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 forthe differences in the performances ofthe too 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 18thcentury, the manufacturing 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. Itwas the Ford Production System that laid out the basic principles of Manufactur- ingand Management during the pe- riod 1910-1980. Itwas an era marked by significant contributions to this body of knowledge from stalwarts such as Fredrick Taylor (Scientific Management), Gilbreths (Motion & Time study), Schewart (Statistical Quality Control), Henry Ford (Flow Tine, 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 20thcentury 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 pricecutting”, that seem toexplain the unpreceden- ted rise ofthe Japanese corporations, be it automobiles, or consumer elec- tronics, during the late 70's and early 80's have now vanished into thin air. The reality has come to stay and + Associate Professor, Indian. Institute of Management, Bangalore, the management accountant, uptember 1998 B. Mahadevan* ‘many leading corporate giants such as Ford, GM, Hewlett Packard, Mot- orola, and Xerox seem to have un- derstood the new rules of the game. This paper hasbeen written with two purposes. Firstly, tohelp cost mana- ement 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 ‘Thefirstshock waves of theimp- ending changes was felt by the auto- mobile giants Ford, Chrysler, and GM during the oilcrisisin1972 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 Talichi 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 cost and high quality. The intention in this writing isnot o report such stories, since hu- ndreds 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. Tabet Charsctsiatien of A World Cass Manufactarer SEN, | Charscteritiee 1 Just in’ oD Total Quality Management {OM} Total Productive Maintenance (TPM) 4 Employee involvement Sa The most often misunderstood ‘and hence misapplied of this list is the Just in Time (IT) system. The core philosophy of JIT is to provide an organisational framework to conti- ritously reveal opportunities for eli mination of non-value added activi- ties. JIT systems have brought to limelight the distinction between va- Jueadded and non-value added acti- vities. If due to a poor design of fac- tory layout the jobs travel afew kilo- metres before being converted into saleable products, the customers may not be interested in paying for the excess transportation (Mahad- evan 1994). A proper understanding, of the JIT philosophy would clarify that by eliminatinga lot of unwanted activities, a substantial reduction in time, be it procurement or manufac- turing or distribution, could be achieved. The popular ideas that JIT is a zero inventory system or a sys- tem that uses a piece of card (known as KANBAN) along with afew stan- dard containers are either secondary to this or are.the fallout ofthe waste 645limination process. An organisational frameworkto expose wasteful activities alone isnot sufficient. t should be complemen- ted by an equally effective organisa- tional framework for continuously climinating them. A Total Quality Management (TQM) system helps to achieve this purpose by organising theentire work force into small imp- ovement groups, and creatingami- ‘nset for continuous improvement ‘The scope of management account ants to contribute to this continuous improvement process seemsto besi- grificant (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 TQM and JIT systems are im- plemented together. The third distinguishing feature ofa WCMistheidea of Total Produc- tive Maintenance (TPM). Contrary, to the traditional thinking that main- tenance has to be done only by “qua- Iified” maintenance crews, WCM or- {garisations 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 f ownership of the pro- cess that they perform and will be comeaware ofthe problems associa- ted with wrong usage/misuse of their facilities. I helps an organisa- tion maintain equipment so often ‘and so thoroughly thatit hardly ever breaks down, jams, or misperforms during a production run. mn order to put the above three systems in place, it is necessary to break away from the rigid classifica- tion ofthe labour that's characteris- ticofa traditional manufacturer. The small improvement group may be performing some maintenance asks, ‘The group may have to be allowed to perform their own quality checks, Cover Feature and a certain degree of autonomy may have tobe granted for schedul- ingand planningof their production tasks As these may sound very unor thodax forthe traditional mindset. Functional managers may have a feling of losing contro. Personnel managers may not like to brush themselves with the union, It may pose problems forthe cost accoun- tant because he may not know how tosegregatethe direct abourcostbe- tween te direct and the indirect o- ponents that he performs, Altena- tively the cost accountant may won derasto how to define direct abour Butthe experience ofthe WCMorg2- nisations suggest that the net effect ofthis isa substantial gain to the or ganisation. This new prescription of the working life is defined a8 Em- ployee involvement. The last feature whichis 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, al proofing sy tems Poka Yoke, Anon lights et), and employee involvement have all contributed to the ideal of simplicity ‘As business giows, and as more ‘arieties ofthe products are bil the Tamufacturing, management, and Control systems will main more o Jess with the same compli ‘Traditional and WCM organisa tions: Differing perspectives ‘The feature ofthe WCM organ sations have implicitly brought out the difference between the tradi tional organisation and a WCM or- fganisation. 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 soare 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- Flals towards converting them into “saleable” finished goods Its cust- ‘omary to consider the WIP inventory asasumof the basic value ofthe mat- erial and the degree of conversion ‘made (value added). These expenses include the labour component and the various manufacturing over- heads (On the contrary, some progre- ssivethinkers argue that WIP cannot be'a value added item. In any organisation raw material has some value, the finished goods at the point of salehas value all other collect only costs. For example, due to the speci- ficnature ofthe productthat an orga- nisation manufactures the WIP inventory can at best be sold on a weight basis. It is one thing to attach value toitto 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-valueadded. Theearlier exa- imple of poor layout seeks to bring this point very clearly. Table 2 has a list of items that can be normally classified as non-value added. All these shareacommonattribute, viz. doing more and more ofthese 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