Cover Feature Principles of World Class Manufacturing This paper seeks to bring out the contrast between the traditional and the new ideals of manufacturing that seem to be responsible for the differences in the performances of the two systems. The paper also examines carefully the likely fall out of these developments on the cost management profession. anagement of manufactu- ring operations isa phen- omenon of the 20th cen- tury. Beginning with an era of indus- trialisation in the second half of the 18th century, themanufacturing acti- vity did not take firm roots until the turn of this century and hence the need for management of manufactu- ring systems did not arise. It was the Ford Production System that laid out the basic principles of Manufactur- ingand Management during the pe- riod 1910-1930. Itwas an era marked by significant contributions to this body of knowledge from stalwarts such as Fredrick Taylor (Scientific Management), Glbreths (Motion & Time study), Schewart (Statistical Quality Control), Henry Ford (Flow line, automation, mass production etc.). Until recently, these thoughts were the guiding philosophy for de- veloping manufacturing manage- ment and control systems for corpo- rateentities globally. As 20th century comes to a close, it was ironical that ‘once again an automobile manufac- turer, The Toyota Production Sys- tem, had to take upon itself the task of rewriting these principles of man- ufacturing management. Proponents of the famous theo- ries, such as “Cultural phenome- non”, and “Deliberate price cutting”, that seem toexplain the unpreceden- {ed rise ofthe Japanese corporations, bet automobiles, or consumer elec- tronics, during the late 70's and early 80's havenow vanished into thin air. The reality has come to stay and “Associate Professor, Indian Institute of Management, Bangalore. the management acountant, eptember 1998 B. Mahadevan* ‘many leading corporate giants such as Ford, GM, Hewlett Packard, Mot- rola, and Xerox seem to have un- derstood the new rules of the game. This paper has been written with two purposes. Firstly, to help cost mana- gement professionals understand ‘what these “new rules” are, and sec- ‘ondly to explore the likely fall out of these to the profession as it gears up itself for the 2ist century. World Class Manufacturing ‘The first shock waves of the imp- ending changes was felt by the auto- mobile giants Ford, Chrysler, and GM during the oil crisis in 1972 when the Toyota Production System shot into prominence. A little later, the story was similar in all the areas where the Japanese companies be- {gan to operate. Perhaps it appeared, {as Taiichi Ohno, the Father of Toyota Production System commented that the strength of a manufacturing system is best tested during an era of recession. While the non-Japanese goods were of high cost and low quality, the Japanese goods were of the other way, viz. low costand high quality. The intention in this writing isnottoreport such stories, since hu- dreds of pages have already been written on this subject matter, but to ‘emphasise that such a phenomenon was possible only because of the “new” principles that govern manu- facturing management and control Although several practitioners and researchers have come out with seemingly different theories of this new principles, all of them have a few things incommon. These charac- teristics could be collectively referred to as the principles of World Class Manufacturing (WCM) (see for de- tails Schonberger 1986). Table 1 lists these characteristics Table Characteristicn of ‘A World Class Manufacturer SLNe. | Characters 1 | Tustin Time Ort Total Quality Management (TOY ‘otal Productive Maintenance (TPM) So a The mrt often misundoriond and hence misnppie of the itt the Just in Time (JIT) system, The core philosophy of JIT is to provide sn onentatonl faeork cont uous seve opportunites orl mination of non-value added activi- ties, JIT systems have brought to limelight the distinction between va- lueadded and non-value added act vities. If due to a poor design of fac- tory layout the jobs travel a few kilo- mores before Ging converted into Suleble product the customers sray not Entered paying ot the excess transportation (Mahad- cyani5Sh) Apepprandencanlng of the JIT philosophy would clarify thay elininatngafetofunanted sthes nated edict time, be it procurement or manuf turing or aistibution, could be schiceThe popular ess ht PE fa scr imesolysyacnor a ye: tem thatusesa pee sear known as KANBAN) along with a few stan- Sart crete to this or are.the fallout of the waste 645elimination process. An organisational framework to expose wasteful activities alone isnot sufficient. It should be complemen- ted by an equally effective organisa- tional framework for continuously eliminating them. A Total Quality ‘Management (TQM) system helps to achieve this purpose by organising theentire work force into small imp- rovement groups, and creating ami idset for continuous improvement. ‘The scope of management account- ants to contribute to this continuous improvement process seems to besi- {gnificant (Kaplan, 1995). The exis- tence of a quality costing system helps to identify areas that need immediate improvement, prioritise the expenditure on such improve- ‘ment projects and evaluate the per- formance, WCM organisations have understood that benefits accrue only when TOM and JIT systems are im- plemented together. The third distinguishing feature ofa WCM is the idea of Total Produc- tive Maintenance (TPM). Contrary to the traditional thinking that main- tenance has to be done only by “qua- lified” maintenance crews, WCM or- ganisations have realised that trans- ferring some of the routine main- tenance tasks to the direct workers themselves would offer numerous benefits. The direct workers will havea sense of ownership of the pro- cess that they perform and will be- ‘come aware of the problems associa- ted with wrong usage/misuse of their facilities. It helps an organisa- tion maintain equipment so often and so thoroughly that it hardly ever breaks down, jams, or misperforms during a production run, In order to put the above three systems in place, it is necessary to breakaway from the rigid classifica- tion of the labour that is characteris- ticof traditional manufacturer. The small improvement group may be performing some maintenance tasks. ‘The group may have to be allowed to perform their own quality checks, Cover Feature and a certain degree of autonomy ‘may have to be granted for schedul- ing and planning of their production tasks. As these may sound very unor- thodox for the traditional mindset. Functional managers may have a feeling of losing control, Personnel managers may not like to brush themselves with the union. It may pose problems for the cost accoun- tant because he may not know how tosegregate the directlabour cost be- tween the direct and the indirect co- mponents that he performs. Alterna- tively the cost accountant may won- deras to how to define direct labour. But the experience of the WCM orge- nisations suggest that the net effect of this isa substantial gain to the or- ganisation. This new prescription of the working life is defined as Em- ployee Involvement. The last feature which is seen to be common among WCM organisa- tions is the simplicity with which they function. The best examples could be seen in the Toyota Produc tion System (Ohno, 1992). The introduction of JIT, TQM, TPM, KANBAN system, fail proofing sys tems (Poka Yoke, Andon lightsetc.), and employee involvement have all contributed to the ideal of simplicity. As business grows, and as more varieties ofthe products are built the manufacturing, management, and control systems will remain more ot less with the same complexity. ‘Traditional and WCM organisa- tions: Differing perspectives The features of the WCM organi- sations have implicitly brought out the difference between the tradi- tional organisation and a WCM or- ganisation. These differences are fundamental and seem to affect all the functional areas including the cost management function, Definition problems The way a cost management professional understands some of the “common place” definitions ina traditional and a WCM organisation seem to be fundamentally different and so are the cost management sys- temsin use. Some of them are discus- sed below * Value added Traditionally the term value added denotes the sum total of all the money spent on the raw mate- rials towards converting them into “saleable” finished goods. It is cust- omary to consider the WIP inventory asasumof thebasic value of the mat- erial and the degree of conversion ‘made (value added). These expenses include the labour component and. the various manufacturing over- hheade ‘On the contrary, some progre- ssive thinkers argue that WIP can not be'a value added item. In any organisation raw material has some value, the finished goods at the point of sale has value all other collect only costs. For example, due to the speci- ficnature of the product that an orga- nisation manufactures the WIP inventory can at best be sold on a weight basis. Itis one thing to attach value toit to write the books of acc- ounts, and yet ano-ther to “think” that WIP has value. In the opinion of the WCM organisations, any activity that finds some usefulness for the final cus- tomer is value added and all others arenon-value added. The earlier exa- ‘ple of poor layout seeks to bring this point very clearly. Table 2has a list of items that can be normally Classified as non-value added. All these share acommon attribute, viz, doing more and more of these would certainly add “cost” but not nece- ssarily value. This understanding is crucial for implementation of cost mana-gement systems that would ensure continuous improvement. © Fixed and variable costs The traditional cost accounting system clearly brings out the differ- ence between fixed and variable costs. While the former includes all the costs that are incurred irrespec- the management accountant, eptember 1998tive of the activity level (asemi-fixed costs is a special situation in which the condition holds good for a cer- tain range of the operating level), the latter changes with the activity evel. Direct material and direct labour come in the variable costs category while bulk of the overheads will be of fixed or semi-fixed nature. Such a classification scheme has a profound psychological impact on the part of the designers, planners, and controll- cts. Itwould be natural to look at the variable cost category to cut down the costs. Traditionally, that was what all the organisations were busy trying to do. Table? Sources of non-value added items in organisations. No. a (Over production Paper work “Machine Breakdown Yield loss bE [n Interestingly, on the contrary, the WCM organisations have asligh- tly different perspective towards the idea of fixed and the variable costs ‘AsShingo Shigeo, the pioneer of “Si- ngle Minute Exchange Die (SMED)" concept, points out, how do manufa- turers of, say, passenger cars differ so much on the cost, quality, and de- livery aspects when all of them use more or less similar technologies? Working towards cutting down the ‘material content and the labour co- tent would not have given them significant results. On the other hand looking at the overheads would have given them ample scope for cost reduction and performance. In a WCM organisation, the difference between fixed and vari- able costs is made by understanding ‘the management acountant, eptember 1998 Cover Feature the ability ofa particular component of the cost to throw opportunites for improvement. All costs that do not offer much scope for improvement are under-stood to be fixed. The trad- itional material and labour costsmay come under this category. The over- heads lend themselves for improve- ‘ment and hence become variable costs, Only because of this under- standing, WCM organisationscould bbringdown the et up time toa range of less than 100 seconds from a whopping 12 hours plus in some of their press and other machining operations. This difference in understan- ding is crucial for a cost manage- ment professional. Newer systems of cost management could gear up the information system in such a way that it identifies opportunities for im- provement. The Activity Based Cost Management Systems are, perhaps, based on an implicit understanding OF this difference Mind set issues Another crucial differencelles in the fact that the traditional mind set is one which believes that standards are the guiding forces for perform- ing, monitoring, and controlling all the activities, whether itis purchas- ing or setting up a machine. Once standards are set the entire work force orchestrates itself to “beating” the standards in order to get their share of incentives. Standards be- come a sensitive issue as itimpinges too much on theearning potential of many individuals in the organisa- tion. Hence revision of standards is not hazarded too often. The extent to which overheads are absorbed {and the favourable and the adverse part of it) areall left to the standards tojudge. Everybody in the organisa- tion has a vested interest in matters relating to standards, There are cer- tain areas in which standards pro- ‘mote complacency. If the standard time to set up a machine is 8 hours, where is the motivation for doing it in 6 Hours or in 80 seconds as some Japanese organisations have demon- strated. On the other hand, WCM organisations have understood that organisations are in a journey towards perfection in a path called continuous improvement. For example, the per- fection in quality is zero defects, the perfection in all business processes is zero non-value added activites, and the perfection in maintenance is zero breakdown. The shining exam- pleto thisis the annual report of Toy- ota Motor company for the year 1994, which was titled “How we sa- ved $1.5 billion: Taking destiny into our own hands”. WCM orga- nisations have understood the need for challenging the “so called” standards. ‘The obsession for standards and conformance to itis too damag-ing and the biggest challenge to the man- agement accountant profession is to chalk out a strategy for abandoning this sooner. There isa need to device methods for measurement, primarily witha view tohelp improve the exis- ting activities and progressively eli- ‘minate the unwanted ones. Performance measures Performance measures and stan- dards are close cousins. The two co- ‘exist in traditional organisations as the performance measures are tight- ly linked with standards. Its a well known fact that the psychology of every individual in an organisation right from the senior executives up to the direct labourers is governed by the measurement systems in place. If there is every hue and cry for quality and customer satisfaction and yet if control systems produced reports detailing out the utilisation indices of the resources, and the fav- ourable and adverse absorption of various overhBads, managers will know how to behave. If for some reason there is a quality problem in the production line, the manufacturing managers 64