SEBI Grade A Costing Lean System and Innovation PDF
SEBI Grade A Costing Lean System and Innovation PDF
There are a few companies such as Toyota and General Motors are already into lean
manufacturing, as it involves a shift in traditional thinking, from batch and queue to product-
aligned pull production. In the case of lean manufacturing, the focus is on different types of
operations conducted adjacent to each other in a continuous flow and not on producing a lot
of parts at one go. A few techniques used in lean manufacturing are given below:
• Just-In-Time (JIT)
• Kaizen Costing
• 5S
• Total Productive Maintenance (TPM)
• Cellular Manufacturing / One Piece Flow Production Systems
• Six Sigma
Features of Just-In-Time:
A JIT has the following features:
• Low or Zero inventories; emphasis on the operation from source to customer
• JIT emphasis on customer service and timing
• Short of operations
• Flexibility of operations
• Efficient flow during the production process
• Use of Kanban and Visibility
Pre-requisites of Just-In-Time:
The following are the essential pre-requisites of JIT:
1. Low variety of goods
2. Demand stability
3. Vendor reliability
4. Defect-free materials
5. Good communication
6. Preventive maintenance
7. Total quality control
Production reporting: The total production figure entered into the system must be
absolutely correct and in case of any error, there may be a possibility that the wrong
component types and quantities get subtracted from the inventory. This problem may arise
because of high turnover or a low level of training provided to the production staff that records
these types of transactions, which in turn will lead to an error.
Scrap reporting: Tracking abnormal scrap and recording it correctly is important, else these
materials will fall outside the back-flushing system and will not get charged to the inventory.
Here also this problem may arise because of high turnover or a low level of training provided
to the employee.
Lot tracing: Lot tracking is not possible under the back-flushing system. A lot of tracing may
be required when a manufacturer needs to keep a record of the production lots that were used
to create a product in case all the items in a lot are recalled. This can be done only through
Picking System, which is generally present on high-end systems.
Inventory accuracy: It may be the case that the inventory turnover is very high every time
because the back-flushing transaction that relieves the inventory generally do that once a
day, during which time the other inventories are sent to the production process. Hence, this
makes it slightly difficult to maintain an accurate set of inventory records in the warehouse.
Kaizen Costing:
Lean manufacturing is founded on the idea of Kaizen Costing and is highly used by Japanese
organizations as a mechanism for reducing and managing costs. Kaizen, a Japanese word,
means making improvements to a process through small incremental amounts, rather than
through large innovations.
A leader in the fields of continuous process improvement and operational excellence, Shigeo
Shingo taught thousands of engineers at Toyota the Toyota Production System, influenced the
creation of Kaizen.
Activities in the Kaizen Costing methodology include the elimination of waste in the production,
assembly and distribution processes, along with the elimination of work steps in any of these
areas. Although the value engineering phase of target costing include these points, but then
the initial value of the engineering might not discover all the possible cost savings. Hence, in
the case of a Kaizen Costing, several value engineering steps are repeated for as long as the
product is produced by constantly refining the process and thereby reducing the extra cost.
Even though the cost reduction as a result of using Kaizen Costing may be low as compared
to the value engineering but are still worth it as the product prices may come down in future
owing to the competitive forces and so any cost saving would still allow the company to
achieve its target profit margin while reducing the cost.
4. This system involves setting a standard first and thereafter continuously strive to improve
these standards to achieve long-term sustainable improvements
5. Kaizen Costing focuses on eliminating waste, improving systems and increasing productivity
6. It involves all the employees and all the areas of the business
5 S:
A name of a workplace organization method that uses a list of five Japanese words, listed
below. IT explains how a workplace should be organized for efficiency and effectiveness by
identifying and storing the items used, maintaining the area and items, and sustaining the
new order. Hence, it helps to eliminate the waste and makes the habit of keeping everything
in its place, ensuring quality consciousness among the people working in a quality workplace
adopting quality process/system and producing quality products/services.
Seiri: Sort (i.e. sorting and disposing of the unwanted items). It focuses on eliminating waste
or unwanted things, else the waste will mess up with the needed things and will make the
work more complicated, thus reducing the efficiency of work. It also prevents in accumulation
of unnecessary things.
Siton: Set in Order (i.e. based on function and frequency of use). It arranges the necessary
things in such a way that it can be identified easily and avoid confusion which may lead to
Seiso: Shine (i.e. periodical maintenance in terms of cleaning and polishing). It focuses on
maintaining things in a dust-free condition. In other words, the ‘third S’ makes people care
about things. It also states that in an unfamiliar environment, people should be able to detect
any problem within 50 feet.
Seiketsu: Standardize (i.e. labeling and making identification easier). It makes sure that the
above ‘3S’ are maintained and are followed, besides following the best practices. It states that
maintaining a high standard, orderliness, everything in order and as per standards is
important to have. Further, the ‘fourth S’ gives a systematic approach to handle the above
‘3S’.
Shitsuke: Sustain (i.e. training for continuous implementation). It makes the habit of keeping
things in an orderly and neat way. This should be done by giving proper training and with
every individual’s commitment.
Pillar 5: Early It directs practical • It ensures that the new equipment reaches
Equipment knowledge and planned performance levels much faster due to
Management understanding of the fewer start-up issues
• Ensures maintenance is easier and more robust
manufacturing
because of practical review and employee
equipment gained
involvement before installation
through TPM towards
improving the design
of new equipment
1. Equipment failure/breakdown
2. Set-up/Adjustment
3. Idling and Minor Stoppages
4. Reduced Speed
5. Reduced Yield
6. Quality Defects and Rework
The first two, i.e. Equipment failure/breakdown and Set-up/Adjustment, refer to the time
losses and are used to find out the availability of the equipment. The third and fourth, i.e.
Idling and Minor Stoppages and Reduced Speed determines the performance efficiency of the
equipment, while the last two, i.e. Reduced Yield and Quality Defects and Rework, are
considered as a quality loss. Hence,
The OEE method can be applied to both individual assets and a process, and because it is
highly unlikely that any process will run at 100% OEE, Dat et al (2000) and Nakajima (1998)
suggested that the ideal values of OEE component measures should be:
Implementation Process:
For implementing a Cellular Manufacturing, the following steps need to be followed:
First, the parts that are required to be made should be grouped into families by similarities,
such as design or manufacturing requirements
Second, a systematic analysis of each of the family should be performed. This is generally in
the form of a production flow analysis (PFA) for manufacturing families, or in the examination
of design/product data for design families. Although this process can be both times consuming
and costly, this is required to be performed because a cell needs to be created for each family
of parts. One can even take the help of a mathematical model and algorithm to plan a cellular
manufacturing center. These models generally take into account variables such as multiple
plant location, multi-market allocation with production planning and various part mix.
Third, after these variables have been determined with a given level of uncertainty,
optimization can be performed to minimize factors such as total cost of holding, inter-cell
material handling, external transportation, fixed cost of producing each part in each plant,
machine and labour salaries.
Six Sigma:
Six Sigma (6σ) is a set of techniques and tools for process improvement. It was introduced
by American engineer Bill Smith while working at Motorola in 1986. Jack Welch made it central
to his business strategy at General Electric in 1995. Six Sigma can be defined as a disciplined,
data-driven approach and methodology that helps in eliminating defects (i.e. driving toward
six standard deviations between the mean and the nearest specification limit) in any process,
ranging from manufacturing to transactional and from product to service. Thus, with the help
of Six Sigma continuous improvement can be brought into the organizational culture by
introducing continuously changing and planned targets. One such target can be achieving six
sigma accuracy, which means the process is 99.999998% accurate, i.e. the process will/can
produce only 0.002 defects per million. The primary focus of Six Sigma is on the following:
• Improved customer satisfaction
• Decision-based on data-driven facts
• Improved process flow
• Proactive management team
• Collaboration within the business
• Goal for perfection
Defects per
Percentage
million Percentage
Sigma Level Defective Quality/Profitability
opportunities Yield (%)
(%)
(DPMO)
DMAIC:
It is a robust method that intends to improve the existing business process and has the
following five phases:
• Define, wherein, the problems, project goals, and customer requirements are defined
• Measure the process to determine current performance
• Analyse the process to find out the root causes of variation and poor performance
• Improve the process by addressing and eliminating the root causes
• Control, which means maintaining the improved process and future process performance
DMADV:
This method is used at creating a high-quality product while keeping in mind the customer’s
requirements at every stage of the product. Hence, it is an improvement system that is used
to develop new processes or products at Six Sigma quality levels. This method also has five
phases:
• Define, wherein, the project goals and customer deliverables are defined
• Measure and determine the customer needs and specifications
• Analyse the process options to meet the customer needs
• Design the process in detailed to meet the customer needs
• Verify, wherein, the design performance and the ability to meet the customer needs are
verified
DMAIC DMADV
It reviews the existing processes and fixes Emphasis is on the design of the product and
problems processes
More reactive process It is a proactive process
Increase the capability Increase the capacity
Rupee benefits can be quickly quantified It is difficult to quantify the rupee benefits
and tend to be much more long term
Examples of DMAIC problem-solving methods: Examples of procedures that DMADV
• Reduction in cycle time to process a development method is designed to address:
patent • Addition of a new service
• Reduction in the number of errors in the • Creation of a real-time system
sales list • Creation of a multiple-source lead
• Improvement in search time for critical tracking system
information
Control Chart: It is a statistical chart that monitors the variance in a process over a time
period and alerts the business in case there is any unexpected variance that may cause
defects.
Histogram: It helps in prioritizing factors and identifying areas that may need urgent
attention of the management.
Pareto Diagram: It revolves around the concept of 80-20 rule, i.e. 80% of the defects in a
process comes from the 20% causes. Hence, it focuses on a problem that will have great
potential for improvements.
Process Mapping: It refers to a workflow diagram of how things are done and help in
reducing the cycle time and defects.
Tree Diagram: A tree diagram shows the key goals, their sub-goals, and key tasks in a
graphical format. Besides it also helps inspire team members to widen their thinking while
creating any solution.
Cause and Effect Diagrams: It helps in identifying the various causes (or factors) of a given
effect (or problem).
Process Innovation:
As already mentioned, a Process Innovation (PI) brings about new processes into an
organization that significantly improves the production or delivery method. This new process
may even include bringing about a significant change in techniques, equipment and/or
software. However, the following are not considered as PI:
• Minor changes to the existing process
• Improvement of the existing process
The process of innovating a new solution may fall into one of the below-mentioned areas:
• Delivery, wherein, tools, techniques, and software solutions are used to improve the supply
chain and delivery system and may include barcodes, tracking systems, or shipping software.
• Radical Redesign, wherein, a fresh start or a clean-slate approach is followed to examine the
organization business processes, with a goal to reinvent what is done and how it is done instead
of tinkering with the present system by making marginal, incremental, superficial
improvements to what’s already being done. It focuses to answer questions such as “If we
were a brand-new business, how would we operate our company?”
• Achieving Dramatic Improvements, which is related to the aforesaid two elements and
aims at performance measurements. Although the preceding two elements are aimed towards
making quantum leaps in performance, they still need to be measured. An improvement in
quality, speed and the like that is on the order of say 10% is not BPR as this may be achieved
even with marginal or incremental changes to the existing processes.
• End to End Business Processes, wherein, BPR focuses on end-to-end business processes
and not on the individual activities that comprise the processes.
Generally, Porter’s Value Chain is a widely used technique in BPR to identify and analyse the
processes that may be of strategic significance to the organization.