Demand forecasts
A materials order specifying the materials, components, and subunit tasks required to
produce a final product.
In MRP, a master production schedule dictates the quantities and timing of each part to be
produced. Once the scheduled production run begins, departments push output through a
system.
The advantages of this system include predictability and efficient inventory control. The
disadvantage is potential inventory accumulation; workstations may receive materials
before they are ready to process them. In addition, any quality control problems may not be
identified until items shipped from inventory reach the end user.
The objective of a just-in-time (JIT) system is a lean manufacturing process that reduces or
eliminates waste by producing components as they are required, rather than holding large
safety stocks of inventory.
Theoretically, demand triggers every step and pulls a product through production, from
customer demand for a finished product, all the way back to the demand for raw materials.
This demand-pull feature of a JIT system requires high levels of quality at each point in the
system because only the minimum number of items demanded will be produced and close
coordination is required among all participants to ensure a smooth flow of goods and
operations.
JIT systems use some type of a trigger or signal mechanism to indicate the need for a
specified quantity of materials or parts to move from one part of the process to the next.
Kanban is a Japanese term for the visual record or card initially used for this purpose. E-
Limitations
Question 1
What is the primary benefit of just-in-time systems compared with traditional materials
requirement planning systems?
What is the primary benefit of just-in-time systems compared with traditional materials
requirement planning systems?
a. Increased stock quantities at all levels in a system.
b. Maximization of production runs to accommodate complete product lines.
c. Replacement of a push-through manufacturing strategy with a demand-pull strategy.
d. Reduced risk of overproduction and savings from holding less inventory.
Outsourcing
Outsourcing allows a firm to capitalize on the expertise of another company that is more
efficient, effective, or knowledgeable at performing a specialized task that is peripheral to
the firm's core business competencies. Common examples include information technology
services, human resources (such as benefit plan administration), and customer service
functions.
A make versus buy analysis examines the relevant costs of keeping activities in-house
versus outsourcing.
Some firms have extended the idea of outsourcing to contract manufacturing, in which
another company actually manufactures a portion of the first firms products. This can be
successful for both organizations if one has excess capacity or specific capabilities the
other lacks.
Limitations
Theory of Constraints
Identify the system constraint either a physical or a policy constraint, such as one step
that is taking too long or is idle too long.
Subordinate everything else adjust the rest of the system to operate at maximum
effectiveness and evaluate the results. Conduct further analysis to maximize flow
through the constraint, eliminating non-value-added activities.
Elevate the constraint if steps 2 and 3 prove to be insufficient. Actions may include
additional investments and capital improvements.
Using this method, the objective is to maximize throughput contribution while reducing
investments and operating costs.
Net profit increases when throughput goes up or operating expenses go down. Throughput
can go up by increasing sales revenues or by reducing variable costs of production.
Measures that increase net profit increase return on investment, as long as inventory
remains the same. If inventory can be decreased, then ROI will increase, even without an
increase in net profit.
Cash flow increases when either throughput goes up or the time to generate throughput is
reduced, assuming the time saved is applied toward generating more throughput.
Unlike traditional performance measures, which focus on direct labor efficiency and unit
costs and how efficiently the company must produce a product, TOC emphasizes how
efficiently an organization must manufacture products for optimum market success.
Organizations that implement the theory of constraints often use activity-based costing as
well. Both methods assess product profitability but there are a few differences:
ABC does not consider resource constraints and process capability; it analyzes cost
drivers and accurate unit costs for long-term strategic pricing and profit planning
decisions.
The short-term aspects of TOC and the long-range focus of ABC make them
complementary profitability analysis methods.
Capacity Concepts
A key issue in costing is choosing the capacity level for computing the allocation of
manufacturing overhead. The choice of capacity level used to allocate overhead can have a
great effect on product cost information.
Theoretical capacity is the level of capacity that can be achieved under ideal
conditions, when there are no machine breakdowns or maintenance, delays, etc.
Theoretical capacity represents the largest volume of output possible, but is
unattainable and unrealistic.
Practical capacity represents the highest level of capacity that can be realistically
achieved, allowing for unavoidable losses of productive time, such as machine
breakdowns, employee vacations, maintenance, etc.
Using theoretical capacity when calculating overhead allocations would mean that a large
denominator activity level would be used, resulting in a lower overhead allocation to
individual units of product. This would make allocated costs too low and misrepresent
product cost information. Practical capacity is a better choice because it generates product
costs that accurately reflect the cost of the product.