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CHAPTER 6

Activity-Based Management and TodaysAdvanced Manufacturing Environment

ANSWERS TO REVIEW !ESTIONS

6-1 The philosophy of a just-in-time (JIT) inventory and production management systemis that no materials are purchased and no products are manufactured until they areneeded. The essence of the JIT philosophy is to reduce all inventories to theirabsolute minimum.

6- The !ey features of a just-in-time inventory and production management system areas follo"s# a smooth production rate$ a pull method of coordinating steps in theproduction process$ purchase of materials and manufacture of subassemblies andproducts in small lot si%es$ &uic! and ine'pensive setups of production machinery$high-&uality levels of ra" material and finished products$ effective preventivemaintenance of e&uipment$ an atmosphere of team"or! to improve the productionsystem$ and multis!illed "or!ers and fle'ible facilities.

6- T*+ stands for total &uality control. ,ince no parts are purchased or manufactureduntil they are needed for production in a JIT system it is crucial that they be justright for their intended purpose.

6. In a just-in-time (JIT) production system ra" materials and parts are purchased orproduced just in time to be used at each stage of the production process. Thisapproach to inventory and production management brings considerable costsavings from reduced inventory levels.

The !ey to the JIT system is the pull approach to controlling manufacturing.The diagram on the ne't page displays a simple multistage production process. Theflo" of manufacturing activity is depicted by the solid arro"s running do"n thediagram from one stage of production to the ne't. /o"ever the signal that triggersmore production activity in each stage comes from the nextstage of production.These signals depicted by the dashed-line arro"s run up the diagram. 0e begin

"ith sales at the bottom of the e'hibit. 0hen sales activity "arrants more production

of finished goods the goods are pulled from production stage III by a signal thatmore goods are needed. ,imilarly "hen production employees in stage III need moreinputs they send a signal bac! to stage II. This signal triggers production activity instage II. 0or!ing our "ay bac! up to the beginning of the process purchases of ra"materials and parts are triggered by a signal that they are needed in stage I.

McGraw-Hill/Irwin 2002 The McGraw-Hill Companies,

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The 2ull3 4ethod in a JIT ,ystem

This pull system of production management "hich characteri%es the JITapproach results in a smooth flo" of production and significantly reduced inventorylevels.

6-5 ive !ey features of JIT purchasing are as follo"s# only a fe" suppliers$ long-termcontracts "ith suppliers$ materials and parts delivered in small lot si%es immediatelybefore they are needed$ only minimal inspection of delivered parts and materials$and grouped payments to each vendor.


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7emand for ra" materials and parts is signaled "henthere is a need in stage I for more inputs.

7emand for production activity in stage I is signaled"hen there is a need in stage II for more inputs.

7emand for production activity in stage II is signaled"hen there is a need in stage III for more inputs.

7emand for finished goods is signaled "hen salesactivity "arrants more finished units. This signaltriggers manufacturing activity in the final stage ofproduction (stage III).

2urchasing

2roduction,tage I

2roduction,tage II

2roduction

,tage III

,ales

7enotes flo" of materials parts partially finished goods and finished goods.

7enotes a signal that more goods are needed at the ne't stage of production.


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6-6 (a) +4, stands for cost management system.

(b) JIT stands for just-in-time.

(c) +8+ stands for computer-numerically controlled.

(d) +94 stands for computer-aided manufacturing.

(e) +97 stands for computer-aided design.

(f) 94/, stands for automated material-handling system.

(g) 4, stands for fle'ible manufacturing system.

(h) +I4 stands for computer-integrated manufacturing.

6-: The !ey differences in the plant layouts used by 9erotech;s 2hoeni' and


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6-1? The t"o-dimensional activity-based costing model provides one "ay of picturing therelationship bet"een 9


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6-11 9ctivity analysis is the detailed identification and description of the activitiesconducted in an enterprise. 9ctivity analysis entails the identification not only ofactivities but also of their root causes of the events that trigger them and of thelin!ages among them. Three criteria for determining "hether an activity adds valueare as follo"s#

(a) Is the activity necessaryG

(b) Is the activity efficiently performedG

(c) Is the activity sometimes value-added and sometimes non-value-addedG

6-1 9n activity;s trigger is the preceding event that indicates that the activity should beperformed. The activity;s root cause is the event or activity that if it had notoccurred "ould have prevented the activity in &uestion from happening. ore'ample the event that triggers the activity of re"or! is the identification of adefective part during inspection. /o"ever the inspection is notthe root cause of there"or! activity. The root cause of the defective part and hence the need for re"or!could lie in erroneous part specifications in an unreliable vendor or in faultyproduction.

6-1 our techni&ues for reducing or eliminating non-value-added costs that result fromnon-value-added activities are as follo"s#

(a) 9ctivity reduction

(b) 9ctivity elimination

(c) 9ctivity selection

(d) 9ctivity sharing

6.1 A'amples of activity sharing include the use of common parts in several relatedproducts and the use of a common service facility (e.g. a photocopying center) byseveral departments.

6.15 +ustomer profitability analysis refers to using the concepts of activity-based costing

to determine ho" serving particular customers causes activities to be performed andcosts to be incurred. A'amples of activities that can be differentially demanded bycustomers include order fre&uency order si%e special pac!aging or handlingcustomi%ed parts or engineering and special machine setups. ,uch activities canma!e some customers more profitable than others.


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6-16 9ctivity-based costing is used to analy%e customer-related costs and determine thecost drivers for these costs. This 9


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"alue engineering(or value analysis) is a cost-reduction and process-improvementtechni&ue that utili%es information collected about a product;s design andproduction processes and then e'amines attributes of the design and processes toidentify candidates for improvement. The attributes e'amined include suchcharacteristics as part diversity and process comple'ity.

&ai'en costingis the process of cost reduction during the manufacturing phase ofan e'isting product. The Japanese "ord !ai'en refers to continual and gradualimprovement through small betterment activities rather than large or radicalimprovement made through innovation or large investments in technology.

6.1 ai%en costing is most consistent "ith the old saying slo" and steady "ins therace. ai%en costing is the process of cost reduction during the manufacturingphase of an e'isting product. The Japanese "ord !ai'en refers to continual andgradual improvement through small betterment activities rather than large or radicalimprovement made through innovation or large investments in technology.

6. mployee empowerment is the concept that "or!ers are encouraged to ta!e theiro"n initiative to improve operations reduce costs and improve product &uality andcustomer service.

Bencmar!ing is the continual search for the most effective method ofaccomplishing a tas! by comparing e'isting methods and performance levels "iththose of other organi%ations or "ith other subunits "ithin the same organi%ation. 9ne'ample of benchmar!ing is an airline;s determining ho" many of its competitors;flights are delayed and comparing the data "ith its o"n flight-delay record.

The most effective methods of accomplishing various tas!s in a particular industryoften discovered through benchmar!ing are referred to as best practices.

*eengineeringis the complete redesign of a process "ith an emphasis on findingcreative ne" "ays to accomplish an objective. @eengineering has sometimes beendescribed as ta!ing a blan! piece of paper and starting from scratch to redesign abusiness process. @ather than searching continually for minute improvements re-engineering involves a radical shift in thin!ing about ho" an objective should bemet.

Organi'ational culture is the mind-set of employees including their shared beliefsvalues and goals.

9 cange campion is an individual "ho recogni%es the need for change andthrough his or her o"n efforts see!s to bring it about. 9 successful changechampion is usually at a high level in the organi%ational hierarchy has strongentrepreneurial s!ills demonstrates political savvy "ithin the organi%ation and hasthe ability to persuade and motivate others.


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6- The teory of constraints(TB+) is a management approach that see!s to ma'imi%elong-term profit through proper management of organi%ation bottlenec!s orconstrained resources. The !ey idea in TB+ is to identify the constraints in a systemthat are preventing the organi%ation from achieving a higher level of success. Thenthe goal is to relieve or rela' those constraints. TB+ recommends subordinating all

other management goals to the objective of solving the constraint problem. ore'ample if limited capacity in a particular machining operation is increasing cycletime reducing throughput and reducing profits then management "ouldconcentrate much of its efforts on e'panding the capacity of that bottlenec!operation. If efforts are continually made to rela' constraints continuousimprovementin organi%ational performance is a li!ely result.

6- The elimination of production bottlenec! activities is an e'ample of the theory ofconstraints. (,ee the preceding ans"er.)

6-5 ive !eys to the successful implementation of 9


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SO*!TIONS TO E+ER,ISES

AA@+I,A 6-: (15 4I8CTA,)

Traditional

actoryK

JITL4,

actoryK@a" materials................................................................................. 7 7Alectricity machines..................................................................... I 7Alectricity lighting and air-conditioning..................................... I IAngineering salaries...................................................................... I 7+ustodial "ages............................................................................ I I7epreciation plant......................................................................... I I7epreciation e&uipment............................................................... I 7Insurance........................................................................................ I I4achine repair "ages................................................................... I 7

4achine repair parts..................................................................... I 77irect labor..................................................................................... 7 7,upervisory salaries...................................................................... I I2roperty ta'es................................................................................ I Iactory supplies............................................................................ I 7Inspection....................................................................................... I 7

K7 denotes direct$ I denotes indirect

AA@+I,A 6-= (5 4I8CTA,)

1. 9irline#

(a) 7eadheading the practice of flying a non"or!ing flight-cre" member toanother city to "or! on a flight departing from that location. The cre" membersometimes displaces a paying customer.

(b) 2reparing e'cess food for a flight "hich is not consumed because the flightoccupancy "as misforecast.

(c) @eturning repairing or replacing lost or mishandled luggage.

(d) +anceling a flight because of an aircraft maintenance problem that should havebeen prevented by routine maintenance.


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AA@+I,A 6-= (+B8TI8CA7)

.


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AA@+I,A 6-? (? 4I8CTA, 2MC, TI4A 9T @A,T9C@98T)

,everal restaurant activities are listed in the follo"ing table along "ith the re&uiredcharacteristics for each activity. 4any other possibilities could be listed depending on thelevel of detail.

9ctivity 7escription

Dalue-9ddedor 8on-Dalue-

9dded 9ctivity Trigger @oot +ause

Ta!ing reservations D9 +ustomer calls onphone

+ustomer desiresreservation

+ustomers "aitingfor a table

8D9 +ustomer arrives butno table is ready

9n error "as made inreservation$ service is slo"$customers are slo"$customers arrive "ithoutreservations

,eating customers D9 Table becomesavailable

+ustomer;s reservation (orturn in line) comes up$ tablebecomes ready

Ta!ing orders D9 +ustomers indicatereadiness to order

itchen staff needs to !no""hat to prepare

,erving meals tocustomers

D9 4eals are ready 4eals are ready$ customersare hungry

@eturning meal to!itchen for revisedpreparation

8D9 +ustomer complainsabout meal

9n error "as made ine'plaining the menu$ thereis an error in the printedmenu description$ meal "asprepared "rong$ customeris pic!y


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AA@+I,A 6-? (+B8TI8CA7)

+ustomers eatingmeal

D9 4eals are served andare satisfactory

+ustomers are hungry

+learing the table D9 +ustomers arefinished

+ustomers are finished

7elivering chec! totable

D9 +ustomers arefinished ordering andeating

+ustomers need to !no"amount of bill

+ollecting payment D9 +ustomers haveproduced cash orcredit card

@estaurant needs to collectpayment for servicesrendered

AA@+I,A 6-1 (? 4I8CTA,)

1. 7escription of course registration process#

(a) @eceive list of courses in mail along "ith bubble sheet for filling in desiredcourses and sections.

(b) 7uring allotted "ee! select courses and fill in bubble sheet.

(c) @eturn bubble sheet to bursar;s office. Bften must stand in line for more than an

hour to turn in sheet. @e&uired since sheet and student I7 must be chec!ed bybursar;s personnel.

(d) Bne month later receive preliminary schedule. If acceptable no further actionnecessary. Just pay tuition. 9utomatically enrolled. inal schedule receivedshortly before ne't semester starts. If didn;t pay tuition schedule is dropped.


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AA@+I,A 6-1 (+B8TI8CA7)

(e) If schedule is unacceptable attend 7ropL9dd "ith 15??? other students in thebas!etball arena. This is a madhouse and a guaranteed headache. 2ostedaround the entrance are lists of open classes but the list is often out of date

"ithin an hour or so. Csing carbon-copy dropLadd forms select ne" class(es).

(f) ,tand in line corresponding to last four digits of social security number so thatbursar;s personnel can chec! course availability. Bften in line for ? minutes ormore depending on time of day.

(g) If course available and re&uirements for course met enrolled on the spot. If notmust initiate process all over again or could be placed on a "ait list. ,cheduleresulting from dropLadd process received shortly before classes start.

(h) If schedule unacceptable or if didLdidn;t get off "aiting list once school begins

fill out dropLadd form get approval by the relevant professor and submit to thebursar. Mong lines once again.

. 9ctivity analysis#

(a) 9ctivity analysis loo!s at activity lin!ages activity triggers and root causes. Itshould also consider the goals of the parties involved. ,tarting "ith the goalsstudents "ant a faster easier registration method that does not re&uire standingin line for hours to obtain information or approvals. They "ant to be able to

prioriti%e their class selections get relatively fast feedbac! on "hether or notthey are in a class and !no" "here they stand on the "aiting list. The college"ants a faster easier registration method that does not re&uire so muchpaper"or! and direct labor is less costly provides timely information on classavailability is accurate and enrolls only paid students.

(b) 9ctivity lin!ages#

7escribed in re&uirement (1).


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AA@+I,A 6- (15 4I8CTA,)

,everal activities performed (or at least supported) by an airline;s ground employees along"ith possible performance measures are as follo"s#

9ctivity 2erformance 4easure

4a!ing reservations over the phone @eservations boo!ed per hour2ercentage of reservations "ith

errors8umber of customer complaints

Tagging luggage


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AA@+I,A 6- (? 4I8CTA,)

Memorandum

7ate# Today

To# 2resident ) 15 (1>) 16(1?) 1= (?) 1:


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AA@+I,A 6- (+B8TI8CA7)

Ees the ran!ing by sales revenue is different from that based on operating income.. 8o 9erotechHs least profitable customers are not the ones "ith the lo"est sales

revenue. The least profitable customers are numbers 11> and 1.

. Ees the profile "ould be different because the ordering of the customers along thehori%ontal a'is "ould match the order in re&uirement (1) instead of the ordering inA'hibit 6-11.

. 9 customer characteri%ed by high sales revenue "ould not necessarily be the mostprofitable because the customer may demand costly services such as specialhandling or pac!aging fre&uent small shipments or uni&ue design features.

AA@+I,A 6-5 (15 4I8CTA,)

1. Trend analysis (percentages rounded)#

Customer-*elated Cost +tem ,ear ,ear . ,ear / ,ear 0 ,ear 1

+ost of engineering changesNNNNNNN. 1.1O 1.>O 1.1O 1.1O 1.?O

,pecial pac!agingNNNNNNNNNNNN. 11.?O 11.5O 1.?O 1.?O 1.?O

. +onclusions#

The cost of engineering changes for customer number 61 "hich remainedconsistently lo" for four tears spi!ed to a very high level in year 5. ,omething unusualmust have occurred in year 5 and this should be investigated by management.

,pecial pac!aging costs although consistent across the five-year period are &uite high.This may be necessary due to the special needs of customer number 61 but thisconsistently high cost should be investigated by management. There may be a "ay to cut

this cost possibly "ith the cooperation of the customer.


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AA@+I,A 6-6 (? 4I8CTA,)

edA' could use customer profitability analysis to analy%e "hich customers (particularlycommercial customers) are more e'pensive to serve and thus less profitable. ,eethe 4anagement 9ccounting 2ractice (4.9.2.) inset on page of the te't.

AA@+I,A 6-: (5 4I8CTA,)

1. 2rocess time# steps 5 6 : = 1? 11

Inspection time# steps 1 >

4ove time# steps 5 6 : 1? 11

0aiting time# steps 5 :

,torage time# steps 1 11

. +andidates for non-value-added activities#

(a) ,tep # +arrying ingredients on hand carts.

(b) ,tep # ,toring dough until bagel machine is free. (+ould move to"ard a JITsystem for dough mi'ing.)

(c) ,tep 5# eeping cut-out bagels until boiling vat is free. (+ould move to"ardJIT system.)

(d) ,tep :# +arrying bagels to oven room.

(e) ,tep :# +ontinual opening and closing of oven door.

(f) ,tep ># +onsumption of misshapen bagels by the staff. (+ould these faultyproducts be sold at a reduced priceG)

(g) ,tep 1?# +arrying "ire bas!ets to the pac!aging room.

(h) ,tep 11# 7riving for!lift to free%er.


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AA@+I,A 6-= (? 4I8CTA,)

(1) @edesigned bagel production process#

(a) Ingredients such as flour and raisins are received and inspected in the morning

or afternoon they are to be used. Then they are placed on a conveyor belt thattransports the ingredients to the mi'ing room ne't door.

(b) 7ough is mi'ed in ?-pound batches in four heavy-duty mi'ers. The dough isplaced on large boards "hich are set on the conveyor. The conveyor transportsthe boards of dough into the bagel room ne't door.

(c) The board is tipped automatically and the dough slides into the hopper of abagel machine. This machine pulls off a piece of dough rolls it into a cylindricalshape and then s&uee%es it into a doughnut shape. The bagel machines can beadjusted in a setup procedure to accommodate different si%es and styles of

bagels. 0or!ers remove the uncoo!ed bagels and place them on a tray. Thetrays are set on the conveyor "hich carries the uncoo!ed bagels into anadjoining room.

(d) This room houses three 5?-gallon vats of boiling "ater. The bagels are boiled forappro'imately one minute.

(e)


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AA@+I,A 6-= (+B8TI8CA7)

(i) 9fter the bagels are cool the "ire bas!ets are placed on the conveyor andtransported to the pac!aging room ne't door.

(j) /ere the bagels are dumped automatically into the hopper on a baggingmachine. This machine pac!ages a half do%en bagels in each bag and seals thebag "ith a t"ist tie.

(!) Then the pac!aged bagels are placed in cardboard bo'es each holding bags.

(l) The bo'es are placed in the free%er "here the bagels are fro%en and stored forshipment. The free%er has a door in the pac!aging room and another door in theshippingLreceiving room.

() ey features of a JIT system#

The ne" production process of


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AA@+I,A 6-> (5 4I8CTA,)

1. Target cost P Q15 R Q5 P Q1??

. Target profit P Q5

. Target price P Q15

. Target costing involves designing a product as "ell as the process used tomanufacture it so that ultimately the product can be manufactured at a cost that "illenable the firm to ma!e a profit "hen the product is sold at an estimated mar!et-driven price. In the case of the photon gismo the design engineering team needs toredesign the gismo andLor the production process so that the gismo can bemanufactured for Q1??.

5. Dalue engineering is a cost-reduction and process-improvement techni&ue thatutili%es information collected about a product;s design and production process andthen e'amines this information to identify candidates for improvement. 9n e'ample inthe conte't of the photon gismo is using a machine to assemble several partsinstead of assembling them manually.

6. The activity phase of a t"o-dimensional 9


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AA@+I,A 6-? (5 4I8CTA,)

9 "ide range of ans"ers is possible for this e'ercise.

1. 9ll colleges and universities have admissions departments course registration

procedures and teaching operations. 9ll aspects of these operations could bebenchmar!ed against similar institutions of higher education. or e'ample ho" doesan undergraduate school of business administration "ith an enrollment of 1???students compare "ith five other similar business schools on the follo"ingdimensions#

a. 9verage grade point average (F29) of students admitted to the business school.

b. 8umber of course offerings.

c. 8umber of corporate recruiters visiting the campus.

d. 9verage number of employment offers received per student.

e. 2ercentage of graduates "ho try for professional certification and aresuccessful in doing so. (or e'ample of the school;s graduates "ho ta!e the+29 or +49 e'amination "hat is the percentage of students "ho pass thee'amG)

. 9 college or university could also benefit from benchmar!ing outside the bo'. 9llcolleges and universities have grounds and maintenance departments food serviceoperations and housing operations. ,o do hospitals and hotels. These types of

college operations could be benchmar!ed against similar operations in hospitals orhotels.

+olleges have course scheduling procedures. ,cheduling is also an important activityin airlines bus lines railroads hospitals and landscaping firms to name a fe".

2ublic service is an important component of the mission of many colleges anduniversities. Affectiveness in this area could be benchmar!ed against a serviceorgani%ation such as the 9merican @ed +ross.

9cademic advising and counseling for students in a college or university could bebenchmar!ed against similar operations in employment search firms and humanresources departments in for-profit businesses.

In short the s!y;s the limit on the !inds of organi%ations against "hich a college oruniversity might effectively benchmar! its operations.


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SO*!TIONS TO /ROB*EMS

2@B


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2@B??? inventory moves P Q? per move

Butgoing shipments# Q5??? 15??? shipments P Q15 per shipment

0arehousing# 55? moves ' Q?NNNNNNN. Q???Butgoing shipments# 5? shipments ' Q15NN :5?

TotalNNNNNNNNNNNNNNNNNN Q5:5?

. A'tra inventory moves in the "arehouse may be caused by boo!s being shelved (i.e.stoc!ed) incorrectly poor planning for the arrival and subse&uentplacementLstoc!ing of ne" titles and other similar situations. A'tra shipments

"ould li!ely be the result of errors in order entry and order filling goods lost intransit or damaged merchandise being sent to customers.

. 9s the follo"ing figures sho" the elimination of non-value-added activities allo"s


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2@B????? units

VThe cost of overtime premiums Q???? is less than the additional forgone contributionmargin if the overtime is not used (15??? units Q6.5? P Q>:5??). Therefore the overtime

should be used.


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2@B


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2@B) @eali%ation by purchasing personnel that the ordered part "ill be (or maybe) late in arriving

(11) @eceipt of order

(1) 7iscovery during inspection that parts do not meet specifications

(1) 7iscovery that parts do not satisfy intended purpose

. 2ossible root causes#

9ctivity8umber 2ossible @oot +ausesK

() Cnclear specificationsIncomplete specifications+lear but apparently "rong specificationsCndertrained purchasing personnel

(>) Dendor delay7elay in placing orderailure by purchasing personnel to ma!e deadline clear

(11) Cse of vendor that has not been fully certified as a reliable supplier+ritical importance of parts

(1) 4isspecification of partsArror by purchasing personnel in placing orderDendor errorInspector error

(1) 4isspecification of partsIncomplete specifications2oor product designArror by purchasing personnel in placing orderDendor error

KThis list is not necessarily complete. Bther root causes may e'ist.


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2@B


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2@B (? 4I8CTA,)

1. The net cash savings reali%ed by 9gri+oHs ,ervice 7ivision as a result of the just-in-time inventory program is Q??? computed as follo"s#

+ash,avings

(loss)unds released from inventory investment....................... Q?????Interest..................................................................................

.15 Q6????

Insurance savings (Q=???? .6?)..................................... =???

0arehouse rental revenue

S(=??? s&. ft. .:5) Q.5? per s&. ft............................ 15???

0arehouse rental cost# no effect........................................ UTransferred employees# no effect....................................... U+ontribution of lost sales (=?? units at Q1?.??)K............. (=???)Bvertime premium (:5?? units at Q5.6?)V........................... (???)8et cash savings.................................................................. Q???

K+alculation of unit contribution margin#@evenue (Q616???? =???? units)............................... Q.??Mess variable costs#

+ost of goods sold (Q66???? =???? units)..................... Q>.5?

,elling and administrative e'penses (Q:????? =???? units) .5? 1.??

+ontribution margin........................................................................ Q1?.??VThe incremental cost of Q5.6? per unit for overtime is less than the additional Q1?.??per unit contribution for the :5?? units that "ould have been lost sales. Therefore theovertime hours should be used.


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2@B +B8TI8CA7)

. actors other than financial that should be considered before a company implementsa JIT inventory program include#

+ustomer dissatisfaction# ,toc!outs of finished goods or spare parts could resultin customers; do"ntime "hich may be costly.

7istributor relations# ,toc!outs of spare parts or finished goods can impair the

manufacturer;s image "ith its distributors "ho represent the direct contacts "iththe ultimate customers.

,upplier dissatisfactions# 2lacement of smaller and more fre&uent orders can

result in higher material and delivery costs from suppliers. 9dditionally "ithchanges in their production and procurement processes suppliers may choose to

discontinue supplying to a just-in-time customer.

+ompetition# The mar!etplace "ill determine the impact of service degradation

due to stoc!outs.


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2@B6???

P Q:.=? per hr.

. There is no single correct response to this re&uirement. Bne reasonable response issho"n in the follo"ing table. Bverhead costs are categori%ed into nine cost poolsdesignated (a) through (i). +ost drivers are identified as follo"s#

(a) 2roduction (in units)

(b) @a"-material cost

(c) actory space

(d) 4achine hours

(e) 2roduction runs

(f) ,hipments of finished goods

(g) ,hipments of ra" materials

(h) 8umber of different ra" materials and parts used in a product

(i) Angineering specifications and change orders

. ,ee the follo"ing table.

. ,ee the follo"ing table.


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2roblem 6-55 (6? minutes)1. 2ic!"ic! 2aper +ompany# +urrent production process.


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+onveyor

,hipping

Moading 7oc!

Mabeling


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2@B


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2@B) 9dditional "ater is removed from the pulp in a series of presses.

(1?) 7riers then remove any remaining "ater from the pulp.

(11) The 94/, carries the sheets of pulp to the calenders. The thin dry sheets ofpulp are then smoothed and polished by the calendars.

(1) The paperboard is "ound into large rolls and placed on the 94/,.

(1) The rolls are labeled and stored for shipment in the labeling building. Inventory

is minimi%ed.

(1) The rolls of paperboard are shipped to customers from the ne" loading doc! inthe labeling building.


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1. 9 proliferation of part numbers means that the company may be ordering and stoc!ing

many more types of uni&ue parts than it needs to. Bverordering and overstoc!ingentail more costs in purchasing receiving inspecting storing and material handlingthan might other"ise be necessary.

. Mong production cycles may indicate that the production process is inefficient.Inefficiencies in turn imply non-value-added costs.

. 9n 9


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. The objective is to find a cost driver that charges to a product the costs associated"ith purchasing receiving inspecting storing and handling the parts used in theproduct. 2ossible candidates for such a driver include (1) direct-material cost ()

number of parts and () number of part numbers.

7river number () the number of part numbers (i.e. the number of differentparts in a product) "ould probably "or! the best. It focuses most directly on theproblem at hand# part number proliferation.


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The profit achieved on the current vehicle model being redesigned.

The profit achieved on other comparable vehicle models.

The level of investment in the vehicle model.

. 9fter the target retail price and target profit have been set the target cost is computedas the target price minus the target profit.

. Dalue engineering accomplishes the really hard "or! of target costing# bringing theultimate production cost of the ne" vehicle model into line "ith the target cost. Dalueengineering is a cost-reduction and process-improvement techni&ue in "hichinformation is collected about a product;s design and production process and

attributes of the design and process are then e'amined to identify candidates forimprovement.

The concept of value engineering can be related to all or most of the stepsdepicted in the diagram given in the problem. or e'ample the styling "ould bee'amined for "ays to trim cost "ithout diminishing the vehicle;s attractiveness. Thetest model dra"ings "ould be carefully scrutini%ed for "ays to cut costs such asusing common parts instead of uni&ue parts. or e'ample an automobilemanufacturer that has 5? different headlight housings "ill incur more cost overallthan a manufacturer that uses 1? different housings. The facility and e&uipment usedin the vehicle;s production "ould be e'amined for potential improvements. The testmodel (prototype) "ould be carefully scrutini%ed for potential improvements andopportunities for cost savings. In short every aspect of the ne" vehicle model;sdesign and production process "ould be analy%ed through value engineering forimprovements and potential cost savings.

5. If the value-engineering team is unable to trim cost do"n to the target cost the result"ill be one of the follo"ing#

The target price "ill be reconsidered (and possibly raised).

The target profit "ill be reduced.

The basic development proposal for the ne" vehicle model "ill be revised.

9nother attempt to trim the cost using value engineering "ill be made.


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,!RRENT ISS!ES IN MANA0ERIA* A,,O!NTIN0

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