Velocity publishes regular 'model answers to practice questions' to help you revise.
This question and answer is for P2.
To answer it, you first need to read the article Management accounting ' performance evaluation in the Study Notes section of May 2008 Financial Management.
This article was written by Ian Herbert, lecturer in accounting and financial management at Loughborough University Business School.
Question
Sherwin Ltd makes a range of pet accessory products. The company recently modernised its production facilities, replacing direct labour with automated machinery. While there were teething problems, the new machines have performed well and to the manufacturer's specification.
However, Sherwin's customers have complained of ongoing problems in terms of product quality and late deliveries. The MD is particularly mystified at the second issue as he had authorised a significant increase in the level of work-in-progress inventory to keep the new machines at full capacity.
At a recent management conference, he heard of Total Quality Management (TQM) and Just In Time production (JIT). He wonders if these techniques might be the answer to Sherwin's problems.
Requirement
As Sherwin's management accountant, advise the MD on the scope for TQM and JIT to solve the problems faced by customers.
(20 marks)
Answer plan
This scenario has quite a bit of information. The requirement verb 'advise' will involve analysis and evaluation.
Introduction
TQM and JIT have been applied in many Western organisations since their development in Japan after 1945. Both techniques offer enormous potential to reduce costs and improve quality, but both need considerable time and commitment to work successfully. Neither should be seen as a quick cure for long-established problems and many such schemes have failed in Western organisations. Each technique will be considered in turn below.
Exam tip - here you should pick up marks for making valid points about the context of TQM and JIT. Unless a 'report format' is specifically required, don't waste time on elaborate introductions or unnecessary preambles such as terms of reference, etc.
(i) TQM
The Total Quality Management philosophy is to build good quality in (before and during production), rather than inspecting bad quality out (after production). It requires commitment throughout the organisation and takes a long time to see results.
The process relies on a supportive and participative management culture. Statistical control techniques are often used to identify problem areas which are then considered and solutions proposed by work teams, although this does not exclude specialist help from outside.
The aim is zero tolerance. Quality is often measured in 'rejects per million' but this depends on the product/situation. In labour intensive service operations, there might still be a high level of variability dependent on the operational context. The measurement of quality will tend to be based on the subjective perceptions of customers, rather than by the sort of objective measures applicable to more tangible products.
Tip - references to the work of Deming would be helpful.
(ii) JIT
The aim of Just in Time production is to reduce the inventory level and cycle lead time to zero by creating a demand-pull environment in which an order to produce depends on the operation in front having zero/one stock unit(s).
If a quality problem is spotted by a worker (who will now be encouraged to self-monitor) then production across the factory ceases immediately and does not start again until the root cause is traced and resolved. Thus few units are wasted or need to be reworked as there is minimal work-in-progress inventory, either before or after the point at which the problem was identified.
Unlike TQM, where the potential for improvement is actively sought by the workforce, JIT invokes an element of enforced problem solving in addition to its primary aims. Production problems such as bottleneck activities become apparent as inventory levels are progressively reduced and are acted upon, enabling further reductions which then expose further problems.
JIT can result in faster benefits than TQM, at least in terms of reduced inventory costs, but it should still be seen as a long term programme rather than a quick fix, especially in terms of its quality improvement potential.
(iii) Potential impacts on customers
The significance of this will depend on how severe the present problems are. Customers will probably be pleased that Sherwin has plans to improve its operations, but given the nature of the two initiatives, in the short term the operational problems might even be made worse. This is especially likely in the case of JIT which will only increase the risk of delivery problems if there are issues that are outside the immediate control of Sherwin such as the supply of raw materials.
Recommendations
1. Investigate customers' issues further. Separate into product quality and delivery issues - there might be overlaps. What are the root causes?
2. Examine existing control and quality improvement systems. Perhaps other factors are causing the present problems?
3. See what competitors are doing. How far is Sherwin away from industry standards?
4. Prioritise the problems - are they quality or delivery related?
5. If a new approach is required choose either TQM or JIT in the first instance. Both approaches are complementary but it is very difficult to do both at once.
6. Draw up special plans and be prepared to inject extra resources (management time, working capital, production capacity, for example, subcontractors) during the change period. It is noted that extra WIP was authorised but has it been implemented appropriately on the factory floor? Are there imbalances in inventory levels between machines/departments?
7. Whatever course of action is decided upon, the process of implementation needs to be monitored and lessons learned for the future. Perhaps there are already lessons from the implementation of the automation project.
Exam tips - Use this opportunity to advise the MD by showing wider knowledge of business and the ability to prioritise the issues. The latter shows that you understand the subject. Don't be afraid to use a numbered list.
In the recommendations above, the first three points concern generic further analysis and information gathering which are likely to apply in a wide range of scenarios but, to get good marks in points 4 to 7 inclusive, you need to tailor these to the scenario.
Reference - Deming, JE, 1992, The Deming Management Method, Mercury Books
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