Activity Based Costing Value Stream Mappingthinkinglean.com/img/files/010204m.pdf · Activity Based Costing Value Stream Mapping ... process, non value added cost analysis is brought

International Journal of Lean Thinking Volume 1, Issue 2 (December 2010)

Lean Thinkingjournal homepage: www.thinkinglean.com/ijlt

Activity Based Costing Value Stream Mapping

S. S. Abuthakeer * Department of Mechanical Engineering, PSG College of Technology, Coimbatore, 641 004, India E-mail Adres: [email protected]

P.V. Mohanram Department of Mechanical Engineering, PSG College of Technology, Coimbatore, 641 004, India

G. Mohan Kumar Park College of Engineering and Technology, Avinashi Road, Kaniyur, Coimbatore 641 659, India

A B S T R A C T K E Y W O R D S

A R T I C L E I N F O

Lean manufacturing, Value stream map, Activity based costing, Target costing.

Received 21 December 2010Received in revised form 27 December 2010 Accepted 29 December 2010 Available online 31 December 2010

This paper attempts to integrate Value Stream Map (VSM) with the cost aspects. A value stream map provides a blueprint for implementing lean manufacturing concepts by illustrating information and materials flow in a value stream. The objective of the present work is to integrate the various cost aspects. The idea is to introduce a cost line, which enhances the clarity in decision making. The redesigned map proves to be effective in highlighting the improvement areas, in terms of quantitative data. TAKT time calculation is carried out to set the pace of production. Target cost is set as a bench mark for product cost. The results of the study indicates that implementing VSM led to reduction in the following areas: processing lead time by 34%, processing cycle time was reduced by 35%, Inventory level by 66% and product cost from Rs 137 to Rs 125. It was found that adopting VSM in a small scale industry can make significant improvements.

________________________________ * Corresponding Author

1. Introduction

Success in modern manufacturing industry directly correlates to how a company handles global

competition. Cost effective solutions and practices are essential to stay competitive in the market.

Many manufacturing facilities have experienced the drastic changes and are in a process of

undergoing physical and cultural transformation to adopt the concept of lean thinking.

Lean has been originally created and defined as the process of eliminating waste

(Womack et al. 1990) Toyota along with the support a system to reduce or eliminate

waste and non-value added activities from the various process (Ohno, 1988; Shingo

and Dillon, 1988).

The conceptual framework for categorizing all of the tools and practices of lean production

in five basic areas:

Value: Define value from the standpoint of the customer. However, in reality, the

final customer is the only one who can s pecify the value of a specific product or

service by paying a price for it.

Value stream: View your product delivery sy stem as a con tinuous flow of

processes that add value to the product.

Flow: The product should constantly be moving through the value stream towards

the customer at the pace of demand.

Pull: Product should be pulled through the value stream at th e customer’s demand

rather than being pushed on to the customer

Perfection: The never-ending pursuit of eliminating waste in the system such that

the products can flow seamlessly through the value stream at the rate of demand.

2. Literature Survey

VSM can serv e a s a go od starting p oint for any enterprise tha t want s t o be le an and

describe value st ream as a collection of all value added a nd non-value added activities

which are required to bring a product or a g roup of products using th e sam e resources

through the main flows, from raw material to the hands of customers (Chandandeep, 2006).

Researchers define the VSM as the process of visually mapping the flow of information

and m aterial. It he lps to visualize the station cycle tim es, inve ntory a t each sta ge,

manpower a nd information f low a cross t he s upply c hain ( Womack a nd J ones, 1996). A

value s tream map provides a blueprint for implementing lean manufacturing concepts by

illustration how the flow of information and materials should operate.

Balkema and Rotterdam (2004) have created current sta te map for a ste el producer, a

steel service center and first-tier component supplier. The current state map identifies huge

piled of inventory and long lead-time. In the future state map target areas were subjected to

different lean tools including kanban, supermarket, and continuous flow.

Ballard and Howell (1994) suggest that, the value stream mapping can serve as a good

starting point for any enterprise that wants to be lean. It prov ides a common language for

S. S. ABUTHAKEER, P. V. MOHANRAM, G. M. KUMAR /International Journal of Lean Thinking Volume 1, Issue 2 (December 2010)

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talking about manufacturing process. It tie s together lean concepts and t echniques which

help to avoid "cherry picking". It forms the basis for an implementation plan by helping to

design the whole f low. Ha lpan and Kueckmann (2001) e xplain value strea m mapping in

aircraft manufacturing. They draw current and future state maps were developed with the

objective of reducing lead time according to customer requirements. The implementation of

the f uture state m ap attained l ead-time re duction. S ummer, 1 998 has described A ctivity

Based C osting ( ABC), ide ntify various c ost components a nd a nalyze t he relative

contribution to the tota l cos t. The es sence of ABC is that, product consumes act ivity,

activity consumes resource and resources generate cost. Thus it is necessary to develop the

relationship b etween acti vity, c oast drivers an d ac tivity measures. Target c osting is to

anticipate the ac ceptable ma rket p rice th rough in tensive customer focus. D esign and

manufacturing team’s all ies to b ring the product within the target cost. Target cost is the

cost that can be incurred while still earning the desired benefit. The objective of the present

work is to demonstrate how a manufacturing system operates with timing of step-by step

activities.


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3. Methodology

The various steps in implementation of VSM are shown in Figure 1 and are discussed in

the following sections. The process analyses is carried out by collecting data from various

enquiries with shop floor experts and directly participates in measuring the time involved in

various processes (Sahoo et al, 2008).

Figure 1. Steps in implementing Value Stream Map

The new con cept in troduced in the autho r’s rese arch i s to ma p/measure th e cost

involved i n the va lue s tream. T he stu dy re searches led us t o i nvolve various costing

systems and inventory management systems. A case study of a small motor manufacturing

company participated in LEAN project has also been presented. The current and future state

drawings are mapped for the shaft manufacturing. Future state maps were developed with

the objective of reducing lead time and cost according to customer requirement.

The cost analysis is carried out b y adding the es sence of ac tivity based costing and

target costing. In this paper, while generating the VSM, the main processes are identified

and the processing costs are calculated for individual processes, now these individual costs


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are the a ctivity cost .The summation of the activity costs gives the manufacturing cost of

the product. The calculations of the activity cost are elaborated in methodology.

The conce pts o f ABC inv entory management sy stem is u sed to classify the handling

cost of the work i n process i nventory. S o t he c lassification of th e i nventory helps us t o

differentiate the various costs incurred in handling the different work in p rocess between

different stations. The redesigned VSM is shown in Figure 2.

Figure 2. Cost Integrated Value Stream Map

The present study uses the philosophy of target costing to set the t arget manufacturing

cost. Target cost is the cost that can be incurred while still earning the desired profit. The

target cost is calculated as follows:

Target cost = Selling price – Desired profit (1)


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3.1 Process Analysis

The m ajor activity i n the process analysis is t o portrait t he ti me lin e. Th e ti me li ne

contains both value added and non-value added time and is calculated as follows:

(2)

(3)

(4)

(5)

3.2 Cost Analysis

The id ea is to add a cost line alo ng with the e xisting time l ine in VSM. Co st line

enables better vis ualization a nd also improves the cla rity of d ecision m aking. While the

value added cost is brought ou t by th e summation o f the d irect co st invo lved in eac h

process, non value added cost analysis is brought about by classifying the inventory as per

the holding cost. The cost calculations are as follows:

=0 (when no material is added in a activity) (6)

(7)

(8)

(9)

4. Case Study

A case study conducted at a motor manufacturing company i s presented and some of

the observations may be useful to the practicing engineers in implementing VSM in small,

medium a nd la rge enterprises. M uch of the ea rlier w ork have a ttempted c omplementary

lean manufacturing too ls in la rge s cale industries and have rec orded their e xperiments.

Hence, there is a need to implement such a lean tool in small and medium size industries.

VTi = CTi

NVTi =

Processing time =∑

Processing lead time = ∑ İ

Value added Activity cost = +

Nonvalue added activity cost = ℎ +

Customer ready to pay = ∑ +

Customer not ready to pay = ∑ ℎ +


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4.1 Selection of Critical Product Family

The first step is the selection of the critical part family. After the through study of all

part families, one part family was rather preferred over all the product families. The Rotor

is main heart of the motor.

4.2 Documentation of Customer Information

Interaction with the manager revealed information regarding customer’s requirement. It

was understood, the company has a wide range of customers requesting for a wide range of

product from 0 .5 hp to 20 hp motor. The requirement of motors was estimated to be 1000

motors/month.

4.3 Identification of Main Processes

A quick walk th rough th e shop fl oor (gemba) helped us in identifying th e main

processes. T he m ain processes in volved i nclude: bar cu tting, roughing, F inishing,

Threading I, Threading II, key machining and rotor turning.


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Fig

ure

3. C

urre

nt S

tate

Map


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4.4 Define the Data to be collected

The data in th e da ta box se rves to track down the opportunities for i mprovement.

Collection of appropriate d ata b enefits in qui ck t racking o f opp ortunities. The data box

envelopes the following data like cycle time, change over time, up time, machine hour rate,

labor hour rate, material cost and the available time. The inventory triangle envelopes two

data, work in p rocess inventory b etween eac h process and respective handling cost of

inventory. Cost and time lines are calculated using the above mentioned model. The current

state map is shown in Figure 3.

4.4 Future state map

The objective of the future state map is to match the production rate with TAKT time

and to achieve the target cost as the manufacturing cost. Hear, for the present study TAKT

time is take n as t he benchmark for process pace and target cost was set as the b enchmark

for the manufacturing cost

4.5 TAKT time: a Benchmark for Process Pace

Takt demonstrates the rate at which the customer buys the product. TAKT reflects the

frequency at which th e p roduct has to release by the m anufacturer to m eet customer

demands. Takt time is calculated by dividing available working time per shift (in sec) with

the customer demand per shift.

Available working time per shift = Operating time - Breaks

= 23280 seconds/shift

Demand=1000 shafts/month

Demand per shift=40 shafts/shift

TAKT time = 582 seconds/shift

TAKT o f 583 rep resents that, every shaft has to be co mpleted in every 582 seconds.

The current state map sights out that the roughing process consumes 18 seconds more than

takt time. In order t o solve this, fi nishing and roughing processes are carried out in the

CNC machine, thus reducing set-up time and other manual interactions; also the cycle time

TAKT Time =


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of the process i s reduced to 120 seconds. The old machine is dedicated to th read cutting

operation only. Thus, the total line is balanced.

4.6 Target cost: a Benchmark for Product Cost

Target cost is se t by subtracting the market cost by the target profit; the target profit is

assigned by the management. The target cost reflects the cost at which the product has to be

manufactured. In this case after consulting with the management, the target cost was set at

Rs125. Now the lean tools serves as a cost minimization tool to minimize the gap between

the Target cost and manufacturing cost.

Daily shipment of bar stock was implemented to reduce the handling cost at the start of

the value stream. Single minute exchange of dyes was implemented in the CNC machine

(finishing process), in order to minimize the lot/batch size. The future state map is shown in

figure 4.

5. Results and Discussions

The implementation of daily shipment resulted in reducing the inventory handling cost

from Rs. 30 to Rs. 9, and the inventory is reduced from 100 parts to 30 parts at the start of

the va lue stream. The implementation of SME D serves t o re duce the in ventory by 6 6%

before the finishing process.


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Fig

ure

4. F

utur

e St

ate

Dra

win

g


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Graphs ar e en closed to v isualize t he ben efits in i mplementing l ean tool s are

presented in Figure 5-8.

Figure 5. Comparisons of cycle time of current and future state

Figure 6. Comparison of processing time in seconds

Figure 7. Comparison of processing lead time in days


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Figure 8. Comparison of product cost

6. Conclusions

This research carries evidence of genuine advantages of applying lean principles in a

small scale m otor manufacturing. As far as our knowledge is concerne d, it is the first

time cost analysis is integrated with the value stream map. It was evidenced that VSM is

an ideal tool to expos e the waste in value stream and identify improvement areas. This

paper substantiates the effectiveness of lean principle in a sy stematic manner with the

help of va rious t ools, s uch as c ost anal ysis in v alue stream ma pping, single m inute

exchange o f dy es and so on . Availability of information such as m aterial and m oney

flow f acilitates a nd va lidates t he de cisions to im plement lean m anufacturing, fu rther

would a lso m otivate t he or ganization dur ing the actua l im plementation i n or der to

obtain the desired benefits. Eventually it e nables the c ompanies to m ove towards their

ultimate goal leading to, sustainability, profit and profitability.

7. References

Balkema, A.A. and Rotterdam , Lean Construction, International Journal of Production

Economics 2004; pp.111-125.

Ballard, G. and Howe ll, G., Implementing lean construction, Journal of Production and

Inventory management 1994; pp. 37-48.

Grewal, C., An initiative to implement lean manufacturing using value stream mapping

in a small company, Int. J. Manufacturing technology and management 2006; pp

55-61.


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Halpin, D.W. and Kueckmann, M., Lean Construction & Simulation, Proceedings of the

Winter Simulation Conference 2001; pp 131-139.

Ohno, T., Toyota Production system Bey ond Large-scale produ ction: Produ ctivity

press; 1988.

Sahoo, A.K., Singh, N.K., Shankar, R. and Tiwari, MK., Lean philosophy: implementation

in a forging company, International Journal of Advanced Manufacturing

Technology 2008; pp.125-131.

Shingo, S. and Dillon, A.P., A study of the T oyota produc tion system : Productivity

press; 1988.

Summer, C .R., Th e R ise o f A ctivity-Based co sting. Part One: What Is an Activity-

Based Cost system?”, Journal of Cost Management 1998; pp. 45-54.

Womack, J.D., Jones, D.T. and Roos, D., The Machine that Changed the World: The

study of Lean Production, Harper Perennial Publishers: New York; 1990.

Womack, J.P. and J ones, D.T., Lean thinking: ba nish waste and create wealth in your

corporation, New York, NY: Simon & Schuster; 1996.


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Activity Based Costing Value Stream Mappingthinkinglean.com/img/files/010204m.pdf · Activity Based Costing Value Stream Mapping ... process, non value added cost analysis is brought