Scholarly article on topic 'Process Oriented Production Evaluation'

Process Oriented Production Evaluation Academic research paper on "Economics and business"

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Abstract of research paper on Economics and business, author of scientific article — J. Gottmann, M. Pfeffer, W. Sihn

Abstract A company’ production at best is efficient, flexible and lean at the same time. Vice versa, a production is not well prepared for future challenges when changes and turbulences pose a serious danger to the performance of production processes or t here is too much waste instead of value-adding within a process. As lean principles and flexibility are hard to quantify, existing approaches evaluate either the efficiency or the implementation of lean principles, which are aimed at flexibility. However, as efficiency, flexibility and lean principles are partly competing objectives, an approach to evaluate a company’ production has to be focused on their interdependencies. As production not only includes the production processes themselves but also supporting processes, necessary for the production activities but not value-adding (e.g. maintenance, planning and controlling, administration), the consideration of these processes within the evaluation of the production is essential. Activity based costing enables a company to assess processes and calculate the different costs of different product variants within production support operations. The appropriation of production assets to the product variants occurs by the machine-hour rate. These approaches imply a predicted production program and associated costs. If the production program changes – in volume, allocation of volume between different variants and the number of variants itself – costs along the value stream will change. For example, a new production program requires an adjustment of lot sizes, work in process increases and thereby efforts for logistics and changeovers alter. Along the value stream it is also possible, that other bottlenecks anticipate the designated production program and require additional investments to achieve the intended output. This paper describes the principles of an approach evaluating the flexibility of the production processes to produce a changing production program (product variants and production volume) and its impacts on the cost curves of a complete value stream including its support processes with the help of activity based costing. It facilitates the evaluation of production’ efficiency as well as its flexibility to react on changing product variants and production volume. It also locates cost intensive processes that can be eliminated or reduced and shows effects on key performance indicators of lean principles, like throughput time and processing time.

Academic research paper on topic "Process Oriented Production Evaluation"

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Procedia CIRP 12 (2013) 336 - 341

8th CIRP Conference on Intelligent Computation in Manufacturing Engineering

Process oriented production evaluation

J. Gottmanna,b'*, M. Pfeffera,b, W. Sihna,b

a Vienna University of Technology, Institute of Management Science, Theresianumgasse 27, 1040 Vienna Austria, www.imw.tuwien.ac.at bFraunhofer Austria, Theresianumgasse 7, 1040 Vienna, Austria, www.fraunhofer.at * Corresponding author. Tel.: +43-676-888-616-24; fax: +43-1-504-69-10-90; E-mail address: juliane.gottmann@fraunhofer.at_

Abstract

A company's production at best is efficient, flexible and lean at the same time. Vice versa, a production is not well prepared for future challenges when changes and turbulences pose a serious danger to the performance of production processes or there is too much waste instead of value-adding within a process. As lean principles and flexibility are hard to quantify, existing approaches evaluate either the efficiency or the implementation of lean principles, which are aimed at flexibility. However, as efficiency, flexibility and lean principles are partly competing objectives, an approach to evaluate a company's production has to be focused on their interdependencies.

As production not only includes the production processes themselves but also supporting processes, necessary for the production activities but not value-adding (e.g. maintenance, planning and controlling, administration), the consideration of these processes within the evaluation of the production is essential. Activity based costing enables a company to assess processes and calculate the different costs of different product variants within production support operations. The appropriation of production assets to the product variants occurs by the machine-hour rate. These approaches imply a predicted production program and associated costs. If the production program changes - in volume, allocation of volume between different variants and the number of variants itself -costs along the value stream will change. For example, a new production program requires an adjustment of lot sizes, work in process increases and thereby efforts for logistics and changeovers alter. Along the value stream it is also possible, that other bottlenecks anticipate the designated production program and require additional investments to achieve the intended output. This paper describes the principles of an approach evaluating the flexibility of the production processes to produce a changing production program (product variants and production volume) and its impacts on the cost curves of a complete value stream including its support processes with the help of activity based costing. It facilitates the evaluation of production's efficiency as well as its flexibility to react on changing product variants and production volume. It also locates cost intensive processes that can be eliminated or reduced and shows effects on key performance indicators of lean principles, like throughput time and processing time.

© 2013 The Authors. Published by Elsevier B.V.

Selection and peer review under responsibility of Professor Roberto Teti

Keywords: production; flexibility; evaluation.

1. Introduction

Manufacturing companies find themselves facing an increasing turbulent environment affected by a diversification of products, dynamic and uncertainty. Therefore, flexibility as additional objective of production has to be included and the ability to estimate future impacts of changes on production structure is required [1]. Production and cost functions therefore have to be adapted and integrated along the entire value creating process to meet the principles of Lean

Production (which are not always in accordance to classical principles of general production theory)[2, 3]. Neither exiting production theories nor business economics consider an integrative approach to all relevant dependencies. To be able to carry a calculative evaluation of dependencies and interdependencies along the entire value stream to cost curves and production functions, a new approach is needed depicting dependencies of production structures on cost functions.

General production theory is built on the principle of maximization of economic efficiency. All decisions within a company are made in a way that with existing

2212-8271 © 2013 The Authors. Published by Elsevier B.V.

Selection and peer review under responsibility of Professor Roberto Teti

doi:10.1016/j.procir.2013.09.058

capacities an optimal development of the goals set can be achieved [4]. Existing definitions of economic efficiency differ mostly in relation to the chosen evaluation object and the related evaluation parameter. Consequently, economic efficiency can only be considered depending on the chosen evaluation object, e.g. production areas, capacities [5], etc. Evaluation parameters are 'revenue and expense', 'incoming payment and payback', 'costs and benefits'. All definitions share the valuation rule of the principle of economic efficiency by enhancing the quotient of monetary output and monetary input.

Theory of Value Creation [3] is the basis of the principles of Lean Production, which divides processes within the production of goods and services in value added and waste. The main method employed is Value Stream Mapping, which considers processes along their production order and states the reduction of throughput time of a product and the overall reduction of work in progress as the most important objectives [2, 6]. Value stream orientation enables observers to terminate complex circumstances of production to material- and information flows. Costs are contemplated only indirectly; waste in terms of overproduction, waiting times and transports are avoided in order to reduce throughput time.

Another important aspect of lean production and value stream orientation is customer focus which requires fast adaption of production to changing customer demands. Therefore flexible processes are needed, which can be changed over rapidly to new products without being hedged by high batch sizes and high inventory. Against this background, scientific literature concentrates on the creation of production systems, which have to react fast and efficiently on internal and external turbulences like changing production life cycles, increasing scarcity of resources, individualized co stumer requests and changing demand behavior by means of structural change. Versatility and especially its advantages are barely monetary evaluable and companies lack in economic evaluation applications

[7, 8].

In the context of lean production, objectives are pursued, which not necessarily concentrate on short-term optimization of economic efficiency. This may lead to conflicts of the objectives based on lean production principles and stringent economic efficiency calculation; e.g. for holding available capacities for flexible processes versus optimization of capacity utilization for increasing economies of scale.

The presented approach will enable the identification of cost advantages of changes in production and allow the linking of production structure to cost functions. A combined consideration of economic efficiency and objectives of lean production as envisaged in the

presented approach has to encompass the whole production structure in order to include impacts of lean and flexible production principles on cost curves (see figure 1).

Fig. 1. Additional required interface [9]

Connections and interdependences between production structure and depending cost curves and especially a mathematical description of those dependencies are barely described in existing literature. Hence, one focus of this approach is to explore those relationships and attempt their mathematical formulation.

According to production theory of Weber and Kabst, a certain factor input and a certain production function leads to a certain factor output, which can be aligned to a cost curve by a cost function [9]. The same input values generate the same output values (the same production factors are able to produce the same production programs). However, production structure has an important leverage on the cost function. For example, lean processes and low batch sizes at the end of the value stream induce lower capital lockup costs in production. Hence, different production structures cause different cost curves, although they have the same values concerning input factors and production functions. The methodological exploration of the relationship between production structure and cost curves is a major objective of the presented approach.

To evaluate existing approaches regarding their suitability and deficits in terms of the required basic principles, concepts feature the connection of production structure and cost curves only partially or at least qualitatively. Methods of cost accounting and company evaluation as well as methods of production management are only partly adaptable for the intended new approach. However, to carry out an algebraic evaluation of dependencies and interdependencies along the entire value stream of a production and to cross over to cost curves and production functions a new method is needed depicting dependencies of production structures on cost functions.

2. Approach

The described approach attempts to bridge the gap between production theory and business economics and thereby enables a strategic alignment of the company. In considering theoretical approaches of production management/lean management as well as objectives of business economics, an integrated evaluation method is aspired. Compared to existing approaches, the following requirements are essential:

• Consideration of the whole value stream (information and material flow)

• Integration of recurring and one-time savings and costs within a value stream

• Derivation of cost functions dependent on production structure

• Dependencies of production structure and corresponding cost functions on changes in production program [ 10]

Moreover, curves of costs and values are depicted to identify possible up- and downturns or extreme values to enable forecast about the continuous development instead of discrete scenarios.

The model to be developed is based on Lean Management Principles in general and on the Value Stream Methodology particular and intends an algebraic concatenation of the independent variables (quantities, number of variants, batch sizes, etc.) with the dependant variable cost. The basis for the model is the assumption of a function of time, variability, volume flexibility and for possible scenarios the focus is on changes in production program and production

structures. Accordingly, the production and cost functions can be adapted to the consideration of time and the number of variants and mapped across the entire value chain.

Cost curves describe the relationship of costs depending on an independent variable. Changing this variable changes the related costs. To generate a whole progress of costs, a calculative correlation in terms of a mathematical function has to be generated. Therewith every value of the cost curve can be assigned to a value of the independent variable. Cost curves can be addressed in dependency on volume as product quantities, amount of inventory, number of product variants, etc. To generate functions for the mapping of cost curves information about the composition of costs are needed, which occur differently by different production structures.

According to General Production Theory different cost functions and constraints for critical scenarios are depicted in order to forecast future developments. The necessary data will be generated using value stream analysis methodology, which renders the processes, inventories and other relevant key performance

indicators along the value creation process. All relvant savings and additional costs by changing a value stream from current to future scenario have to be considered. Following steps are needed to define a process oriented production evaluation:

• Step 1: Identification and classification of value-adding and non-value adding processes

• Step 2: Identification of cost structure and cost types along a value stream

• Step 3: Calculating economic effects within a future value stream

• Step 4: Calculating support processes

• Step 5: Calculating batch sizes, inventory characteristics and flexibility

• Step 6: Influence on cost curve

2.1. Identification and classification of value added and non-value added processes

Beside direct waste, which can be unfolded by value stream mapping and kaizen potentials, there are further non- value adding activities within each process that can't be recognized directly. They are often located within the information flow, so that the information processes have to be divided into their activities as described below. Each process is scanned for its value added ratio. Non-value adding process are avoided, reduced to a minimum or eliminated (see figure 2).

nen value adding value adding

\ v v. v.

necessary reduce V x V N push

unnecessary V eliminate v. \ s \ V N \

Fig. 2. Portfolio of value added

2.2. Identification of cost structure and cost types along a value stream

Wages, material and stock (current assets) and capital assets are responsible for expenses in production; the required factor input is due to product quantities, number of product variants and resulting batch sizes and days of inventory. The relevant cost types along the value stream are depicted in figure 3.

Sn—t —

n n p=i x=i

i = 1 n product variant i

j = 1.....m productionprocessj

InvCi inventorycontentof product variant i

EPEIJ EPEIof productionprocess j +1

EPEIJ+1 EPEIof followingproductionprocess j

DCi daily consumption of product variant i

Fig. 3. Cost types along the value stream [11]

The main part of expenses in support processes form wages and salaries depending on several cost drivers as customer orders or reclamations. Cost drivers activated by production process are again product quantities, number of product variants and number of batches produced.

2.3. Calculating economic effects within a future value stream

Changes within the value stream on the one hand create expenses in terms of single payments or expenses for current operating; on the other hand reduction of waste generates savings which can be one-time or recurring. Expenses as well as savings can be classified by one-time or recurring impacts (see figure 4).

economic parameters

savings/ revenues expenses/ costs

« aj "(D E ni cp one-time disposition disposals disinvestments investments restructuring

TD ro aj E recurring resources disintegration capital lockup operating costs resources amortization capital lockup operating costs

Fig. 4. Correlation between economic and time related reference parameters

2.3.1. One-time savings by value stream transformation

Changes in the value stream and the corresponding material- and information flow can deliver resources, which gain one-time revenue. This can be described as disinvestment or return flow of assets or work in process. This return flow is defined as extent for a process p by a time t (equation (1)).

2.3.2. Recurring savings by value stream transformation Recurring savings which flow back within a certain time mostly are reductions in wages, space, logistic savings by reducing transports and savings in operating. The reduction or avoidance of waste can be calculated as in equation (2).

p=\ x=1

with Srt

x = 1...m p = 1....n

sum of recurringsavings/ revenuesat timet

recurringsavings/ revenuesfor resource/

object/ measure x in process/ subprocess p at timet

timeof returnflow

object x

process p

2.3.3. One-time expenses by value stream transformation One-time expenses by reorganizing value streams are connected with investments at a certain time. These investments can run in processes by new investments as well as measures for restructuring or rebuilding (see equation (3)).

Eo-t r^^fo-tx-p-, p=1 x=1

Eo_t t sum of one-timeexpensesat timet

E^-tx_p_t one-timeexpenses for resource/

object/ measure x in process/ subprocess p at timet

t timeof returnflow

x = 1...m object x

p = 1....« process p

2.3.4. Recurring expenses by value stream transformation

Continuous expenses are formed by all additional costs which are generated by changing the value stream.

These may be additional wages, licences, operating costs, tools, etc. (see equation (4)).

P=1 X^=1

with Er

x = 1....m p = 1...n

sum of recurringexpensesat timet recurringexpenses for resource/

object/ measure x in process/ subprocess p at timet timeof returnflow object x process p

2.4. Calculating support processes

Activity Based Costing after HORVART and MAYER does not represent an independent cost calculation system [12]. It is rather based on existing cost type and cost unit calculation and it is an addition to traditional cost calculation systems. Direct costs are attributed directly to the cost objects. The attribution of overhead costs to cost units onto cost objects requires a detailed consideration by a sophisticated analysis of overall costs in indirect cost units. Thereby overall costs are transferred from unit oriented to process oriented distribution [13].

The application of activity based costing is limited to processes of indirect work sections. The application to direct production processes is not considered as necessary as they are derived from existing work schedules and can be evaluated by marginal costing. Both, the German and the American approaches to Activity Based Costing, are cost calculation systems which were created by the requirement to picture indirect work units more transparently. Moreover, the results should help calculate according to the input involved and accomplish cost management according to existing processes.

Identifying process costs and analysis of activities are performed as interface to support processes. All activities are evaluated considering the portfolio in figure 2 and process costs are calculated based on changes of activities and/ or changes in quantities for each future scenario (see equation (5)).

The process cost ratios as well as the overall process costs are dependent on the defined savings or additional expenses and the corresponding process subset. So it is possible to calculate mainstream processes (information flow process) by using process quantities of subprocesses and their ratio-factor, based on production volume, amount of product quantities, etc.

PCRsp * PS

processcosts of process p

PCRsp processcost ratioof subprocess sp k number of subprocesses

PS processsubset

2.5. Calculating batch sizes, inventory characteristics and flexibility

Batch sizes and the resulting number of batches cause inventory and activities for changeover, handling and support. Estimating future batch sizes requires an accurate mapping of inventory's characteristics - exit speed, transfer of batches and batch production itself.

If there is a constant exit speed, and presumption that batch comes and goes the same out of inventory at once is realistic, than inventory content can be supposed equation (6):

InvCj =

DOI * DCi 2

i = 1.....n product varianti

InvCi inventorycontentof product variant i

DOI days of inventory

DCi daily consumption of product variant i

Days of inventory can be determined by the EPEI (Every Part Every Inverval). The EPEI specifies how long it takes to produce all product variants in their corresponding batch sizes considering daily consumption which has to be met by production as first objective of lean production [3] (see equation (7)).

EPEIPn

i = l.....n

CO, PTi DCi At

At-^PTi * DCi i=1

product variant i

changeoveitimeof product variant i processtimeof product variant i daily consumption of product variant i tecnicalavailability(plancapacity)

-2/T * DCi remainingtimefor changeover i=1

x-p—t

2.6. Influence on cost curve

For a process orientated production evaluation, based on different influence, it is necessary to combine indicators of the process itself (EPEI, stock), savings and additional costs (one-time/recurring) and process costs along the value stream (especially within information flow processes). These values will change by changing a production process from its current to a future state using lean methods like value stream mapping to identify non-value adding processes. Figure 5 shows the effects of the different indicators on cost curves.

[5] Wöhe, G., 1993, Einführung in die allgemeine Betriebswirtschaftslehre, Franz Vahlen Verlag. Erlach, K., 2007. Wertstromdesign, Springer-Verlag. Nyhuis, P. et al., 2009. Wandlungsfähige Produktionssysteme. wt Werkstatttechnik online, Jg. 99, H.4, p. 205. Sethi, A.K., Sethi, S.P., 1990. Flexibility in Manufacturing: A Survey, The International Journal of Flexible Manufacturing Sysytems, 2, p. 289.

Weber, W., Kabst, R., 2006. Einführung in die Betriebswirtschaftlehre, Gabler Verlag.

[10] Pujawan, N., 2004. Assessing supply chain flexibility: a conceptual framework and case study, Int. J. Integrated Supply Chain Management,1/1, p.79.

[11] Gottmann, J. et al, 2012. "Cost Impact Assessment of Production Program Changes: A Value Stream Oriented Approach," CIRP Conference On Assembly Technologies And Systems, May 2012, Ann Arbor.

[12] Schunter, J.G., Zirkler, B., 2007. Vom Standard Costing zum Value Stream Costing, VDM Verlag Dr. Müller.

[13] Remer, D., 2005. Einführen der Prozesskostenrechnung, Schaeffer-Poeschel Verlag.

Fig. 5. Influences on cost curves

3. Conclusion and Summary

The value stream is divided in production processes, inventories and support activities causing expenses and costs in terms of wages, material, stock and capital assets. The number of product variants their quantities and batch sizes are responsible for factor input needed. As costs of support and administration form a big part in companies' expenses they deserve an adequate attention.

The presented approach enables the representation of the existing production structure, the import of changing production programs and structures and the evaluation of the resulting effects on cost distribution. The principal idea is to consequently assign expenditures and respective cost drivers to the characteristics of the production program along the entire process chain in order to develop a simple and comprehensive model.

References

[1] Son, Y.K., Park, C.S., 1987. Economic measure of productivity, quality and flexibility in advanced manufacturing systems, Journal of Manufacturing Systems, 6/3, p. 193.

[2] Rother, M., Shook, J., 2000. Sehen lernen, LOG_X Verlag GmbH

[3] Dyckhoff, H., 2006. Produktionstheorie, Springer Verlag.

[4] Syska, A., 2006. Produktionsmanagment, Gabler Verlag.