QRM Success Factors and Obstacles
Many, but not all initiatives to use Quick Response Manufacturing to change and improve processes have been successful. There are three major reasons for being successful in using or implementing Quick Response Manufacturing.
QRM is a strategic direction towards time based competition.
The first success factor is to decide whether you need a time-based competition strategy. The values of Quick Response Manufacturing should be worked out for the specific markets and challenges faced by your company. Note that the value proposition of some customers might not be focused on time, but on quality, cost, or customer service. Some companies that have successfully implemented Quick Response Manufacturing found themselves in such a situation while they still choose a time-based strategy as it helped them to improve the organization of smooth work processes that made them far more flexible and responsive to actual customer demands. Moreover, the on time delivery of complete orders was an essential part of the service component customers were expecting. Hence, the first success factor is to decide whether you actually think (or even know) that time-based competition will be an important factor in survival or future growth of your company.
QRM means Quick Response Manufacturing, not Quick Resulting Miracles
A second success factor is to avoid a mismatch between managerial objectives. If you as a manager say to aim for flow efficiency, but in the end only care for resource efficiency, the latter is what you get. The same holds true if you focus on short term results. Quick Response is not another phrase for Quick Results. If you expect miracles without changing the way you organize, lead, and control your company, either nothing will happen or the results will diminish as soon after the implementation project has ended. Quick Response asks for a long term vision and strategy. Disappointments will arise as soon as we start focusing on cost reductions or waste reductions, instead of on adding real value to the customer. A wrong focus results in a loss of trust amongst the employees, but they have to be actively involved in the improvement efforts of a successful Quick Response Manufacturing implementation.
Base decisions on QRM values and principles, not on management information from cost accounting systems, as the latter nformation is often misleading
The third obstacle are the systems that are supposed to support managers in their decision making processes, the so called managerial information systems. These systems are based on cost accounting, a profession with a long-standing history in business management. However, the information from these cost accounting systems is often misleading for managerial decision making. Isn’t that shocking? Yes it is, at least for managers that would like to align their business with current insights in how to develop their business and expect to rely on the information available in these systems that are developed to support managers in these complex tasks. No, it is not for the experts who have worked in the field of cost accounting and management control themselves, as they are aware of the many drawbacks of the systems that are currently available on the market. See the next items for a further explanation.
Cost accounting systems tend to focus too much on the directly visible and measurable factors that contribute to the costs of a product. These costs are for example:
- costs of raw materials,
- cost of direct labour,
- machining hours,
- set ups, and
- costs of transport.
No one doubts whether these costs are incurred when producing a product. Historical accounts show that these costs were a substantial part of the total costs, i.e. more than 70%. However, according to recent research, in the last decades they only account for less than 50% of the total costs of a product. And now the problem becomes clear:
Most cost accounting systems do not systematically gather, allocate, or analyse the remaining cost factors that are responsible for more than 50% of the total costs of a product.
Most cost accounting systems just treat the remaining costs as overhead costs that are distributed according to some unrealistic assumptions to the various products. Research has developed methods for some of these additional overhead costs, for example, activity based costing. Such methods require that the activities performed by planners, managers, controllers, chasers, purchasers, administrators, and engineers are measured and administered in such a way that the time spend on the overhead activities can be assigned to specific products. But in practice, it is really difficult to answer questions like: how much of your planning time was devoted to planning or controlling product A? Hence, the cost accounting systems keep relying on the disputable assumptions that allocate more than 50% of total costs to products, assuming that more expensive products in terms of materials used or estimated production hours also ask for more time of management, purchasers, and administrators
Cost accounting systems do not provide insight on added value of activities, just on costs associated with some activities. Now, the activities that are being performed as indirect hours, so called overhead activities, might be difficult to assign to specific products. But, and that is the next issue, as long as it is evident that they add value to the customer, who cares?
Management information systems do not monitor at all whether specific overhead activities do or do not add value to the customer.
For some activities it is clear that they add value to the customer. For example, bid preparation, engineering work for a customer order, work preparation, packaging and expedition, et cetera. The only reason why these costs in some cases are treated as overhead instead of direct hours are related to the lack of precise data on the activities themselves or the incomplete design of the cost accounting system in place.
For other activities it is less clear how they add value to the customer. For example, who has to pay for replanning because of a breakdown of a machine or a late delivery by a supplier? Who has to pay for the telephone calls of customers who are waiting too long on a specific order that has not yet been completed?
Hence, the cost accounting systems do not differentiate between activities that actually are a waste or that add value to the customer. Wouldn’t that information be most relevant to you as a manager in order to organize your processes more effectively?
A third drawback of the cost accounting systems in use in many companies is that they do not actually monitor the load and performance of the production system over time. The systems calculate the costs irrespective of the time the production system has used to complete the product. The only time factors that are included are the expected processing times at specific machines or work places. These time factors are so called cost drivers, i.e. they are used to calculate one or more variable cost factors. Hence the focus of many companies to reduce direct contact hours with customers, processing times, et cetera. However, these are the most important value-adding activities in a company, so why focus cost reduction programmes on these activities?
Cost reduction programmes based on cost accounting systems tend to focus on saving costs on value adding activities instead of focusing on non-value adding activities
Moreover, the costs associated with a longer throughput time or customer lead time are not reported, nor the total time a product is in the system. Such information is generally available in Enterprise Resource Planning (ERP), but not transferred to the cost accounting systems, nor kept for a longer time period as useful managerial information on the performance of the company over time.
The fourth drawback has already been pinpointed to. There is nothing wrong with cost accounting as such, but the assumption of the main techniques used in the current systems is no longer valid in modern economies. Overhead costs are more relevant than ever to measure, control, and reduce.
In the times of the Scientific Revolution, most activities in a company were performed by labour and some machines. Nowadays, the role of computers, robots, sensors, control systems, and automatic transfer systems have taken over many tasks of employees. These employees have moved to other –more indirect- tasks, such as cleaning, maintaining, preparing, controlling, improving, testing, and managing processes.
The main cost factors and drivers have changed, but these changes are in most cases not reflected in the way cost accounting systems produce managerial information.
Cost accounting systems tend to assume that low purchasing prices will lead to low costs. They add an allowance for transportation and perhaps some storage costs to the purchasing price offered by a supplier in a low cost country. That cost is compared to the real cost incurred (i.e. the real direct costs plus the overhead costs allocated to the product).
There is an important and often overseen flaw in this way of comparing costs. Purchasing at external suppliers that are located far away will result in large overhead costs, but these overhead costs are completely ignored in most comparisons based on pourchasing prices, while they are included whend determining the costs of making it internally.
In case the product is not produced internally but externally, the internal overhead costs are not reduced with the same percentage as the production volumes have decreased. In most cases the overhead costs even increase due to the additional efforts needed to
- build a relationship with the supplier,
- negotiate on the conditions of delivery, product quality, packaging, and price,
- monitor performance of the supplier through regular audits,
- protect intellectual properties of engineering designs,
- provide additional storage space for increased safety stocks or minimum order quantities, and
- pay for emergency orders that might have to be send by air in order to safeguard the production system from a lack of materials.
Correct decisions on whether or not to outsource production should therefore take the increase of overhead costs into account, but cost accounting systems tend to neglect these factors.
To conclude, cost accounting system frequently use inappropriate assumptions and therefore lead to misleading information for adequate management decision making. Perhaps it is now easier to see why the main disappointment with Quick Response Manufacturing will arise as soon as we would focus on cost reductions instead of adding value to the customer.
Cost reductions will be realized as soon as we focus on time reductions, but they might have been kept unnoticed in the formal cost accounting systems.
QRM does not focus on improving the cost accounting systems themselves, but on improving companies, especially by reducing the various time-consuming non-value adding activities. Cost reductions and throughput increases will be the result.