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chapter
26(12)
Lean Manufacturing and
Activity Analysis
______________________________________________
OPENING COMMENTS
between value-added and non-value-added activities.
Because these topics are receiving so much press, it would be relatively easy for your students to find
the Internet.
1. Describe lean manufacturing practices.
2. Describe the implications of lean manufacturing on the accounting system.
3. Describe and illustrate activity analysis for improving operations.
ADM: Describe and illustrate the use of lean principles and activity analysis in a service or administrative
setting.
KEY TERMS
activity analysis
appraisal costs
backflush accounting
Chapter 26(12) Lean Manufacturing and Activity Analysis 476
batch size
conversion costs
cost of quality report
costs of quality
electronic data interchange (EDI)
employee involvement
enterprise resource planning (ERP)
external failure costs
internal failure costs
lead time
lean accounting
lean enterprise
lean manufacturing
lean principles
nonfinancial measure
non-value-added activity
non-value-added lead time
Pareto chart
prevention costs
process
process-oriented layout
product-oriented layout
pull manufacturing
push manufacturing
radio frequency identification devices (RFID)
Raw and In Process (RIP) Inventory
Six Sigma
supply chain management
value-added activity
value-added lead time
value-added ratio
STUDENT FAQS
Why is lean, manufacturing considered made-to-order, custom-order, short, or lean manufacturing?
What is the difference between value-added lead time and non-value-added lead time in lean
manufacturing?
Why does lean manufacturing emphasize product-oriented layout, whereas traditional manufacturing
disregards setup time as an improvement priority?
Why is all in-process work combined with raw materials to form a new account “Raw and In-Process
(RIP) Inventory” under lean manufacturing?
How can activity analysis help manage quality costs?
Why are prevention and appraisal costs considered costs of controlling quality, whereas internal and
external failure costs are costs of failing to control quality?
What is so special about a Pareto chart of quality costs?
Chapter 26(12) Lean Manufacturing and Activity Analysis 477
Why is direct labor put into a cost account called “Conversion Cost” under lean manufacturing
accounting?
OBJECTIVE 1
Describe lean manufacturing practices.
SYNOPSIS
Learning Objective 1 describes lean manufacturing. It is an attempt to produce products with high quality,
low cost, fast response, and immediate availability. To become lean, manufacturers must focus on eight
issues or dimensions: inventory, lead time, setup time, production layout, employee involvement,
production scheduling, quality, and supplier/customer relationships. Exhibit 1 compares lean
organizations and traditional manufacturers on these eight dimensions. Lean manufacturing views
inventory as wasteful and thus attempts to eliminate or reduce it. But, as shown in Exhibit 2, reducing
inventory often reveals a number of previously hidden production problems. If immediate availability is
desired but inventory isn’t, then reducing lead times becomes critically important. Exhibit 3 describes
how lead time is computed, while Exhibit 4 highlights the value-added and non-value-added components
of lead time. Likewise, to reduce product throughput time, setup time must be minimized. As illustrated
in Exhibit 5, long setup times lead to large batch sizes and large batch sizes lead to higher inventory levels
all culminating in longer lead times. The relationship between batch size and lead time is similarly
illustrated in Exhibit 6. As an aside, it’s not surprising that traditional manufacturers do not treat setup
improvement as a priority given their high inventory buffer! This new perspective on inventory has
transformed many manufacturers from a push manufacturing approach (“If we build it, it will sell.”) to a
pull manufacturing approach (“Don’t build it until you sell it!”). Learning Objective 1 wraps up with a
discussion of layout, employee involvement, and supply chain management.
Key Terms and Definitions
Batch Size—The amount of production in units of product that is produced after a setup.
Electronic Data Interchange (EDI)—An information technology that allows different business
organizations to use computers to communicate orders, relay information, and make or receive
payments.
Employee Involvement—A philosophy that grants employees the responsibility and authority to
make their own decisions about their operations.
Enterprise Resource Planning (ERP)—An integrated business and information system used by
companies to plan and control both internal and supply chain operations.
Lead Time—The elapsed time between starting a unit of product into the beginning of a process
and its completion.
Lean Enterprise—A business that produces products or services with high quality, low cost, fast
response, and immediate availability using lean principles.
Lean Manufacturing—A manufacturing enterprise that uses lean principles.
Lean Principles—Principles associated with the lean enterprise that include reducing inventory,
reducing lead time, reducing setup time, product/customer oriented layouts, employee
involvement, pull scheduling, zero defects, and supply chain management.
Non-Value-Added Lead Time—The time that units wait in inventories, move unnecessarily, and
wait during machine breakdowns.
Chapter 26(12) Lean Manufacturing and Activity Analysis 478
Process-Oriented Layout—Organizing work in a plant or administrative function around
processes (tasks).
Product-Oriented Layout—Organizing work in a plant or administrative function around
products; sometimes referred to as product cells.
Pull Manufacturing—A Lean manufacturing method wherein customer orders trigger the
release of finished goods, which triggers production, which triggers release of materials from
suppliers.
Push Manufacturing—Materials are released into production and work in process is released
into finished goods in anticipation of future sales.
Radio Frequency Identification Devices (RFID)—Electronic tags (chips) placed on or
embedded within products that can be read by radio waves that allow instant monitoring or
production location.
Six Sigma—A quality improvement process developed by Motorola Corporation consisting of
five steps: define, measure, analyze, improve, and control (DMAIC).
Supply Chain Management—The coordination and control of materials, services, information,
and finances as they move in a process from supplier, through the manufacturer, wholesaler, and
retailer to the consumer.
Value-Added Lead Time—The time required to manufacture a unit of product or other output.
Value-Added Ratio—The ratio of the value-added lead time to the total lead time.
Relevant Check Up Corner and Exhibits
Exhibit 1—Lean versus Traditional Manufacturing Principles
Exhibit 2—Inventory’s Role in Manufacturing
Exhibit 3—Lead Time
Exhibit 4—Components of Lead Time
Exhibit 5—Relationship Between Setup Times and Lead Time
Exhibit 6—Batch Size and Lead Time
Check Up Corner 26(12)-1 – Lean Concepts and Lead Time Analysis
SUGGESTED APPROACH
Lean manufacturing (LEAN) processing is not just a method of reducing inventory. It is embraced as a
philosophy that emphasizes eliminating waste from all processes. Inventory is simply a buffer that
protects a process against unreliability (such as poor supplier delivery or machinery that breaks down
frequently). Reducing inventory levels without correcting the problems that create unreliability will stop
production. Constructing a reliable system will eliminate the need for an inventory buffer.
Exhibit 1 in the text compares the principles of lean manufacturing with a traditional manufacturing
system. Review this chart with your class, explaining the concepts of lead time, production layout, and
production scheduling. Follow this introduction with the in-class simulation provided below.
Objective 1 also introduces the concepts of value-added and non-value-added lead time. Your students
will find it helpful if you lead a discussion that distinguishes between value-added and non-value-added
activities.
Chapter 26(12) Lean Manufacturing and Activity Analysis 479
IN-CLASS SIMULATION—Lean Manufacturing
The instructor’s materials for Chapter 17(3) included instructions for conducting an in-class simulation
demonstrating the effect of a demand-pull system with manufacturing cells. If you did not have time to
run this simulation when introducing lean manufacturing in Chapter 17(3), consider doing it now. Even if
you used the simulation, you may want to repeat it. This lean simulation provides a powerful example of
the changes that occur when a manufacturer moves from a process-oriented push system to a product-
oriented pull system. For convenience, the instructions for this simulation will be repeated here.
Lean manufacturing is essentially a pull system. Products are not made until they are needed by the
customer, and component parts are not made until they are needed by the next stage of production. Lean
manufacturing significantly reduces inventories, allowing manufacturers to reduce costs incurred in
moving and storing inventory. Lean manufacturing also emphasizes quality.
You can simulate the difference between the traditional push system and the pull system of lean
manufacturing in your classroom. You will need scrap paper, four pens, a stapler, and six volunteers.
Divide the scrap paper between two volunteers. Instruct one student to write an ‘A’ on his or her pieces of
paper, and ask the other to write a ‘B.’ Use another volunteer as an expediter to collect the completed A
and B papers and carry them to a fourth volunteer, who staples the papers together. The fifth volunteer
picks up the stapled sets of paper and delivers them to the sixth volunteer—the customer.
For the first simulation, instruct all volunteers to do their assigned tasks as quickly as possible. Tell them
to assume they are being evaluated based on the quantity they produce. Allow them to work for 30
seconds, then stop the production line. Announce that the customer wants to change the color of the ink
used to write the As and Bs, effective immediately. Therefore, any work in process will need to be
scrapped. Count the scrapped sheets. Allow your students to work for another 30 seconds. Ask your
customer to count the completed products he or she received. You may also want to ask a student with a
stopwatch to measure cycle time by timing how long it took to get the first completed unit to the
customer.
Run this simulation a second time, but this time institute a pull system. Instruct all workers that they are
not to make a new product (or component) until it is needed for the next stage of production. Also ask
them to focus on quality, not quantity. In addition, change to a product-oriented layout by physically
moving the students who are writing letters close enough to the student stapling the papers so that an
expediter is not needed to move the papers from one station to the next. Allow your students to work for
30 seconds. At that time stop production, announce another ink color change, and collect any work in
process as scrap. Start up the production line again for another 30 seconds. Ask your customer to count
the completed products received and note the cycle time.
You should find that the number of completed units is about the same under either system. However, the
amount of scrap will be dramatically reduced under the lean manufacturing system. In addition, you may
want to ask your customer to compare the quality of the output. It should be significantly higher under the
second simulation.
Chapter 26(12) Lean Manufacturing and Activity Analysis 480
GROUP LEARNING ACTIVITY—Results of Lean Manufacturing Simulation
Divide your class into five groups. Ask each group to discuss the results of the manufacturing simulation,
concentrating on one of the areas listed below.
Group 1: Amount of Inventories
Group 2: Lead Time Needed to Produce the Product
Group 3: Production Layout
Group 4: Work Scheduling—who/what determined when each worker performed a task
Group 5: Quality
In their discussion, your students should identify the changes that occurred between the two
manufacturing systems. These group assignments are also listed on TM 26(12)-1. After a few minutes,
ask each group to share its observations.
LECTURE AID—Value-Added vs. Non-Value-Added
Each activity performed by an organization creates cost. If the activity does not create any value for the
customer, its cost represents wasted resources. The following questions can aid students in determining if
an activity is value-added or non-value-added.
1. Given a choice, would the customer pay for this activity?
2. If you quit performing this activity, would the customer care?
3. If you quit performing this activity, would the output still meet customer requirements?
4. Could you eliminate this activity if some other activity were done correctly or differently?
5. Would re-engineering the system eliminate this activity?
A ‘yes’ answer to questions 1 or 2 indicates a value-added activity. A ‘yes’ answer to questions 3, 4, or 5
indicates a non-value-added activity.
GROUP LEARNING ACTIVITY—Value-Added vs. Non-Value-Added
TM 26(12)-2 lists the activities used by a catalog sales company to process and ship a customer order.
Divide your class into groups and ask them to classify each activity as value-added lead time or non-
value-added lead time. Items 2, 4, 6, 8, and 9 are non-value-added.
DEMONSTRATION PROBLEM—Within-Batch Wait Time
Any student who has ever waited in line at your college’s advising or financial aid offices will agree that
wait time is non-value-added. To illustrate within-batch wait time, make a comparison to a hypothetical
doctor’s office. Assume that a doctor spends, on average, 10 minutes with each patient. Of course, some
patients require more time and others require less. Some patients arrive early for their appointment and
some arrive late. To allow the doctor to see the most patients and eliminate down-time, three patients are
scheduled during every thirty-minute interval. For example, three patients are scheduled at 9:00 and three
more are scheduled at 9:30. In effect, the doctor has a “batch” of three patients at a time. The last patient
Chapter 26(12) Lean Manufacturing and Activity Analysis 481
point of view, but it is not efficient from the patient’s perspective. The patient’s lead time is increased
because of the batch concept. If the doctor moved to a one-piece flow concept and scheduled one patient
Now, let’s move to a manufacturing example. Assume a product is produced in batches of 20 units at a
time. Each unit takes 5 minutes of processing time. It will take 100 minutes (20 units × 5 minutes each) to
process the entire batch. Each unit will be waiting during the time the other 19 units are being worked on.
Therefore, the within-batch wait time is calculated as follows:
= 5 minutes × (20 – 1)
= 5 minutes × 19
= 95 minutes
The lead time can be analyzed as follows:
Lead Time % of Total
Value-added lead time (processing time) 5 minutes 5%
Non-value-added lead time (within-batch wait time) 95 minutes 95%
Total 100 minutes 100%
OBJECTIVE 2
SYNOPSIS
Learning Objective 2 discusses the impact that lean manufacturing has had on the accounting system.
Accounting systems that have adopted the lean philosophy have few transactions and ledger accounts,
they track nonfinancial measures, and they attempt to trace more overhead directly to products than
traditional systems (e.g., indirect labor is directly assigned to product cells). Backflush accounting
systems. See the more complete list of examples in the text. The set of financial and nonfinancial
operating measures is often referred to as key performance indicators, or KPIs.
Key Terms and Definitions
Backflush Accounting—Simplification of the accounting system by eliminating accumulation
