CHAPTER 12
Activity-Based Management
COLLABORATIVE LEARNING EXERCISE SOLUTION
1. Howard was concerned about meeting the schedule and staying within the 5 percent vari-
ance guideline. The first week’s production exceeded the guideline for both materials and
labor, and he expected the same outcome for the second week. By stopping inspections,
no materials waste would be observed and recorded for the second week, moving the us-
age variance back within the 5 percent tolerance level. Also, by accepting all units pro-
duced, the total labor time reported will be reduced. Finally, using inspectors as produc-
tion labor and counting their time as inspection labor provides some “free” direct labor
time, which would also contribute to the reduction or elimination of an unfavorable labor
2. There appears to be an overreliance on standards and variances. There also appears to be
a strong internal focus—Howard did not give much consideration to the effect of his de-
cision on the company’s customers. The reward structure seems to be tied to Howard’s
ability to meet or beat standards, and this provides some incentive to engage in perverse
and even unethical behavior. The system certainly works against the goals of zero defects
and total quality. An activity-based system would tend to mitigate the problem because it
encourages a multidimensional performance measurement. For example, quality
measures are important. Failure to meet measures on one dimension may be offset to
some extent by good performance on other dimensions.
3. The first week’s experience indicates a fairly high defect rate—between 7 and 8 per-
cent—which was expected to continue for the second week. Apparently, item-by-item in-
spection is the company’s way of ensuring reliable bolt perfor-mance. Abandoning the
inspection process for a week simply to meet internal reporting standards seems like a
weak excuse, even if a return to normal practices is expected. All too often, this sort of