CH – 03 LEAN SYSTEM & INNO VA T ION

SUMMARY NOTES
CHAPTER
LEAN SYSTEM & INNOVATION
03

LEAN SYSTEM means a system of waste minimization. There are generally 7 type of wastes:
1) Overproduction: Producing ahead of demand.
2) Inventory: Having more inventory than is minimally required (WIP of FG)
3) Waiting: Waiting includes products waiting on the next production step.
4) Motion: People or equipment moving or walking more than is required.
5) Transportation: Moving products that is not actually required to perform the process.
6) Rework from defects: Non-right first time.
7) Over Processing: Unnecessary work elements (non-value added activities).

A. JUST IN TIME (JIT)

It means to produce (FG) or procure (RM) only when required, rather than accumulating them
in stock. It is a Pull System which responds to demand.

CHANGES IMPOSED BY JIT:

1. Reduces Raw Material Inventory & Improves Quality:
• Small order quantities of materials received at exact time when needed.
• Material Delivered straight to the production floor.
• Visit supplier sites to provide assistance for improving quality
• Install a system of auto-ordering.
2. Reduces WIP & Scrap:
• If machine setup is long and expensive, then company tends to produce more units in
each setup. This will increase WIP and FG inventory, increase carrying cost, obsolesce.
It will also increase defectives as defect might me identified only after batch completion.
Thus we need to shorten the machine setup time, by making a video tape of the setup
and studying this tape to eliminate some steps.
• If there is difference in the operating speeds of consecutive machines, then there will be
inventory build-up in front of the slow machine. Defect, if any, may remain undiscovered
until the next machine process it, and by that time, more defectives get produced. This
problem must be resolved under JIT. 2 methods to resolve:

03. 1 CA FINAL – STRATEGIC COST MGMT & PERFORMANCE EVALUATION Compiled by Devang Kothari (CA, CS)
 CH – 03 LEAN SYSTEM & INNO VA T ION

- A “Kanban Card” is a notification that a downstream machine sends to the upstream

machine authorizing the production (∴ Pull System).
- Related machines are grouped into working cells, run by a single operator.
• When 1 worker was attending only 1 machine, it was monotonous and boring for him,
now he handles many machines in the cell so its more interesting for him.
• Employees must be empowered, i.e. they are allowed to stop the machine when they
see a problem.
3. Change in Accounting System (Backflushing):
• Now that there are daily shipments of materials, so there is lots of paperwork regarding
payables. There is no receiving paperwork, so there is no way to determine whether
deliveries have been made or not.
• Payables problem can be solved by making consolidated monthly payments.
• But to get an assurance of the deliveries made, companies use “Backflushing”.
• “Backflushing” is an accounting system in which 1st we determine the quantity of finished
goods produced during the period, and then multiply these quantities by the materials
listed on the bill of materials for each product. Thus, we obtain total theoretical quantity
of each material that should have been used. (Adjusted for process losses, if any)
• Supplier payments are also done based on this theoretical quantity.
• There is no need for suppliers to send invoices, since the company relies solely on its
internal production records to complete payments.
• Problems in Backflushing:
- Production quantity reported might go wrong is there is high labour turnover and low
level of labour training.
- Both Normal as well as Abnormal losses must be correctly reported so that it can be
adjusted to get real consumption.
- Tracing the lot of a specific material is impossible in JIT which might be required in
case of a recall. However certain high-end softwares do make it possible.
- Inventory accuracy may also be very low.

ESSENTIAL PREREQUISITES OF JIT:

- Low variety of goods - Vendor reliability - TQM - Defect free materials
- Good communication - Demand stability - Preventive maintenance

IMPACT OF JIT ON:

1. Waste Costs: Decrease as all wastes are eliminated.
2. Overheads: Decrease as material handling, quality inspection, space required reduces
3. Product Prices: With better quality of product and delivery, customers willing to pay higher.

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 CH – 03 LEAN SYSTEM & INNO VA T ION

TRADITIONAL PERFORMANCE MEASURES “NOT” USED IN JIT:

1. Machine Utilization: because higher machine utilization will manufacture more units of
product and lead to inventory build-up. JIT is a pull system that focuses on manufacturing
only what is needed.
2. Piece Rate Wages:
3. Labour Efficiency: measured not based on speed, rather based on quality.

NEW PERFORMANCE MEASURES USED IN JIT:

1. Inventory Turnover: Must be high. 2. Setup Time: Must be low
3. Customer Complaints 4. Scrap
5. Cost of Quality
6. Customer Service: Delivery time, number of returns, etc.
7. New Ideas Generated: because employees also pitch in.

NOTES FOR PRACTICAL QUESTION OF JIT:

Calculate cost with & without JIT:
Costs Without JIT: Costs with JIT:
• Carrying cost on inventory, • Increase in Purchase Cost
• Quality checking, material handling costs • Overtime Premium Paid
• Inventory Insurance • Stock Out Costs (like Contribution Lost)
• Warehouse Rent and other Exps.

B. KAIZEN
Kaizen philosophy implies that small, incremental changes routinely applied and sustained
over a long period result in significant improvements. It aims to involve workers from multiple
functions and levels in the organization working together to improve a process.
• Gradual improvements, at an acceptable cost. Radical change or disruptive innovation is
not expected.
• Focus on eliminating waste, improving systems, and improving productivity by value chain
analysis (Ch-01)
• Continually improving the standards to achieve long-term sustainable improvements. (i.e.
like Cost Reduction, not Cost Control). However it should not reduce quality of product.
• Collective decision making, employee involvement.

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 CH – 03 LEAN SYSTEM & INNO VA T ION

C. 5S
It explains how a work space should be organized. It is the foundation for the 8 pillars of TPM.
1. Sort: remove unnecessary & unused items. (use Color coding done)
2. Set in Order: arrange the necessary items into most efficient and accessible way. It makes
items easy to find, and saves space, ensures FIFO.
3. Shine: clean the workplace and upkeeping of machines.
4. Standardize: the best practices in operations (SOP). Ensure they are performed correctly
and consistently.
5. Sustain: not one-time-exercise, it needs to be sustained. Training, motivation, monitoring
& audits must be performed to ensure that employees do this without being told.

D. TOTAL PRODUCTIVE MAINTAINENCE (TPM)

It is regarding maintenance of machines in top working condition so as to avoid breakdowns
and delays.
PILLARS OF TPM:
Foundation: 5S: Organizing the workplace.
P-1: Autonomous Maintenance: Give autonomy to employees to eliminate defects at source.
P-2: Focussed Improvement (Kaizen): Minor improvements continuously applied.
P-3: Planned Maintenance: Preventive Maintenance, Breakdown Maintenance, Corrective
Maintenance, and Maintenance Prevention to ensure zero breakdowns.
P-4: Early Management: Shortening the time for product and equipment development by
Engineering and Re-engineering Processes.
P-5: Quality Maintenance: deliver highest quality product.
P-6: Education & Training: to improve knowledge, skills and morale of employees
P-7: Office TPM: apply TPM in admin work.
P-8: Safety, Health, and Environment: have zero accidents and zero health damages
PERFORMANCE MEASUREMENT IN TPM: (For Practicals)
It is done in terms of Overall Equipment Effectiveness (OEE).
Particulars Hours
Total time:
(-) Time Lost: Break Time:
Breakdown:
Maintenance & Setup Time
Power Failure, etc.
∴ Time Available

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 CH – 03 LEAN SYSTEM & INNO VA T ION

∴ Std Time for Actual Production: Actual Production Units

(-) Units Rejected -
∴ Good Production Units -
𝑇𝑖𝑚𝑒 𝐴𝑣𝑎𝑖𝑙𝑎𝑏𝑙𝑒
(1) Availability Ratio (%) = × 100 - Time Losses
𝑇𝑜𝑡𝑎𝑙 𝑇𝑖𝑚𝑒
𝑆𝑡𝑑. 𝑇𝑖𝑚𝑒 𝑜𝑓 𝑃𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑜𝑛
(2) Performance Ratio (%) = × 100 - Speed Losses
𝑇𝑖𝑚𝑒 𝐴𝑣𝑎𝑖𝑙𝑎𝑏𝑙𝑒
𝐺𝑜𝑜𝑑 𝑃𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑜𝑛 𝑈𝑛𝑖𝑡𝑠
(3) Quality Ratio (%) = × 100 - Quality Losses.
𝐴𝑐𝑡𝑢𝑎𝑙 𝑃𝑟𝑜𝑑𝑢𝑐𝑖𝑡𝑜𝑛 𝑈𝑛𝑖𝑡𝑠

(4) OEE (%) = Availability % × Performance % × Quality %

Ideal values for the OEE component measures are:
Availability > 90%; Performance > 95%; Quality > 99%
Accordingly, OEE at World Class Performance would be approximately 85%.

E. CELLULAR MANUFACTURING
It is a sub section of JIT, in which one or more machines & processes are put together and
considered as one ‘Cell’. Multiple such cells are used in assembly line, each cell
accomplishes a certain task.
• These cells are arranged in a ‘U’ shaped design, so that the supervisor can watch over the
entire production without moving much.
• Scattered processes are merged, so it reduces flow time, flow distance, floor space,
inventory, scrap and rework, etc.
• Quality control is facilitated as problems can be easily detected and underperforming cells
can be easily isolated.
• It improves employee cohesiveness and scales it down to a more manageable level.
• Cells are designed to maintain a specific flow volume, so they are not flexible.

F. SIX SIGMA
It is quality improvement technique to eliminate defects that affects customer satisfaction. By
measuring defects in a process, a company can develop ways to eliminate them and
practically achieve “zero defects” i.e. 3.4 defects per million opportunities or getting things
right 99.99966% of the time.
IMPLEMENTATION OF SIX SIGMA:
1. DMAIC: 2. DMADV:
For existing business process. Phases: To develop new processes or products:

• Define the problem • Define the customer deliverables.

• Measure current performance. • Measure and determine customer needs

• Analyze to find root cause. • Analyze process to meet customer needs.

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• Improve process, eliminate root causes. • Design a process to meet customer needs.

• Control means maintaining the improved • Verify the design performance and ability to
process and future process performance. meet customer needs.
DMAIC is used under the following cases: DMDAV is used under the following cases:
- Existing product or process. - New product or process.
- Part of ongoing continuous improvement. - Process already optimized using DMAIC.
- Project have strategic importance.
- Only a single process needs to be altered. - Multiple process need to be altered.
- Competitor’s actions are stable. - Competitor’s performance is changing.
- Customer’s behaviour is unchanging. - Customer’s behaviour is changing.
- Technology is stable. - Technology is growing.
- Short term benefits - Long term benefits

G. PI & BPR
BPR focuses on amending existing processes, while PI attempts to implement new
processes. Process Innovation (PI) could be in the following areas: Production, Delivery, or
Support Services.
Business Process Reengineering (BPR) means fundamental rethinking and radical redesign
of business processes to achieve dramatic improvements in areas such as cost, quality,
service, and speed.

03. 6 CA FINAL – STRATEGIC COST MGMT & PERFORMANCE EVALUATION Compiled by Devang Kothari (CA, CS)