2 Chapter The Modern Business - PowerPoint Presentation

1. 2ChapterThe Modern Business Environment

2. Learning ObjectivesLead A2: Compare and contrast quality management methodologiesComponent A2): Compare and contrast: Just-in-timeQuality ManagementKaizen Process re-engineeringThe impacts of just-in-time (JIT) production and quality management on efficiency, inventory and costs.The benefits of JIT production, total quality management Kaizen costing, continuous improvement and cost of quality reporting.Elimination of non-value adding activities and the reduction of costs using process re-engineering.

3. Session ContentThe Global EnvironmentNew Management ApproachesJust in timeTotal quality managementTheory of constraintsCost Planning andCost ReductionThe value chainValue analysisLife cycle costingTarget costingLogisticsSupply chain managementOutsourcingIn this chapter we explore how the modern production system has changed, and in the following chapters we examine how costing has adapted to this and created new ways to calculate a product's production cost.

4. Introduction to the Modern Business Environment“To compete successfully in today’s highly competitive global environment companies are making customer satisfaction an overriding priority, adopting new management approaches, changing their manufacturing systems and investing in new technologies. These changes are having a significant influence on management accounting systems.”Colin Drury in Cost and Management Accounting

5. Characteristics of the Modern EnvironmentGlobal environmentOperate in World Economy Global customers and competition and sourcingInternational regulationsFlexibilityCustomers have far greater choice than ever beforeHuge increase in demand for new, cutting edge innovative productsCustomers are demanding ever improving levels of service in cost, quality, reliability and delivery.Customers demand flexibilityAs a consequence of this:Many companies now have very diverse product ranges, with a high level of tailor made products and services;Product life cycles have dramatically reduced, often from several years to just a few months.

6. Characteristics of the Modern EnvironmentEmployee EmpowermentTo ensure this flexibility, managers need to empower their employees to make decisions quickly, without reference to more senior managers.By empowering employees and giving them relevant information they will be able to respond faster to customersManagement accounting systems are moving from providing information to managers to monitor employees to providing information to employees to empower them to focus on continuous improvement.

7. Just-in-TimeThe emphasis of JIT is on produce or procure products or components as they are required by a customer or for use, rather than for inventory.JIT Production 2. JIT PurchasingPush vs Pull systemSupplier to Production to ConsumersConsumers to Production to SuppliersToyota SystemIn a full JIT system virtually no inventory is held, that is no raw material inventory and no finished goods inventory is held, but there will be a small amount of WIP, say one tenth of a day’s production.

8. Just-in-TimeTo successfully adopt or implement JIT, the following is required:labour force must be versatileProduction processes must be grouped by product lineinfallible information systemA ‘get it right first time’ approach and an aim of ‘zero defects’.Strong supplier relationships.

9. Total Quality ManagementTQM is the general name given to programmes which seek to ensure that goods are produced and services supplied of the highest quality.Originates from Japan, its behind the success of many Japanese businesses.Two basic principles:Get it right first time – prevention costs are lesser than correction costs. zero defects and 100% qualityContinuous improvement – dissatisfied with the status quo.

10. Continuous Improvement and Cost of QualityThere are two approaches to CI:Kaizen Costing and Target CostingQuality costs are divided into compliance costs (or ‘conformance costs’) and costs of failure to comply (‘non conformance costs’). Prevention costs - costs of ensuring that defects do not occur in the first place.Appraisal costs - are connected with measuring conformity with requirements and includes Internal failure costs – includes reworking costs; costs of scrap; correction costsExternal failure costs – there are several measurable costs for external failure i.e. Marketing costs associated with failed products & loss of goodwill.‘

11. Commitment to QualityFor TQM to bring about improved business efficiency and effectiveness it must be applied throughout the whole organisation.It begins at the top with the managing director, the most senior directors and managers who must demonstrate that they are totally committed to achieving the highest quality standards. Middle management must ensure that the efforts and achievements of their subordinates receive appropriate recognition, attention and reward.This helps secure everyone’s full involvement – which is crucial to the successful introduction of TQM.

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

13. Quality CirclesIs a team of four to twelve people usually coming from the same area who voluntarily meet on a regular basis to identify, investigate, analyse and solve work-related problems.They present their solutions to management and is then involved in implementing and monitoring the effectiveness of the solutions.The problems that quality circles tackle may not be restricted to quality of product or service topics, but may include anything associated with work or its environment.

14. The role of Management AccountingManagement accounting systems can help organisations achieve their quality goals by providing a variety of reports and measures that motivate and evaluate managerial efforts to improve quality – including financial and nonfinancial measures.Traditionally, the management accounting systems focused on output, not quality.Nonfinancial measures include:Number of defects at inspection expressed as a percentage of the number of units completed.Number of customer complaints.Number of defectives supplied by suppliers.Time taken to respond to customer requests.

15. Throughput AccountingThroughput = Sales Revenue Less Direct Material CostAim to maximise throughputFully utilise bottlenecks

16. Goldratt and Cox’s 5 stepsIdentify bottlenecksExploit bottlenecksSubordinate to bottlenecksElevate bottlenecksIf break a bottleneck return to step 1

17. Accounting MeasuresReturn Per Hour=Throughput Per UnitTime on BottleneckCost Per Hour=Total Factory CostsTotal Time on BottleneckT A Ratio=Return Per Factory HourCost Per Factory Hour

18. Kaizen CostingKaizen’ is a Japanese term meaning to improve processes via small, incremental amounts rather than through large innovations.Kaizen costing is a planning method used during the manufacturing cycle that emphasises reducing variable costs of a period below the cost level in the base period.The organisation should always seek perfection. Improvements should be sought all the time. Improvements will be small and numerous rather than occasional and far reaching.

19. Kaizen Costing & BPRCost reduction targets are set and applied on a more frequent basis than standard costs. Refer to page 62 for comparisons of Kaizen and Standard Costing.The continuous improvement philosophy contrasts sharply with the concept underlying business process reengineering (BPR). BPR is concerned with making far reaching one off changes to improve operations or processes.

20. Five stages in BPR projectDevelop the business vision and process objectivesIdentify the processes to be redesigned Understand and measure the existing processes so that a baseline against which is to measure improvement is set.Identify ‘IT levers’ that can be used to apply is setDesign and build a prototype to show which changes are possible, and involve customers before implementing any revised system

21. Supply Chain ManagementSCM considers logistics but also relationships between members of the supply chain, identification of end-customer benefit and the organisational consequences of greater inter-firm integration to form ‘network organisations’. SCM may be broken down into several areas: Purchasing Inventories Customer Ordering Delivery and logistics

22. OutsourcingOutsourcing involves the buying in of components, sub-assemblies, finished products and services from outside suppliers rather than supplying them internally.Non-core activities are outsourcedAdvantagesDisadvantagesGreater flexibilityPossibility of choosing wrong supplierLower investment riskLoss of visibility and control over processImproved cash flowPossibility of increased lead timesConcentrates on core competenceEnables more advanced technologies to be used without making investment

23. InsourcingInsourcing is a business practice in which work that would otherwise have been contracted out is performed in house.AdvantagesDisadvantagesHigher degrees of control over inputRequires high volumesIncreases visibility over the processHigh investmentEconomies of scale/scope to use integrationDedicated equipment has limited flexibilityNot a core competence