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FAQ - What stops many manufacturing companies from using world class manufacturing techniques (often called lean manufacturing these days)

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The principle reasons many manufacturing companies the world over work in a wasteful and inefficient way is because they are driven by principles of traditional standard costing derived along with the equally discredited "scientific management" techniques at the start of the last century.  In standard costing there are direct costs and indirect costs.  Indirect costs are loaded onto jobs in proportion to the direct cost.  To minimise costs under standard costing you reduce the direct element of manufacturing  jobs which, in standard costing terms also, theoretically, reduces the product's indirect costs.

When indirect costs were a fraction of direct costs this method of apportioning costs worked quite well but as automation reduced direct costs and administration costs increased with regulation, litigation and safety issues, this way of costing now causes well intentioned management to make very expensive mistakes.  Indirect costs are now usually many times direct costs. Activity based costing is a much better way to reflect real costs but standard costing is still the most used costing technique in most companies.

Lean manufacturing teaches us that people should be responsible for inspecting their own work.  Time and again it has been shown that self inspection reduces overall costs at the same time as increasing quality. Standard costing dictates that it is better to minimise direct costs and have centralised inspection which is an indirect cost. Standard costing can only cost direct scrap not the increases administration and the effect on customer service of poor quality.

Lean manufacturing teaches us that it is better to have equipment dedicated to one job which improves quality, and reduces cost, inventory and lead time. Standard costing dictates that this is more expensive because the lower utilisation increases the cost per unit. Quality and lead lead time are not quantifiable in standard costing and inventory holding costs are indirect.

Lean manufacturing encourages reduced batch sizes to reduce inventory and lead time and improve quality and responsiveness.  Standard costing only looks at the cost per unit which, where there is a fixed set-up cost, is theoretically reduced by large batches.

All the lean manufacturing concepts encourage cellular manufacturing where the members of the cell work on a variety of tasks to complete process or even the whole product.  This goes completely against standard costing principles which give no credit for customer service, reduced inventory, improved quality (except the very limited scrap cost reduction) or reduced lead time. In fact a big reduction in inventory is regarded by traditional accounting methods as reducing the net worth of the business!

The more the economy focuses on traditional costing techniques the less likely they are to adopt just in time. It need a very open mind or a new look at management accounting to adopt lean manufacturing techniques.

For more information you should purchase my e-book World Class Manufacturing, click here for more details.