2.29.2016

The Toyota Production System and Job Shops

For this blog post, I’m turning the reigns over to Dr. Shahrukh Irani to explore how Lean initiatives can be successful in high-mix/low-volume environments and job shops. As an associate professor in the department of Integrated Systems Engineering at Ohio State University, his research at OSU produced JobshopLean.

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Lean is Necessary for Every Manufacturer
The goal of any manufacturer is to reduce the total time that customers must wait from the time that they place their order to the time that they receive their order free of defects. The Seven Types of Waste are activities that add:
1. Delays to the time that customers must wait to receive their order.
2. Costs to the price that customers must pay to receive their order.

A High-Mix Low-Volume Manufacturer is not like Toyota 
Without question, the revolutionary Toyota Production System is the gold standard for how any business can pursue cost reduction through waste elimination without headcount reduction. But does a high-mix low-volume manufacturer implement Lean the same way as a low-mix high-volume manufacturer such as Toyota? No -- no Toyota facility makes refrigerators and bicycles on any of their automobile assembly lines. An assembly line that uses a conveyor to move a product (or product family) through a fixed sequence of work stations is inflexible. It could not make other products whose manufacturing routings, bills of materials, and processes used to make the final product are different from those used to make automobiles. Finally, every Toyota assembly line must be just flexible enough only to build a limited variety of automobiles whose annual demand provides sufficient return on investment to justify continued operation of that line.

How a Job Shop Differs from an Assembly Line 
An assembly line and a job shop are radically different manufacturing systems. An assembly line is a low-mix high-volume manufacturing system. A job shop is a high-mix low-volume manufacturing system. Some of the characteristics of a typical job shop that make its production system radically different from the Toyota Production System are:

  • It fulfills orders for a diverse mix of hundreds (sometimes thousands) of different products.
  • Manufacturing routings differ significantly in their equipment requirements, setup times, cycle times, and lot sizes.
  • The facility has a functional layout (i.e. the facility is organized into departments --“process villages”) such that each department carries equipment with identical/similar process capabilities.
  • Demand variability is high.
  • Production schedules are driven by due dates.
  • Due dates are subject to change.
  • Production bottlenecks can shift over time.
  • Finite capacity constraints limit how many orders can be completed on any given machine on any day. 
  • Order quantities can range from low to high.
  • Lead times quoted to customers must be adjusted based on knowledge of the production schedule.
  • The diverse mix of equipment from different manufacturers makes operator training and maintenance more challenging than for an assembly line.
  • It is a challenge to identify the part families in the product mix.
  • Customer loyalty is not guaranteed.
  • It is necessary to be able to serve different markets. In fact, a job shop must deal with the tendency for their product mix to alter as their customer base changes or they hire new sales and marketing staff who bring with them their past business contacts from new sectors of industry.
  • It could be a challenge to recruit and retain talented employees with a strong work ethic, a desire to learn on the job and get cross-trained to operate different machines.
  • There are limited resources for workforce training.
  • It is hard to control the delivery schedule and quality of suppliers.
  • It is hard to negotiate the due dates set by customers.
  • Production control and scheduling is more complex.
What Do You Think?
If you are a high-mix low-volume manufacturer and have customized the implementation of Lean in your facility or you would like to know how, please send us your questions and comments.  Let’s get a conversation going! 

Thank you,  
Dr. Shahrukh Irani
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2.16.2016

Traditional Accounting Systems -- They Don't Properly Value Time

Lean advocates have long been critical of the fact that traditional accounting systems motivate over-production and promote building inventory. In her book, The Monetary Value of Time: Why Traditional Accounting Systems Make Customers Wait, the author, Joyce Warnacut, discusses the fact that traditional accounting systems don’t properly value time. I asked her directly: "How is this different from the Lean perspective?" and here is her complete response:

Lean objections are based on the fact that absorption costing requires overhead allocation. The cost per unit is driven down by making more and spreading the cost over a larger number of units. H. Thomas Johnson (Professor of Business Administration, Portland State University) wrote the following in his article Work Lean to Control Costs: “Producing more and more output to reduce average unit costs is a time-honored pathway to excess, delay, and abnormal variation – prime drivers of higher total cost.”

These concerns are valid, and yet the total impact of traditional accounting goes far beyond overhead allocation. The matching principle, one of the foundations of traditional accounting, requires matching of production cost to revenue. This means that if you spend $1,000 making a product this month, but don’t sell it until next month (or next year), the matching principle requires you to stash $1,000 away in inventory. This puts the $1,000 on your balance sheet as an asset and keeps $1,000 in production costs off your profit and loss. The $1,000 will be recorded as a cost of sales at the time the product sells (i.e., the cost will be “matched” to the revenue).

Note that the $1,000 cost – and the resulting profit from the transaction – is exactly the same whether the product sells today or several months from today. Is this true? Inventory costs (storage, handling, carrying costs, planning, expediting, moving, counting, potential obsolescence, etc.) are allocated in some fashion over production. The allocation may be as simple as units or hours (volume-based allocations are by far the most common) or a more complex allocation formula.

But no matter what formula is used, the cost recorded for that particular product is the same whether the product is sold immediately or held in inventory for months. Intuitively, most people would think that product sold directly off the production line contributes more to the bottom line than product that is carried on the books for a month or more. From an accounting perspective, however, this is generally not the case.

Resources that are invested in inventory are valued no differently than resources invested in product that can be converted to cash immediately. What if our accounting methods put a value on time? What if product cost increased for every day the product was held in inventory? What if our shop floor operations were evaluated based on how quickly they turn orders into cash? What different motivations might this create? What changes would be made in how we allocate resources?

Although accountants recognize the time value of money when comparing investment alternatives, the same principles are not applied in how we value inventory, how we allocate resources, nor in how we evaluate the profitability of our products. 

What do you think of Joyce Warnacut's perspective here? Does your organization function under a traditional accounting system? Have this system undercut the true value of your Lean initiative?