UNIT - II

Lean Mfg:g Principles p Basic tools and Techniques Definition of lean manufacturing Assessment tools Implementing Lean Mfg Science behind lean manufacturing Capacity utilization Variability and Delivery

Lean Manufacturing Principles

The basic lean manufacturing principles can be explained with some keywords used in lean manufacturing. manufacturing . By y understanding g these key y words y you will understand the basics of lean manufacturing, which is very important in success

Value:

Lean manufacturing defines the value of a product or a service with the customer point of view. Customers do not mind how hard you work or what is the technology you used to create the product or service you are selling to them. They will evaluate your product or the service by looking at how well this is going to fulfill their requirements. Customers do not need to p pay y for the quality q y defects you y have removed from your production lines. They also do not need to pay for the huge amounts of Over Head costs you have back in your facility facility. They will pay for the fulfillment of their requirements with the product or service you are providing to them.
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Waste:

Each and every organization wastes up to 95% of their resources, while most commonly this value exceeds 70%. Even the best lean manufacturers waste up to 30% of their resources. So it is obvious that there are serious wastes that are hidd or yet hidden t to t be b discovered di d in i your organization. i ti Knowing the scale of the wastes, it is worthy to know exactly a waste according to lean manufacturing. In lean manufacturing the wastes are defined as anything which does not add value to the end product. If customer sees the value with the end product, it is very much h fair f to define d f a waste in this h way.

Root Cause:

Every problem in the system has a cause for it. Sometimes it is one or more root causes for a problem. One root cause even can contribute for more than one problem. When you clearly understand the problems and their causes, causes then it is time to find out the solutions. Lean manufacturing solutions are more often very simple and very effective. This kind of problem solving requires people who can think differently or creatively. When you find the solution to the problem, then it is the time to implement the solution and to make sure that you achieve your objectives. Lean manufacturing believes that each and every activity is interconnected. Therefore one advancement in one place will increase the system as a whole. Therefore this cycle of identifying, finding root causes, finding solutions and implementing will go on and on again and again. This process will be continuous until there are wastes to be removed. The cycle will never end. Therefore you will have increments in your total productivity everyday.. Lean manufacturing is the way to never ending continuous improvement. This is also known as the Kaizen in lean manufacturing. g
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Team building:

It is one of the most important aspects of lean manufacturing manufacturing. lean manufacturing treats the organization as a single unit. Therefore departmental thinking will not be good in lean manufacturing. This is applicable to individuals working in the organization. i ti They Th all ll lead l d to t the th ultimate lti t objective bj ti of f the th organization, with various job functions. They are made into teams sometimes cross functional teams to accomplish p the objectives j of the organization. g Every job has to be supported by many other people. Therefore no organization can succeed if the workers are only concentrated about themselves, and play individually. This is why almost all the organizations around the globe are trying to build team working culture in their organization. Good team means better future. So it is crucial to learn the art of team building to survive in todays tough, competitive world.

Motivate: When organization is changed from conventional to lean manufacturing, people tend to relax and go flat. So how do we refresh them continuously and get the best out of them? You Yo ha have e to moti motivate ate them contin continuously. o sl Understand the requirements of the people, and talk to their requirements and fulfill them. In a team working environment there is a strong possibility of talented people getting demotivated. So it is necessary to give some attention to individuals with very high talents. Maslows hierarchy of needs is one way to understand the requirement of the people better better. According to this hierarchy people have an order of requirements where only when the lower a level need is satisfied they will look into higher level needs. For an example they will not look to satisfy their esteem needs until their basic requirements like food food, water and shelter is satisfied. So learn how to motivate yourself and people working with you.

BASIC TOOLS OF LEAN MANUFACTURING

5s workplace organization

Work cell

Primary tools

Total Productive Maintenance

Process / Value stream Mapping app g

(Also known as Primary tools of Lean Mfg.)

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Lean manufacturing is based on continuous finding and removal of the wastes. Therefore all the tools in lean manufacturing aim to identify and remove wastes from the system continuously continuously. There are four steps in implementing lean manufacturing. They are;
1. Identifying the fact that there are wastes to be removed

2. Analyzing the wastes and finding the root causes for these wastes 3. Finding g the solution for these root causes 4. Application of these solutions and achieving the objective

5S work p place organization: g One of the very important standardization tools used in lean manufacturing is the concept of f 5S
1. 2 2. 3. 4. 5. Seiri Seiton Seiso Seiketsu Shitsuke

Seiri refers to the sorting items according to their importance of use and discarding the items which are not useful.
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Seiton refers to the arranging g g of the selected items in a well organized and meaningful manner. manner . This is like keeping the tools used frequently near to the worker worker. . Seiso refers to keeping the workplace clean clean. . In the bigger picture this might be equivalent of having a continuous process of identification and removal of wastes wastes. . Seiketsu is continuously following the above three rules to achieve a good and organized work place place. . Shitsuke is training and motivating the people to follow these g good p practices simply p y as a p part of their day to day life. life.
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Total Productive Maintenance (TPM): Maintenance function is very important aspect which ensures smooth running of a production facility. facility . In lean manufacturing one machine breakdown will not be just another breakdown since it can hold the entire production flow as there is no WIP to consume in the time of the machine b kd breakdown. breakdown . TPM has h three th main i areas. areas. They are
Preventive maintenance Corrective maintenance Maintenance prevention
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Preventive maintenance is continuous checking and prevention ti of f major j maintenance. i t Regular checkups are planned and carried over at regular intervals. Correction of the problems when they occur is very important to run the production units smoothly. This is done after the machine breaks down Maintenance prevention is one of the key aspects which makes the path to become lean. This is the process where the decisions are made in order to prevent maintenance. This process might include decisions like buying correct machinery for the job, training people to overcome most common p problems etc.
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Process Mapping: pp g Process map simply maps all the processes and the activities which are carried out in bringing a specific product or a service in to a reality. reality.

Irrelevant of the value they add to the final product or the service, the process map includes all ll the h activities i i i from f the h point i of f development d l or order inquiry to making and shipping the goods and up to the point where customer collects the goods. goods.

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When you map the process, you will start to see the
1. Value added and 2. Non value added activities

You will also have better idea of what are the h avoidable, id bl non value l added dd d activities i ii and what are the non value added unavoidable activities. activities After understanding these clearly, you have to create the process map for the future.

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Process maps p are prepared p p before starting g any y improvement program. If one is ignorant of his current situation, he cannot set any goals for improvement Types of process maps:

It gives a birds eye view of the entire process. It provides only the major steps in the process and thus acts as g point p of any y process p study y the real starting It helps in establishing the scope of the process Helps to identify the significant issues.

High level process map:

it shows each and every step involved in the process. This is prepared after having a brain storming session among the participants.

Detailed p process map: p

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Work Cell
Work cell concept is another concept developed with the JIT. Work place is arranged in to a cell which is in the shape of English letter U. In a work cell there will be 33-12 people depending on the job task performed by this cell. cell People who are in this cell are multi skilled and d can perform f multiple lti l tasks t k according di to the requirement

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Advantages of work cell

One of the main advantages of the work cell is less movement and lesser transportation. transportation Also this will reduce the over production considerably. considerably This will also give very high flexibility to th entire the ti production d ti system t since i changing from one product to another is very easy.

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DEFINITION OF LEAN MANUFACTURING

Lean Manufacturing g is an operational p strategy gy oriented toward achieving the shortest possible cycle time by eliminating waste. It is derived from the Toyota Production System and its key thrust is to increase the valuevalue-added work by eliminating waste and reducing incidental work. The technique often decreases the time between a customer order and shipment, and it is designed to radically improve profitability, customer satisfaction, throughput time, time and employee morale morale.

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The benefits generally are lower costs costs, higher quality, and shorter lead times. The term "lean manufacturing" is coined to represent half the human effort in the company, half the manufacturing space, half the investment in tools, and half the engineering hours to develop a new product in half the time.

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The characteristics of lean processes are:

Single Single-piece production Repetitive order characteristics Just-In JustIn-Time materials/pull scheduling Short cycle times Quick changeover Q g Continuous flow work cells Collocated machines, equipment, tools and people C Compressed d space Multi Multi-skilled employees Flexible workforce Empowered employees High first first-pass yields with major reductions in defects
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ASSESSMENT TOOLS

Many a times small tools will help overcome big problems with least effort. When we know which secondary tools need to be used with which primary tools its easy to solve problems quickly Assessment tools are also known as secondary tools
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Secondary tools help the organization to

Identify areas requiring further study Identify causes for the problems Construct a p performance indicator Achieve better products Improve productivity Develop p communication Spider chart P k yoke Poka k Kanban Autonomation SMED DFMA Workplace visuals

The secondary tools that are used are

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Spider Chart: This is also

Known as radar chart

A radar chart graphically shows h the h size i of f the h gaps among five to ten organizational performance areas. The chart displays the important categories of Performance and makes visible concentrations of strengths and weaknesses.
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Poka yoke:
Poka Yoke, also called mistake proofing, is a simple method to prevent defects from occurring in your business processes Lean manufacturing understands that large portion of these mistakes is due to the problems in the system itself. Therefore lean manufacturing calls for a system which hi h is i mistake i t k proof f by b nature. t
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Pokayoke systems reduce the cost of failure dramatically. No defective part will be passed to the next p process. So at the end of the p process you y can trust that you have a good quality parts on your hand. Poka yoke is one of the critical steps in the lean journey.
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Kanban: Kanban :
Kanban is Japanese for sign or designated place. It is used in manufacturing to mean a visual signal that tells when it is time to get or make more of something. What Kanbans Do:
Controls the amounts of raw material amounts and of material in W k In Work I Process P Smoothens out flow, if sized properly Tells when and where there is a problem in the process Assures A there th is i always l just j t enough h material t i l on hand h d to t make k what is needed

Types Of Kanbans Kanbans: :

Raw Material Kanban In In-Process Kanban Finished Goods Kanban
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Single g Minute Die Exchange g ( (SMDE) ) One of the most complicated problems this industry faced was overcoming the time taken to change the style in the production line. line This took days and therefore made the production lines inflexible. The idea was to reduce the setup time of the machinery. This is why SMDE was born born. With the aid of careful planning and coordination it was possible to reduce the time taken to change h the th line li into i t minutes i t from f days. d This made an immense flexibility in the production p oduct o line. e
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This has something to do with

strategic planning, machinery, choosing correct machinery having correct layouts, having trained people and correct mindset of the people.

Achieving SMDE require very good analysis l and d creative solution l making. k

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Workplace visuals APAGOREUETAI TO KAPNISMA

VIETATO FUMARE

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Visual management helps you:

Understand and indicate work priorities See whether performance (usually daily) was met Identify the flow of work and what is being done Identify when something is going wrong or not happening Show what standards of work should be Communicate to everyone what performance measures are in place Demonstrate all the elements required for safe and effective work P id real Provide l time ti feedback f db k to t everyone involved i l d in i the th whole process Cut down on meetings to discuss work issues.
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Autonomation: Autonomation :
An automatic signal that indicates the status of any machine, quality parameter or any other things that need to be measured. There is no manual intervention and everything is automated. automated The signal can be in the form of light, sound, or combination of both When everything is ok the green light is in on condition When Wh the th machine hi has h a problem bl it shows h a red d light. This helps the operator to look after multiple machines at a time.
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DFMA:
While designing any component the designers concentrate only on the end use of the product. They are habituated to thinking only about the functional point of view. While designing a component many issues have to be taken up
Raw materials Customer requirements Manufacturing process Quality Qua y pa parameters a Ease of assembly Safety etc.

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Implementation of lean mfg. mfg

Rules of lean mfg implementation

Stability Standardized work Pull system Level Production Continuous improvement

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When the top p management g decides to go g ahead with lean transformation they pp a consulting g organization g and approach the following steps have to be complied with
Lean champion has to be selected Lean leaders and associates are chosen Meeting between leaders and associates to be arranged g CEO will explain the necessary training and implementation process
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 A training and implementation schedule is prepared in collaboration with the consultant Leaders and associates are trained Brainstorming takes place Leaders for each project have to be identified A project charter has to be prepared Leaders select the associates Again brainstorming takes place between leaders and associates for each project Project implementation commences Projects are reviewed at regular intervals
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 Saving through implementation is calculated Train employees in 5s implementation Start 5s implementation Measure results of 5s p and processes. p Sustain the improvements

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VARIABILITY AND DELIVERY

Variability is the consistency of each step to ensure that each cycle y of the p process is identical

Strategies g for Variability: y

Manufacturers can either

1) reduce variability or 2) cope with it.

Almost ost e every eye element e e to of Lean ea Manufacturing a u actu g aims at reduction, coping or both. Most variability y is unnecessary, y, unproductive p and indicative of an underlying problem.
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For these reasons, variability reduction is the first line of defense defense. . TQM/Six Sigma is an example of variability reduction. reduction. Occasionally, variability is irreducible for t h i l reasons or desirable technical d i bl for f marketing k ti reasons. reasons . In these cases, cases systems can be designed to cope with it. it. CNC processing equipment is an example of coping with variability variability. . However, However coping with variability (as opposed to reducing it) is often expensive p and may y p produce undesirable consequences. consequences .
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Almost every aspect of Lean Manufacturing i involves l variability. i bilit Some S elements l t of fL Lean reduce variability while others attempt to cope with irreducible variability. variability Variability y is the reason that inventory y rapidly p y rises with increasing utilization. The amount of variability shapes the curve that defines this relationship. l h The amount of variability also limits capacity. With high variability, a factory or production line "chokes chokes up" up well below theoretical capacity.
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CAPACITY UTILIZATION

Extent or level to which the productive capacity of a plant, firm, or country is being used in generation of goods and services. services. Expressed usually as a percentage, it is computed t d by b dividing di idi th total the t t l capacity it with the portion being utilized. utilized.
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Another way of defining it is is

Capacity utilization is a percentage measure or KPI which indicates the amount of available capacity that is being used to supply current demand demand. . It is a good indicator of business and market conditions as when times are good most plants are able to run at close to 70 7080% 80 % capacity utilization and in some cases all the way up to 100% 100 %.

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Capacity utilization is a widely used KPI and operational measure in many industries in the strategic capacity and business planning functions of many organizations.

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It can be used as a measure which helps d t determine i optimum ti timing ti i of f capacity it expansions, entry into new markets, market exits cost curves for different manufacturers exits, and profitability. profitability. Capacity utilization, along with other information, can also be used in operations and production management to calculate the average marginal cost of production, the split between fixed and variable costs, inventory, manning, overtime costs, and engineering / maintenance costs costs. .
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A firms productive capacity is the total level of output or production that it could produce in a given time period. Capacity utilization is the percentage of the firms total possible production capacity that is actually being used. Capacity utilization is calculated as follows: Capacity utilization (%) = actual output per month (or per annum) x 100% _______________________________________ maximum i possible ibl output t t per month th (or ( P.A.) PA)

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For example, example if a firm could produce 1200 units per month, but is actually producing 600 per month month, its capacity utilization is as follows: Capacity utilization % = 600 units per month x 100% / 1200 units per month = 50%

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Financial implications of capacity i utilization ili i

A firm firms s level of capacity utilization determines how much fixed costs should be allocated per unit. unit As a firms capacity utilization increases, the fixed costs (and therefore also also, total costs) per unit will decrease. It th therefore f f follows ll th that t a fi firm should h ld be b most efficient if it is running at 100% capacity it utilization. tili ti

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However, if a firm is running at full capacity, there are a number of potential drawbacks: drawbacks :
There may not be enough time for routine maintenance, , so machine breakdowns may y occur more frequently and orders will be delayed It may not be possible to meet new or unexpected orders so the business cannot grow without ith t expanding di it its scale l of f production
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Staff may y feel under excessive pressure, p , leading to increased mistakes, absenteeism and labour turnover If the factory space is overcrowded overcrowded, work may become less efficient due to the untidy working conditions It may be b necessary to spend d more on staff overtime to satisfy orders, increasing l b labour costs
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In general, general businesses would feel most comfortable at something between 80 % to 90 90% % capacity utilization because fixed costs per unit are relatively low and there is some scope to meet new orders or carry out maintenance and training

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END OF UNIT UNIT-2

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leanmanufacturingvitGroup home page: http://groups.yahoo.com/group/lea nmanufacturingvitGroup nmanufacturingvit Group email: il leanmanufacturingvit@yahoogroups l f t i it@ h .com

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UNIT - III
Strategic issues:
- Actions - Issues - Focus - Leadership - Management of teams Training.

Lean accounting: Activity based costing Product costing Volume adjusted costing Focused factory concept B ildi strategic Building t t i advantage d t th through h enterprise t i wide. id

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ACTIONS
Lean Implementation Process

Plan

Do

Check

Adjust j

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Plan

Align goals, strategy, and actions

Step 1: Policy deployment

In this step, step tools and methods guide leaders in aligning strategy, goals, and actions. a o This alignment minimizes waste and increases the impact of business activities.

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Step 2: Action plans

Once the actions have been identified in the policy p y deployment p y step, p, action plans p are designed, assigned, and implemented.

Step 3: Value Stream Mapping

A value stream map represents the flow of materials and information through a business syste system.

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There are three tangible, detailed end products of a value stream map exercise:
1. Current state map: the asis process 2. Future state map: the improved process 3. Implementation plan: how to get from the current state to the future state
Implementation n

Current state

Future state

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Do

Implement Lean according to plan

Kaizen workshops
Kaizen workshops are focused process improvement workshops. Process improvements in the range of 50% are typical in kaizen workshops. Most of the improvements that are developed by the t e kaizen a e workshop o s op tea team a are e implemented p e e ted immediately for immediate return.
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 Projects
Projects are improvement activities that cannot be achieved within the time scope of a kaizen workshop. An example of this might be implementing a new computing system. system

Go dos do s
Godos are simple improvement activities that do not need to be a kaizen workshop or project.
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Measure and analyze progress

Systematically measuring and analyzing progress is one of the most important aspects of sustaining and improving on changes. changes . Without this discipline, the changes will not be maintained maintained. . Th There are two t categories t i of f measures measures: :
Process metrics Management metrics
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Process metrics let employees and managers k know th status the t t of f a particular ti l process at t any particular time. time. These are the measures that guide behavior at a local level, level and that help everyone understand how a process is doing doing. . An example of a process metric is the cycle time for an order to be entered into the system. system. Management metrics help managers make business decisions. decisions.
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Standardize and sustain change

In this phase, phase two important things happen:

1. 1 Process improvements are adjusted and standardized based on the measures and analysis a a ys s 2. Changes are sustained and improved

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Very few improvements run perfectly out of the chute. B Because modern d b business i systems t are so complex, l there th are unanticipated consequences that require a response. This is a normal occurrence, , and those that plan p for it are more likely to succeed in their efforts to sustain change. Measurements and analysis help make the inevitable adjustments to the process more effective. Whenever possible, it is advisable to make decisions that have some connection to data. Sustaining and improving these changes requires commitment from leadership leadership. Leaders keep continuous improvement on the agenda, make it a priority, and help remove obstacles preventing progress.
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ISSUES

The most common challenges manufacturing businesses face when implementing Lean.
Resistance to change Lean cannot be learnt by reading a book Recognize lean as a whole philosophy Failure to empower people Lean is not limited to manufacturing Cultural issues

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FOCUS

The primary focus of lean manufacturing is to eliminate waste The second focus is to empower workers and allow them to make production decisions. The focus of lean manufacturing g extends on to driving rapid, continual improvement in cost, quality, service, and delivery, significant environmental l benefits b f typically ll occur as a result l of these productionproduction-focused efforts.
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The focus needs to be on improving processes and d not t operations. ti In the past the focus was on getting equipment to run at maximum speeds to produce the highest volume of products products creating mountains of inventory without considering the exact needs of customers. The want was on both machines and people to work correctly, but with the wrong emphasis putting p g energies g in the wrong g direction.
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LEADERSHIP

Seven Essential Qualities of a Lean Leader

P
PERSPECTIVE

R RESPONSIBILITY O OPENNESS F I
FLEXIBILITY INERTIA TEAMWORK SELF KNOWLEDGE
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T S

MANAGEMENT OF TEAMS

The team in an organization is like the family in a society. i t It is i the th fundamental f d t l building b ildi block bl k of f trust and competence. The te team mi is the he heart t of the social o i l system tem both at the front line level and at all levels of management. management Three characteristics a group are required to be considered a real team, and to maximize its potential:
A meaningful and common purpose Adaptable skills Mutual accountability

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The most effective organizations are all built on the f foundation d ti of f effective ff ti t teams. The majority j y of companies p implementing p g lean organization are not achieving the results they could achieve because they are primarily focused on the technical things which form only half the organization. organization The other half is the human side, the culture of the organization. This is the hard part because it is about you how you think, feel and behave. It is about the relationships between team members, between different functions and levels in the organization It is about trust. organization. trust This is the hard part part.
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Lean Team Management for most companies is a change in culture. It is a culture of responsibility for performance at every level l l of f the h organization. It is a culture that is very focused on data, the f t of facts f performance. f It requires everyone to know and serve their customers internally and externally customers, Lean is not a set of problemproblem-solving techniques. L Lean is i a culture lt that th t is i practiced ti d toptop t -to t -bottom, tob tt leftleft -to to-right, in the organization.
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Effective team management helps not only how to establish a productive environment and exploit group dynamics, but also provides practical techniques for you to try in different settings Benefits: Team management helps to remove bottle necks. Results in better work with innovative ideas. ideas It reduces time wastage and increases production. Employee job satisfaction gets boosted.

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Team Management role

Role 1: The Team Coach A team coach is an entry level team leader role. role . The role has a narrow scope, scope with accountability limited to its two main functions which are to functions,
organize and assign prepre-planned work act t as a subject bj t matter tt expert t or coach h to t less l experienced or less knowledgeable employees
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This type of role is suited to

Small teams of 8 employees or less completing repetitive tasks, where a full time team leader is not warranted or justified. justified. Small highly technical teams where a subject matter expert can add considerable value value. . Small business where the next level manager retains performance management responsibilities responsibilities. . Large g teams of employees p y who complete p highly g y repetitive tasks where others are responsible for planning the work, recruitment, training and performance monitoring monitoring. .

People in these jobs tend to focus on their technical skill development, rather than on developing their people leadership capabilities. capabilities.
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Role 2: The Team Supervisor

The team supervisor is a management/leadership role. role.

full

time

Th core functions The f ti of f this thi role l are to t

Planning and assign the work that needs to b completed be l d Rosters employees to meet forecast demand, id tifi identifies resource gaps and d resolves l both b th technical and performance coaching Managing planned and unplanned leave
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Role 3: The Team Leader

A team leader is someone who is wholly accountable for their teams performance performance. . They participating fully in the hiring and firing process and they have a high level of involvement in the planning processes that affect their team team. . Thi role This l has h a far f greater t emphasis h i on leading l di people than on developing the incumbents technical capabilities capabilities. .
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Typical Team Leader Tasks

Preparing for and the Facilitation of meetings Building effective teams Developing and coaching team members Managing g g
One on ones Fire side chat Performance feedback Performance Appraisal M Managing i poor performance f Managing undesirable behavior Managing unplanned absence
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Managing budgets or costs Planning work Planning Resources Driving for results Making M ki decisions d i i Analysis and problem solving Managing change Managing quality Managing safety Personal Pe sonal development de elopment

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TRAINING

The term training refers to the acquisition of knowledge, skills, and competencies as a result of the teaching of vocational or practical skills and knowledge that relate to specific useful competencies As technology changes and employees are obligated to learn to use new equipment that keeps the competition on their toes toes, companies find that they must offer training programs that often times can be quite sophisticated
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Training g and developing p g employees p y for optimum performance is crucial to g success organizational On On-the the-job training is the most fundamental type of training. OJT is the easiest kind of training to implement and can be effective where the job is relatively simple As an employee gets hired they immediately begin to be trained by doing, or watching others for a while and imitating them

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OJT has some advantages

such as when the employee is being trained, the trainer has the opportunity to build good relationship with that employee. employee OJT also has few outout-of of-pocket costs for training facilities, facilities materials, materials or instructor fees and easy transfer of learning back to the job, as the learning site is the work site. The training can have positive effects on employee p y morale as it teaches them not only y have skills related to the specific tasks they do at work but also trains them with the ability to think h k critically ll and d solve l problems bl
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There are some drawbacks to OJT, as it is one of the most poorly implemented training methods and has these shortcomings: (1) lack of a structured training ; environment; (2) poor training skills of management; (3) lack of defined job performance criteria.

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One abridged approach to the framework of an OJT system is discussed below. It contains four steps:
1) 2) 3) 4) Conducting an organizational analysis; C Conducting d ti a task t k analysis; l i Implementing the training program; Evaluating E l i the h training i i program.

A self explanatory picture representation of the framework would look something like this:
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ACTIVITY BASED COSTING

ActivityActivity -based costing (ABC) is a special costing model that identifies activities in an organization and assigns the cost of each activity with resources to all products and services according to the actual consumption by each. each h. With h ABC, C an organization can soundly dl estimate the cost elements of entire products and services. services .
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ABC methodology assigns an organization's resource costs through activities to the products and services provided to its customers customers. . ABC is generally used as a tool for understanding product and customer cost and profitability based on the production or performing p gp processes. processes . ABC is predominantly p y used to support pp strategic g decisions such as pricing, outsourcing, identification and measurement of process improvement initiatives. initiatives.
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Principle of ABC
"The The Activity Based Costing paradigm is based on the principle that it is not the products that a company produces that generate costs, but rather the activities that are performed in planning, planning procuring and producing the products. It is the resources that are necessary to support the activities performed during the course of business that result in costs being incurred.

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Traditional Manufacturing Costing Systems S t Vs V ABC

Manufacturing companies operate with

the simple job order costing systems and p process costing g systems. y

These systems assign

direct di t labor l b and direct materials costs to products.

Traditional systems always use volume volume-related measures, such as direct labor hours or machine hours, to allocate overheads to products products.
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Indirect expenses termed as support dept expenses

M/C Expense

Depreciation p Insurance Utilities

Gen. Expenses

Scheduling QC Purchasing

Supervision

Maintenance

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Assume that products consume all resources in proportion to their production volumes thus report distorted product volumes, costs. Traditional systems were designed for a narrow range of products, and direct labor and materials costs were the dominant factory costs. Information I f ti processing i costs t were hi high, h and it was therefore difficult to justify more sophisticated hi ti t d cost t allocation ll ti methods. th d

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ABC Systems Emphasize the need to obtain a better understanding d t di of f the th behavior b h i of f overhead h d costs, and thus ascertain what causes overhead h d costs t and d how h they th relate l t to t products ABC assumes that activities cause costs and also that products/ services create demands for activities

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ABC seeks to understand the forces that cause o e head costs to change o overhead over e time A link is made between activities and products by assigning costs of activities to products based on an individual products consumption or demand for each activity ABC systems simply recognizes that businesses must understand the factors that drive each major activity, the costs of activities and how activities relate products Redesign or improve processes, e.g. rationalize costs Eliminations of less value added activity or 94 support services costs (strategic purpose)

The design g of ABC systems y involves the following stages:

Identify the major activities that take place in an organizations; Create a cost pool/cost center for each activity; Determine the cost driver for each major activity; Assigning the cost activities to products product s according to the products demand for activities

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Application in routine business

ABC has p proven its applicability pp y beyond y academic discussion. ABC is applicable throughout company financing, costing and accounting: ABC is i a modeling d li process applicable li bl for f full f ll scope as well as for partial views. ABC helps to identify inefficient products, departments and activities. ABC helps to allocate more resources on profitable products, d t d departments t t and d activities. ti iti ABC helps to control the costs at any perper-productproduct-level level and on a departmental level.
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ABC helps to find unnecessary costs that may be eliminated. ABC helps fixing the price of a product or service with any desired analytical resolution. resolution

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Reasons for implementing ABC

Better Management Budgeting, performance measurement Calculating costs more accurately Ensuring product /customer profitability Evaluating and justifying investments in new technologies Improving product quality via better product and process design Increasing competitiveness or coping with more competition titi
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Managing costs Providing behavioural incentives by creating cost consciousness among employees Responding to an increase in overheads Responding to increased pressure from regulators l Supporting other management innovations such as TQM and JIT systems

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PRODUCT COSTING

Product costing is a methodology associated with managerial accounting, i e accounting intended to serve i.e., management in an operational context Product costing is intended accurately to d t determine i the th cost t of f a unit it of f production d ti (or of a service delivered) by study of every resource used d in i its it creation. ti
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It is a way of identifying cost components that can be addressed specifically in order to take cost out of the product by
purchasing, redesign redesign, reengineering, retooling retooling, packaging, and other interventions

by the management at whatever stage needed.

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Product costing evolved by assigning an appropriate percentage of total overhead and also measuring g additional costs upstream upstream p such as packaging, warehousing, and delivery to the ultimate buyer. Product costing data act as feedback to designers, are used in manufacturing management to
Identify d f ideal d l workflow, kfl Influence the purchase of tooling, For precise pricing of goods goods.
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Product costing is used in most routine production activities, including service occupations E Even i in quite it small ll businesses, b i some level l l of product costing is practiced in that managements t usually ll know k the th costs t associated with important functions id tifi d with identified ith different diff t products. d t

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PROBLEMS OF MEASUREMENT
In product costing much emphasis is placed on capturing all costs, even those that do not immediately spring to mind costs of developing good relations with suppliers, suppliers is difficult to measure Warranty service is yet another area that d does not ti immediately di t l spring i to t mind: i d it is i typically handled long after a sale is completed. l t d

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PRODUCT COSTING IN SERVICE OPERATIONS

The "product" product of a sales consultancy may be a printed report to a client accompanied by a Microsoft PowerPoint presentation. Here the real cost of the product will have little relationship to costs of tangible "deliverables." The business is actually selling information and judgments acquired by interviews, focus groups, d data searches, h reading, d analysis, l discussions, d and consultations some of which may have required extensive travel. travel
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Other examples

In another operation, engaged in evaluating sites for the presence of hazardous waste dumped in the past, the deliverables may again be a report, but the work may have required extensive groundwater sampling based on geological l i l maps of f the th site it and d extensive t i searches of old real estate transactions. In yet a third operation, operation specializing in carpet cleaning operations, the product is a visit in the course of which equipment is used and labor applied.
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Volume adjusted costing

ABC - Too Many Cost Drivers

Many people became fed up with the cost and effort required to keep up the level of detail information required to maintain the credibility of ABC ABC, which which, in the opinion of many, became the biggest nonnon-value added activity activity.

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VAC - A New Solution

A id the Avoids th mistake i t k of f identifying id tif i hundreds h d d of f cost t drivers and activities, which becomes too costly, complex, p , and difficult to maintain. VAC has only two components: 1) a well maintained standard cost system 2) a mathematical adjustment to each parts standard overhead cost on
an operation by operation; process by process basis (e.g., machining, assembly, painting)

by comparing the annual volume of the individual part to the average volume of all parts going through each process. This adjustment results in
the overhead cost of a high volume part being decreased the overhead cost of a low volume part being increased.
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Steps to Volume Adjusted Costs

VAC differs from traditional standard costing by an additional calculation that credits high volume parts and charges low volume parts in such a way that the total budgeted overhead to be absorbed remains the same. 1.Develop the traditional Standard Overhead Cost 2. Determine the Experience Curve percentage (the

relationship between production costs and production quantity.)

3 Primary 3. P ima Volume Vol me Adj Adjustment stment to traditional t aditional overhead 4 Total Overhead Proration (Shared) 4. (Sh d) Adjustment. Adjustment
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The p purpose p of volume adjusting j g is not just j to provide more accurate costs. It is to provide a tool for decisiondecision-making. It is an integral part of the h entire i business b i strategy VAC can only be an enhancement to a wellwellmaintained i t i d cost t system. t VAC can change a cost system from being passive to active; from being reactive to proactive; from looking backward to a powerful tool used to help chart the forward course of the company

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Focused factory concept

Production facility organized around a specific, narrowlynarrowly -limited set of resources resources, , to provide a narrow range of services or operations in manufacture of a few p products at lowlow-cost and highhigh-throughput A Focused Factory strives for a narrow range of products, customers and processes. The result is a factory that is smaller, simpler and totally focused on one or two Key Manufacturing Tasks
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The Focused Factory y rests on three underlying concepts: There are many ways to compete besides low cost. A factory cannot perform well on every measure. Simplicity & repetition bring competence

Benefits

customer satisfaction, satisfaction lower cost less frustration frustration.

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Several forces and factors diff diffuse the h original i i lf focus

Inconsistent Policies Professional Isolation Gradual G d l Mission Mi i Change Ch Failure To Design The Task Unrecognized Inconsistencies Product Proliferation Market Proliferation

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Building strategic advantage through enterprise wide. wide

Strategic advantage is the most fundamental and persistent advantage that the target companies p possess over it's competitors p p over the very long term term. . These advantages g or disadvantages g are generated by the companies actions actions. . For Example:
WalWal-Mart strategic advantage is their low prices. Their always have the lowest prices, which puts any competitor at a disadvantage when compared directly to WalWal-Mart (aka: Kmart).
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Coca-Cola has their brand name, which always Cocamakes k th them t to charge h hi higher h prices i for f similar i il products. An example of a strategic disadvantage is the travel brokerage industry after the development of online travel services. Travel services are cheaper and more convenient for most people; therefore, the traditional travel brokers were at a strategic disadvantage to low cost online alternatives.

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A company can outperform rivals only if it can establish a difference that it can preserve. preserve . The term 'strategic advantage', originally from the world of military y doctrine, , refers to gaining of overall advantage. advantage. When you g advantage g and y your hold the strategic opponents do not, situations start unfolding g in y your favour. favour. In the world of business, it has significance - when you have one, , y you can beat industry y rivals rivals. .

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How a business can gain a strategic Advantage? It derives from an organisation organisation's s inbuilt capacity to use its strengths and overcome its weaknesses in order to use opportunities and face threats. The external behaviour helps a business to think 'what to do' while the internal environment helps it to decide 'what what it can do'.
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The elements of the framework required q for developing a strategic advantage include the following: g
Resources g behaviour Organizational Strengths and weaknesses Synergistic effects Competency Organizational capabilities Competitive advantage

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END OF UNITUNIT-3

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