kaizen costing for lean manufacturing

Vol.43,No.9,1May2005,1751–1760

Kaizen costing for lean manufacturing:a case study

B.MODARRESS y,A.ANSARI z*and D.L.LOCKWOOD z

y Science Applications International Corporation,13024Beverly Park Road,

Suite103,Mukilteo,WA98275

z Department of Management,Albers School of Business and Economics,

Seattle University,Seattle,WA98122

(Revision received October2004)

In the past decade due to increasing global competition USfirms have radically

changed their manufacturing practices to improve their competitiveness.In

pursuing this goal they have adopted a number of advanced techniques,such

as just-in-time,total quality management,lean manufacturing,flexible manufac-

turing systems,process improvement,and design for manufacturability,to name

a few.The objectives of all these programmes have been to reduce cost,improve

quality,reduce cycle time,and increaseflexibility on the factoryfloor.Support

systems such asfinance and cost management,however,have generally not kept

pace with the level of corresponding operational changes being implemented.This

paper presents a case study of kaizen costing as practised by Boeing Commercial

Airplane Company,IRC Division.The purpose of this study is to describe a

method used to set kaizen costs which will provide relevant cost data to support

lean production decisions that would be useful to practitioners.

Keywords:Lean manufacturing;Kaizen costing;Target costing

1.Introduction

According to Berliner et al.(1988),standard cost accounting and cost management systems utilise performance measures that are often in conflict with strategic manufacturing objectives,and they cannot adequately evaluate the importance of non-financial measures such as quality,throughput,andflexibility.This is,in part, a result of the installed base of legacy accounting systems.In tough economic times, managers are understandably reluctant to spend millions of dollars to install a new accounting information system without a demonstrable return on investment guar-antee upfront.Yet,manyfirms are discovering that standard cost systems are inade-quate to identify costs associated with modern manufacturing process objectives and have instead opted for kaizen costing as an emerging strategic management tool (Schneider1997).Kaizen costing is a method for ensuring that a product meets or exceeds customer requirements for quality,functionality,and prices to sustain prod-uct competitiveness(Ellram2000).Kaizen costing,along with value added analysis, help implement kaizen costing practices.Standard costing systems focus on meeting *Corresponding author.Email:aansari@seattle.edu

International Journal of Production Research

ISSN0020–7543print/ISSN1366–588X online#2005Taylor&Francis Group Ltd

http://www.tandf.co.uk/journals

DOI:10.1080/002075405000341741752 B.Modarress et al.

cost standards and avoiding unfavourable variances.Kaizen costing,in contrast, stresses continuous cost reductions(Shank and Fisher1999,Tanaka1993). The purposes of this paper are to describe and prescribe the use of kaizen costing to developfinancial measurement metrics that are more appropriate to use on the shopfloor in lean production systems.This approach is based on the information gathered from the Boeing Commercial Airplane Company in the Interiors Responsibility Center(IRC)Division.This article is organised as follows.First, target costing,kaizen,and value added analysis are briefly reviewed since these have been discussed at length elsewhere by a number of authors(Ellram2000, Lockamy and Smith2000,Tanaka1993).Second,an overview of IRC operations at Boeing is presented to provide a context for the study.Finally,the actual implementation of new target costingfinancial metrics in IRC is discussed.

2.Cost management methods

2.1Target costing

Increased pressures within supply chains,coupled with new pressures from capital markets are forcingfirms to adopt Japanese cost management systems(Hopper et al. 1999).Japanese manufacturers acknowledge that standardfinancial measures are still vital in running a lean production system,but they have tailored their cost management systems to support target costing methods by separating cost management from cost accounting.In Japanesefirms,cost management is proactive in planning,managing,and reducing costs,as opposed to the historical backward looking focus of cost accounting(Berliner et al.1986).As Robin Cooper states in his study of Japanese manufacturing,‘only by sharing the relevant cost information could management expect the workers to be able to most effectively achieve cost reduction by setting and committing to sensible targets’(Cooper1995).In other words,employees must have access to related cost data to meet set targets.

Japanesefirms consider cost reduction as the most critical measure among all others.They believe the consumer will only buy the product if the price is less than the perceived value of the product.As such,there are only two ways to make this happen—increase the perceived value of the product or lower the price of the product by lowering the costs required to produce it(Monden2000).

Therefore,the key to target costing is the principle in which a product price is developed based on what the market is willing to pay for it,not on what it actually costs to produce the product.Thefirm then sets the desired profit margin based on its strategy and the remainder is the target cost to be attained through changes in the product design.The target cost is established by the difference between target profit margin and selling price.As illustrated infigure1,the target cost with a customer price of80cents and a profit margin of20%becomescents(0.80Â0.20¼0.16) and(0.80À0.16¼0.).The target cost is then used to control design and manu-facturing costs(Creese2000).It is estimated that80%of product costs are locked in during the design phase,therefore making it difficult to achieve major cost reductions after this phase(Bakerjian1992,Cooper and Chew1996).Designs for manufacturability practices do affect design costs,but these will not be discussed in this paper.The remaining20%of product cost is due to manufacturing costs. As illustrated infigure1,with a target cost ofcents,the design cost would then

be $0.51($0.Â80%)and the remaining manufacturing cost to work within would be $0.13($0.Â20%).Kaizen costing and value added analyses are methods used to lower prices in the target costing approach.

2.2Kaizen costing

Kaizen costing activities focus on continual small incremental product cost improve-ments in the manufacturing phase,as opposed to improvements in the design and development phase.In kaizen costing,management will set the cost reduction targets for the product.In Boeing,for example,the overall cost reduction for the division is set during a six-month time interval.Then,kaizen costing at the work cell group level is subsequently established based on negotiation and agreement between man-agement and the work cell.Once reduction targets are finalised,the work cell has complete freedom in coming up with ways to achieve these targets.Generally,the only product costs considered are those directly controllable by the shop floor.Interim results are measured after three months to evaluate if the work cell has progressed toward achieving its target.If the work cell fails to meet progressive targets,the reasons are investigated.It could be that the target was set unreasonably high to begin with,or external factors beyond their control,such as supplier con-straints,contributed to the failure.In the former case,the previous cost per product should be used as a starting baseline for kaizen cost reductions.Costs must be subsequently reduced in each successive period in order to meet the target profit (Monden 2000).In the latter case,the procurement area would need to work with suppliers to eliminate constraints.

Key factors in successful implementation of kaizen costing are twofold.First after the cost-reduction target is established,then the work cell should be held accountable to these.Second,the kaizen process needs to be consistent and repeat-able.It must become part of the culture for the work cell to always strive to meet their target and be able to recognise the progress made over the course of the year.The use of value-added analysis is recommended on the shop floor to facilitate work cells in reaching their kaizen

targets.

Design for

Manufacturability Kaizen Costing

Figure 1.Target costing.

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Kaizen costing for lean manufacturing

2.3Value-added analysis

Value-added analysis quantifies the level of waste existing in a given production process.Basically,the total elapsed time a part spends in various process activities on the shopfloor is broken out between value and non-value added time.Value-added time is the time spent in the process transforming materials into a product which adds more value to the product.Non-value time are activities such as inspec-tion,rework,queues,moving material,and wait time spent in the transformation process that adds no benefit to the product.This is considered waste and an unwel-come cost by thefirm.The ideal situation would be one where the value-added time of a product equals its lead-time.In this case there is no waste whatsoever in the process.

To achieve this goal,once the correct parameters and assumptions are in place, value-added metrics need to be established.Just as in kaizen,the key point is to establish targets,measure to the targets for a given period,and then reset new targets.This information is usually expressed in percentages of a work cell’s time (e.g.20%value added v.80%non-value added time for a given period).To begin the analysis,each production activity must be studied and a determination made as to whether or not it adds value to the product(Maskell1991).Then re-sampling is performed at predetermined intervals to track the change in proportion of value-added time.As this process continues,the work cells becomes more attuned to what non-value-added time is andfind it easier to come up with ways to eliminate waste.

In the next section,kaizen costing and value-added analysis are applied to a shop floor in the Interiors Responsibility Center of the Boeing Commercial Airplane. 3.Interiors Responsibility Center

The Interiors Responsibility Center(IRC)in Everett,Washington,has design and production responsibility of aircraft interiors for the Boeing Commercial Airplane Company.The IRC produces interiors for the737,747,757,767,and777models, both production and spares.Products include overhead stowage bins,ceiling panels, sidewall panels,class divider partitions,closets,flight attendants work stations, and crew rests.

The majority of products manufactured are composite crush core parts made of kevlar,graphite,carbonfibre,andfibreglass materials.The fabrication process consists of laminating the composites in a crush-core press that numerically controls (NC)routing of parts to trim.Thereafter components from other Boeing divisions and outside suppliers are assembled onto the fabricated piece for thefinished end item to the airline customer.The production area was organised into product groups broken out by stowbins,closets and partitions,ceilings and sidewalls.Each product group was led by a senior manager who had supply chain responsibility for all products within the group.Engineering was a separate function located in a different building.

As a result of lean manufacturing efforts in IRC over the past few years,the product groups are now further broken down into separate cells delivering a specific product.Each work cell is a self-directed work team with one supervisor having responsibility over the cell.Previously,the production was taking place in three buildings.Currently,it is consolidated into a single building in Everett.Support

functions such as manufacturing engineering,industrial engineering,and purchasing have been moved to the work cells they are assigned to support.As a result of these organisational and process changes,lead times and unit costs have been dramatically reduced.However,the financial measurements posted in the shop floor were very similar to those used in the past,even though the organisation of the shop itself was drastically different.

While some of the actual techniques for gathering data have changed,the overall financial measurement metrics themselves have not changed to support the new process.Two metrics are used to measure the work cells in terms of financial per-formance.These are hours per part (HPP)and budget v.actuals.The HPP is a basic algorithm of total direct labour hours expended for a given period,usually a month,divided by total part completions out of the work cell for that same period.Obviously,this is a measure of productivity and the lower the HPP the better.But the challenge is to determine how low HPP can go,what is the finite limit,and what the targets should be.

Currently,using budget v.actuals metrics,the shop floor has visibility of the total annual budgeted dollars for each individual work cell.Furthermore,this is broken down by different cost elements and the actual expenditures are shown for each month.While this aggregate information is important and necessary to display on the shop floor,it is inadequate because work cell employees do not have sufficient knowledge of what comprises the charges and are therefore unable to relate it to the activities and tasks they perform.As a consequence,they often distrust the fair-ness of the charge and feel they have little information with which to control costs (Berliner et al.1998).

Now that management techniques have changed significantly and more authority is given to the shop floor,the traditional metrics used by management are no longer sufficient (Maskell 2000).Hence,a new set of financial performance measures needed to be adopted to facilitate lean initiatives and process improvements in the IRC’s.What IRC needed was:(1)metrics that could tie the worker’s job to the goals of lean manufacturing,and (2)financial measures that could guide decision making now vested in the work cells.The following section will describe the financial metrics and processes implemented on the IRC shop floor.

4.The Implementation of new financial metrics in IRC

It was important to design a process that was repeatable and that could be applied across all of IRC.For this reason,two vastly different work cells were used in the development process.The first work cell was 1SC where the 777sidewall panels are manufactured.The 1SC is a basic and stable product with the only variation being the pattern on the exterior decorative laminate and the width of the sidewall.As such,the process and costs are very consistent across parts built in the work cell.The second work cell was 2MB which produces a multi-model complex closet.As the name suggests,this work cell fabricates and assembles complex closets such as flight crew rests and flight attendant work stations for all Boeing aircraft models.Although all of the closets are of a composite panel construction,a significant amount of variability exists in the products and work statements throughout the 2MB work cell.The goal was to find new financial metrics that could be applied to 1755

Kaizen costing for lean manufacturing

both work cells,and in this way increase the chance of having a set of measures that could be used across all of IRC.

Kaizen costing is one of the two new financial methods implemented in the IRC lean environment.To implement kaizen costing for each work cell three parameters were considered including:(1)the present product cost,(2)target set for reduction,and (3)a method of visibility and tracking.

As a result of past systems,accurate product costs are readily accessible from the IRC database.The process begins with finding a representative part number for each work cell based on the projected build schedule coming across the work cell over the next three months.The next step is to break out the controllable and non-controllable costs in the IRC.There are some unchangeable costs that are assigned to the division over which the IRC has no control.These costs include some supplier prices due to contracts and overhead site abatements.This information provides visibility to the shop floor employees in order to have better understanding of the full cost of the product.However,cost targets and progress were based only on activities such as raw materials,parts supplied by the Boeing Commercial Airplane Company,and labor which IRC can control to a certain extent,i.e.,‘controllable costs’.It is important to note that the costs of materials supplied by external suppliers remain constant during the term of a contract.Once the cost of the product for the work cell is known,this information as well as the kaizen cost target is shown on the work cell performance record (WPR).The actual product cost will be updated monthly.To illustrate,in figure 2the work cell shows a 2.5%

Kaizen Costing Summary Report

Interiors Responsibility Center

Part:Number Commodity Model 439W1006-6B Balance 777-200ER IRC Controllable Costs IRC Uncontrollable Costs Raw Material

$6,461.00Purchased Components Auburn Components $3546.00 $ 661.00 $4207.00 BCA Supplied

$316.00Total Costs 17,530 $ Labor Costs $6,546.0013,323.00 $Total Cost 17,530.00

$ 2MB - Complex Closets Name Purser Work Station Workcell

Jul-02Aug-02Sep-02Oct-02Nov-02

Dec-02July through December Kaizen Target

Workcell 2MB

Figure 2.Work performance record.A 2.5%six-month improvement.All quantitative data

including costs,process times etc,are disguised v.actual company data.1756 B.Modarress et al.

improvement in six months.The actual percentage of improvement was significantly higher than that presented in figure 2.In subsequent periods,the work cell achieved even greater improvement.

The target setting process itself was the most important step in kaizen costing and consisted of a negotiated iterative process between upper management and work cell employees.In the end,the target that was set must be both achievable and satisfac-tory to meet overall company objectives.If the target is too high,there will be no buy-in from work cell employees,and hence no real effort will be given to achieve target goals.On the other hand,if the target is set too low it will not satisfy the company’s target goals.As shown in figure 3,a top-down and bottoms-up process was used to develop target costing goals.This approach was designed to go through reiterations until the link from bottom to top is complete and consistent and meets in the middle,at point 2.2in figure 3.

Since the company’s cost targets and budgets are updated every quarter,this time period was also used to update cost targets.This process coordinated overall company directions with what has been accomplished on the shop floor and also shows the linkages throughout the entire process.Once cost targets and metrics were established for work cells,the employees were provided with some indication of where waste exists in the process.To accomplish this goal,value added analysis was used.

5.Results of value-added analysis

Value added analysis was performed in order to determine which activities in the manufacturing processes were value added and which ones were not.First,the

Kaizen Costing Setting Process at IRC

Top-Down Path

Figure 3.Target costing setting process.

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Kaizen costing for lean manufacturing

amount of time spent on each activity was measured.This information could be obtained from three sources:

(a)From the work cell employees report form showing how much time was

spent on each activity.

(b)From the routing standard established for each step.

(c)The number of value-added hours worked over a period of time less

non-value-added time.

Next,in order to determine which activities were value added,work cell employees identified where waste was taking place in their process and which could conse-quently be reduced over time.Although most work cell employees were able to intuitively identify where waste existed in a process,this analysis helped them focus their efforts on tracking the progress being made.At this point,industrial engineering performed time-and-motion studies of at least two separate products within each work cell to develop a baseline.It was possible to have more than two products,but it is important to strike a balance between quality of the data and the cost of obtaining it.Upon the completion of the study,an agreement was reached among industrial engineering,manufacturing engineering,and work cell team members on what sections of the process were value added v.non-value added.

To illustrate this,the value-added analyses for work cell1SC-777sidewalls is shown infigure4.In thefirst period,this work cell spent a total of4.25hours to complete26tasks.Only about2.05hours,or48.24%,out of4.25hours were value-added time compared to51.76hours of non-value-added.Only6tasks or23%of tasks were value added and the remaining tasks were non-valued-added.During the second period,using the kaizen concept the total number of hours used was reduced to3.55hours and the non-value-added hours was reduced to1.50hours as illus-trated in part(b)offigure4.These changes in the value-added percentage were then tracked over time.This analysis was posted for each work cell in a prominent location.

Once this baseline was established,the updates occurred on a monthly basis. This allowed the work cell team to verify their progress in removing wastes from processes.A specific target was not set at this time for the value-added analysis. Rather,it was used to enable the teams to achieve target costs which were expressed in dollars.

6.Summary and conclusions

In the last decade,many US manufacturers have experiencedfierce global competi-tion and have adopted a lean manufacturing philosophy in order to compete in the international market.Many USfirms have used traditional standard costing systems to control costs during the manufacturing process.These systems are insufficient in supporting lean manufacturing objectives and are often in conflict with strategic goals of thefirm.Kaizen costing has increasingly been adopted as a new cost management tool and philosophy to support lean manufacturing in order to remain competitive.The focus of kaizen costing is on continuous cost reduction. Two objectives of this article were to describe a method of setting kaizen costs and to proposefinancial measurement metrics essential to the successful implementation

of lean manufacturing.The kaizen costing process and financial metrics described herein have been developed and actually implemented in Boeing IRC.For future research Boeing needs to be able to compare post-performance metrics with those obtained prior to kaizen implementations (i.e.before-and-after measures)to further substantiate the efficiency of kaizen costing.

The key to success in the implementation of new financial measurement metrics depends on close cooperation between work cell team members and management.These metrics were developed using the guidelines that targets are indeed achievable,and that they meet both groups’expectations.Senior management will use these metrics to hold people accountable.All elements related to these metrics and

Figure 4.Workcell value-added analysis tracking chart.All data are disguised v.actual

company data for proprietary reasons.

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Kaizen costing for lean manufacturing

processes must be understood and accepted by all parties involved,otherwise none of it will be of any use as people will not follow them,trust them,or use them.

The success of anyfinancial metric depends heavily on the availability of accurate estimates of activity costs.After initial data gathering,the shopfloor must insure that these metrics are timely,visible,and updated.Finally,these metrics must be made available to management for review,evaluation,and control purposes. Adopting new target costing methods andfinancial practices using kaizen costing and value-added analysis has helped to further IRC’s lean manufacturing implementation.

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