inventories will be visible. Thus, the company can redesign these areas in terms of work cells by using cellular manufacturing tool and it promotes the production to be in small batch size. Batch size will be equal one. Standardized Work. Through VSM, all the areas that have wastes will be visible to be eliminated and it supports adopting standardized work to keep the things consistent from one area to another. 5S. Creating VSM provides visualization way for the workplace identifying unordered or uncleaned areas. Thus, it supports applying 5S tool to keep the workplace ordered and cleaned, eliminate all types of wastes and optimize its productivity without changing its configuration. SMED. By creating VSM, it documents setup times for each process. Thus, it supports adopting SMED tool to reduce setup times and achieve quick changeover. In summary, lean tools and their interrelationships are useful in supporting the fulfillment of lean manufacturing requirements in order to achieve the main goal of lean manufacturing system. Applying these tools supporting the fulfillment of lean
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manufacturing requirements results in: keep continuous and smoothy flow, productivity and flexibility will be enhanced, reducing lead time achieving takt time, increasing visibility, improving quality, on-time delivery without any delays, waste elimination and finally creating better value to customers without waste, raising customer satisfaction and loyalty and generate more profits.
3-3. Summary In this chapter, the main cultural and technical requirements of lean manufacturing system has been proposed. These requirements should be in place to enable companies to adopt lean manufacturing system. Also, some of the lean tools that considered as part of cost management tools have been determined in order to support some of these requirements in general. Also, interrelationships among these tools has been highlighted.
In the next chapter, the researcher will try to propose a framework to determine appropriate cost management tools including some of lean tools that should be applied inside the firm when it performs the internal processes and also in extended value stream (outside the firm) to support the fulfillment of lean manufacturing requirements.
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CHAPTER FOUR COST MANAGEMENT TOOLS THAT SUPPORT THE FULFILLMENT OF LEAN MANUFACTURING REQUIREMENTS TO IMPROVE CUSTOMER VALUE
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CHAPTER FOUR COST MANAGEMENT TOOLS THAT SUPPORT THE FULFILLMENT OF LEAN MANUFACTURING REQUIREMENTS TO IMPROVE CUSTOMER VALUE 4-1. Overview The future of any professional business discipline relies on the development of new ideas and methods that effectively incorporate and support technological and methodological innovations regardless of the source. Lean manufacturing and technological advances are providing organizations with means to compete. Many organizations have applied lean manufacturing system to compete on a global basis and it results in a notable progress in manufacturing process. Also, applying technological advances has provided organizations with means to improve their performance in terms of quality, cost and time. Therefore, companies are now beginning to recognize that traditional costing and accounting methods may conflict with these developments. Consequently, important questions have been raised: is a new cost management system required for companies adopt lean manufacturing system?. If so, what should the cost management tools be involved?. To answer these questions, it should be noticed that cost management system should be developed to remedy the limitations of current cost management techniques, be relevant in companies needs to adopt lean manufacturing system and support the fulfillment of lean manufacturing requirements. So that this chapter will be organized as follows: the second section will be devoted to define cost management. The third section will discuss the reasons of renewing the cost management techniques. In the forth section, a proposed framework for cost management system in lean manufacturing environment will be discussed. The fifth section will summarize the whole chapter.
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4-2. Cost Management Definition Agrawal and Siegel (1998) indicated that the term cost management is not well defined term. It builds on both cost accounting and management accounting, but goes beyond the two. Cost management was defined as “ a set of techniques and methods for controlling and improving a company’s activities and processes, its products and services”. [Agrawal and Siegel, 1998: 16]
Cost management was defined as “ a philosophy, an attitude and a set of techniques to create more value at lower cost”. [Hilton et al., 2000: 8] Hilton’s definition for cost management is more comprehensive than Brinker’s definition. Because, Hilton defined cost management in terms of three sides : philosophy, attitude and techniques, but Brinker took only one side that is techniques. Three sides will be explained as follows: Philosophy. Cost management is a philosophy of improvement because it promotes the idea of continually finding ways to help organizations make the right decisions to create more customer value at lower cost. Attitude. Cost management represents a proactive attitude that all the costs of products or services result from management decisions. Techniques. Cost management is a set of reliable techniques. These techniques may be used individually to support a specific decision or together to support the overall management of the organization. A set of cost management techniques that function together to support the organization’s goals and activities is called “cost management system”. In this thesis, the researcher will try to propose a framework for cost management system in lean manufacturing environment to determine the appropriate cost management tools and their role in supporting the fulfillment of lean manufacturing requirements. 4-3. Reasons of Increasing The Need for Effective Cost Management System Cost management is a field undergoing to a rebirth. The last fifteen years had seen some standardization of methods and models within cost management. Nowdays, intense effort has renewed some important cost management practices and theories [McNair, 2007: 10], because of the following reasons: [Hilker, 2011: 18]
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1. Lean has become a major movement and is adopted today by companies in many industries both inside and outside of manufacturing. Effective cost management in a lean enterprise must address all processes in an organization holistically and not be limited to just manufacturing function. 2. The ever-increasing diversity of products and internal services in an organization and the specifics of how they are to be provided to customers drive the need for effective cost management. 3. Orientation of business activities towards the customer and determining how to deploy the resources toward these activities are important aspect of lean thinking. It is suggested that customers do not care what it costs to produce a product or provide a service only what the effect and value will be to them if they decide to buy. Thus, lean enterprises need the ability to map and make transparent all activities and resources associated with providing a product or internal service to a customer. 4. Management information has suffered from being viewed as irrelevant, inaccurate or not understandable due to ill-used cost management practices and the lack of benefits obtained for managerial decision making. Thus, lean enterprises need relevant and accurate information to make good decisions. Therefore, existing cost management system should be modernized and apply lean principles to provide relevant and accurate information. 4-4.
A Proposed Framework for Cost Management System in Lean Manufacturing Environment
An effective cost management system supports lean initiatives and abandons outdated, poorly implemented and ill-practiced cost management approaches and inadequate performance and incentive measures. Also, effective cost management in a lean enterprise must address all processes in an organization holistically and not be limited to just the manufacturing function. [Hilker, 2011: 17] Due to the importance of cost management in the extended value stream as a vital element in the reduction of total value stream costs, in this section the researcher will try to propose a framework for new cost management system in lean manufacturing environment. Within this framework, the researcher will try to determine some of the current cost management techniques to be adopted along the extended value stream, new cost management techniques to be adopted to overcome the limitations of the current techniques and to
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demonstrate the role of both current and new techniques in supporting the fulfillment of lean manufacturing requirements. The following figure (4-1) shows the proposed framework that combine some of the appropriate cost management tools in lean manufacturing system. This figure shows the suggested cost management tools including some of lean tools that should be applied by a company seeks to adopt lean manufacturing system to support the fulfillment of lean manufacturing requirements. This figure can be divided into two main parts: The first part reflects cost management tools applied inside the manufacturing firm when it performs the key internal activities like Research and Development (R&D), design, production, marketing and distribution. The second part reflects the cost management in extended value stream. It means that the company will take into account both external suppliers and customers. Therefore, cost management tools that will be applied through supplier-buyer (manufacturing firm) and manufacturer-end customer relationships should be determined. The following section starts with the first part of the proposed framework to highlight the suggested cost management tools that will be applied by the company seeks to adopt lean manufacturing system when performing the key internal value stream’s activities. The first part of proposed framework will be divided into the following stages: 4-4-1. Market Analysis, Research and Development and Design Stage The importance of market analysis, research and development (R&D) and design in a lean manufacturing environment can not be emphasized enough. Trying to develop and design products without knowing the target market or understanding customers’ needs will lead to inefficiencies and waste.
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Inside Manufacturing Company
Cost management tools including lean tools
Marketing (e.g.market research)
-Life cycle costing -Target costing
R&D Design
-Customer driven lean cost management
-Value stream costing Inbound logistics
-Features and characteristics product costing
Manufacturing
Suppliers Purchasing
Product costing purpose
Operational Continuous control improvement purpose purpose
Outbound logistics Distribution
-Just -in- time -Theory of constraints
-Six sigma -Kaizen costing After sale service Figure (4-1): Proposed Framework for Cost Management System in Lean Manufacturing Environment Flow of information Supporting cost management tool at each stage of company's internal value stream
Customers
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Products are developed on the basis of trial and error because customers’ needs are not known. When this happen, products lack the features, functionality and price levels that customers want. Many of these products may be unsuccessful , yet they consume considerable resources resulting in waste in the system. Lean enterprises must develop techniques to manage the costs of future products: life-cycle costing and target costing are valuable for this purpose. [Kalagnanam and Vaidyanathan, 2000: 625] 4-4-1-1. Life Cycle Costing The highly automated manufacturing systems enable manufacturers to produce an ever-more diverse set of products. Moreover, the rate at which technology is changing means that the life cycles of most products are becoming shorter. To be competitve, manufacturers must keep up with the rapidly changing market place. Managers must have timely information about product characteristics in order to respond quickly and effectively to the competition. [Hilton, 1999: 15] Life cycle costing is the accumulation of costs for activities that occur over the entire life cycle of a product from inception to abandonment by the customer. It is a measure of the total costs over the product’s life including design and development, acquisition, operation, maintenance and service. Service costs include marketing, distribution, administrative and after-sale service costs [Gurowka and Lawson, 2007: 22]. So that it attempts to estimate the product’s cost over its life time. Life cycle costing technique is useful for the companies adopted lean manufacturing system because this tool enable the companies to identify high cost contributers across product life cycle. In other words, life cycle costing can identify non value added costs across product life cycle to be eliminated. In this case, opportunities for cost reduction will be highlighted. Thus, life cycle costing can support continuous improvement as a cultural lean manufacturing requirement. 4-4-1-2. Target Costing Today, competition among companies in many industries is turning global. Companies competing in this global market are now in a highly competitive race in terms of quality levels and to survive each company would come up with technological innovations. Because technological innovation has become a
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key part of this race, competing companies are also faced with intense cost competition as they seek to provide customers with desired quality at an affordable cost. So that, companies would now set prices that are competitive in today’s market while also setting costs that allow a sufficient profit margin. Because of determining the price by market competition, costs must be carefully managed to create profits. New forms of management tools and techniques are emerging to help managers take on this difficult task. This tool is called target costing. [IMA, 1998: 1] Swenson et al.,(2005) defined target costing as “a system of profit planning and cost management that is price led, customer focused, designed centered, and cross functional. Target costing initiates cost management at the earliest stages of product development and applies it throughout the product life cycle by actively involving the entire value chain”. [Swenson et al.,2005: 43] Target costing involves key principles that arised from its definition. These principles are indicated as follows [El-Helbawy and El-Nashar, 2013 and Swenson et al.,2005]: Price –led costing. Target costing is market driven, it means that target costing focuses on customer requirements to determine selling price then sets cost targets by subtracting the required profit margin from the competitive market price. Customer focus. The customer perspective is paramount and represented continuously throughout product development. Product features and functions are only added up the product or retained in an existing product if they provide sufficient value to customer to justify their costs. Focus on design. Target costing is viewed as an integral part of the design process for new products/services, and/or modifications of existing ones. Reducing the cost of a poorly designed product or process during production is far more difficult than designing the product or process to be produced at lower cost. Cross-functional teams. Cross-functional teams are essential to target costing. The teams bring together individuals from different functional areas like: marketing, purchasing, production and servicing. The teams are responsible for managing new products from initial concept to production. Life-cycle costing. Target costing considers both producer’s and user’s life cycle costs. For the producer, life-cycle costs include all of
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the costs incurred within the organization from product concept until the organization is no longer responsible for the product. For the consumer, life-cycle costs include all costs of owning a product throughout its life cycle including purchase price, operating costs, non-warranty maintenance and repairs and disposition costs. Entire value stream involvement. Target costing promotes participation from outside members of the extended enterprise. Such as suppliers, customers and distributors. Target costing can be used in manufacturing firms that outsource some components as well as those that make the entire product themselves. The benefits of applying the target costing technique in a company seeks to adopt lean manufacturing system under using internet technology will be concluded as follows: 1. The outcome of the target costing technique is a detailed action plan for ongoing lean improvement resulting in waste elimination and achieving continuous improvement. Examples of these actions are: Using value engineering to change product design to facilitate manufacturing process and reduce its costs. Reduce the value stream process costs through waste elimination. Redeployment of free-up resources resulted from lean improvement into other value added activities to produce more valued products with the same capacity . Enhance the relationship between manufacturers and suppliers to reduce rework and scrap avoiding the potential bottlenecks from occurance during the production process. 2. Target costing can support the fulfillment of some of the cultural requirements of lean manufacturing like: Target costing encourages the teamwork which is considered one of the cultural requirements of lean manufacturing system. Because target costing technique requires that a team designs the product. The team will include members of all relevant departments, from marketing through engineering and production to sales. The second cultural lean manufacturing requirement supported by applying target costing is lean partnership with suppliers and customers. Target costing used in the companies that outsource requires a good relationship with suppliers to facilitate new product designs and improve
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logistics. Also, target costing requires a good relationship with customers to know their requirements to set market price. Target costing also can support continuous improvement. Because the outcome of target costing technique is a detailed action plan for ongoing lean improvement. After describing both target costing and life cycle costing techniques, it can be noticed that these techniques are built in the market (external focus) to determine the customer’s preferences then take this information and turn it inward with the aim of reducing the costs (cost driven). The alternative to these techniques is to link customer perspective with the firm’s spending patterns. In other words, effective spending becomes defined by a sole criterion: “does it increase the value the firm creates for the customers?”. So that the value perspective is considered a great challenge to traditional cost management techniques to date. Therefore, the new cost management technique should be adopted in order to overcome this limitation. This new tool is called “customer-driven lean cost management” [McNair et al.,2006: 10]. The following section will describe this tool in more detail. 4-4-1-3. Customer-Driven Lean Cost Management Customer-driven lean cost management (CLCM) is considered a new cost management technique that builds customer perspective directly into ongoing cost management system. Customer-driven lean cost management technique links the customer’s value profile with the analysis of the firm’s cost structure. [McNair et al.,2006: 10] Value creation model can define the firm’s cost structure in terms of value added, non-value added but required activities and waste. This model also seeks to understand the trade-off between what the customer is willing to pay for a product/service bundle and the cost the firm bears to provide what the customer desires [McNair et al.,2001a: 33]. Thus, the definition of value creation model will be presented and determine how this model can be merged with the customer’s value profile to launch customer-driven lean cost management.
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4-4-1-3-1. Value Creation Model Value creation model contributes to the existing cost management technique through analyzing and defining the linkages between firm’s internal cost and market value. McNair et al., (2001a) indicated that “value creation model commences by identifying bundels of attributes desired by customers to determine the firm’s costs in terms of value added, non-value added as well as waste”. The following figure (4-2) presents the value creation model as follows: Price barrier Profit
waste BVA- (C,F,A) Value adding core of activities
Figure (4-2): Value Creation Model [McNair et al., 2006b: 13]
McNair et al.,(2001b) indicated that the value creation model focuses on five key elements. These elements are: price, value added core of activities, business value added, waste and profit. These elements will be explained in some details as follows: 1. Price. It is an outer limit on what the firm can earn for its products and services. It is defined as a valid approximation of the value that customers derive from the bundle of characteristics embedded in the product. Also, it is considered a boundary set by the customer and the market. In other words, it is not controlled by the company. 2. Value-added core of activities. These are set of activities that the customers are willing to pay for. Value added core includes those activities and outcomes that directly benefit customers and are tightly tied to the value attributes of the product or service bundle. Also, value added core is where the resources are consumed to satisfy customers’ needs.
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Although the value added core is only a small percentage of the total costsapproximately 20% - an additional dollar spent on these activities will create more than one dollar of price. In other words, these activities are only activities that generate the firm’s revenues. Thus, it can be noticed that price is driven by value not cost as assumed by cost management in the past. Also, it will provide an evidence that the value should be determined by customers not by the management. In the previous figure, it can also be noticed that there is a wide gap between the value added core and the price boundary. This gap is divided into three specific layers: business value added, waste and profit. These layers will be summarized as follows: 3. Business value added. It is considered a third key element in the value creation model. It has three categories: Business value added-current (BVA-C) activities which are necessary to support the value added core. If these activities are poorly done, the customer will be dissatisfied. Business value added-future (BVA-F) activities include the investment a firm makes in future products and services. Although the customers are not willing to pay for them because these innovations make their current purchase obsolete, the company must develop new products/services to survive in global markets. Business value added-administrative (BVA-A) activities include the activities that have no relationship with the customer-defined value. Thus, the customer is not willing to pay for them. These activities are essential for the firm to survive and can not be defended. 4. Waste. It is the fourth element of the value creation model. It is considered as a form of cost incurred without any value created. For example, putting more value into product or service than the customer needs is waste. These costs are not related to price because the customers will not pay for them. Thus, they consume the firm’s profits. 5. The last key element of the value creation model is profit. Profit is the money or resources left over after all costs of doing business have been met. Profit is driven by understanding and providing the optimal blend of products or services to customers while consuming a minimum amount of resources. So that it is considered a result from managing the gap between the price and costs. It can be noticed that the main goal of value creation model is to link the firm’s cost structure with the customer preferences. This goal can be achieved
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by determining the value added activities to be performed to satisfy customers’ needs. They are only activities the customers are willing to pay for them. Also, the costs of these activities are value added costs. It means that each dollar spent on the value added activities can lead to generate more revenues. So that, if the company can not understand and determine value added activities, the company will face lower profit and an uncertain future.
4-4-1-3-2. Customer’s Value Profile Customer’s value profile provides information about the relationship between the firm’s activities and customer-defined value. This information is provided by estimating the relationship between the value preferences of a firm’s customers and the activities, costs and performance. Customer’s value profile is established through the following steps [McNair et al.,2006: 10]: 1. The value attributes for a specific product or service are obtained from the customers through a focus group or surveys. 2. Each customer provides a relative ranking of each attribute’s importance to the overall value embedded in the product or service. 3. The revenues provided by the sales of the products or services are multiplied by the value ranking to create revenue equivalents for each attribute. 4. The firm’s cost structure is matched to the product and its value attributes. Value added costs are identified and summarized by attribute. 5. Value multipliers are estimated by dividing an attribute’s revenue equivalent by its value added cost. Value multiplier measures the number of dollars of revenue generated by every dollar of value added cost the firm incurs. 6. After establishing customer’s value profile through following the previous discussed steps, it should be merged with the value creation model to create customer-driven lean cost management technique. This technique can be shown in the following figure (4-3):
66 Value creation multipliers Value stream cost profile Resources R1
Value added costs Future value added
R2 R3
Customer value added
R4
M1
$V1
%V1
V1
M2
$V2
%V2
V2
M3
$V3
%V3
V3
M4
$V4
%V4
V4
M5
$V5
%V5
V5
R5 Business value add-current R6 R7
Business value add-administrative
R8 . . . Rn
Non-value add (waste)
Revenue Customer value equivalent preference stream Value Proposition
Non-value added costs
Figure (4-3): Customer-Driven Lean Cost Management [McNair et al.,2006: 16]
From this figure it can be noticed that McNair et al., (2006) did not identify or target specific segment of customers to be satisfied. Identifying a segment of customers is important. Because there are a wide variety of weights that any given customer places on the features of any given product or service bundle. Thus, the optimal bundle of product or service attributes should be determined within the boundaries of a targeted set of customers that have the same set of requirements or value profile. After that each customer can provide a relative ranking for each attribute according to its importance. [McNair et al.,2001b: 12]
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Customer –Driven Lean Cost Management (CLCM) technique is a valuable tool for companies seeks to adopt lean manufacturing system. This tool supports the fulfillment of some of cultural lean manufacturing requirements. CLCM tool requires a good relationship with the company’s customers to identify their requirements to be linked with the firm’s cost structure. In this case, lean partnership with the customer will be achieved as a cultural lean manufacturing requirement. 4-4-2. Production Stage Management accounting systems have traditionally paid too much attention to production, because a majority of most manufacturers’ costs are incurred during the production. [Kalagnanam and Vaidyanathan, 2000: 626] In this section, the researcher will try to determine some of the cost management techniques that may be appropriate to support three purposes during the production stage: product costing, operational control and continuous improvement. 4-4-2-1. Cost Management Techniques For Product Costing in Lean Manufacturing System Ward and Graves (2004) presented activity-based costing (ABC) as an appropriate technique to satisfy the product costing purpose in lean manufacturing system. Also, there are some managers that have mistakenly viewed ABC as a key system to guide them to significant improvement and even to becoming a lean enterprise. They believed that ABC would give them the control to make the changes needed to transform to a lean firm. [Huntzinger, 2007: 246] Huntzinger (2007) indicated that ABC is a costing system that has gained attention in recent years, but it is not relevant for the companies adopted lean manufacturing system, because of the following reasons: ABC is still an allocation method and wants estimates to be expressed in very precise terms. It means that ABC is highly dependent on allocations. Thus, ABC is considered as an improvement over traditional standard costing systems. It is an improvement of a failed system. ABC is expensive to establish and maintain.
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ABC may lead one to believe that the way to reduce costs is to produce in bigger batches. Flow manufacturing is considered an important reason for not adopting ABC. Flow is considered one of lean manufacturing principles that ties an operation directly to the customer’s needs and demands with lower resources consumed. So that flow manufacturing eliminates the majority of tracking ABC issues that works to resolve. Due to the limitations of traditional costing system (either ABC or standard costing system), a new costing system has been arised which is called “value stream costing”. Value stream costing is considered a new tool that is relevant for the company seeks to adopt lean manufacturing system. Gordon (2010) indicated that the main advantage of value stream costing is that it reduces the need for allocations of many indirect costs, which are often made on more or less arbitrary bases in traditional costing systems. By using value stream costing, the production process is viewed as a value stream and assigning all costs associated with the value stream as direct costs. Also, Gordon (2010) indicated that value stream perspective views all support functions necessary to produce the product or family of products as an integral part of the value stream. Thus, support costs become direct to the value stream and there is no need for allocations. Also, it can be noticed that the primary driver of product cost through value stream is the rate of flow of individual product that is determined by the rate of flow of the product through bottleneck operation within value stream which is called pacemaker. In many cases, not all the products made by the value stream have the same cycle time. Thus, there is another valuable tool to be used that is called “features and characteristics product costing (F&C)”. [Maskell and Baggaley, 2004: 156] F&C product costing recognizes that the cost of a product is not determined by the amount of labor time (or machine time) required to make the product. It is determined by the rate of flow of the product through value stream. F&C product costing determines the features and characteristics of the product that affect the rate of flow through the value stream [Maskell and Baggaley, 2006b : 23]. Therefore, it can be concluded that the product cost can be calculated in more accurate manner by using F&C method when its features and characteristics are known.
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After explaining the most relevant costing systems should be adopted to satisfy product costing purpose in lean manufacturing system (value stream costing and feature and characteristics product costing), it can be concluded that both of them are valuable tools to lean manufacturing system. 4-4-2-2. Cost Management Techniques For Operational Control in Lean Manufacturing System It can be noticed that operational control system in a lean company motivates zero inventories, relies on delivering the products to a customer at the right time and supports flow and pull production concepts. Therefore, there are two techniques that can achieve these objectives: JIT manufacturing and Theory of Constraints (TOC). 4-4-2-2-1. Just-in-Time Manufacturing (JIT) Watson (2006) indicated that JIT is a method of manufacturing which guaranteed that raw materials are purchased and finished products are produced and delivered at the right time. Some companies in the mid-1990s like Boeing has used the term lean manufacturing to refer to the philosophies and approaches of JIT. In other words, JIT and Lean manufacturing can be used interchangeably. Badurdeen (2007) indicated that JIT is the backbone of lean manufacturing. Actually, the concept grew first with Toyota system was the JIT, then it developed to lean manufacturing. Based on Badurdeen’s view, it can be concluded that JIT is considered as a prerequisite to the lean manufacturing because: a) Flow and pull is considered one of the lean manufacturing principles. Flow of product through value stream can be only achieved when pulled by the next step in the process. This principle can be achieved through adopting JIT manufacturing technique. b) The implementation of JIT requires some key elements. These elements can be summarized as follows: 1. Demand pull system using kanban production control. Such system begins at the last stage of manufacturing process. Therefore, parts are pulled from particular work center, rather than pushed, by a need for
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2.
3.
4.
5.
6.
these parts in the subsequent work center. It means that nothing is manufactured in any stage until its need is signaled from the subsequent process via kanban, no inventories build up and the manufacturing process exhibits a smooth uniform flow of production. Organizing production operations into manufacturing cells. Physical layout of a company adopted JIT is organized into work cells rather than functional departments. Small or zero inventory buffers. Materials are purchased and goods are produced only as required. It results in small/zero inventories and reducing the associated non-value-added costs like storage and waiting time. High quality level for raw material and finished products. To keep a smooth flow of production in a company adopted JIT, quality of raw material received in time should be with a high quality level to avoid the stoppage of production line. Effective preventive maintenance of equipment. To avoid costly down time from machine breakdowns, the routine maintenance schedules should be adhered. Achievement of reliable suppliers’ relations. A company that adopts JIT production also adopts JIT purchasing. So, this company should keep good relationship with suppliers to ensure that the required materials will be received in time with high quality level.
7. Maintaining of well-trained and motivated workforce. Workers must be multi-skilled to perform a variety of operations and tasks. After highlighting the key elements of JIT, it can be concluded that the implementation of JIT can support the fulfillment of some of the lean manufacturing requirements (either technical or cultural). For example, empowerment, teamwork and lean partnership with suppliers can be fulfilled as cultural requirements. And small-lot production, quality at source, setup reduction, stability (in terms of machines) and layout redesign can be fulfilled as technical requirements. Although there are some similarities between JIT and lean as discussed above, there are slightly differences between these two terms: JIT alone may not be effective technique to eliminate waste completely. Because overproduction or overpurchases wastes may be resulted. Thus, there is a need for JIT to become lean.
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Abdullah (2003) indicated that lean has been applied on all the aspects of the firm, but JIT has only been applied on purchasing, production and distribution. 4-4-2-2-2. Theory of Contraints (TOC) TOC is a concept that emphasizes the role of constraints in limiting the performance of an organization. TOC derives managers to identify and eliminate constraints in order to reach their primary goal- to make money now and in the future. TOC focuses management’s attention on the factors that impede system performance [IMA, 1999: 3]. Constraint can be defined as anything that impedes the system from achieving a higher level of performance towards its goal-making money now and in the future. [Huang, 1999: 23] TOC views manufacturing processes or organization as chains, wherein the entire system is only as strong as its weakest link. Thus, TOC’s purpose is to identify the weakest link (constraint) within an organization and to strengthen this link to the point where it is no longer the limiting factor in determining the strength of the chain (or orgnization). [Pegels and Watrous, 2005] Also, Ahmed (2005) indicated that before identifying the constraints, customers’ values should be understood. Because a customer only pays for what he or she values. If addressing a constraint has a negative impact on something a customer values, it is likely not heading in the right direction. Also, the constraints must be identified in a holistic way to determine the most critical constraint that restrict the overall throughput to be removed. Thus, not all constraints are removed simultaneously only the most critical one. From the previous discussion it can be concluded that TOC can support the fulfillment of some of lean manufacturing requirements (either cultural or technical). It can be summarized in the following part: 1. TOC views the company as a system with set of elements among which there is an interdependent relationship. Each element depends on the others in some way and the global performance of the system relys on the joint efforts of all its elements. In this case, TOC can support the fulfillment of interrelationships across functions and processes as a technical lean manufacturing requirement.
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2. Hung (1999) indicated that TOC can be described by using pull system that minimizes inventory levels. In pull system, products move into production or from work station to work station only as capacity becomes available to begin working on them. In this case, each work station signals the station precedes it when it is ready to receive more product. Therefore, TOC supports small-lot production (one-piece flow) as a technical lean manufacturing requirement to minimize inventory levels and to keep a smooth flow of products in the manufacturing process. 3. Applying TOC results in removing bottlenecks and keeping a smooth flow in the manufacturing process leading to produce at the customer demand rate. It means that TOC facilitates the company to achieve takt time. 4. TOC is considered an operational tool but at the same time it has a strategic horizon. Because the bottlenecks should not only be identified within the firm’s boundary. In other words, bottlenecks should be identified through the extended value stream to involve both suppliers and customers [El-Helbawy and El-Nashar, 2013: 67]. So that it requires establishing a good relationship with both customers and suppliers. Thus, TOC supports lean partnerships with suppliers and customers as a cultural lean manufacturing requirement. 5. TOC is considered a continuous process for identifying and removing the bottlenecks. It means that when the bottleneck is removed, a new one will appear and the cycle will be repeated to identify and eliminate new constraint [El-Helbawy and El-Nashar, 2013: 67].Thus, TOC supports continuous improvement as a cultural lean manufacturing requirement. 4-4-2-3. Cost Management Techniques for Continuous Improvement in Lean Manufacturing System A key element of lean manufacturing is the drive for continuous improvement. Although operational control methods can provide significant incentives for continuous improvement, supplementary techniques are required to manage cost reduction and support waste elimination [Ward and Graves, 2004: 28]. There are some techniques that can achieve it such as Total Quality Management/ Six Sigma and Kaizen Costing.
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4-4-2-3-1.
Total Quality Management
TQM was defined as “ an integrated management philosophy and set of practices and emphasizes, among other things, continuous improvement, meeting customers’ requirements, reducing rework, increased employee involvement and teamwork, process redesign, competitive benchmarking, team-based problem solving, continuous measurement of results and closer relationships with suppliers”. [Powell, 1995: 16]
El-Helbawy and El-Nashar (2013) and Powell (1995) indicated the main factors of TQM that considered as prerequesities for implementing TQM can be concluded as follows: 1. Committed leadership. Long-term commitment and involvement by top management to TQM must be existed. 2. Employee empowerment. All employees must be involved in all the firm’s activities by top management. Also, they should be delegated by enough authority and capability to enable them plan, check and improve the firm’s activities to the benefit of themselves and the company and to suggest their ideas and opinions and take the correct action in time without permission. 3. Closer customer relationships. There must be a good relationship with customers to determine their requirements to be satisfied. 4. Closer supplier relationships. There must be a good relationship with suppliers to ensure that required inputs will be delivered in time and satisfy customers’ needs. 5. Increased training. It must be a great focus on increasing training to enhance the skills of staff. 6. Zero defects. Defects must be detected when they occur to be eliminated. 7. Continuous improvement. Once the commitment to total quality is made, the job is never stop. It is a way of life and it involves the continuous improvement of every phase of every activity. 8. Benchmarking. Best competitive practices should be searched and observed. Implementation of TQM can yield some benefits for the company. These benefits are concluded as follows: non value-added activities will be eliminated, inventories, lead times and defects will be reduced, streamlining production flow, linkages with suppliers will be enhanced and workforce will be more flexible. Although adopting TQM can offer many benefits to the company as stated above, there are some critics to this technique. This view is supported by
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Klefsjo and Bergquist (2007) who asserted that “TQM is less visible now than in the early 1990s due to problems including lack of integration, leadership apathy, a fuzzy concept, unclear quality goals and a failure to break down internal barriers” . It means
that implementation of TQM is a complex process and requires a fundamental change in the company’s culture. Therefore, six sigma is appeared to overcome these limitations. The following part will highlight the basics of six sigma. 4-4-2-3-2. Six Sigma Klefsjo and Bergquist (2007) explained six sigma as a business approach that seeks to find and eliminate causes of mistakes or defects in business processes by focusing on process outputs that are of critical importance to customers. It can be noticed that six sigma emphasizes the reduction of variation, a focus on doing the things right, combining of customer knowledge with core process improvement efforts and a subsequent improvement in company sales and revenue growth. Thus, six sigma encourages companies to take a customer focus to improve their business processes. [Summers, 2007: 2] DMAIC is considered an important part of six sigma. This procedure includes five steps: Define – Measure- Analyze – Improve –Control [Dahlgaard and Park, 2006 and Andersson et al., 2006]: Define. Define which process or product that needs improvement. Define the most suitable team members to work with the improvement. Define the customers of the process, their needs and requirements and create a map of the process that should be improved. Measure. Identify those characteristics of the product or process that are critical to the customer’s requirements for quality performance and which contribute to customer satisfaction. Analyze. Evaluate the current operation of the process to determine the potential sources of variation. Improve. Select those product or process characteristics which must be improved to achieve the goal.
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Control. Ensure that the new process conditions are documented and monitored to sustain improvement. Thus, it can be concluded that six sigma is considered as an improvement program and its main purpose is to eliminate variations in the processes which leads to reduced defects and to reduce the associated non value added costs. Also, the implementation of six sigma can offer many benefits to the company adopted it like: enhancing customer value, reducing cycle times, elimination of defects, increased capacity and productivity rates resulting in improving the process flow and improving the financial performance of the company. Although the adoption of six sigma can yield some benefits to the company, there are some authors critize this technique. Because they believe that six sigma has the same common features as TQM and six sigma does not, in principle, contain anything new. So, the following part will present a comparison between six sigma and TQM in order to know if six sigma is something new or it is considered just a prerequisite to TQM. There are few studies that directly compare TQM and Six sigma. Klefsjo and Bergquist (2007) indicated that there is no difference between them. Also, Jeyaraman and Teo (2010) advocated that view because six sigma and TQM require the same changes or factors to be in place before their implementation in order to reach the desired success. These factors are for example: committed leadership, teamwork basis, employee involvement and empowerment, close relationships with suppliers and customers, training and continuous improvement. On the other hand, there are some studies stated that there is a significant difference between TQM and six sigma. The major aspect of six sigma that is not emphasized sufficiently in TQM is that six sigma places a clear focus on bottom line financial results. It means that no six sigma project is approved unless the bottom line impact has been identified. But financial benefit from the improvement projects related to TQM were not measured at all. [Klefsjo and Bergquist, 2007: 10] The researcher believes that this view is not logical because TQM’s purpose is to improve organizational performance and focuses on satsifying customers’ needs in terms of reliability, availability, delivery and
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maintenance. Also, there is a positive correlation between customer satisfaction and the financial results of companies. Thus, when customers’ needs are satisfied, it leads to raising the customer satisfaction and consequently financial results of the company will be enhanced. After highlighting the previous studies related to the comparison between TQM and six sigma, it can be concluded that six sigma is used as a technique to help a company to implement TQM. It means that six sigma is considered as a prerequisite to TQM. Also, six sigma is considered a valuable tool for companies seeks to adopt lean manufacturing system. Six sigma can support the fulfillment of lean manufacturing requirements (either technical or cultural). For the cultural requirements, the implementation of six sigma requires some changes in the company culture such as leadership, teamwork, empowerment and continuous improvement. So that achieving these changes supports the cultural lean manufacturing requirements. For technical requirements, the main purpose of six sigma is to eliminate variations that results in reduced defects in the products or services. So that six sigma can support quality at source as a technical lean manufacturing requirement. Also, reduced variations and defects results in streamlining production flow, so six sigma helps the company produce at the rate of the customer demand. 4-4-2-3-3. Kaizen Costing Kaizen costing is the second suggested tool that supports continuous improvement in lean manufacturing system. Kaizen costing is the continuous improvement applied to cost reduction in the manufacturing stage of a product’s life cycle. Kaizen costing reduces the cost of producing existing products by finding ways to increase the efficiency of the production process used in their production. Modarress et al.,(2005) indicated that kaizen costing activities focus on continual small incremental product cost improvements in the manufacturing phase, as opposed to improvements in the design and development phase.
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In kaizen costing, management will set the cost reduction targets for the product. Then, kaizen costing at the work cell group level is established based on negotiation and agreement between management and the work cell. Once reduction targets are finalized, the work cell has complete freedom in coming up with ways to achieve these targets. Interim results are measured after three months to evaluate if the work cell has progressed toward achieving its target. If the work cell fails to meet progressive targets, the reasons are investigated. It could be that the target was set unreasonably high to begin with, or external factors beyond their control, such supplier constraints contributed to the failure. [Modarress et al., 2005: 1753] The company can establish a value stream map to identify value added and non-value added activities, thus the managers can determine the opportunities for cost reduction. By establishing value stream mapping all value added and non value added activities will be more visible. In this case, all the areas that have waste will be easily detected and eliminated. In this case, the company will direct its efforts only toward the value added activities that need to be improved resulting in saving cost, time and effort. Also, it can be noticed that kaizen costing is considered a valuable tool for the companies adopted lean manufacturing system. Kaizen costing can support the fulfillment of continuous improvement which is considered a cultural lean manufacturing requirement. Also, kaizen costing requires a commitment and involvement from all employees in the company to take into consideration their suggestions and kaizen efforts to be implemented when appropriate. So that, kaizen costing supports the fulfillment of teamwork and empowerment as cultural lean manufacturing requirements. 4-4-3. Distribution Stage Traditionally, the production process has been isolated from both inbound and outbound logistics. But in lean manufacturing system, distribution is not an isolated process. In lean manufacturing system, distribution is where everything begins. The product is there to be delivered because the customer requested it. That is pull system where the production process responds to pull from the customer,
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which requires close connectivity between suppliers, the production process and the customers. In other words, lean manufacturers with a responsive production system should not have any difficulties in meeting customer demands. [Kalagnanam and Vaidyanathan, 2000: 621] 4-4-4. After Sale Service Stage Companies adopted lean manufacturing system will not need to do reworks or repairs because it is assumed that they provide zero defects products to enhance the value created to customers. But in this stage, a company can provide another type of service to the customer such as providing information, resolve issues or technical support. Also, using the internet technology can allow customers to access the company’s web site and make online shopping providing real time chat service that connects online shoppers with customer service representatives, email service that uses routing technology to deliver messages to the most appropriate operator and also self-service Frequently Asked Questions (FAQ). In summary, identification of cost management tools that should be applied by a company seeks to adopt lean manufacturing system is very important not only inside the company but also outside its boundaries. Because the adoption of these suggested tools will support the fulfillment of technical and cultural lean manufacturing requirements. So that in the next section, the second part of proposed framework will be discussed and the researcher will try to propose the cost management tools that should be applied through extended value stream especially in the supplier-buyer (manufacturer) relationship. 4-4-5. Cost Management in Extended Value Stream Companies wish to continue to compete in the global industry, which is characterized by technology, cost, time and quality-based competition, they will need to establish long-term, mutual trust relationships with suppliers and customers. Thus, value stream is a new and more useful unit of analysis than the supply chain or individual firm. Thus, the value stream concept should extends beyond the firm’s boundary to involve both suppliers and customers. Therefore, the relationship between the firm and its suppliers and customers will be described in the following part.
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4-4-5-1.
The Supplier-Buyer Relationship
Ward and Graves (2004) indicated that internal changes alone are not sufficient to maintain competitive advantage. Lean companies outsource a high proportion of the value-added of their products from suppliers. Thus, supplier support is considered a critical factor for the successful implementation of lean manufacturing. Cooper and Slagmulder (2003a) presented the interorganizational cost management as a disciplined approach to manage and coordinate the activities of firms in a supplier network in order to reduce total costs in the network. Supplier base structure for lean company may include for example major and common suppliers which constitutes the supplier network. Major suppliers are responsible for providing a high percentage of outsourced valueadded items and common suppliers provide low value-added items. For simplicity, the researcher will focus on describing the relationship between the buyer (manufacturer) and only major suppliers. Cooper and Slagmulder (2003a) indicated that interorganizational cost management can be undertaken in lean supplier network in which the buyersupplier relations are characterized by interdependence, trust and extensive information sharing. They also identified the major features of lean buyersupplier relations. These features are: Reduced supplier base compared to mass producers. Reducing number of suppliers becomes imperative for companies to choose suppliers who can meet their product development, production and logistics requirements due to high supplier switching costs. The level of the relationship which depends on the extent to which the buyer is relying on the supplier for innovation in product design. The nature of lean buyer-supplier relationship. These relationships are stable overtime, highly cooperative and mutually beneficial. Cooper and Slagmulder (2003b) indicated that there are three major aspects of interorganizational cost management. These aspects are: product design stage, manufacturing stage and increased efficiency of the interface between buyers and suppliers. In the following part, cost management tools that should be applied at each stage will be determined.
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Product design stage. Target costing technique become especially effective when they are linked to form a chain. It acts as a disciplining mechanism for interorganizational cost management during product design. Manufacturing stage. The primary technique to coordinate manufacturing activities in a supplier network is kaizen costing which acts as a disciplining mechanism for interorganizational cost management during manufacturing. Interorganizational kaizen costing starts when the buyer transmits the cost reduction pressure it faces in the marketplace to its suppliers. The focus of the interorganizational kaizen costing process is the production processes the supplier uses to manufacture the items outsourced by the buyer. Also, lean supplier should apply other tools such as theory of constraints and JIT manufacturing, delivery and purchasing to be able to keep smooth continuous flow, avoid any delays or bottlenecks, eliminate all wastes and deliver the required items to the buyer in time. Increased efficiency of the interface between buyers and suppliers. The relationship between supplier and buyer must be one of a cooperative partnership where both parties work together to build a prosperous future. This relationship has some features include: long term contracts, improved accuracy of order filling, improved quality, order flexibility, small lots ordered frequently and continuous improvement in the partnership. 4-4-5-2. The Manufacturer and End Customer Relationship A manufacturing company adopted lean manufacturing system will be able to deliver what exactly the customer wants, at the reasonable price, at the right quantity and when customer wants. So that, the company can create value to customer resulting in raising customer satisfaction level and the company’s profitability. 4-5. Summary Due to the importance of cost management not only inside the company’s boundary but also beyond the company’s boundary, cost management system should be developed to be relevant in companies adopt lean manufacturing system.
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Cost management system should be developed to be relevant in companies adopted lean manufacturing system. This system should involve new tools to overcome the limitations of current tools. CLCM is considered a new cost management tool that links customers’ preferences to the firm’s cost structure. Cost management system should be established inside the firm to determine the appropriate tools being adopted when the firm performs its internal value stream activities in order to support the fulfillment of lean manufacturing requirements. Also, cost management system should be established along extended value stream to involve both suppliers and customers and establish good relationships with them.
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CHAPTER FIVE APPLIED STUDY
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CHAPTER FIVE APPLIED STUDY 5-1. Overview In this chapter, the researcher will apply the proposed framework to determine the appropriate cost management tools to support the fulfillment of lean manufacturing requirements in El-Araby Washing Machines Factory. The researcher selected Home Appliances Industry as one of the El-Araby Group industrial companies in general and selected Washing Machines Factory in particular because this factory started applying some of lean manufacturing tools. The researcher utilized case study methodology and conducted interviews, documentary analysis and observation as methods of collecting data to obtain a clear picture of the current state of Washing Machine Factory and be able to create an obvious map for the proposed future state of this factory after applying lean manufacturing system. In this chapter, Egyptian Home Appliances sector and its importance will be firstly highlighted. Secondly, the case study will be discussed through presenting the characteristics of unit of analysis and methods of collecting data. Finally, the analysis of data and the application of proposed framework will be presented. 5-2. Egyptian Home Appliances Sector: Overview Household-appliances companies produce refrigerators, freezers, washing machines, dryers, dishwashers, stoves, air conditions and microwave ovens. With worldwide economic boom, household-appliances industry grows intensively and benefits from the large potential market. Householdappliances companies struggle to improve their products’ quality and adding new innovative features to cope with the different requirements of the customers and achieving high level of customer satisfaction. Egyptian Home Appliances, or White goods industry as they were commonly called, dates to 1960s when large state-owned companies dominated the domestic production of household appliances. As the economy began to liberalize in the mid-1970s, several privately owned companies started to appear on the manufacturing sector. About 246 companies are active
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on the Egyptian manufacturing scene producing everything from air conditioning units, fans and heaters to refrigerators, dishwashers, washing machines and gas cookers. Home Appliances Industry in Egypt becomes a most important and critical one. There are some factors that contribute to this importance resulting in increasing the pressure on this sector. These factors are as follows: Egypt is considered the oldest industrial base in Middle East and Africa for most products including household appliances. Between 2001 and 2007, output of the Egyptian household appliance industry increased by about EGP 33.6 billion, an increase of 54%. The industry’s increase in output has been supported by surging domestic demand which has been growing at an approximate rate of 6% on average per year. Household appliances are one of Egypt’s promosing export sectors. Development and growth of the domestic market. Due to free trade agreements that include the European Union, Egypt is uniquely positioned to help white goods manufacturers gain access to larger consumer markets and thus realize significant economies of scale. Evolution of the consumption pattern of the Egyptian family. Most of the customers become more luxurious and prefer buying branded products because of prestige, also the customers demand products at highest level of quality, reasonable price and with different designs. Development of Cost Management. Increased costs have forced the home appliance industry to review their existing practices. Some companies adopt aspects of lean manufacturing and others outsource parts of the development or manufacturing process. According to these factors which increase the pressure on Home Appliance Industry, the researcher believes that applying some of cost management tools is so vital to ensure that the requirements of lean manufacturing system are fulfilled. In this case, these companies would be able to adopt lean manufacturing system resulting in meeting customers’ needs and competing effectively in both domestic and foregin markets. So that the purpose of this study is to propose a framework for cost management system for Egyptian Home Appliances manufacturer (El-Araby Washing Machines Factory) assuming this factory adopts some of the lean manufacturing concepts.
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5-3. Case Study Design 5-3-1. The Main Company: Toshiba El-Araby Group El-Araby Group is one of the most successful and respected industrial companies in Egypt. It established in 1964 and engaged in both manufacturing and marketing engineering products. The Group is dedicated to providing high quality products that incorporate high technology in order to satisfy the needs of the customers. El-Araby Group comprises six industrial and commercial companies, manufacturing and marketing a range of more than 330 products, adopting the latest technology and the most sophisiticated shop floor assembly lines. The Group consists of the following companies: 1. 2. 3. 4. 5. 6. 7.
El-Araby company for trade and industry. El-Araby company for air conditioning cooling industry. El-Araby company for home appliances. El-Araby company for engineering industries. El-Araby company for lighting technology. El-Araby company for home appliances marketing. El-Araby Association for social development “non-profit charitable institution”.
About 7246 dedicated workers, 444 highly qualifed engineers and 3066 professional managers are employed by El-Araby Group. They work hard to make El-Araby Group one of the most renowned among Egypt’s successful and modern industrial ventures. The following figure (5-1) shows the organizational chart for El-Araby group.
86 El-Araby Group Industrial Companies
Trade and industry company
Refrigerators factory
Engineering industries company
Air conditioning and cooling industry company
Washing machines factory
Lighting technology company
Vacuum cleaner factory
Fans factory
Home appliances industry company
Ventilating fans factory
Water heat factory
General manager for washing machines factory
Senior manager for sales and marketing Hydroulic piston manager
Operations control manager
Senior production manager for half automatic machines
Assembly manager
Senior production manager for full automatic machines
Senior manager for maintenance
Maintenance planning manager
Electrical maintenance manager
Mechanical maintenance manager
Maintenance planning engineer
Electrical maintenance engineer
Mechanical maintenance engineer
Senior manager for HRM
Senior manager for quality assurance
Quality assurance director
Inspection quality director
Quality control director
Figure (5-1): The Organizational Chart For El-Araby Group
Senior manager for R&D
Production engineering management
Senior manager for engineering management
Product engineering management
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5-3-2. Unit of Analysis: El-Araby Washing Machines Factory El-Araby Group has witnessed many strategic stages since it was established in 1964. Today, it has become one of the most important industrial and commercial entities in Egypt and Middle East. Since the group was established, it has adopted the Japanese production philosophy and culture in some of its factories like Washing Machines Factory. Therefore, the researcher selected this factory to be the unit of analysis in this study. A. The Manufacturing Process of Washing Machines Factory: The Washing Machines Factory produces about 10 models of half automatic washing machines as follows: Twin Tub washing machines VH-1230S (12 kg). Twin Tub washing machines VH-1210SP (12 kg). Twin Tub washing machines VH-1210S (12 kg). Twin Tub washing machines VH-1000P (10 kg). Twin Tub washing machines VH-1000S (10 kg). Twin Tub washing machines VH-1000 (10 kg). Twin Tub washing machines VH-720P (7 kg). Twin Tub washing machines VH-720 (7 kg). Twin Tub washing machines VH-620P (12 kg). Twin Tub washing machines VH-620 (6 kg). The main inputs used are metal sheets and other semi-finished parts that produced by the plastic factory which is one of the group factories. The three types of suppliers that the factory relies on are El-Araby Plastic Factory, Local suppliers other than the group factories and Foreign suppliers. The following figure (5-2) shows the production layout for El-Araby Washing Machines Factory in which the manufacturing processes needed to produce washing machines can be summarized. The manufacturing processes will be explained in detail as follows: Process No.1: Metal Cabin Forming Process: In this process, the metal cabin is formed by passing metal sheets through three pistons and roller. The time required to process metal sheets is about 2.5 minutes. To produce different models of the washing machines, the time required to setup pistons will be changed. It will take 45-60 minutes.
88 INPUT Preparing legs
HYDROLIC PISTON for metal forming Fixing spin link
Fixing break face
Fixing capacitor
Fixing unreturn valve
Fixing drain hose
Fixing spin motor
Fixing washing motor
Balancing bases for motor
Fixing base with cabin
Fixing plug and earth wire Fixing drain hose and bollows Spin Basket
Fixing pulley
Fixing washing fan
Twin tub
Friction welding machine
Fixing spin basket with machine cabin and base
Bottom metal sheet
Fixing panel plate with base
Fixing wire between base and panel plate
Fixing panel plate
Fixing cover with base panel
Fixing knob and pumb cam
Spin timer
Fixing washing timer
Slide plate
Fixing legs with base
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Full loaded test
Accessories input Insulating test
Fixing back metal sheet
Process #3: Quality Assurance Process
Quality room test
Fixing overflow strainer and drain strainer
Process #4 : Packing Process
Cleaning outside surface with tinner
Fixing lower part of carton
Fixing strainer with filter
Filter
Branch line
Main line
Figure (5-2): El-Araby Washing Machines Factory Production Layout
Packing
Final product
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Process No.2: Assembly Process: The main assembly line in the Washing Machines Factory is being supported by three subassembly lines. These lines are as follows: 1. The machine base assemble line. This line involves the following processes: Finxing legs with the base of washing machine. Balancing bases for motor. Fixing washing and spin motors. Fixing capacitor. Fixing break face. Fixing spin link. Fixing base with cabin. Fixing plug and earth wire. 2. The spin basket assembly line. This line involves the following processes: Fixing twin tub. Fixing washing fan. Fixing pulley. Fixing drain hose. Fixing unreturn valve. Fixing drain hose and bollows. Fixing spin basket with machine cabin and base . Fixing bottom metal sheet. 3. The panel plate assembly line. This line includes the following processes: Fixing slide plate. Fixing washing and spin timer. Fixing knob and pumb cam. Fixing cover with base panel. Fixing panel plate with base. Fixing wire between base and panel plate. The final step in the assembly process is to fix the back metal sheet of the washing machines.
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The time required to assemble each unit of washing machine is approximately 34 minutes. After assembling the main parts of the washing machine, quality controls tests are made to ensure the adhernece of the machines to the quality criteria. These tests are: full loaded test and insulating test. Process No.3: Quality Assurance Process: In this process, the final product (washing machine) is checked to ensure the quality of the product shape and performance. It can be done through performing a complete test on a sample of the washing machines produced. If any defect has been detected, the corrective action will be immediately taken to identify the cause of the defect, solve it and keep the production line smoothly. Process No.4: Packing Process: This process involves the following steps: 1. 2. 3. 4. 5. 6. 7.
Cleaning outside surface with tinner. Fixing the lower part of carton. Fixing the washing machine with carton. Fixing overflow strainer and drain strainer. Added the required accessories. Packing washing machines. Putting the filter and stapling the carton.
After the production layout for the El-Araby Group has been identified, it is vital to determine that El-Araby Group is pursing to apply lean manufacturing system in its factories especially Washing Machines Factory. 5-3-3. Data Collection Methods The researcher used in this study interview, observation and documentary analysis as methods of collecting data. First: Interview Hussey and Hussey (1997) stated that “ interview is a method of collecting data in which selected participants are asked questions in order to find out what they do, think or feel. Interviews make it easy to compare answers and may be face-to-face,
92 voice-to-voice or screen-to-screen conducted with individuals or a group of individuals”.
Interview questions may be described as open-ended, where each respondent can give a personal response or opinion in his or her own words. Other questions can be described as closed, where the respondent’s answer is selected from a number of predetermined alternatives. Open questions offer the advantage that the respondents are able to give their opinions as precisely as possible in their own words. [Hussey and Hussey, 1997: 166] The researcher met 7 interviewees to collect the required data about the general strategy of the El-Araby group as a whole, the main manufacturing processes in the Washing Machines Factory and the main lean manufacturing requirements that are fulfilled in the Washing Machines Factory. Interviewees are as follows: General manager of Washing Machines Factory. The manger of production department in Washing Machines Factory. The manager of maintenance department in Washing Machines Factory. One qualtiy assurance engineer. One maintenance engineer. Two technicians. The researcher began the interview sessions with general questions and then moved to more specific questions. These questions are shown in Appendix B. Second: Observation According to Hussey and Hussey (1997), observation is a method for collecting data. It can be conducted in a laboratory setting or in a natural setting. There are two ways in which observation can be conducted: nonparticipant and participant observation. The purpose of non-participant observation is to observe and record what people do in terms of their actions and their behaviour without the researcher being involved. Participant observation is a method of collecting data where the researcher is fully involved with the participants and the phenomena being researched. The aim is to provide the means of obtaining a detailed understanding of values,
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motives and practices of those being observed. [Hussey and Hussey, 1997: 166] In order to gain a detailed description about the production layout of Washing Machines Factory, main processes within this factory, the time required to finish each process and the number of workers needed to perform each process, the researcher made a tour inside the factory. Third: Documentary Analysis Using written documents such as reports and flow charts enabled the researcher to obtain an obvious and complete picture about the organizational structure of the Washing Machines Factory and its production layout [see figures (5-1) and (5-2)]. Also, it provided the researcher with specific details that support the researcher in creating value stream mapping which will appear in the next section. Cultural and Technical Requirements Fulfilled in Washing Machines Factory After collecting the required data, the researcher will try to determine the main lean manufacturing requirements that are fulfilled in Washing Mashines Factory. Cultural and technical lean manufacturing requirements which are fulfilled in the Washing Machines Factory can be summarized in the following table (5-1) as follows: Table (5-1): Cultural and Technical Lean Manufacturing Requirements Fulfilled in The Washing Machines Factory
Cultural requirements Lean culture Lean partnership Continuous improvement
Technical requirements Stability Quality at source Visual management Setup reduction
The cultural lean manufacturing requirements that fulfilled in the Washing Machines Factory can be explained as follows: 1. Lean Culture. Washing Machines Factory recognized that applying lean principles or tools without cultural change will be failed and benefits of lean can not be achieved. So that the factory struggles to change its culture through the following points:
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The factory develops a leader not a manager to implement lean principles. The factory depends on teamworks and each team is selfdirected or managed and be supervised through a leader or coach. Also, the factory provides job description for each worker and engineer in each team to determine their roles and responsibilities. Employees are empowered in the factory. They are involved in making decisions, are self-inspected looking for wastes to be eliminated and be able to suggest new ideas and express their opinions. The factory has a strong moral and financial incentive systems to motivate and encourage the workers and engineers. These systems are based on the workers’ evaluation for their quality and productivity. The factory provides regular training programs to enhance the workers’ skills and capabilities. 2. Lean Partnerships. The factory has a good relationship with both suppliers and customers. The factory has a good relationship with both local and foreign suppliers. The factory evaluates the suppliers according to their quality level, price, response and support. Then the factory selects the best suppliers and has a contract with them to ensure that the required materials will be received in time, at high quality level and in small quantity. Also, the factory has a good relationship with customers. The factory executes a customer focus analysis to determine the customers needs and their opinions about the products’ quality, price and warranties. It can be done through questionnaires, face-to-face meetings or via a website. 3. Continuous Improvement. Continuous Improvement is a business culture where entire workforce of Washing Machines Factory is involved daily in making beneficial changes to the operations that increase customer value. Washing Machines Factory uses Kaizen as a lean tool and be considered ongoing attitude to achieve continuous improvement. Technical lean manufacturing requirements that are fulfilled in the Washing Machines Factory are as follows:
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1. Stability. Washing Machines Factory begins achieving stability as a starting point for implementing lean manufacturing system. Washing Machines Factory achieves stability in terms of Manpower, Machines, Materials and Methods- 4Ms as follows: A. Manpower. Washing Machines Factory provides regular training programs for workers, engineers and technicians to continuously improve their skills and capabilities and be able to do different jobs at the same time. B. Materials. Washing Machines Factory holds buffer raw materials inventory not more than 30 days, work-in-process inventory not more than 2 days and finished goods inventory not more than 2 weeks. C. Machines. Washing Machines Factory is interested in machine availability and uptime as a starting point toward applying lean manufacturing system. Therefore, the factory adopts both Total Productive Maintenance (TPM) and 5S. Total Productive Maintenance (TPM). TPM is a lean tool used to attack issues with the machines to enhance Overall Equipment Effectiveness (OEE) like machine breakdowns, machine setup, stoppage of machines, slow cycle time , defects and reworks. TPM pillars in Washing Machines Factory is shown in the following figure (5-3 ):
TPM Pillars
Kaizen
Planned maintenance
Quality maintenance
Saftey, health and environment
Development management
Education and training
5S
Figure (5-3 ): TPM Pillars in Washing Machines Factory
Also, there is a regular maintenance for machines in the Washing Machines Factory ( periodically, monthly or annually). 5S or Visual Workplace. Washing Machines Factory uses 5S to keep machines clean. It is considered one of the TPM pillars that leads to reduce workplace waste, optimize productivity by
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maintaining an orderly workplace and eliminate non value added activities. D. Methods. To have standardized methods, Washing Machine Factory uses standardized work as a lean tool. This tool refers to a detailed, documented and visual system by which workers develop and follow a series of predefined process steps. 2. Quality at Source. There is a quality plan in Washing Machines Factory that is based on preventing the occurance of errors or defects at source to ensure the quality of washing machine. Washing Machines Factory uses Poka-Yoke and Jidoka as lean tools to achieve this purpose. By using Poka-Yoke which is also called Error-Proofing or Mistake-Proofing, quality is designed into a product in design stage or manufacturing stage. If quality is designed into the product during design stage, it will be ensured that assembly processes will be correctly done and it is called error-proofing. But if it does not occur, it is possible to build the quality into manufacturing process which is Mistake-Proofing. Also, Washing Machines Factory uses Jidoka as a lean tool to detect defects if occurred to be eliminated. In this case, the factory uses the buffer inventory to meet the customer’s demands and avoids the delays. 3. Visual Management. Washing Machines Factory uses visual system to enable the operators and workers be well informed about production procedures and other important information for them. Also, operators check the machines daily to expose any deviations, identify root cause by using 5 Whys as a lean tool and implement correct actions. 4. Setup Reduction. Washing Machines Factory struggles to reduce the setup time to a minimum level. Approximately, the time required to setup a machine is 5 mintues but this time changes if the washing machine model differs.
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5-4. Data Analysis After conducting the interview sessions, taking a tour in the factory, reviewing and analyzing some written documents, the researcher obtained an obvious picture of the Washing Machines Factory. The researcher had a detailed description to the manufacturing processes, the inputs required for each process like material, labor and time and also number of units produced. The researcher analyzed the interviewee’s responses, taken notes and written documents to determine which cost management tools are appropriate to be applied in the Washing Machines Factory in order to support the fulfillment of lean manufacturing requirements and how the framework for cost management system relevant to such factory could be constructed. 5-4-1. Value Stream Mapping (VSM) In order to propose a framework for cost management system in lean manufacturing environment for El-Araby Washing Machines Factory to determine the appropriate cost management tools that support the fulfillment of the lean manufacturing requirements, VSM is needed. El-Araby Washing Machines Factory has only one value stream which produces ten models of washing machines that involves the same processes but with different inputs for each model. Through value stream mapping, all processes occurring along a value stream, the time required for each process, number of workers and wasteful activities will be identified. 5-4-1-1. The Current State Map: The researcher uses the data presented in the flow chart of production layout of Washing Machines Factory as shown in the figure (5-4) to draw current state map for the value stream in this factory. The following figure shows the current value stream map for El-Araby Washing Machines Factory. Also, key VSM icons used in this study are shown in Appendix A.
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From the current value stream map for El-Araby Washing Machines Factory, it can be noticed that the production system based on monthly schedule made by the customer service according to the forecasts from the customers. Also, shipments are daily scheduled depending on customers’ orders. Therefore, there are some issues which need to be changed before applying lean system. These issues are as follows: Production should be based on pull system not a push system according to the customers’ orders in order to avoid creating huge amount of inventories. The process cycle times are not balanced among processes that may create bottlenecks resulting in a waiting waste. There is a great deal for inspection and reworks that refers to existing many errors or defects. The current state value stream map shows the value stream information as the process is currently designed like flow of production, production cycle time, setup time, inventory and other wastes that impede the flow of product. But, future state value stream map shows process flows as they will be in the future, when more lean improvement has been implemented [Maskell and Baggaley, 2004: 342]. So that, future state value stream map for El-Araby Washing Machines Factory will be initiated in the following part.
99 Suppliers - Local supplier - Foreign supplier
Customer service
Purchasing
Customers
Approximately 2000 units per month
Monthly schedule - once monthly for local supplier - every 3 months for foreign supplier
Daily ship schedule Daily
Metal forming process
I
2 people 4 machines
Assembly Process
I
57 people 1 machine
Quality assurance process
Shipping
16 people
I
2 people 1 machine
C/T =150 sec.
C/T =16 min.
C/T= 68 sec.
C/0 =45 min.
700 units/day
One washing machine as a sample/ hr.
120 Cabin/hr
Packing Process
I
14 people C/T = 132 sec.
Figure (5-4) : Current Value Stream Map for El-Araby Washing machines factory
I
C/T = 15 min.
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5-4-1-2. The Future State Map: The future state value stream map is considered as a vision for the Washing Machines Factory in the future. There are many changes will be occurred compared to the current state when lean improvement has been implemented. The future state value stream map for El-Araby Washing Machines Factory can be shown in the following figure (5-5). According to the future value stream map for El-Araby Washing Machines Factory, some changes from the current state should be done as follows: A Kanban system should be used to pull customers’ orders instead of scheduling them and to pull the required materials from suppliers. The contracts between the factory and suppliers should be renegotiated to be based on responsing to kanban daily order rather than monthly for local suppliers and three months for foreign suppliers. The cycle time for assembly process should be reduced through redesigning the work cell to keep the work flow smoothly. Quality should be improved and designed in the stage of designing the washing machines to prevent the occurance of errors or defects and keep the quality at source. The lead time should be reduced by adopting lean manufacturing system resulting in reducing number of workers in each cell. So that free-up resources can be deployed to other value added activities in the El- Araby Group’s Factories.
101 Supplier
Purchasing
Customer service
Forecast
Forecast
Customers
Daily orders
Daily
Daily orders
Daily Daily OXOX
Batch
Metal forming process - people - machine C/T ≤ 150 sec. C/O ≤ 45 min. Cabins/hr
Assembly process ... People … Machine C/T ≤ 16 min. ... Units /day
Quality assurance process
Packing process
Shipping
... People … Machine
.. . People
... People
C/T ≤ 68min.
C/T ≤ 132 sec.
C/T ≤ 15 min.
... Washing machine as a sample / hr
Figure (5-5): Future value stream map for EL-Araby Washing Machines Factory
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5-4-2. Applying The Proposed Framework In this section, the researcher will try to apply the proposed framework for cost management system on the El-Araby Washing Machines Factory to determine the most appropriate cost management tools to be applied in order to fulfill lean manufacturing requirements. The proposed framework can be presented in the following figure (5-6) 5-4-2-1. Cost Management Tools Machines Factory
Applied Inside The Washing
The following part starts with the first part of the proposed framework to highlight the suggested cost management tools that should be applied by the Washing Machines Factory moving toward implementing lean manufacturing system when performing the key internal value stream’s activities. 5-4-2-1-1.
Market Analysis, Research and Development and Design Stage
During this stage, life cycle costing technique is useful for the El-Araby Washing Machines Factory moving toward implementing lean manufacturing system because this tool enables the Washing Machines Factory to identify high cost contributers across washing machine life cycle. In other words, life cycle costing can identify non value added costs across washing machine life cycle to be eliminated. In this case, opportunities for cost reduction will be highlighted. Also, target costing technique is useful for Washing Machines Factory moving toward applying lean manufacturing system because target costing is a detailed action plan for ongoing lean improvement resulting in waste elimination and achieving continuous improvement. Target costing can support the fulfillment of some lean manufacturing requirements like teamwork, lean partnership with suppliers and customers and continuous improvement. Life cycle costing and target costing are built (external focus) to determine the customer’s preferences then take this information and turn it inward with the aim of reducing the costs (cost driven).
103 Inside Washing Machines Factory Cost management tools Including some of lean tools
Marketing (e.g.market research)
-Target costing -Life cycle costing
R&D Design
-Customer driven lean cost management
-Value stream costing -Features and characteristics product costing
Inbound logistics
Manufacturing
Suppliers Purchasing
Product costing purpose
Operational Continuous control improvement purpose purpose
Outbound logistics Distribution
-Theory of constraints -Just -in- time
-Six sigma -Kaizen costing After sale service Figure (5-6): A Proposed Framework for Cost Management System in El-Araby Washing Machines Factory Flow of information Supporting cost management tool at each stage of washing machine factory's internal value stream
Customers
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The alternative to these tools is customer-driven lean cost management (CLCM). This tool is considered a new cost management technique that builds customer perspective directly into the ongoing cost management system to link customer’s preferences with firm’s cost structure. This tool is useful for Washing Machines Factory moving toward applying lean manufacturing system because it supports the fulfillment of some of lean manufacturing requirements like lean partnership with customers. 5-4-2-1-2.
Production Stage
During this stage, Washing Machines Factory should apply some appropriate cost management tools to support three purposes during the production stage. The purposes are: product costing, operational control and continuous improvement. First: Product Costing: Value stream costing is considered a Washing Machines Factory. By using this viewed as a value stream and assigning all stream as direct costs. So, there is no need costs.
new tool that is relevant for tool, the production process is costs associated with the value for allocations of many indirect
By using this tool , the primary driver of washing machine’s cost through value stream will be the rate of flow of washing machine that is determined by the rate of flow of the washing machine through bottleneck operation within value stream. If the washing machines made by the value stream do not have the same cycle time, there is another valuable tool the Washing Machines Factory can use that is called “ Feature and Characteristics Product Costing (F&C)”. F&C product costing determines the features and characteristics of the washing machine that affect the rate of flow through the value stream. Second: Operational Control: Operational control system is important for Washing Machines Factory to move toward applying lean manufacturing system. Because operational
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control system encourages zero inventories, relies on delivering the products to customers at the right time and supports flow and pull production concepts. Therefore, there are two techniques that should by adopted by Washing Machine Factory to achieve these objectives: JIT manufacturing and Theory of Constraints (TOC). JIT is considered as a prerequisite to lean manufacturing system and Washing Machines Factory adopts this technique. The researcher will determine the main elements of JIT manufacturing that have been adopted by such facory as follows: 1. Using of both push and pull system. El-Araby Washing Machines Factory adopts both push and pull systems. The factory’s parts are pushed in large quantities and stored to be assembled when there is actual customer demand. When customers request washing machine, the washing machine’s parts are assembled into a final washing machine to be shipped to customers. 2. Effective preventive maintenance of equipment. Washing Machines Factory is interested in machine availability and uptime as a starting point toward applying lean manufacturing system. Therefore, the factory performs a regular maintenance for machines ( periodically, monthly or annually) to avoid costly down time machines breakdowns. 3. Achievement of reliable suppliers’ relations. The factory obtains its raw materials and other parts from El-Araby plastic factory, local suppliers and foreign suppliers. The factory has a good relationship with suppliers and communicate with them through a website to save time, cost and effort. 4. Maintaining of well-trained and motivated workforce. Washing Machines Factory provides training programs to enhance the workers’ skills and capabilities and be able to do different tasks at the same time. The factory motivates the workers through a strong moral and financial incentive systems according to their productivity.
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5. Emphasis on reducing lead time and setup time. The Washing Machines Factory struggles to reduce the setup time to a minimum level. Approximately, the time required to setup a machine is 5 mintues but this time changes if the washing machine model differs. Also, the lead time per washing machine is reduced from 28 seconds in 2011 to 18 seconds in 2013. Through applying TOC, Washing Machines Factory can identify the constraints to be removed and keep the production line smoothly flow and produce at the customer demand rate. TOC is considered an operational tool but at the same time it has a strategic horizon. Because the bottlenecks should not only be identified within the Washing Machines Factory’s boundary. In other words, the factory should identify bottlenecks through the extended value stream to involve both suppliers and customers. So that, TOC supports the fulfillment of some of lean manufacturing requirements like continuous improvement and relationships with suppliers and customers. Third: Continuous Improvement: Although operational control methods can provide significant incentives for continuous improvement, supplementary techniques are required to manage cost reduction and support waste elimination. So that Washing Machines Factory should adopt Six Sigma and Kaizen costing to achieve this purpose. By adopting six sigma, Washing Machines Factory can emphasize on the elimination of variation, focus on doing the things right, combining of customer knowledge with core process improvement efforts and a subsequent improvement in company sales and revenue growth. Also, six sigma can support the fulfillment of lean manufacturing cultural requirements like changes in the Washing Machines Factory’s culture such as leadership, teamwork, empowerment, continuous improvement. Quality at source is considered a technical requirement that is fulfilled by adopting six sigma. So that, it is considered a valuable tool to the Washing Machines Factory moving toward applying lean manufacturing system.
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Also, Washing Machines Factory should use kaizen costing in the manufacturing stage of the washing machine’s life cycle to reduce the cost of producing existing washing machines by finding ways to increase the efficiency of the production process used in their production. Kaizen costing is considered a valuable tool for the Washing Machines Factory moving toward applying lean manufacturing system. This tool can support some of cultural lean manufacturing requirements like teamwork, empowerment and continuous improvement. 5-4-2-1-3.
Distribution Stage
Distribution is where everything begins in the Washing Machines Factory. The factory struggles to provide what customers need at the right time. That is a pull system where the production process responds to pull from the customer, which requires close connectivity between suppliers, the production process and the customers. Also, the factory has special trucks to distribute the products to the customers as required. 5-4-2-1-4.
After Sale Service Stage
The Washing Machines Factory has a good relationship with customers. The factory executes a customer focus analysis to determine the customers needs and their opinions about the products’ quality, price and warranties. It can be done through questionnaires, face-to-face meetings or via a website. The El-Araby Group’s website allows the customers to access it and make online shopping providing real time chat service that connects online shoppers with customer service representatives. The following part will presents the second part of proposed framework to propose the cost management tools that should be applied by Washing Machines Factory through its extended value stream especially in the supplier-buyer (manufacturer) relationship. 5-4-2-2. Cost Management In Washing Machines Factory’s Extended Value Stream Wu (2003) indicated that value stream is a new and more useful unit of analysis than the supply chain or individual firm. Thus, the value stream
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concept that extends beyond firm’s boundary to involve both suppliers and customers. Therefore, the relationship between the Washing Machine Factory and its suppliers and customers will be described in the following part. 5-4-2-2-1.
The Supplier-Buyer Relationship
Supplier support is considered a critical factor for Washing Machines Factory to be able to apply lean manufacturing system successfully. Supplier base structure for Washing Machines Factory includes El-Araby plastic factory, local suppliers and foreign suppliers. Cooper and Slagmulder (2003a) presented the interorganizational cost management as a disciplined approach to manage and coordinate the activities of firms in a supplier network in order to reduce total costs in the network. Therefore, Washing Machines Factory should adopt this discipline to achieve this purpose. There are three major aspects of interorganizational cost management. These aspects are: product design stage, manufacturing stage and increased efficiency of the interface between Washing Machine Factory as buyers and suppliers. 1. Product Design Stage. Target costing technique become especially effective when they are linked to form a chain between suppliers and Washing Machines Factory. 2. Manufacturing stage. The primary technique to coordinate manufacturing activities in a supplier network is kaizen costing which acts as a disciplining mechanism for interorganizational cost management during manufacturing. 3. Increased efficiency of the interface between Washing Machines Factory and suppliers. The relationship between the supplier and the factory must be one of a cooperative partnership where both parties work together to build a prosperous future. 5-4-2-2-2.
The Washing Machine Factory and End Customer Relationship
The Washing Machines Factory has a good relationship with customers to provide what exactly the customers want, at the reasonable price, at the
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right quantity and at the right time. The factory communicates with customers to determine their needs and opinions about the products through open meetings, website or through the questionnaires. 5-5.
Summary
After conducting the case study in Washing Machines Factory, the researcher concluded the following results: Washing Machines Factory started implementing lean manufacturing system but it does not reach the final stage of implementing this system due to the financial losses that occurred to the El-Araby group since two years ago. These financial losses were considered an important barrier to implement lean manufacturing system. Washing Machines Factory adopted some of the lean tools like 5S and TPM, 5 Whys, Kaizen, Standardized Work and Poka-Yoke and Jidoka. Lean culture, lean partnership and continuous improvement are fulfilled in the Washing Machines Factory as cultural lean manufacturing requirements. Stability, quality at source, visual management and setup reduction are fulfilled in Washing Machines Factory as technical lean manufacturing requirements. Most of cost management tools are theoritically not practically applied in Washing Machines Factory. To some extant, Washing Machines Factory applies Just-In-Time Manufacturing (JIT) as a cost management tool and a prerequisite to lean manufacturing system. The proposed framework would improve the current cost management system in Washing Machines Factory, support the fulfillment of cultural and technical lean manufacturing requirements and help the factory prepare to implement lean manufacturing system.
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CHAPTER SIX CONCLUSION, RECOMMENDATIONS AND SUGGESTION FOR FUTURE RESEARCH
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CHAPTER SIX CONCLUSION, RECOMMENDATIONS AND SUGGESTIONS FOR FUTURE RESEARCHES
6-1.
Conclusion
The main goal of this research was to propose a framework for cost management system that combine different cost management tools that may be appropriate to support the fulfillment of lean manufacturing requirements to improve customer value. Within this framework, the researcher determined that the main limitation of current techniques is that these techniques are built in the market (external focus) to determine the customer’s preferences then take this information and turn it inward with the aim of reducing the costs (cost driven). The new cost management technique to be adopted to overcome the limitations of the current techniques is customer driven lean cost management technique (CLCM) which link customer perspective with the firm’s spending patterns. The researcher utilized case study methodology and selected Toshiba El-Araby Washing Machines Factory as a unit of analysis. Also, the researcher conducted interviews, taking a tour inside the factory and reviewed and analyzed some written documents in order to collect the required data for this study. After analyzing the collected data, the researcher enabled to determine which cost management tools are appropriate to be applied in the Washing Machines Factory in order to support the fulfillment of lean manufacturing requirements and how the framework for cost management system relevant to such factory could be constructed. The researcher applied the proposed framework on Washing Machines Factory and found that Washing Machines Factory started implementing lean manufacturing system, some cultural and technical lean manufacturing requirements are fulfilled and most of cost management tools are theoritically not practically applied.
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So that, the proposed framework would improve the current cost management system in Washing Machines Factory, support the fulfillment of cultural and technical lean manufacturing requirements and help the factory prepare to implement lean manufacturing system. After conducting this research, the researcher concluded the following points: Companies in new business environment today should change their manufacturing system to cope with the global competition in the new business environment in order to compete effectively and be able to grow and survive. So that companies should adopt lean manufacturing system and shifting away from mass production. The main goal of lean manufacturing system is to provide what the customers need at the right time, high level of quality and at reasonable price. There are cultural and technical requirements for implementing lean manufacturing system. These requirements must be firstly fulfilled to enable companies implementing lean manufacturing system. Cultural lean manufacturing requirements must be firstly fulfilled to support the fulfillment of technical lean manufacturing requirements. Lean manufacturing and technological advances are providing organizations with the means to compete. Lean manufacturing enables organization to compete on a global basis and applying technological advances provides the organization with the means to improve its performance in terms of quality, cost and time resulting in improving the value created to customers. Companies are now beginning to recognize that traditional costing and accounting methods may conflict with these developments. It leads to increase the need to cost management system based on technological advances to remedy the limitations of current cost management techniques.
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6-2.
Recommendations
The researcher recommended the following: First: companies that need to grow, survive and compete on a global basis in new business environment should pay their attention to their production systems and the means of technological advances. Second: lean companies should have an effective cost management system inside the company and in its extended value stream. Third: lean companies should recognize the role of information technology in performing the activities of value stream in order to enhancing the value created to customers and save time, cost and effort. Forth: lean companies should recognize the importance of the interrelationships among lean tools and its role in supporting the fulfillment of lean manufacturing requirements. Fifth: lean companies should recognize the advantages of having partnership with lean suppliers. 6-3.
Suggestions for Future Research
There are several opportunities for future researches: First: future research can propose a framework for cost management system in a lean service organization. Second: future research can be conducted to determine how information technology supports the implementation of lean manufacturing tools. Third: future research can be conducted to determine to what extant the lean manufacturing requirements in manufacturing companies differ from the lean requirements in service companies. Forth: future research can be conducted to demonstrate how lean manufacturing system can be adapted from the discrete to continuous manufacturing environment.
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Fifth: future research can be conducted to diffuse lean production through the supply chain to create lean suppliers. Sixth: future research can be conducted to integrate lean management with six sigma highlighting how lean organizations can gain from six sigma and how six sigma organizations gain from lean management.
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APPENDIX A KEY VALUE STREAM MAPPING SYMBOLS
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VSM Process Symbols
Supplier/customer
This icon represents the supplier when in the upper left, the usual starting point for material flow. The customer is represented when placed in the upper right , the usual point for material flow.
Department or manufacturing process : the top of the icon shows the name of the department or the process being mapped. The bottom of the icon shows resources, information, or a relevant lean-enterprise technique. Data box: this is a place for key data such as C/T (Cycle Time), time ( in seconds) that elapses between one part coming off the process to the next part coming off. C/O (changeover time, also called setup time) - time to switch from producing one product on the process to another.
Process
C/T = C/O = Batch = Avail = Data box
Value Stream Map Material Symbols
I
This icon shows inventory between two processes. While mapping the current state, the amount of inventory can be approximated by a quick count and that amount is noted beneath the triangle.
This icon shows the movement of raw materials or components that are "pushed" by the production process rather than being requested by the customer. This icon represented movement of raw materials from suppliers to the receiving dock/s of the factory. Or, the movement of finished goods from the shipping dock/s of the factory to the customers.
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Value Stream Map Information Symbols A straight, thin arrow shows general flow of information from memos, reports, or conversation. Frequency and other notes may be relevant. This wiggle arrow represents electronic flow of data.
Production kanban : A card used to initiate the production of a certain item. (used for kanban systems only).
A location where kanban signals reside for pickup. Often used with two-card systems to exchange withdrawal and production kanban. Signal kanban : a card used to initiate a batch operations signal kanban is used to trigger production of a specified number of containers when a reorder point is reached. XOXO Load leveling
This icon is a tool to batch kanbans in order to level the production volume and mix over a period of time.
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APPENDIX B INTERVIEW QUESTIONS
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First: Questions for Executive manager and Vice-General manager of El-Araby Group: 1. What is the main contribution of El-Araby Group to the home appliances sector in the Africa and Middle East in the future ? 2. What is the position that El-Araby Group needs to be dominated in the future ? In other words, how does the El-Araby Group view itself in the future ? 3. What is the business strategy adopted by the Group ? 4. Do you have a formal organizational structure ? If yes, please give me a copy.
Second: Questions for Manufacturing department manager of washing machine factory: 1. Is the factory organized in terms of departments, product lines, manufacturing cells and/or other organization. (please specify) 2. What is the production strategy followed by the factory: produce based only on customers’ orders or produce in large quantities and store to be sold later ? 3. Does the factory have different types of inventories like raw material, work-in-process or finished goods between manufacturing processes ? 4. If the company adopts lean manufacturing system, how can the factory deal with unexpected demands? In other words, does the factory have buffer inventory to deal with unexpected circumstancies? 5. Does the factory adopt up to date production technology? Please specify in details. 6. What is the nature of the factory’s relations with both local and foreign suppliers?
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7. Is the committed material reach the factory just in time? 8. Does the factory maintain sufficient funds for Research and Development ( R&D) activities to meet customers’ needs ? 9. How can the product (washing machine) be priced? 10. What are the policies followed by the factory to implement the marketing and distribution activities? 11. Does the factory announce its products through a web site? 12. What are the main actions taken to maintain customers’ loyalty? Are there additional services provided to the customers after sale? If yes, please specify in details. 13. Does the factory have clearly defined roles and responsibilities for each engineer and worker? 14. What are the actions taken by the factory to retain its employees? 15. In your opinion, are the employees aware of the technological advances in the production?
Third: Questions for Engineers (Maintenance and Quality assurance): 1. What are the main manufacturing processes required to produce one washing machine? 2. Do the manufacturing processes differ according to the model of washing machine? 3. How much time required to finish each process? 4. How many workers needed to implement each process?
5. Does the factory provide training programs to enhance the workers’ skills?
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6. Is there regular maintenance for machines? 7. What are the main procedures followed to ensure the washing machine’s quality? 8. What is the acceptable level of defective units per batch? 9. If there are defective units, what are the actions taken to deal with them? 10. How many times the machines are maintained? 11. What the percentage of time is spent on set up for each machine? 12. If the machines are breaking down, who is responsible for repairing them? 13. Is the manufacturing equipment can produce many different types of washing machines? In other words, a new machine can be produced using the existing equipment?
Forth: Questions for technicians and workers: 1. Do the workers and technicians have the flexibility in performing different tasks, suggesting new ideas and making decisions? 2. How can the workers deal with machines’ breaking down? 3. How can the factory encourage its workers and technicians to perform their tasks (i.e bonus, housing, clothes or any other incentives)? Please specify.
