CHAPTER 7 Managing Quality and Time to Create Value ANSWERS TO REVIEW QUESTIONS 7.1 Refer to the list of key terms at the end of the chapter and the glossary. 7.2 Several decades ago, high quality was a means of establishing a competitive advantage. However, now high quality is considered to be a competitive necessity. Quality does not just happen; it is the result of conscious management decisions. Just like cost, measuring and evaluating quality is necessary to ensure that high quality is being maintained. 7.3 Some feel that now managing time is at the same stage as managing quality was 10 to 20 years ago – soon it will be a competitive necessity, but it may be a source of competitive advantage now. Organizations that are able to meet customer needs more quickly (and with high quality) may have an advantage, but superior time performance does not just happen. It, too, is the result of applying management focus and techniques. 7.4 TQM advocates believe that investments in improved quality will always pay off because customers will prefer to buy from a quality supplier and they should be willing to pay premium prices. 7.5 ROQ advocates believe there is an optimum level of quality, beyond which the costs of achieving higher quality exceed the benefits (higher prices) of higher quality. According to ROQ, organizations should seek to maximize profitability, not quality. TQM, on the other hand, presumes that increases in quality always increases profitability. 7.6 Quality dimensions are (1) product or service attributes and (2) customer service before and after the sale. 7.7 Perhaps the major difference between tangible and intangible product features are the ease and reliability with which organizations can measure achievement of those features. 7.8 High degrees in variation of performance of process activities usually leads to variation in product attributes, which are important contributors to quality. High variation itself usually means that there is a greater chance of product attributes being well below expectations. 7.9 Lead indicators of quality reflect current process activities that the organization believes will affect the quality of products and services as perceived by customers. Diagnostic information about quality may be lead indicators of quality, but also may measure customer perceptions about quality that has resulted. Diagnostic information identifies or helps identify causes of poor quality. 7.10 Customer satisfaction and quality are closely related because high degrees of quality, as defined by the customer, could result in high customer satisfaction. Customer satisfaction also considers the degree to which products and services meet customers’ expectations about price. 7.11 COQ, particularly preventive activity costs, may be a lead indicator of quality if it is computed frequently. More often, COQ is used as diagnostic information, which identifies causes of poor quality performance (e.g., external failures). 7.12 Organizations should evaluate whether increased preventive activities result in fewer internal and external failure activities. Most organizations feel there is a favorable tradeoff, but there is not much evidence that organizations have formalized the tradeoff; that is, measuring by how much spending a certain amount on preventive activities will reduce external failure costs. 7.13 COQ could be used by either TQM or ROQ advocates. TQM advocates could point to an imbalance between preventive activity costs and the other COQ categories and claim that the organization should shift its efforts from inspection, and correcting failures to prevention of poor quality. ROQ advocates could use COQ information to try to quantify the tradeoffs among types of quality activities. 7.14 Improvements in time performance, while maintaining customer value, usually are not possible without improvements in quality. Likewise, improvements in quality usually result in improved time performance because time for inspections and correcting failures is reduced. 7.15 JIT in its complete form is not possible without high quality processes. Low quality processes mean that sufficient inventories of parts must be purchased or built to compensate for the inevitable defective parts that result from low quality processes. Maintaining high levels of inventory for these purposes is not value-added and is wasteful of scarce resources. 7.16 Several types of productivity measures include individual factor productivity, such as sales per employee, and total factor productivity, which measures total output achieved by all resources employed. 7.17 Cycle time is the elapsed time between when a product or service is begun and when that product or service is completed and ready for delivery to the customer. Average cycle time should be measured by the time for working on all units, whether they are completed without error or reworked, divided by the total good units completed. 7.18 Throughput efficiency depends on how much time a process spends adding value to a product or service compared to the total time the product or service is in process. It is measured by the throughput time ratio, which is the time spent adding value by active processing divided by total cycle time. 7.19 Process capacity is the ability of an organization to transform inputs into outputs. The chapter uses an example of traffic on the highway to identify the process of cars entering and parking in a city. The process capacity is the rate at which cars can enter and park within the city. 7.20 Theoretical capacity is the maximum rate of transformation of inputs into outputs if a process were fully used. Practical capacity is a more realistic rate of transformation considering such items as reserve capacity, maintenance, and planned downtime. One reason an organization might operate at practical capacity is that planned downtime is often necessary to keep equipment maintained and running. Another is that demand for the process output may be less than theoretical capacity. Also, running at theoretical capacity may cause breakdowns and delays, which could severely hamper the throughput of the organization. ANSWERS TO CRITICAL ANALYSIS 7.21 These views can be conflicting, but they may reinforce each other. At one time, an example of the difference in views was the contrasting implementation of quality by BMW and Lexus. BMW prided itself on building “driving machines,” which epitomized faultless driving performance (speed, handling, etc.). Lexus, however, focused on providing comfort, luxury, and reliability because it assessed that there was a larger market of people willing to buy expensive autos who defined quality this way – people who in an earlier generation perhaps would have bought Cadillacs. It is interesting to see that both BMW and Lexus apparently are adopting some of each other’s definitions of quality, perhaps to offer broader quality and appeal to all of the upscale auto market. 7.22 Though quality no longer may be a way to achieve competitive advantage, it would be shortsighted to say that quality is now less important. Failing to provide high quality cannot be offset by developing new products more quickly. It is fair to say that new product development time is crucial now, but high quality must be maintained. 7.23 While we have not reviewed the bankruptcy court proceedings for this case, we may speculate that this company overspent on achieving high quality. One of the criticisms of the Malcolm Baldrige award is that it focuses too much on achieving high quality processes and not enough on successfully providing customer value competitively. 7.24 FedEx seems to be saying that it will invest in quality up to the point of just improving customer value – this is the ROQ approach to quality. Hewlett Packard seems to be saying, however, that quality improvement is an inextricable part of the company’s culture – this is the TQM approach. Both may be successful, but the ROQ approach seems more consistent with economic decision-making. At some point, one suspects that even Hewlett Packard would judge a quality improvement more costly than could be recovered by higher prices. 7.25 This may be a touchy question, particularly if this chapter is covered around registration time for the next semester or quarter. Students have a strong interest in registering quickly and for the classes they want and need. A fair measure of average registration time should include time spent reworking schedules, which may involve standing in long lines to reregister if the initial registration was not successful. 7.26 All of these factors may be dimensions of quality as perceived by customers. You would expect each airline to stress its most favorable qualities, while leaving unsaid its less successful quality performance. 7.27 Depending on how the questionnaire is constructed, the insurance company may discover information about its quality performance and diagnostic information about how it may improve its customer service. 7.28 It may seem strange to today’s students that at one time formal student evaluations of university teaching were rare. Though this is controversial among some professors, most students perceive themselves as customers who have a right to demand high quality service and to provide feedback about the quality of service delivered. While student evaluations at most universities may be flawed, they do attempt to measure the quality of teaching services. Some universities (e.g., Chicago – not surprisingly) rely on markets for courses to signal all the dimensions of quality of instruction. 7.29 Quality of service may have many dimensions. On-time delivery may be very important, but it may not be the only important one. Other delivery companies may not have quite as good on-time delivery performance as UPS, but they may excel on other dimensions of customer-perceived quality – e.g., real-time information about shipments, interactions with customers. It is interesting that UPS reportedly is relaxing its focus on speed and encouraging its personnel to interact with customers more to identify problems and to convey service information. 7.30 Motorola’s six-sigma program seems more closely aligned with the TQM approach because it is pursuing what may seem to others as an impossible goal. Achieving this low level of defects could be more costly than it would be worth in terms of the higher prices that Motorola could charge for its products. On the other hand, most organizations may find improving quality easier when they establish a tangible goal (e.g., a small number of defects) for all parts of the organization than a more general and theoretically superior goal of maximizing profits from quality improvements. How do individuals at all levels of the organization make the tradeoffs necessary to implement profit maximization when they may see only a part of the process? 7.31 Tangible features include clarity, readability, accuracy, topic coverage, and comparisons with competitive books. Intangibles include design, appearance, and achievement of educational goals. Of course, we are interested in these ratings. 7.32 All three methods seek to improve the organization by focussing on quality. TQM seeks to install attitudes and processes that lead to continuous quality improvements. ROQ seeks to find economic tradeoffs between the costs and benefits of quality improvements. COQ seeks to measure the costs of four types of quality activities to quantify the organization’s commitment to and consequences of quality. 7.33 Presumably, improvements in internal processes, such as shorter cycle time, and customer value, such as product quality, are leading indicators of improved profits. However, under pressure to generate current profits, top managers may encourage lower-level managers to take quality and/or processing time shortcuts that would save current expenditures. This could be even more costly in the long run, and some companies have begun to include non-financial performance measures, such as quality, time, and customer satisfaction, in the evaluations of top managers, too. These issues are covered in more detail in Chapters 20. 7.34 By itself, a measure of average cycle time for good units only does not seem complete. However, it could be compared to the average cycle time for all units to indicate the improvements that would be possible if rework can be eliminated. Managers may be motivated to measure the cycle time for only good units because they know this measure will be compared to previous times or times from other, more efficient organizations. Unless the proportion of bad or reworked units is very small, ignoring the time wasted on them is not realistic and probably will fool no one for long. 7.35 It certainly is possible to increase the throughput of one part of an organization to the detriment of the organization’s profitability. Consider the case of one part of a production process that virtually eliminates non-productive time (increasing the throughput time ratio dramatically) and uses the freed-up time to produce more of its parts and assemblies. But what if this rate of production far exceeds the organization’s ability to use those parts and assemblies because other parts of the process may be less efficient? Excess parts and assemblies will build up, wasting the company’s resources, and leading to lower profitability. 7.36 It is probably no accident that many well-run organizations intend to operate at a practical capacity that is approximately 80 percent of theoretical capacity. Practical capacity usually puts an upper limit on the planned use of capacity, but does not necessarily limit the actual use of capacity to 80 percent of theoretical. If unforeseen, profitable opportunities arise, the organization can use its reserve capacity to meet them. Intentionally scheduling resources to use close to theoretical capacity (even allowing for planned maintenance) may not allow the organization to take advantage of these opportunities or to meet scheduled demand if the process unexpectedly shuts down because of problems. It does seem tempting to fully utilize capacity, but organizations have found it to be prudent to reserve some capacity for unforeseen opportunities or problems. 7.37 Answers will vary, but should discuss the boundaries of the “true” transportation problem that needs to be solved. Because most such projects are performed by agencies with limited responsibilities (e.g., highway construction), solutions often are partial in nature; that is, they do not consider the entire transport system. SOLUTIONS TO EXERCISES 7.38 (10 min) The Malcolm Baldrige award is granted by the US Department of Commerce to US companies that demonstrate commitment to and achievement of high quality processes, products and services. The Deming Prize is open to organizations around the world and also is based on the quality of processes, products, and services. Both prizes are awarded after extensive self-study and examinations by outsiders. ISO 9000 is a set of international standards for designing and evaluating processes to ensure quality outcomes. 7.39 (20 min) Costs of quality Classifcation of items Category Materials inspection Appraisal Scrap Internal Failure Employee training Prevention Returned goods External Failure Finished goods inspections Appraisal Processing customer complaints External Failure Cost of Quality Report Activity Amount % of Sales Sales $ 450,000 100% Prevention activities Employee training $13,000 2.89% Appraisal activities Materials inspection 13,000 FG inspections 15,000 28,000 6.22% Internal failure activities Scrap 8,000 1.78% External failure activities Returned goods 3,000 Process customer complaints 6,000 9,000 2.00% Total costs of quality $ 58,000 12.89% EXCEL SOLUTIONS ARE FOUND IN EXCEL SOLUTIONS FILE 7.40 (15 min) Quality according to the customer Product or Service Customer-quality attribute a. Tuxedo for a bridegroom Style, material, cost, timeliness or accessibility b. Microwave oven Speed, flavor of food, ease of use c. Accounting course at a university Knowledge achieved, grade, quality of professor d. Trip on a cruise ship Food, comfort, entertainment, itinerary, etc. e. Frozen dinner Taste, nutrition, perishable, etc. f. Tax return prepared by professional Accuracy, amount of refund/reduction to tax liability, audit defense 7.41 (15 min) Quality according to the customer Product or Service Customer-quality attribute a. Personal computer Speed, memory, storage, reliability, customer service b. Television programming Entertainment value, time of day, informativeness c. Meals in a fine restaurant Taste, presentation, setting, service, variety d. Student study guides for an accounting text Ease of use, relevance to text, completeness, accuracy e. Running shoes Comfort, support, style, performance f. Legal representation in traffic court Effectiveness, timeliness 7.42 (15 min) Quality according to the customer Product or Service Customer-quality tradeoffs a. Personal computer Speed, memory, storage, video and audio performance, reliability, customer service, cost b. Portable MP3 player Sound reproduction and amplification, reliability, styling, features, cost c. Checking account Ease of use, service features, fees d. Taxi ride through New York Speed, safety, informativeness (perhaps) e. Personal clothing Style, functionality, ease of care, cost 7.43 (30 min) Costs of quality Classification of activities Category Process inspection……………….. Appraisal Scrap………………..……………….. Internal Failure Quality training……………………. Prevention Warranty repairs………………….. External Failure Testing equipment……………….. Appraisal Customer complaints…………….. External Failure Rework………………………………. Internal Failure Preventative maintenance……….. Prevention Materials inspection……………….. Appraisal Field testing………………………… Appraisal Types of costs Year 1 Amounts As a % of Sales Year 2 Amounts As a % of Sales Sales $ 2,450,000 100% $ 2,200,000 100% Prevention Quality training $ 198,000 8.08% $ 130,000 5.91% Preventative maintenance 135,000 5.51% 95,000 4.32% Total prevention 333,000 13.59% 225,000 10.23% Appraisal Process inspection 16,500 0.67% 18,800 0.85% Materials inspection 65,000 2.65% 48,000 2.18% Field testing 94,000 3.84% 124,000 5.64% Testing equipment 70,000 2.86% 70,000 3.18% Total appraisal 245,500 10.02% 260,800 11.85% Internal failure Scrap 18,500 0.76% 19,300 0.88% Rework 170,000 6.94% 185,000 8.41% Total internal failure 188,500 7.69% 204,300 9.29% External failure Warranty repairs 43,000 1.76% 48,000 2.18% Customer complaints 28,000 1.14% 34,000 1.55% Total external failure 71,000 2.90% 82,000 3.73% Total costs of quality $ 838,000 34.20% $ 772,100 35.10% EXCEL SOLUTIONS ARE FOUND IN EXCEL SOLUTIONS FILE 7.44 (30 min) Costs of quality Classification of activities Category Process inspection Appraisal Scrap Internal Failure Quality training Prevention Warranty repairs External Failure Testing equipment Appraisal Customer complaints External Failure Rework Internal Failure Preventive maintenance Prevention Materials inspection Appraisal Field testing Appraisal Activities Year 1 Costs As a % of Sales Year 2 Costs As a % of Sales Sales $ 1,960,000 100% $ 1,760,000 100% Prevention Quality training 158,000 8.06% 105,000 5.97% Preventive maintenance 108,000 5.51% 76,000 4.32% Total prevention 266,000 13.57% 181,000 10.28% Appraisal Process inspection 13,200 0.67% 15,000 0.85% Materials inspection 52,000 2.65% 38,000 2.16% Field testing 75,000 3.83% 99,000 5.63% Testing equipment 56,000 2.86% 56,000 3.18% Total appraisal 196,200 10.01% 208,000 11.82% Internal failure Scrap 14,800 0.76% 15,500 0.88% Rework 136,000 6.94% 148,000 8.41% Total internal failure 150,800 7.69% 163,500 9.29% External failure Warranty repairs 34,000 1.73% 38,000 2.16% Customer complaints 22,500 1.15% 27,200 1.55% Total external failure 56,500 2.88% 65,200 3.70% Total costs of quality $ 669,500 34.16% $ 617,700 35.10% EXCEL SOLUTIONS ARE FOUND IN EXCEL SOLUTIONS FILE 7.45 (30 min) Costs of quality Classification of items Category Process inspection Appraisal Scrap Internal Failure Quality training Prevention Warranty repairs External Failure Testing equipment Appraisal Customer complaints External Failure Rework Internal Failure Preventative maintenance Prevention Materials inspection Appraisal Field testing Appraisal Types of costs Year 1 Costs As a % of Sales Year 2 Costs As a % of Sales Sales $ 3,920,000 100% $ 3,520,000 100% Prevention Quality training 305,000 7.78% 220,000 6.25% Preventative maintenance 220,000 5.61% 152,000 4.32% Total prevention 525,000 13.39% 372,000 10.57% Appraisal Process inspection 26,400 0.67% 30,000 0.85% Materials inspection 105,000 2.68% 75,000 2.13% Field testing 150,000 3.83% 200,000 5.68% Testing equipment 115,000 2.93% 115,000 3.27% Total appraisal 396,400 10.11% 420,000 11.93% Internal failure Scrap 28,800 0.73% 30,100 0.86% Rework 272,000 6.94% 195,000 5.54% Total internal failure 300,800 7.67% 225,100 6.39% External failure Warranty repairs 70,000 1.79% 75,000 2.13% Customer complaints 44,500 1.14% 54,200 1.54% Total external failure 114,500 2.92% 129,200 3.67% Total costs of quality $ 1,336,700 34.10% $ 1,146,300 32.57% EXCEL SOLUTIONS ARE FOUND IN EXCEL SOLUTIONS FILE 7.46 (15 min) Cost of quality Prevention Category Cost Design engineering $ 600 Supplier evaluations 450 Equipment maintenance 1,154 Quality training 500 $ 2,704 Appraisal Category Product testing $ 786 786 Total $ 3,490 7.47 (30 min) Quality and time control (appendix) Week Avg. cycle time in hours 1 133.4 2 158.8 3 121.9 4 120.3 5 125.8 6 133.1 7 140.7 8 122.8 9 135.7 10 165.3 11 128.1 12 103.3 13 102.5 14 101.4 15 118.9 16 127.8 17 132.2 18 135.5 Statistical Control Parameters Overall Mean 128.19 hours Standard Deviation (SD) 16.92 hours 2 SDs 33.84 hours UCL = Mean + 2 SD 162.04 hours LCL = Mean - 2 SD 94.35 hours This chart indicates only one observation outside the historical control limits. A possible run occurred in weeks 11-15 when four consecutive observations were outside one standard deviation. The process shows a lot of variation that seems to be moderating in recent weeks, perhaps indicative of successful corrections. EXCEL SOLUTIONS ARE FOUND IN EXCEL SOLUTIONS FILE 7.48 (20 min) Time control chart This chart indicates mostly random fluctuations, and no evidence of trends or runs. Nearly 50% of the time, however, the process takes longer or shorter than the target control limits. This seems excessive. Investigation appears warranted. EXCEL SOLUTIONS ARE FOUND IN EXCEL SOLUTIONS FILE 7.49 (30 min) Quality control chart Week Average test performance 36 1.7 37 1.7 38 1.7 39 1.6 40 1.6 41 2.2 42 1.4 43 1.4 44 2.0 45 2.1 46 1.2 Target Control Parameters Target Mean 1.50 UCL = 2.10 LCL = 1.20 EXCEL SOLUTIONS ARE FOUND IN EXCEL SOLUTIONS FILE This chart shows the process is tending to greater variation recently and appears to be barely in control. Corrective action is indicated even though the most recent observations are within the limits 7.50 (30 min) Quality control/run chart (appendix) Week Average test performance 35 55 36 33 37 93 38 82 39 49 40 73 41 88 42 45 43 69 44 36 45 101 46 107 47 89 48 74 49 64 50 55 51 52 52 57 Statistical Control Parameters Overall Mean 67.89 Standard Deviation (SD) 21.97 2 SDs 43.94 UCL = Mean + 2 SD 111.82 LCL = Mean - 2 SD 23.95 7.50 continued This chart shows relatively high levels of variation in earlier weeks that has moderated greatly in recent weeks. Because of the recent reduction in variation, the historical control limits seem out of date and should be revised, or perhaps replaced with target control limits. EXCEL SOLUTIONS ARE FOUND IN EXCEL SOLUTIONS FILE 7.51 (20 min) Pareto chart. Defects sorted by frequency Pricing and shipping appear to be the primary causes of complaints. EXCEL SOLUTIONS ARE FOUND IN EXCEL SOLUTIONS FILE 7.52 (20 min) Pareto chart. Data sorted by frequency. Causes of defects Frequency Incoming components 148 Mounting machine alignment 64 Incomplete solder 29 Operator error 23 Improper sequence of components 17 Testing error 11 Faulty board 6 By far, the largest number of defects is caused by faulty incoming components. The company should either improve its supply of components or test them before they are installed. EXCEL SOLUTIONS ARE FOUND IN EXCEL SOLUTIONS FILE 7.53 (20 min) Quality versus cost Status quo Waste $ 3,000 Lost business 2,500 Total cost $ 5,500 Alternative 1 Alternative 2 Lease new regulator $ (4,000) New employee (2,500) Waste savings 2,000 Waste savings 1,500 Lost business savings 2,000 Lost business savings 1,800 net savings $ - net savings $ 800 Cost savings seem to favor alternative 2, but alternative 2 appears to be less effective in eliminating the problem. Estimates of the costs of lost business, in particular, are difficult to make reliably, and they may be understated here. The less lost business, the less likely is adverse publicity. Therefore, the company may consider alternative 1 to be more attractive since it reduces estimated lost business, presumably through having more product available for sale (and less wasted). Another consideration is that repairing or exchanging the new regulator may be easier than firing or retraining the new employee if he or she does not work out. EXCEL SOLUTIONS ARE FOUND IN EXCEL SOLUTIONS FILE 7.54 (20 min) Quality versus cost Status quo Waste $ 5,000 Lost business 3,500 Total cost 8,500 Alternative 1 Alternative 2 Lease new regulator $(3,500) New employee $(3,000) Waste savings 3,500 Waste savings 2,500 Lost business savings 2,000 Lost business saving 2,000 net savings $ 2,000 net savings $ 1,500 Cost savings and effectiveness favor alternative 1, which eliminates more of the problem and offers greater cost savings than alternative 2. EXCEL SOLUTIONS ARE FOUND IN EXCEL SOLUTIONS FILE 7.55 (20 min) Quality versus cost Status quo Waste $ 3,000 Lost business 1,500 Total cost 4,500 Alternative 1 Alternative 2 Lease new welder $(3,500) New employee $ (3,000) Waste savings 1,500 Waste savings 2,500 Lost business savings 1,000 Lost business saving 1,000 net savings $(1,000) net savings $ 500 Alternative 2 appears to be more effective in eliminating the quality problem. Though both alternatives eliminate most of the problem of lost business (perhaps), the company still seems to generate a large amount of waste. It should investigate whether its waste is unusual for the industry and whether waste can be reduced, perhaps through better designs or material preparation. EXCEL SOLUTIONS ARE FOUND IN EXCEL SOLUTIONS FILE 7.56 (20 min) Answers will vary, particularly over time. Try searching using Google or another engine on the key words, “just in time” and “outsourcing.” Answers should consider features, reliability, and so on of the outsourced activities. 7.57 (20 min) Answers will vary. Try searching Google or ABI Inform on the key words “just in time,” “cost,” and “benefit.” Answers should cover the study’s objective(s), data, and conclusions and should contain two questions to the author(s). 7.58 (20 min) Productivity. a. Note that sales and income are in $ millions. A B C D E F 1 Year 5 Year 4 Year 3 Year 2 Year 1 2 Number of employees 22,230 24,400 24,100 22,000 21,800 3 Sales revenue (millions) $ 2,843 $ 2,796 $ 2,669 $ 2,318 $ 1,993 4 Operating income (millions) $ 468 $ 475 $ 530 $ 436 $ 303 5 Sales per employee (B3/B2) $ 127,890 $ 114,590 $ 110,747 $ 105,364 $ 91,422 6 Total factor productivity (measured as Sales/Total operating expenses, B3/(B3-B4)) 1.1971 1.2047 1.2478 1.2317 1.1793 Changes may be more apparent in the following graphs. EXCEL SOLUTIONS ARE FOUND IN EXCEL SOLUTIONS FILE 7.59 (20 min) Cycle time and throughput efficiency a. Looking only at the throughput time efficiency ratio indicates improving performance; however, average cycle time shot up in March, reflecting much lower throughput during that month. EXCEL SOLUTIONS ARE FOUND IN EXCEL SOLUTIONS FILE SOLUTIONS TO PROBLEMS 7.60 Remanufacturing Costs and Benefits (30 min) Remanufacturing carpet fiber Data Input New Remanufactured Sales volume per year, units 2,000,000 2,000,000 Sales price per unit $ 12.00 $ 7.00 Direct material cost per unit $ 4.95 $ 0.87 Direct labor cost per unit $ 0.08 $ 0.02 Machine hours per unit 0.06 0.01 Cycle time per unit, hours 0.90 0.40 Manufacturing overhead per year $ 2,400,000 $ 400,000 Total direct labor cost per year $ 160,000 $ 40,000 Total machine hours per year 120,000 20,000 Total cycle time per year, hours 1,800,000 800,000 a. Manufacturing cost, Direct labor New Remanufactured Manufacturing OH rate based on DL* 1,500% 1,000% Per unit cost, using DL-based OH rate: Direct materials $ 4.95 $ 0.87 Direct labor 0.08 0.02 Manufacturing overhead 1.20 0.20 Total cost per unit $ 6.23 $ 1.09 Total cost of goods sold per year $ 12,460,000 $ 2,180,000 *Calculation of OH rate $2,400,000/$160,000 $400,000/$40,000 EXCEL SOLUTIONS ARE FOUND IN EXCEL SOLUTIONS FILE b. Manufacturing cost, Machine hours New Remanufactured Manufacturing OH rate per MH** $ 20 $ 20 Per unit cost, based on MH Direct materials $ 4.95 $ 0.87 Direct labor 0.08 0.02 Manufacturing overhead 1.20 0.20 Total cost per unit $ 6.23 $ 1.09 Total cost of goods sold per year $ 12,260,000 $ 2,180,000 **Calculation of OH rate $2,400,000/120,000 $400,000/20,000 c. Manufacturing cost, Cycle time New Remanufactured Manufacturing OH rate per hour of cycle time*** $ 1.33 $ 0.50 Per unit cost, based on cycle time Direct materials $ 4.95 $ 0.87 Direct labor 0.08 0.02 Manufacturing overhead 1.20 0.20 Total cost per unit $ 6.23 $ 1.09 Total cost of goods sold per year $ 12,260,000 $ 2,180,000 ***Calculation of OH rate $2,400,000/1,800,000 $400,000/800,000 d. Profit estimates and memo New carpet: DL based OH Mach. Hrs. based OH Cycle time based OH Sales (price x volume) $24,000,000 $24,000,000 $24,000,000 Cost of goods sold 12,460,000 12,260,000 12,260,000 Gross margin $11,540,000 $11,740,000 $11,740,000 Remanufactured carpet: DL based OH Mach. Hrs. based OH Cycle time based OH Sales (price x volume) $14,000,000 $14,000,000 $14,000,000 Cost of goods sold 2,180,000 2,180,000 2,180,000 Gross margin $11,820,000 $11,820,000 $11,820,000 These three overhead application methods give identical or nearly identical results. The two product lines are about equally profitable, so there is no reason to drop one or the other. The lower sales price on the remanufactured carpet is offset by the lower costs. As long as the economics of the business does not change, both new and remanufactured carpets are profitable. The company should consider quality issues. Will the remanufactured carpet be high enough quality so the company’s reputation will not be negatively affected? The company might gain some public goodwill and develop a niche in the market by focusing more on remanufactured carpet, of course. 7.61 Remanufacturing Costs and Benefits (30 min) Remanufacturing fuel injection case Data Input New Remanufactured Sales volume per year, units 1,000,000 1,000,000 Sales price per unit $ 6.00 $ 4.00 Direct material cost per unit $ 1.00 $ 0.12 Direct labor cost per unit $ 1.00 $ 0.20 Machine hours per unit 0.16 0.05 Cycle time per unit, hours 0.26 0.20 Manufacturing overhead per year $ 1,200,000 $ 400,000 Total direct labor cost per year $ 1,000,000 $ 200,000 Total machine hours per year 160,000 50,000 Total cycle time per year, hours 260,000 200,000 a. Manufacturing cost, Direct labor New Remanufactured Manufacturing OH rate based on DL* 120% 200% Per unit cost, using DL-based OH rate: Direct materials $ 1.00 $ 0.12 Direct labor 1.00 0.20 Manufacturing overhead 1.20 0.40 Total cost per unit $ 3.20 $ 0.72 Total cost of goods sold per year $ 3,200,000 $ 720,000 *Calculation of OH rate $1,200,000/$1,000,000 $400,000/$200,000 EXCEL SOLUTIONS ARE FOUND IN EXCEL SOLUTIONS FILE b. Manufacturing cost, Machine hours New Remanufactured Manufacturing OH rate per MH** $ 7.50 $ 8.00 Per unit cost, based on MH Direct materials $ 1.00 $ 0.12 Direct labor 1.00 0.20 Manufacturing overhead 1.20 0.40 Total cost per unit $ 3.20 $ 0.72 Total cost of goods sold per year $ 3,200,000 $ 720,000 **Calculation of OH rate $1,200,000/160,000 $400,000/50,000 c. Manufacturing cost, Cycle time New Remanufactured Manufacturing OH rate per hour of cycle time*** $ 4.61538 $ 2.00 Per unit cost, based on cycle time Direct materials $ 1.00 $ 0.12 Direct labor 1.00 0.20 Manufacturing overhead 1.20 0.40 Total cost per unit $ 3.20 $ 0.72 Total cost of goods sold per year $ 3,200,000 $ 720,000 ***Calculation of OH rate $1,200,000/260,000 $400,000/200,000 d. Profit estimates and memo New fuel injection cases: DL based OH Mach. Hrs. based OH Cycle time based OH Sales (price x volume) $ 6,000,000 $ 6,000,000 $ 6,000,000 Cost of goods sold 3,200,000 3,200,000 3,200,000 Gross margin $ 2,800,000 $ 2,800,000 $ 2,800,000 Remanufactured fuel injection cases: DL based OH Mach. Hrs. based OH Cycle time based OH Sales (price x volume) $ 4,000,000 $ 4,000,000 $ 4,000,000 Cost of goods sold 720,000 720,000 720,000 Gross margin $ 3,280,000 $ 3,280,000 $ 3,280,000 These three overhead application methods give identical results. The two product lines are about equally profitable, so there is no reason to drop one or the other. The lower sales price on the remanufactured items is offset by the lower costs. As long as the economics of the business does not change, both new and remanufactured fuel injection cases are profitable. The company should also consider quality issues. Will the remanufactured carpet be high enough quality so the company’s reputation will not be negatively affected? 7.62 (20 min.) A B C D Number of 40-hour shifts per week 2 3 1 2 Number of identical assembly lines 3 5 = 600÷(40x3) 4 5 Available hours per week 240 = 40x2x3 600 160 = 40x1x4 400 = 40x2x5 Average cycle time per unit 3.5 hrs 9.5 hrs 2.0 hrs = 0.8÷0.4 1.33 hrs = 0.2÷0.15 Throughput time ratio 30% 20% = 1.9÷9.5 40% 15% Value-adding cycle time 1.05 hrs = 0.3x3.5 1.9 hrs 0.8 hrs = 160÷200 0.2 hrs = 400÷2,000 Theoretical capacity in units 229 = 240÷1.05 316 = 600÷1.9 200 2,000 = 1,600÷0.8 Practical capacity in units 183 = 229x0.8 253 = 316x0.8 160 = 200x0.8 1,600 EXCEL SOLUTIONS ARE FOUND IN EXCEL SOLUTIONS FILE 7.63 (30 min.) A B C D Number of 40-hour shifts per week 1 2 2 3 Number of identical assembly lines 4 5 = 400÷(40x2) 7 5 Available hours per week 160 = 40x1x4 400 560 = 40x2x7 600 = 40x3x5 Average cycle time per unit 6.5 hrs 11.5 hrs 3.2 hrs = 0.8÷0.25 20 hrs = 3÷0.15 Throughput time ratio 50% 16.5% = 1.9÷11.5 25% 15% Value-adding cycle time 3.25 hrs = 0.5x6.5 1.9 hrs 0.8 hrs = 560÷700 3.0 hrs = 600÷200 Theoretical capacity in units 49 = 160÷3.25 211 = 400÷1.9 700 200 = 160÷0.8 Practical capacity in units 39 = 49x0.8 169 = 211x0.8 560 = 700x0.8 160 EXCEL SOLUTIONS ARE FOUND IN EXCEL SOLUTIONS FILE 7.64 Time-based Activity-based Costing (30 min) EXCEL SOLUTIONS ARE FOUND IN EXCEL SOLUTIONS FILE Inventory stocking costs Data input Inventory stocking department costs Payroll (labor + benefits) $ 302,000 per year Depreciation of equipment 5,000 Rent and utilities 45,000 Supplies and other 32,000 Total department costs $ 384,000 Number of employees 4 Work week 32 hours per week Work year 50 weeks per year Inventory stocking and picking 0.5 Time to start stock or pick 5 minutes Time to add new or delete old inventory line item 20 minutes Time to place or pick an item 1.5 minutes Time to fill a special order 30 minutes Time to process a return 8 minutes a. Time-based costing analysis Time-based cost-driver rate $384,000/(4 workers x 32 hrs. x 50 weeks x 60 minutes) $ 1.00 per minute b. Costs to process: 1. Pick order, 6 items $ 14.00 = $1 x [5 + (6 x 1.5)] 2. Stock 1 new item $ 26.50 = $1 x [5 + 20 + 1.5] 3. Stock 5 returned line items $ 20.50 = $1 x [5 + (5 x 1.5) + 8] 4.Pick 11 existing items, special order $ 51.50 = $1 x [5 + (11 x 1.5) + 30] 5. Pick and delete 1 new item $ 26.50 = $1 x [5 + 20 + 1.5] c. Most of the costs are personnel costs. Will those workers be laid off or reassigned to positions that are now vacant. If not, the move to online ordering will not save much costs in the short run. Also, Cassavetes should compare the quality of online ordering with the current process. 7.65 (60 min) Answers will vary, but good answers will have enough detail to verify their validity 7.66 (60 min) Answers will vary, but good answers will have enough detail to verify their validity. 7.67 (60 min) Answers will vary, but good answers will have enough detail to verify their validity. 7.68 (45 min) Flow chart EXCEL SOLUTIONS ARE FOUND IN EXCEL SOLUTIONS FILE a. Defects appear to be failure to confirm or show up for appointments. b. Sources of defects may be lack of clarity of process or unexpected events c. Recommended changes might include calling patients to confirm appointments, allowing cancellations for unforeseen events, allowing changes via internet. 7.69 (30 min) Comparative control chart a. This comparative chart shows that both the Sea Quill and the Orcas are using excessive amounts of fuel, which may indicate adverse conditions, overloading, or the need for maintenance. Furthermore, both are trending upward, which indicates worsening fuel efficiency. On the other hand, the Neptune’s use of fuel is well within control limits. b. Control charts in monetary terms would show the cost impact of excessive use of fuel. If fuel prices are low, managers may tend to ignore violations of upper limits. That may be shortsighted, however, if the cause of excess fuel usage is related to causes that may signal greater problems in the future – for example, unscheduled maintenance or stoppages that will interfere with scheduled use. EXCEL SOLUTIONS ARE FOUND IN EXCEL SOLUTIONS FILE 7.70 (25 min) Managing inventories Human resources: Sales per employee A: $327M/1,600 = $204,375 B: $584M/3,600 = $162,222 C: $8,508M/29,500 = $288,407 Inventory turnover A: $245M/$5,700,000 = 43 B: $414M/$13,500,000 = 31 C: $5,191M/$763M = 7 b. Reports will vary but should consider the JIT success factors and the costs that may be necessary to achieve them: • Commitment to quality • Creation of flexible capacity or predictable orders • Achievement of reliable supplier relations • Development of smooth production flow • Maintenance of a well-trained, motivated, flexible workforce • Achievement and improvement of short cycle time and customer response times EXCEL SOLUTIONS ARE FOUND IN EXCEL SOLUTIONS FILE 7.71 (30 min) Qualitative evaluation of JIT a. The company could benefit by imposing the discipline of JIT on the use of resources and by implementing the quality improvements necessary to perform JIT within its manufacturing operations. This should result in improvements in cycle time and meeting customers’ delivery needs. By becoming more efficient, the company may be more flexible and able to adopt new technologies. The company also may benefit if overall inventory levels are lower because of centralizing control over inventories. b. Ideally, the company would be able to compare its quality, time and cost performance before and after implementing JIT with a centralized warehouse. Doing so requires advance planning for this type of evaluation so that before and after numbers are comparable. 7.72 (30 min) Evaluation of JIT Change Amount Cost (Savings) Decrease In inventory $ (1,200,000) Decrease in carrying cost 12% $ (144,000) Decrease in opportunity cost 10% (120,000) Decrease in employees $ (90,000) (estimated savings per year for 3 years assuming normal 1/3 turnover) 0.333333333 (30,000) Increase in prevention costs 250,000 Increase in appraisal costs 160,000 Decrease in internal failure cost (280,000) Decrease in external failure cost (210,000) Increase in tooling 140,000 Net cost (savings) $ (234,000) b. It appears that some quantifiable factors have been omitted, including training and severance costs, if necessary. Qualitative factors to consider are the costs of overcoming resistance to change, other benefits of improving productions methods (e.g., improved reputation, attraction of better employees, increased sales). EXCEL SOLUTIONS ARE FOUND IN EXCEL SOLUTIONS FILE 7.73 (45 min) Cycle time and throughput efficiency A B C D E F G H I 1 Average 8-hour days spent: 2 Days to complete % Number Processing by adjusters Waiting for adjusters Waiting for information Revisions and corrections Average cycle time in days Throughput efficiency ratio (= D/H) 3 0 to 10 4% 11,520 0.25 3.50 4.10 0.12 7.97 3.14% 4 11 to 20 10% 28,800 0.34 8.10 10.10 0.11 18.65 1.82% 5 21 to 30 30% 86,400 0.65 9.40 15.20 0.15 25.40 2.56% 6 31 to 40 24% 69,120 1.30 9.10 25.60 0.28 36.28 3.58% 7 41 to 50 19% 54,720 2.40 11.90 31.40 0.44 46.14 5.20% 8 51 to 60 8% 23,040 2.90 12.30 38.20 0.88 54.28 5.34% 9 more than 60 5% 14,400 3.10 11.50 49.70 2.60 66.90 4.63% 10 total 100% 288,000 1.39* 9.77 23.39 0.41 34.97+ 3.97% * D10 = (C3*D3+C4*D4+C5*D5+C6*D6+C7*D7+C8*D8+C9*D9)/C10 + H10 = (C3*H3+C4*H4+C5*H5+C6*H6+C7*H7+C8*H8+C9*H9)/C10 Other average times in row 10 are computed similarly. The most obvious causes of low throughput efficiency and long cycle times are excessive (?) waiting times for adjusters (nearly 10 days on average) and information (more than 23 days on average). This could be a situation that needs an information technology solution: adjusters need more information quickly. The company should analyze the types of information typically needed and reasons for delays. EXCEL SOLUTIONS ARE FOUND IN EXCEL SOLUTIONS FILE 7.74 (45 min) Cycle time and quality A B C D E 1 Regular workgroups January February March April 2 Units completed without rework 198 134 117 189 3 Assembly time for good units 1,809.70 1,293.60 1,105.60 1,714.20 4 Total cycle time for good units 4,994.70 4,791.05 3,397.06 2,891.13 5 Rework workgroups January February March April 6 Units reworked successfully 10 8 5 13 7 Units scrapped 1 0 2 0 8 Rework time for all reworked units 57.2 43.2 54.6 48.6 9 Total rework cycle time 161.3 153 186.4 158.4 10 11 a) First-time good units January February March April 12 Average cycle time for good units (B4/B2) 25.226 35.754 29.035 15.297 13 Throughput time ratio for good units (B3/B4) 36.23% 27.00% 32.55% 59.29% 14 b) Reworked units January February March April 15 Average rework cycle time (B9/B6) 16.130 19.125 37.280 12.185 16 Plus average good cycle time (B12) 25.226 35.754 29.035 15.297 17 Average total cycle time for reworked units (B15+B16) 41.356 54.879 66.315 27.482 18 19 Average first time cycle time (B12) 25.226 35.754 29.035 15.297 20 Average rework cycle time (B15) 16.130 19.125 37.280 12.185 21 Average rework time (B8/B6) 5.720 5.4 10.920 3.738 22 Total throughput time ratio for reworked units* (B21/(B19+B20)) 13.83% 9.84% 16.47% 13.60% • assuming first-time assembly time is wasted (continued next page) 23 c) Combining good and reworked units January February March April 24 Units completed (B2+B6) 208 142 122 202 25 Total assembly time+ (B3+B8+B6*(B3/B2)) 1,958.30 1,414.03 1,207.45 1,880.71 26 Total cycle time+ (B4+B9+B6*(B4/B2)) 5,408.26 5,230.08 3,728.63 3,248.39 27 28 Average cycle time (B26/B24) 26.00 36.83 30.56 16.08 29 Throughput time ratio (B25/B26) 36.21% 27.04% 32.38% 57.90% + assumes average first-time assembly and cycle times added to reworked units d) Though the average figures in parts "a" and "c" are not too different, separating reworked units provides additional information about the impact of reworking units rather than making good units the first time. Rework also can be a costly way to guarantee quality. e) If separate workgroups do only rework, then it appears that rework is a normal part of the process. Furthermore, other groups appear to not be responsible for making units that need to be reworked. If all groups were responsible for their defective units, they might have incentive to reduce defects. EXCEL SOLUTIONS ARE FOUND IN EXCEL SOLUTIONS FILE 7.75 (30 min) Capacity management a. The following spreadsheet computes initial estimates of the improvements that may be anticipated (column I) based on a straight (linear) applications of the British firm’s percentage improvements. Miille should evaluate these new levels critically. These improvements will not “just happen;” the company will have to study how the British firm achieved these improvements and whether the methods will translate directly to Miille’s situation. The most suspicious number in column I may be the estimated improvement in value-adding cycle time to the lofty level of 91.5%. This seems unlikely, and a more likely result may be an improvement to something near the British firm’s 63%. A B C D E F G H I 1 Production item Old British circuit breaker process New British circuit breaker process Percentage improve-ment = (D – B)/B Miille’s current process Miille's expected process =G*(1+F) 2 Average parts and materials inventory ₤24,300 ₤18,000 -25.93% $110,000 $81,481 3 Average cost of orders in process ₤12,000 ₤375 -96.88% $90,000 $2,813 4 Cycle time per unit 20 hrs 0.58 hrs -97.08% 23 hrs 0.67 5 Number of employees 21 16 -23.81% 33 25 6 Production floor area 109 m2 30 m2 -72.48% 1,000 ft2 275 7 Output per day 330 units 345 units 4.55% 420 units 439 8 Value-adding cycle time percentage 2% 63% 3,050.00% 3% 91.5% b. Yes, for a given level of throughput, the longer items are in process (i.e., the longer the cycle time), the higher will be the average work-in-process inventory. c. The opportunity cost of the current level of inventory is 20 percent of the average capital tied up in parts, material, and work-in-process. The before-tax amount is 0.20 x ($110,000 + 90,000) = $40,000. If Miille could reduce its average inventory levels, as expected to $81,481 + $2,813, the amount saved would be 0.20 x ($200,000 – 84,294) = $23,141 on this product alone. If this level of savings could be realized on all products, the beneficial impact on the company could be very large. EXCEL SOLUTIONS ARE FOUND IN EXCEL SOLUTIONS FILE 7.76 (20 min) Process improvements a. Each of the changes could improve the company’s profitability, as explained below: Item Percentage change Effect on profitability Cost of orders in process - 75.3% Reducing the cost of inventories frees up resources that could be saved or applied productively in other activities (e.g., generating more throughput). Cycle time per unit - 87.5% The less time products are in process, the fewer resources are tied up or needed to sustain their production. With sufficient demand, the resources can be used to process more units. Labor time per unit - 23.6% Costs of labor may be reduced if employees are not paid proportionately more because they are more productive. Otherwise the effect of improved labor productivity itself is a “wash.” Labor costs may decline if excess employees are let go and not simply transferred to other functions. If they are transferred, they must be used productively. Distance traveled through the process - 53.2% Reducing travel distance reduces processing cycle time and frees up physical space and other resources used to transport products. Floor area used - 66.7% Profits will increase if freed-up floor area can be sold, rented, or used productively on other activities. b. and c. None of these changes happens without beneficial or harmful side-effects, some of which may be difficult to quantify at the time that decision must be made. Managers need to balance the expected costs and benefits, quantitative and qualitative. Dramatic changes like these often mean significant changes in employees’ jobs and relations with suppliers. Managers need to anticipate resistance to change and manage the change process carefully. For example, reducing costs of inventories often means improving relations with suppliers to achieve quick re-supply with high quality parts and materials. Identifying and implementing opportunities to reduce labor time will be difficult without the cooperation of current employees. Managers must be prepared to demonstrate their incentives to improve their productivity. SOLUTIONS TO CASES 7.77 (60 min) Quality improvement, Billington Corp. A B C D 1 Present Alternative 1 Alternative 2 2 Tubing capacity 150,000 150,000 150,000 3 Welding capacity 100,000 100,000 100,000 4 Units started in tubing 100,000 101,010 (C3÷(1-C5)) 100,200 (D3÷(1-D5) 5 Scrap rate 1.00% 1.00% 0.20% 6 Units scrapped, B4*B5,C4*C5, D4*D5 1,000 1,010 200 7 Units completed and sold, B4-B7, etc. 99,000 100,000 100,000 8 Sales price $180 $180 $180 9 Costs: 10 Direct materials, per unit 88 88 98 11 Variable tube manufacturing, per unit 7 7 7 12 Welding costs, per unit 43.5 43.5 38.5 13 Manufacturing overhead 1,000,000 1,000,000 1,000,000 14 Design 220,000 220,000 220,000 15 Inspection 85,000 85,000 85,000 16 Sales, B7*B8, C7*C8, D7*D8 $ 17,820,000 $ 18,000,000 $ 18,000,000 17 Variable costs of units sold 18 Direct materials, B7*B10, etc. 8,712,000 8,800,000 9,800,000 19 Costs of scrap, B6*sum(B10:B12), etc. 138,500 139,885 28,700 20 Variable tube manufacturing, B7*B11 693,000 700,000 700,000 21 Welding, B7*B12, etc. 4,306,500 4,350,000 3,850,000 22 Total variable costs 13,850,000 13,989,885 14,378,700 23 Contribution margin, B16-B22 3,970,000 4,010,115 3,621,300 24 Committed costs 25 Manufacturing overhead, B13, etc. 1,000,000 1,000,000 1,000,000 26 Design, B14, etc. 220,000 220,000 220,000 27 Inspection, B15, etc. 85,000 85,000 85,000 28 Total committed costs, sum(B25:B27) 1,305,000 1,305,000 1,305,000 29 Operating profit, B23-B28 $ 2,665,000 $ 2,705,115 $ 2,316,300 a. Alternative 1 is more attractive financially than either the status quo or Alternative 2. This is a situation where the optimal level of scrap appears to be greater than zero. This appears to be caused by an inability to charge a higher price for frames built using higher quality materials in alternative 2. Perhaps this quality difference is not perceived by customers. b. If training could reduce scrap altogether, profits of the status quo and alternative 1 (which are now identical) would increase by $180,000 by eliminating scrap and increasing sales to 100,000 units (Sales increases for the status quo by $180,000 but total variable costs remain the same, whereas for alternative 1, scrap costs are eliminated). The $180,000 is the most Whelan would be willing to spend on training. Because of higher unit costs (net of materials increase and welding decrease) and no change in sales price, Alternative 2 is not as profitable as either the status quo or alternative 1. c. Whelan should consider whether other benefits are available from a higher trained workforce and using higher quality materials. Perhaps these could result in more improvements and improved reputation (and higher prices). EXCEL SOLUTIONS ARE FOUND IN EXCEL SOLUTIONS FILE 7.78 (60 min) Quality management a. MBNA defines quality in terms of the financial worthiness of its customers, customer retention (loyalty), and process consistency. MBNA measures process consistency using 70 measures and evaluates employees on 14 of them daily. b. MBNA identifies, attracts, and retains high quality customers aggressively, as a visit to its homepage shows. c. Advantages include “real time” evaluation of customer service quality. The company is prepared to intervene quickly to address quality problems and probably nips them in the bud. MBNA must spend a lot on appraisal activities, however. Other costs may be due to the high pressure environment that its employees must work in. This could show up in higher than desired employee turnover and training costs. d. MBNA’s approach may be copied by other companies who can specify proper procedures for dealing with customer orders, complaints, and problems. These are similar to using traditional accounting or bureaucratic controls to control processes. Where tasks are not as well understood and exceptions to the rule are the norm, such regulated control of quality probably will not work well. In these cases, companies may choose to invest more in the quality of employees to train them to be flexible and make difficult decisions quickly. 7.79 (45 min) Development time a. Lead time differences are obvious. The typical US or European manufacturer took about 62 – 65 months to develop a new model, whereas Japanese manufacturers took only 43 months. The largest advantages appear to be early in the process, where the Japanese combine and accelerate concept generation, product planning, and advanced engineering. They also enjoy advantages in product and process engineering, probably because these personnel are involved in the planning stages, too. b. Japanese manufacturers enjoy more than a 1.5-year head start on meeting new customer needs and opportunities. This could translate into significant market share and sales gains. Additionally, since the Japanese, for the same number of new models, would have fewer resources tied up in development, they also would have a significant cost advantage – fewer people, salaries, and support costs over the development cycle. c. Mastering technology, predicting technological changes, anticipating customer needs and preferences are all important for developing new products. d. This is an extremely difficult problem, but we recommend adopting an activity-based approach – use a cross-functional team to • identify the activities involved in each stage of development, • measure the value of each activity to the ultimate outcome (a new product that meets emerging customer needs), and • find ways to eliminate activities (and resources) devoted to non-valued activities. 7.80 Evaluation of JIT Costs and Benefits a. At one time, observers speculated that there would be only two types of manufacturing firms: JIT and extinct. While that may be an overstatement, competition has caused most manufacturing firms to emulate JIT, if not adopt it altogether. These days, it may be a bit late to announce JIT and expect a favorable response, but it may not be too late to benefit from JIT. After evaluating the costs and benefits of JIT and if benefits outweigh the costs, management should seriously consider adopting JIT methods. Simply announcing JIT will not make it happen, however. The entire value chain may be affected by JIT. So, the organization must also invest in training and education of its employees and suppliers before implementing JIT. b. JIT may affect every employee in the organization, plus customers and suppliers. Therefore, it may be desirable to construct a cross-functional team composed of open-minded individuals within the organization. When the analysis has progressed to the point of understanding the impact on suppliers and customers, it might be a very good idea to include representatives of major customers and suppliers in the analysis and planning. c. and d. Exhibit 1-5 introduced a helpful format for cost-benefit analysis that includes both quantitative and qualitative information. Identified benefits and costs Quantitative Information Comments, assumptions, and qualitative Information Benefits of Adopting JIT Annual amounts 1. Personnel cost savings $ 0 Savings only if personnel laid-off or not replaced after normal attrition. Personnel transferred to other operations result in no immediate savings. Personnel re-training costs not estimated. 2. Inventory carrying cost savings 60,000 Inventory reduction of $500,000 with 12% carrying cost results in annual cost savings. Inventory reduction requires solving any quality problems that may have required excess inventory. 3. Inventory opportunity cost savings 50,000 Inventory reduction of $500,000 with 10% opportunity cost results in annual cost savings. Inventory reduction requires solving any quality problems that may have required excess inventory. 4. Decrease in internal failure cost 156,000 This assumes that quality and process improvements can reduce rework and delays. 5. Decrease in external failure cost 185,000 This assumes that quality, process, and distribution improvements can reduce lost sales and warranty claims. Total quantifiable benefits $ 451,000 Costs of Adopting JIT Annual amounts 1. Prevention costs $ 120,000 This estimate must include costs for additional training, equipment, and maintenance. 2. Appraisal costs 90,000 This estimate must include costs for additional training, equipment, and maintenance. 3. Tooling costs 80,000 This estimate must include costs for additional training, equipment, and maintenance. 4. Adverse effects of personnel transfers N/a Transfers may be seen as first step in transferring more personnel with adverse effects on employee morale and productivity because of lost opportunities to work in the most important operations. Total quantifiable costs $ 290,000 Net quantifiable benefits $ 161,000 Solution Manual for Cost Management: Strategies for Business Decisions Ronald W. Hilton, Michael W. Maher, Frank H. Selto 9780073526805, 9780072430332, 9780072830088, 9780072299021, 9780072881820, 9780072882551, 9780070874664, 9780072388404, 9780072343533
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