Lean Production

Term Paper & Case : Lean Production, relevant benefits, relevant costs. (LO3)
Managers frequently use a process management method known as lean thinking, or what is called Lean Production in the manufacturing sector. Lean Production is a management approach that organizes resources such as people and machines around the flow of business processes and that only produces units in response to customer orders.
It is often called just-in-time production (or JIT) because products are only manufactured in response to customer orders and they are completed just in time to be shipped to customers. Lean thinking differs from traditional manufacturing methods that organize work departmentally and that encourage departments to maximize their output even if it exceeds customer demand and bloats inventories. Because lean thinking only allows production in response to customer orders, the number of units produced tends to equal the number of units sold, thereby resulting in minimal inventory. The lean approach also results in fewer defects, less wasted effort, and quicker customer response times than traditional production methods.

In the this sense
You may address the following issues:

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1. Describe why companies are using just-in-time (JIT) purchasing and Explain the basic characteristics of Just-in-Time system
2. Distinguish materials requirements planning (MRP) systems from just-in-time (JIT) systems for manufacturing.
3. Identify the features and benefits of a just-in-time production system.
4. Describe different ways backflush costing can simplify traditional inventory-costing systems.
5. Understand the principles of lean accounting.
6. Apply your understanding of the topic in giving recommendation to management in regards to the following case (CMA, adapted):
The ABC Corporation is an automotive supplier that uses automatic turning machines to manufacture precision parts from steel bars. ABC’s inventory of raw steel averages $400,000. The president of ABC, and ABC’s controller, are concerned about the costs of carrying inventory. The steel supplier is willing to supply steel in smaller lots at no additional charge. The controller identifies the following effects of adopting a JIT inventory program to virtually eliminate steel inventory:

▪ Without scheduling any overtime, lost sales due to stock outs would increase by 25,000 units per year. However, by incurring overtime premiums of $30,000 per year, the increase in lost sales could be reduced to 15,000 units per year. This would be the maximum amount of overtime that would be feasible for ABC.
▪ Two warehouses currently used for steel bar storage would no longer be needed. ABC rents one warehouse from another company under a cancelable leasing arrangement at an annual cost of $60,000. The other warehouse is owned by ABC and contains 16,000 square feet. Three fourths of the space in the owned warehouse could be rented for $3.00 per square foot per year. Insurance and property tax costs totaling $10,000 per year would be eliminated.

ABC’s required rate of return on investment is 15% per year. ABC’s budgeted income statement for the year ending December 31, 2017, (in thousands) is:

Revenues (1,000,000 units) $15,000
Cost of goods sold
Variable costs $6,380 Fixed costs $2,820
Total cost of goods sold
Gross margin
Marketing and distribution costs Variable costs $2,010 Fixed costs 750
Total marketing and distribution costs
Operating income

Required:
6 (B). Identify and explain other factors that ABC should consider before deciding whether to adopt JIT purchasing. For more information on Lean Production see this: https://www.encyclopedia.com/management/encyclopedias-almanacs-transcripts-and-maps/lean-manufacturing-and-just-time-production

Lean Production

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