Chapter 26: Summary Cheat Sheet

Lean Business Model Overview The Lean Business Model is designed to minimize waste and increase efficiency, focusing on creating customer value through streamlined production processes and efficient resource use. Key concepts include: • • • Value Streams: These are the end-to-end activities necessary to create products or services that deliver value to the customer. Each value stream is optimized to eliminate non-value-added activities, ensuring all processes contribute to customer satisfaction. Pull Production: Production begins only after a customer order is received, minimizing inventory and reducing the risk of overproduction. This approach aligns production closely with customer demand and reduces holding costs. Push Production: Unlike pull production, push production relies on forecasts to drive manufacturing. Goods are produced in anticipation of demand, which can lead to excess inventory if forecasts are inaccurate. Production Performance in Lean • • • Cycle Time (CT): Total time required from starting production to completing a finished product. Reducing cycle time leads to faster delivery and improved efficiency. Cycle Efficiency (CE): The percentage of total cycle time that is valueadded, with the goal of maximizing time spent on direct customer value. Setup Time: Time required to prepare production machinery and processes, which lean practices aim to minimize. Lean Accounting Practices Lean accounting aligns with lean production by simplifying accounting practices and focusing on value stream costs rather than traditional cost allocation methods. • • No Separate Raw Materials Inventory: Raw materials are immediately assigned to Work in Process (WIP) Inventory as they are acquired, reflecting the just-in-time nature of lean production. Entries for Materials and Conversion Costs: 1. Acquire Raw Materials: Record the acquisition of materials, typically on credit, directly to WIP Inventory. 2. Apply Conversion Costs: Apply budgeted conversion costs (including labor and overhead) to WIP at a predetermined rate, based on the production process requirements. 3. Record Actual Conversion Costs: Track actual costs for labor and overhead, which are compared to applied costs to ensure efficiency. Key Lean Terms 1. Batch Size (Lot Size): The quantity of units produced at one time after a machine setup. 2. Closed-Loop Supply Chain: A supply chain model focused on recycling and reusing materials to minimize waste. 3. Conversion Cost Rate: A predetermined rate used to allocate conversion costs (labor and overhead) to products during production. 4. Costs of Quality: Costs associated with maintaining or improving product quality, including prevention, appraisal, internal failure, and external failure costs. 5. Cost of Quality Report: A report detailing all quality-related costs, helping identify where quality investments are most needed. 6. Days’ Payable Outstanding: A metric showing the average time taken to pay suppliers, critical for cash flow management in lean businesses. 7. Days’ Sales in Work in Process Inventory: The average time inventory remains in production, with lean practices aiming to minimize this. 8. Non-Value-Added Time: Time spent on activities that do not contribute directly to customer value, which lean practices seek to eliminate. 9. Value-Added Time: Time spent on activities that directly increase customer value, targeted to be maximized in lean processes.