Lean System and Innovation – CA Final SCMPE Question Bank

Lean System and Innovation – CA Final SCMPE Question Bank is designed strictly as per the latest syllabus and exam pattern.

Lean System and Innovation – CA Final SCMPE Question Bank

Question 1.
Write Short Note on:
Six Sigma process in Quality Management. (June 2012, 5 marks) [CMAFG III]
Answer:
Six Sigma is a business management strategy, originally developed by Motorola in 1986. Six Sigma seeks to improve the quality of process outputs by identifying and removing the causes of defects (errors) and minimizing variability in manufacturing and business processes. It uses a set of quality management methods, including statistical methods, and creates a special infrastructure of people within the organization.

A six sigma process is one in which 99. 99966°/c of the products manufactured are statistically expected to be free of defects (3.4 defects per million). Motorola set a goal of six sigma” for all of its manufacturing operations, and this goal became a by word for the management and engineering practices used to achieve it.

Six Sigma projects follow two project methodologies. These methodologies, composed of five phases each, bear the acronyms DMAIC and DMADV

  • DAIC is used for projects aimed at improving an existing business process.
  • DMADV is used for projects aimed at creating new product or process designs.

DMAIC
The DMAIC project methodology has five phases:

  • Define the problem, the voice of the customer, and the project goals, specifically.
  • Measure key aspects of the current process and collect relevant data.
  • Analyze the data to investigate and verify cause and effect relationships. Determine what the relationships are, and attempt to ensure that all factors have been considered. Seek out root cause of the defect under investigation.

Lean System and Innovation – CA Final SCMPE Question Bank

Improve or optimize the current process based upon data analysis using techniques such as design of experiments, mistake proofing, and standard work to create a new, future state process. Set up pilot runs to establish process capability.

Control the future state process to ensure that any deviations from target are corrected before they result in defects. Implement control systems such as statistical process control, production boards, visual workplaces, and continuously monitor the process.

The DMADV project methodology, also known as DFSS (“Design for Six Sigma”), features five phases:

  • Define design goals that are consistent with customer demands and the enterprise strategy.
  • Measure and identify CTQs (characteristics that are Critical to Quality), product capabilities, production process capability, and risks.
  • Analyze to develop and design alternatives, create a high-level design and evaluate design capability to select the best design.
  • Design details, optimize the design, and plan for design verification. This phase may require simulations.
  • Verify the design, set up pilot runs, implement the production process and hand it over to the process owner(s).

Lean System and Innovation – CA Final SCMPE Question Bank

Question 2.
Write a note on “Kaizen Costing”. (June 2015, 7 marks) [CMAFG III]
Answer:
Kaizen is a Japanese term meaning “change for the better”. The concept of Kaizen encompasses a wide range of ideas; it involves making the work environment more efficient and effective by creating a team atmosphere, improving everyday procedures, ensuring employee satisfaction and making a job more fulfilling, less tiring and safer.

A method of costing that involves making continual, incremental improvements to the production process during the manufacturing phase of the product/service lifecycle, typically involving setting targets for cost reduction. Some of the key objectives of the Kaizen philosophy include the elimination of waste, quality control, just-in-time delivery, standardized work and the use of efficient equipment.

An example of the Kaizen philosophy in action is the Toyota production system, in which suggestions for improvement are encouraged and rewarded, and the production line is stopped when a malfunction occurs.

Lean System and Innovation – CA Final SCMPE Question Bank

Question 3.
Describe the Just-in-time systems. (Nov 2008, 6 marks)
Answer:
Just-in-Time
A complete JIT system begins with production, includes deliveries to a company’s production facilities, continues through the manufacturing plant and even includes the types of transactions processed by the accounting system.

1. The company must ensure that it receives it supplies on time, preferably directly at the production facility that needs them. The company engineers must assist suppliers at their premises and ensure defect free supplies. Thus raw material inventory is reduced if correct quantities are delivered as per production schedules.

2. Long set-up times are reduced into short ones by eliminating inefficiency. Thus the WIP is reduced and so is the number of products before defects are identified.

3. A ‘Kanban’ card, which authorizes production of the right quantity by its feeder machine ensures ‘pulling’ the production process and elimination of inventory. Another method is the introduction of a working cell, which is a cluster of machines run by a single trained operator. This also identifies defects quickly and reduces maintenance costs. Both methods are used together.

4. Work force is trained to be empowered to halt operations understand more about the system, product flow, different machines and thus, elaborate reporting of a past variance is eliminated.

5. Suppliers may be paid based on production units adjusted for defects.

Lean System and Innovation – CA Final SCMPE Question Bank

Question 4.
What is Back flushing in JIT? State the problems that must be addressed for the effective functioning of the system. (May 2010, 4 marks)
Answer:
Back flushing requires no data entry of any kind until a finished product is completed. At the time the total amount finished is entered into the computer system, which multiplies it by all the components listed in the bill of materials for each item produced.

Problems that must be addressed for effective functioning of the system

  1. Production reporting: The total production figure entered into the system must be absolutely correct.
  2. Scrap reporting: All abnormal scrap must be diligently tracked and recorded; otherwise these materials will fall outside the back flushing system and will not be charged to inventory. ,
  3. Lot tracing: Lot tracing is impossible under the back flushing system. It is required when a manufacturer needs to keep records of which production lots were used to create a product in case all the items in a lot must be recalled.
  4. Inventory accuracy: Maintain accurate set of inventory records.

Lean System and Innovation – CA Final SCMPE Question Bank

Question 5.
Answer the following:
Explain the concept of Just In Time approach in a production process. (Nov 2011, 4 marks)

Question 6.
The following independent situations are given in JIT systems of production. You are required to state if each recommendation is valid or invalid and give a brief reason. (Nov 2013,  4 Marks)

SituationRecommendation by the Cost Accountant

(i) A company produces LCD TVs Presently total inventory turnover is measured annually. Compute inventory turnover every month. Break it down into raw material, WIP, expensive inventory and finished goods.
(ii) Textile company. Accept employees’ claim for piece rate incentive for exceeding a certain production volume.
(iii) Sports goods manufacturing company Closely monitor direct labour variances including idle time variances to convince employees to work faster.
(iv) Multi product production Monitor the average set up time per machine in a period which is given by Aggregatesetuptime of all machines / Total number of machines

Answer:

Situation Valid / Invalid
(i) A company pro­duces LCD TVs. Presently total inventory turnover is measured annually Valid: JIT system emphasize extraordinary high inventory turnover. When a company is producing LCD TVs, total turnover of inventory will be high, when the recommendation of computing of inventory turnover and breaking it into raw material, W-I-P and finished goods is given JIT system is very much valid.
(ii) Textile company Invalid: In textile industry, employees are paid extra if they exceed certain production volume targets. JIT focuses on producing only what is needed not to accumulate inventory on accountof high incentives. So, any piece rate system must be eliminated and replaced with measures that focus instead on the quality of output or the number of employee suggestions for improving the system, which are much more important outcomes in a JIT system.
(iii) Sports goods manufacturing company Invalid: Monitoring Direct labour efficiency is highly inappropriate in JIT system. As JIT system unlike traditional system does not focus on fast workings of employees. Instead JIT focuses on quality of product manufactured. JIT system strives to avoid all unnecessary activities and hence eliminate non- value – added activities like monitoring direct labour variance including idle variance.
(iv) Multi product production Invalid: The average setup time per machine is of great importance as it can be measured periodically and plotted on a trend line. The shortest possible setup intervals are crucial for the success of short production runs, so this is a major JIT measurement. It is best to measure it by machine, rather than in the aggregate, since an aggregate measure does not reveal enough information about which equipment requires more setup time reduction work.

Lean System and Innovation – CA Final SCMPE Question Bank

Question 7.
What is meant by Business Process Re-engineering (BPR)? How can BPR be applied to an organisation? Give an example of BPR application. (June 2014, 2 + 6 + 2 = 10 marks) (CMAFG III)
Answer:
Business Process Re-engineering: is a business management strategy, originally pioneered in the early 19905, focusing on the analysis and design of workflows and process within an organization BPR aimed to help organizations fundamentally rethink how they do their work in order to dramatically improve customer service, cut operational costs, and become world-class competitors. In the mid 1990s, as many as 60% of the Fortune 500 companies claimed to either have initiated re-engineering efforts, or to have plans to do so.

BPR seeks to help companies radically restructure their organizations by focusing on the ground-updesign of their business processes. According to Davenport (1990) a business process is a set of logically related tasks performed to achieve a defined business outcome. Re-engineering emphasized a holistic focus on business objectives and how processes related to them, encouraging full-scale recreation of processes rather than iterative optimization of sub-processes.

An Example of BPR Application
For example, if a bank customer enters into the bank determined to apply for a loan, apply for an ATM card and open a savings account, most probably must visit three different desks in order to be serviced. When BPR is applied to an organization the customer communicates with only one person, called “case manager”, for all three inquiries.

The implementation of “One Stop Shopping” as a major customer service innovation, requires the close coordination with a team of staff assigned to a process powered by IT for exchanging information and documents in order to service the customer’s request.

For instance a customer applying for a loan “triggers” a team of staff assigned to service a loan application. The manager completes an application for a loan in electronic form, which in turn is submitted through the network to the next team member, the credit control director, who examines the credit status of the customer. If the credit status is not satisfactory the rejection of the loan is approved by the credit manager and a rejection form is filled and it is returned to the case manager. The case manager explains to the customer the reason that his application was rejected.

Lean System and Innovation – CA Final SCMPE Question Bank

How can BPR be applied to an organization

1. Empowering people Empowerment means giving people the ability to do their work: the right information, the right tools, the right training, the right environment and the authority they heed. Information systems help empower people by providing information, tools and training.
2. Providing Information Providing information to help people perform their work is a primary purpose of most information systems although they provide information in many different ways.
3. Providing Tools In addition to providing the right information, empowering people means giving them the right tools.
4. Providing Training Since information systems are designed to provide the information needed to support desired work practices, they are often used for training and learning. As shown by an expert system and a decision simulator, they sometimes provide new and unique training methods.
5. Eliminating Unproductive Uses of Time Information systems can reduce the amount of time people waste doing unproductive work.
6. Eliminating Unnecessary Paper One common way to improve data processing is to eliminate unnecessary paper. Although paper is familiar and convenient for many purposes, it has major disadvantages. It is bulky, difficult to move from place to place and extremely difficult to use for analysing large amounts of data.
7. Eliminating Unnecessary Variations in the Procedures and Systems In many companies, separate departments use different systems and procedures to perform essentially similar repetitive processes, such as paying employees, purchasing supplies and keeping track of inventories.
8. Minimizing the Burden of Record Keeping Data Handling and General Office Work. Since processing data is included in most jobs, improving the way people process data is an obvious place to look for information system applications.

Lean System and Innovation – CA Final SCMPE Question Bank

Question 8.
What are the types of companies where management may find difficulties in using Discounted Cash Flow Technique for Valuation? (June 2014, 4 marks) (CMAFG III]
Answer:
Limitations of DCF Valuation:
This technique requires a lot of information. The inputs and information are difficult to estimate. This technique cannot differentiate between over and undervalued stocks. It is difficult to apply this technique ¡n the following scenarios:

1. Negative earnings firms For such firms, estimating future cash flows is difficult to do, since there is a strong probability of insolvency and failure. DCF does not work well since under this technique the firm is valued as a going concern which provides positive cash flows to its investors.
2. Cyclical Firms For such firms earnings follow cyclical trends. Discounting smooths the cash flows. It is very difficult to predict the timing and duration of the economic situation. The effect of cyclical situation on these firms is neither avoidable nor separable. Therefore, there are economic biases in valuations of these firms.
3. Firms with un/underutilized assets DCF valuation reflects the value of all assets that produce cash flows, if a firm has assets that are un/under utilized that do not produce any cash flows, the values of these assets will not be reflected in the value obtained from discounting expected future cash flows. But, the values of these assets can always be obtained externally, and added on to the value obtained from discounted cash flows valuation.
4. Firms with patents or product options Firms often have unutilized patents or license that do not produce any current cash flows and are not expected to produce cash flows in the near future, but nevertheless, these are valuable. If values of such patents are ignored then value obtained from discounting expected cash flows to the firm will understate the true value of the firm.
5. Firms in the process of restructuring Firms in the process of restructuring often sell, acquire other assets, and change their capital structure and sometimes dividend policy. Some of them also change their status from private to public. Each of these changes makes estimating of future cash flows more difficult and affects the riskiness of the firm. Using historical data for such firms can give a misleading picture of the firm’s value.
6. Private Firms The measurement of risk to be used in estimating discount rates is the problem since securities in private firms are not traded, this is not possible. One solution is to look at the riskiness of comparable firms, which are publicly traded. The other is to relate the measure of risk to accounting variables, which are available for the private firm.

Lean System and Innovation – CA Final SCMPE Question Bank

Question 9.
Answer the following:
How does the JIT approach help in improving an organization’s Profitability? (Nov 2014, 4 marks)
Answer:
Just in Time: A JIT approach is a collection of ideas and philosophy that streamline a company’s production process activities to such an extent that waste of all kinds, viz material and labour is systematically driven out of the process. Just in time technique enables a company to ensure that it receives products/spare parts materials from its suppliers on the exact value and date and the exact time when they are needed.

So, from an organization’s perspectives JIT is beneficial the most in terms of cost, time and inventory.

JIT is beneficial to an organisation in the following ways:

  1. Reduction in inventory cost: Unnecessary filling up of raw material, WJP and finished goods are avoided. The focus is on production and purchase as per the organisation’s requirements.
  2. Reduction in wastage of time: Wastage of time in various ways like inspection time, machinery set up time, storage time, queue time, defectives rework time etc.
  3. Reduction in scrap rates: There will be sharp reductions in the rates of defectives or scrapped units. The workers themselves identify defects and take prompt action to avoid their recurrence.
  4. Reduction In overhead costs: By reducing unnecessary activities and the associated time and cost – drivers, overheads can be greatly reduced e.g. material handling rework cost, facility costs etc.

Thus, in these ways JIT is beneficial to an organization.

Lean System and Innovation – CA Final SCMPE Question Bank

Question 10.
The public sector Bank of India (BOl), which targets to take its business to about ₹ 12 lakhs crore in next five years, mulls to implement Business Process Re-engineering (BPR) initiates to streamline its growing business. Seven consultants, including Ernst and Young, Boston Consulting Group (BCG) and McKinsey, have expressed interest to take up the job of evaluation and restructuring the organizational set-up by using ₹ 3 Model of BPR. What are the actions and resources to be considered for ₹ 3 Model of BPR for expecting the results to BOl? (June 2016,  6 marks) [CMAFG III]
Answer:
BPR is achieving dramatic performance improvements through radical changes in organizational process, re-architecting of business and management process. it involves the redrawing of organizational boundaries, the reconsideration of jobs, tasks, knowledge and skills. This occurs with the creation and the use of models. In resuming the whole process of BPR in order to achieve the expected results is based on key steps- principles which include ₹ 3 (i.e., re-design, re-tool and re-orchestrate). Each step- principle embodies the actions and resources as presented in below:

Re-design Re-tools Re-orchestrate
Simplify Networks Synchronies
Standardize Intranets Processes
Empowering Extranets Information Technology
Employee-ship Workflow Human resources
Groupware
Measurements ‘

Lean System and Innovation – CA Final SCMPE Question Bank

Question 11.
Explain, how implementation of JIT production method can be a major source of competitive advantage and success of the company. (Nov 2019, 4 marks)
Answer:
Implementation of JIT production method can be a major source of competitive advantage and success of the company in following ways:
1. Establishing a pull system:
By following the just in time philosophy, your organization will have the opportunity to create a pull system and apply it to your current production processes. The way, only a work that needs to be done will be in progress.

2. Eliminate waste:
The pull system will make your team deliver work items only different kinds of waste from your production process.
Types of waste may vary depending on the industry, but in lean management, there are 7 major wastes:

  • Waste of time
  • Waste from overproduction
  • Transportation waste
  • Processing waste
  • Inventory waste
  • Waste of motion
  • Waste from product defects.

3. Visibility/Board overview :
Just in time production requires the application of team Kanban boards. With their help, every member of your team will be able to recognize the current goals and tasks.

This gives a much broader overview of the current processes and all team members are familiar with what needs to be done at every moment.

Lean System and Innovation – CA Final SCMPE Question Bank

4. Smooth workflow :
The Kanban board makes It much easier to acquire a full overview of the working processes. Furthermore, it gives you the opportunity to observe every stage of the workflow, so you can easily detect and handle bottlenecks.
This way you can always keep your team on the right track and maintain a smooth workflow.

5. Continuous improvement :
Just in time production encourages every employee to analyze current processes and offer suggestions for improvement.
Widely known as kaizen, this never-ending cycle will allow any team to constantly improve its performance and “change for the better”.

6. Simplicity and Flexibility :
Just in time management requires your team to work and deLiver small badges of tasks. It will allow you to find simple solutions for existing issues and be much more flexible, than teams that work on projects of a great scale.
This also has a positive impact on your team’s overall productivity, because it lets team members focus only on current tasks.

Lean System and Innovation – CA Final SCMPE Question Bank

Question 12.
(A) Based on the answer derived from the above can you demonstrate that the machine is working at world class performance as suggested by ‘Nakajima’ ideal values for the ‘OEE’. (Jan 2021, 2 marks)
(B) is an aggregate measure. Its components will compensate for each other or, on the contrary, will aggravate a failing situation and attract further attention to it”. Explain. (3 marks)

Question 13.
An automobile production line turns out about 100 cars a day, but deviations occur owing to many causes. The production is more accurately described by the probability distribution given below: (Dec 2013, 6 marks) (CMAFG III)
Lean System and Innovation – CA Final SCMPE Question Bank 1
Finished cars are transported across the day, at the end of the each day, by ferry has space for only 101 cars.

Required:
(i) What will be the average number of cars waiting to be shipped?
(ii) What will be the average area of empty space on the boat?
The fifteen random numbers are given: 20, 63, 46, 16, 45, 41, 44, 66, 87, 26, 78, 40, 29, 92, & 21
Answer:
Simulation of data of the Automobile Production Line:

Production/day Probability Cumulative Probability Random No. Range
95 0.03 0.03 0-2
96 0.05 0.08 3-7
97 0.07 0.15 8-14
98 0.10 0.25 15-24
99 0.15 0.40 25-39
100 0.20 0.60 40-59
101 0.15 0.75 60-74
102 0.10 0.85 75-84
103 0.07 0.92 85-91
104 0.05 0.97 92-96
105 0.03 1.00 97-99
Total 1.00

Lean System and Innovation – CA Final SCMPE Question Bank

Day Random No. Production No. of cars waiting to be shipped No. of empty space on the boat
1 20 98 * – 3
2 63 101
3 46 100 1
4 16 98 3
5 45 100 1
6 41 100 1
7 44 100 1
8 66 101
9 87 103 2
10 26 99 2
11 78 102 1
12 40 100 1
13 29 99 2
14 92 104 3
15 21 98 3
Total . 6 18

Average No. of cars waiting to be shipped: 6 ÷ 15 = 0.40
Average No. of empty space on the boat: 18 ÷ 15 =1.2

Lean System and Innovation – CA Final SCMPE Question Bank

Question 14.
Maruti India Ltd., offers a range of cars from economy, Sedans, SUVs and used cars have decided to adopt JIT policy, in making of the New Alto Car materials. (June 2015, 8 marks) (CMAFG III)
The following effects of JIT policy are identified:
(1) To implement JIT, the company has to modify its production and material receipt facilities at a capital cost of ₹ 10,00,000. The new machine will require a cash operating cost of ₹ 1,08,000 per annum. The capital cost will be depreciated over 5 years.
(2) The Raw Material Stockholding will be reduced from ₹ 40,00,000 to ₹ 10,00,000.
(3) The company can earn 15% on its long-term investments.
(4) The company can avoid rental expenditure on storage facilities amounting to ₹ 33,000 per annum. Property taxes and insurance amounting to ₹ 22,000 will be saved due to JIT programme.
(5) Presently there are 7 workers in the store department at a salary of ₹ 5,000 each per month. After implementing JIT scheme, only 5 workers
will be required in this department. Balance 2 workers’ employment will be terminated.
(6) Due to receipt of smaller lots of Raw Materials, there will be some disruption of production. The costs of Stock-outs are estimated at ₹ 77,000 per annum.

Determine the financial impact of the JIT policy; is ¡t advisable for the Maruti company to implement JIT for New Alto production system?
Answer:
The cost- benefit analysis of JIT policy at Maruti India Ltd.
Lean System and Innovation – CA Final SCMPE Question Bank 2
Conclusion: The JIT policy for New Alto may be implemented, as there is a net benefit of ₹ 2,90,000 per annum.

Note: Depreciation, being apportionment of capital cost, has been ignored in decision-making. Further the tax saving on Depreciation has not been considered in the above analysis.

Lean System and Innovation – CA Final SCMPE Question Bank

Question 15.
Innovation Ltd. has entered into a contract to supply a component to a company which manufactures electronic equipments.
Expected demand for the component will be 70000 units totally for all the periods. Expected sales and production cost will be: (Nov 2015, 8 marks)

Period 1 2 3 4
Sales (units) 9500 17000 18500 25000
Variable cost per unit 30 30 32.5 35

Total fixed overheads are expected to be ₹ 14 lakhs for all the periods.
The production manager has to decide about the production plan.
The choices are:
Plan 1: Produce at a constant rate of 17500 units per period. Inventory holding costs will be ₹ 6.50 per unit of average inventory per period.
Plan 2: Use a Just-In-Time (JIT) system
Maximum capacity per period normally – 18000 units
It can produce further upto 10000 units per period in overtime.
Each unit produced in overtime would incur additional cost equal to 30% of the expected variable cost per unit of that period.

Assume zero opening inventory.
(i) Calculate the incremental production cost and the savings in inventory holding cost by JIT production system.
(ii) Advise the company on the choice of a plan.
Answer:
(i) Statement Showing Inventory Holding Cost under Plan I

Particulars Pd. 1 Pd. 2 Pd. 3 Pd. 4
Opening Inventory                             …(A) 8,000 8,500 7,500
Add:        Production 17,500 17,500 17,500 17,500
Less:      Demand/Sales 9,500 17,000 18,500 25,000
Closing Inventory                              …(B) 8,000 8,500 7,500
Average Inventory \(\left(\frac{A+B}{2}\right)\) 4,000 8,250 8,000 3,750
Inventory Holding Cost @ ₹ 6.50 26,000 53,625 52,000 24,375

Inventory Holding Cost for the four periods = ₹ 1 56,000
(₹ 26,000 + ₹ 53,625 + ₹ 52,000 + ₹ 24,375)

Lean System and Innovation – CA Final SCMPE Question Bank

Statement Showing ‘Additonal Cost-Overtime’ under Plan 2 (JIT System)

Particulars Pd. 1 Pd. 2 Pd. 3 Pd.4
Demand/ Sales 9,500 17,000 18,500 25,000
Production in Normal Time 9,500 17i000 18,000 18,000
Production in Over Time                   …(A) ….. ….. 500 7,000
Variable Cost per unit 30 30 32.5 35
Additional Cost – Overtime per unit (@30% of Variable Cost)                                 …(B) 9 9 9.75 10.5
Additional Cost – Overtime …(A) × (B) ……. …… 4,875 73,500

Total Additonal Payment (Overtime) = ₹ 78,375 (₹ 4,875 + ₹ 73,500)

Statement Showing ‘Additonal Variable Cost’ under Plan 2 (JIT System)

Particulars Pd. 1 Pd. 2 Pd. 3 Pd.4 Total
Production (Plan 1) 17,500 17,500 17,500 17,500 70,000
Variable Cost                 …… (A) 5,25,000 5,25,000 5,68,750 6,12,500 22,31,250
Production (Plan 2, JIT) 9,500 17,000 18,500 25,000 70,000
Variable Cost                 ……. (B) 2,85,000 5,10,000 6,01,250 8,75,000 22,71,250
Total                   …… (B) – (A) 40000

* excluding overtime cost
Incremental Production Cost in JIT System = ₹ 78,375 +₹ 40,000
= ₹ 1,18,375
Therefore, Saving in JIT System (Net) = ₹ 1,56,000 – ₹ 1,18,375
= ₹ 37,625

Lean System and Innovation – CA Final SCMPE Question Bank

(ii) Advice
Though Innovation Ltd is saving ₹ 37,625 by changing its production system to Just- in-time but it has to consider other factors as well before taking any final call which are as follows:

  1. Innovation Ltd has to ensure that it receives materials from its suppliers on the exact date and at the exact time when they are needed. Credentials and reliability of supplier must be thoroughly checked.
  2. To remove any quality issues, the engineering staff must visit supplier’s sites and examine their processes, not only to see if they can reliably ship high- quality parts but also to provide them with engineering assistance to bring them up to a higher standard of product.
  3. Innovation Ltd should also aim to improve quality at its process and design levels with the purpose of achieving “Zero Detects” in the production process.
  4. Innovation Ltd should also keep in mind the efficiency of its work force. Innovation Ltd must ensure that labour’s learning curve has reached at steady rate so that they are capable of performing a variety of operations at effective and efficient manner. The workforce must be completely retrained and focused on a wide range of activities.

Lean System and Innovation – CA Final SCMPE Question Bank

Question 16.
Hindustan Ltd. supplies the following information relating to a vital equipment used in its production activity for April, 2018: (May 2018)
Total time worked during the month – 210 hrs.
Total production during the month – 2800 units.
No. of units accepted out of total production – 2520 units.
Standard time for actual production of the month – 180 hrs.
Time lost during the month – 28 hrs.

Required:
(i) State an appropriate approach to measure the total productive maintenance performance of an equipment. (2 marks)
(ii) Quantity the total productive maintenance performance of the above-
mentioned equipment by using the approach stated in (i) above. (6 marks)
(iii) Comment on the effectiveness of maintenance of the equipment. (2 marks)
Answer:
(i) The most important approach to the measurement of TPM performance is known as Overall Equipment Effectiveness (OEE) measure. The calculation of OEE measure requires the identification of “six big losses’s

  1. Equipment Failure? Breakdown
  2. Set-up / Adjustments
  3. Idling and Minor Stoppages
  4. Reduced Speed
  5. Reduced Yield and
  6. Quality Defects and Rework

The first two losses refer to time losses and are used to calculate the availability of equipment. The third and fourth losses are speed losses that determine performance efficiency of equipment. The last two losses are regarded as quality losses.
Performance × Availability × Quality = OEE %
OEE may be applied to any individual assets or to a process. It is unlikely that any manufacturing process can run at 100% CEE.

Lean System and Innovation – CA Final SCMPE Question Bank

(ii) Availability Ratio per shift = \(\left(\frac{210 \mathrm{hrs} .}{210 \mathrm{hrs} .+28 \mathrm{hrs} .}\right)\) × 100%
= 88.24%
Performance Ratio = \(\left(\frac{180 \mathrm{hrs} .}{210 \mathrm{hrs} .}\right)\) × 100%
= 85.71%
Quality Ratio = \(\left(\frac{2520 \text { units }}{2800 \text { units }}\right)\) × 100%
= 90.00%
Thus, OEE = 0.8824 × 0.8571 × 0.90
= 68.06%

(iii) Comment
World Class OEE is 85% or greater, Hindustan Ltd.’s OEE is somewhere around 68%. It just means that company got some opportunities for improvement. Hindustan Ltd. may improve OEE by collecting information related to all downtime and losses on equipment, analyzing such information through graphs and charts, making improvement decisions thereon like autonomous maintenance, preventive maintenance, reduction in set up time etc. and implementing the same.

Lean System and Innovation – CA Final SCMPE Question Bank

Question 17.
Pixel Limited is a toy manufacturing company. It sells toys through its own retail cutlets. It purchases materials needed to manufacture toys from a number of different suppliers. Recently, due to the entry of few reputed foreign brands in the toy market and particularly in the segment in which Pixel Ltd. is doing business, it is facing a threat to operate profitably. Each toy requires 4 kg. of materials at ₹ 19 per kg. and 5% of all materials supplied by the suppliers are found to be substandard. Labour hour requirement for each toy is 0.4 hour at 120 per hour. (Nov 2019)

Market research has determined that the seWing price will be ₹ 240 per toy. The company requires a profit margin of 15% of the selling price. Expected demand for toy in the coming year will be 50.000 toys. Sales and variable overhead per unit for the four quarters of the year will be as follows:

Q1 Q2 Q3 Q4
(Festive season) (Festive season)
Sales (units) 7,500 9,000 15,500 18,000
Variable overhead per unit (₹) 22 22 24 25

Total fixed overheads are expected to be ₹ 6,25,000 for each quarter.
The production manager has decided to produce ₹ 12,500 units in each quarter. Inventory holdÍng costs will be ₹ 18 per unit of average inventory per quarter. Inventory holding costs are not included in above. Normal production capacity per quarter is 15,000 toys. The company can produce further up to 6,000 units per quarter by resorting to overtime working. Overtime wages will be at 150% of normal wage rate. Assume zero opening inventory.

Lean System and Innovation – CA Final SCMPE Question Bank

Required:
(i) Calculate the cost gap that exists between the total cost per toy as per the production plan and the target cost per toy. (9 marks)
(ii) Discuss how just-in-time purchasing and Just-in-time production will remove the cost gap calculated in (i) above. Show calculations in support of your answer. (7 marks)
Answer:
(i) Cost gap between Total Cost per toy as per the production plan and the Target Cost per toy

Target Cost per toy

Particulars ₹ per unit For Annual Sales of 50,000 units
1. Selling Price per toy 240 1,20,00,000
2. Required Profit Margin (15% of selling price =15% × ₹ 240 per unit) 36 18,00,000
3. Target Cost per annum (Step 1 – 2) 1,02,00,000
4. Target Cost per toy (Step 3 / 50,000 units) 204.00

Therefore, Target Cost is ₹ 204 per toy.

Lean System and Innovation – CA Final SCMPE Question Bank

Total Cost as per production plan
Pixel Ltd. has an annual production requirement of 50,000 toys, which is also its annual sales. Given that opening inventory for the first quarter is nil. The production manager wants to produce 12,500 units per quarter irrespective of the sales demand for the quarter. This implies that during some quarters, there might be unsold inventory, for which inventory holding cost has to be borne. This type of production is called ‘produce to stock”.

Production Schedule and Inventory Holding Cost for the year
Lean System and Innovation – CA Final SCMPE Question Bank 3

Total Cost of Production per toy as per production plan
Lean System and Innovation – CA Final SCMPE Question Bank 4

Lean System and Innovation – CA Final SCMPE Question Bank
Note 1
Each toy requires 4kg of material, 5% of all materials is substandard. Therefore, procurement should factor this substandard quality.
Material required per unit = 4 kg / 95% = 4.21 kg
Material Cost per toy produced = 4.21 kg × ₹ 19 per kg = ₹ 80 per unit

Note 2
Each toy requires 0.40 hours. Rate per hour is ₹ 120 per hour. Therefore, Cost per toy = 0.40 × 120 = ₹ 48 per unit

Cost Gap
= Total Cost per toy as per production schedule – Target Cost per toy
= ₹ 208.09 – ₹ 204.00 per toy
= ₹ 4.09 per toy

(ii) JIT System
Just in Time Purchasing and Just in Time Production is aimed at eliminating inventory holding of raw material and finished goods respectively. Components are purchased only when there is a requirement in the production process. Similarly, finished goods are produced only when there is a demand for them.

This type of production is called “produce to order”. Hence, there is neither any opening inventory nor any closing inventory, thereby no inventory holding cost. In the given problem, this savings is off-set by the extra payment to be made to labor for overtime. Production capacity is 15,000 toys per quarter. This can be increased by 6,000 toys per quarter by incurring additional overtime cost.

Lean System and Innovation – CA Final SCMPE Question Bank

The Production Plan under the Just in Time System

Particulars Q1 Q2 Q3 Q4 Total for the year
1. Opening Stock (units)
2. Production (units) 7,500 9,000 15,500 18,000 50,000
3. Sales (units) 7,500 9,000 15,500 18,000 50,000
4. Closing (units)
5. Inventory Holding Cost ___
6. Production Beyond Capacity of 15,000 Toys per quarter (units) 500 3,000

Total Cost of Production under JIT System
Lean System and Innovation – CA Final SCMPE Question Bank 5
Lean System and Innovation – CA Final SCMPE Question Bank 6

Lean System and Innovation – CA Final SCMPE Question Bank

Note 1
Carefully selected suppliers of delivering high quality materials in a timely manner directly at the shop floor, reducing the material receipt time and loss due to sub-standard material.

Note 2
Overtime wages are 150% of normal wage rate. Therefore, for every toy produced over the quarterly production capacity of 15,000 toys, 50% extra wage over and above the hourly rate has to be paid as overtime wages. Each toy needs 0.40 hours for production. Therefore, overtime cost for excess production = excess production units × 0.40 × 50% × ₹ 120 per hour.

Cost Gap
The cost of production per toy under the JIT system is ₹ 199.38 per toy as compared to the target cost of ₹ 204 per toy and save ₹ 4.62 per toy.

The savings primarily comes from eliminating the inventory holding cost of ₹ 3,42000 per annum and sub- standard material cost of ₹ 2,00,000 per annum under the previous production system. This is slightly offset by the additional cost of ₹ 84,000 per annum that has to be paid towards overtime labor charges and ₹ 22,500 towards additional variable overheads. However, by switching to the JIT system, Pixel Ltd. could reduce its production cost below the target cost per toy.

Lean System and Innovation – CA Final SCMPE Question Bank

Question 18.
APZ Company Ltd. manufactures spare parts and can be called Thigh volume base& manufacturing environment. The company is using the system of Total Productive Maintenance for maintaining and improving the integrity of manufacturing process. There are several different automated manufacturing machines located in the plant, through which manufacturing of spare parts are done and supplied to cater the demand in the market. A 12 hour shift is scheduled to produce a spare part in APZ Company Ltd. as shown in the schedule below. The shift has three 15 minute breaks and a 10 minute clean up period. (Nov 2019)

Production Schedule for Automated machine A 10:
Cycle 10 (seconds),
Spare parts Manufactured: 3360,
SCRAP : 75,
Unplanned Downtime : 36 minutes

Required :
(i) Calculate OEE (Overall Equipment Effectiveness) and comment on it. (6 marks)
(ii) The management of company has decided o ensure that things are done right the first time and that the defects and waste are eliminated from operations. Thus they are planning to implement Total Quality Management (TQM) also.
Summarize the connection between Total Quality Management (TQM) and Total Performance Maintenance (TPM). (4 marks)
Answer:
(i) Overall Equipment Effectiveness (OEE) (%) = Availability × Performance × Quality
= 87.36% × 89.03% × 97.77%
Overall Equipment Effectiveness (OEE) = 76.04%
Availability = (12 hours × 60 minutes) – (3 × 15 minutes) – (10 minutes) + 36 minutes
= 720 minutes – 45 minutes – 10 minutes + 36 minutes
= 629 minutes
Availability Ratio = \(\frac{629}{720}\) × 100
= 87.36%
Performance Ratio = \(\frac{(3,360 \times 10)}{629 \text { minutes } \times 60 \text { Seconds }}\) × 100
= \(\frac{33,600 \text { Seconds }}{37,740 \text { Seconds }}\) × 100
= 89.03%
Quality Ratio = \(\frac{3,360-75}{3,360}\) × 100
= 97.77%

Lean System and Innovation – CA Final SCMPE Question Bank

Comment:
Since CEE of APZ Company Ltd. is lesser than 85 % i.e. World Class Performance Level, Company is advised to improve its each ratio i.e. availability ratio, performance ratio and quality ratio by collecting information related to all downtime and losses on machines, analyzing such information through graphs and charts, making improvement decisions thereon like autonomous maintenance, preventive maintenance, reduction in set up time etc. and implementing the same.

(ii) Connection between TOM and TPM:
The connection between TOM and TPM are summerized below:

  • TQM and TPM make company more competitive by reducing costs, improving customer satisfactions and slashing lead times.
  • Involvement of the workers into all phases of TQM and TPM is necessary.
  • Both processes need fundamental training and education of participants.
  • TPM and TOM take long time to notice sustained tangible benefits.
  • Commitment from top managements are necessary for success of the implementation.

Question 19.
The Business Digest, a fortnight business magazine, in its recent release has published an article titled “Why you can safely ignore Six Sigma’ This was highly critical of Six Sigma. The pointed criticism leveled under five sequentially numbered paras which are listed herein below: (Jan 2021, 5 Marks)

(i) The results often don’t have any noticeable impact on company financial statements. Thus Six Sigma success doesn’t assure you the higher stock values. This is true for 90 percent of companies that implement Six Sigma.
(ii) Only early adopters can benefit from the implementation of Six Sigma.
(iii) Six Sigma focuses on defects which are subjective to determine for service business.
(iv) Six Sigma can’t assure that your product will have market.
(v) Substantial infrastructure investment is required.
How would you respond to these statements?

Lean System and Innovation – CA Final SCMPE Question Bank

Question 20.
Based on the following data calculate ‘Overall Equipment Effectiveness’: (Jan 2021, 3 Marks)

Particulars Data
Shift length

Short breaks

Meal break

Equipment down time                                        .

No. of parts produced per hour (Standard)

Total units produced per shift

Rejected units out of the above

9 hours

3 of 10 minutes each

45 min

30 min

30 per min

12,240

240

Leave a Comment

Your email address will not be published. Required fields are marked *