the application of lean principles in a small...
TRANSCRIPT
The Application of Lean Principles in a Small Manufacturing Firm
A Research Report presented to:
The Graduate School of Business
University of Cape Town
in partial fulfilment
of the requirements for the
Master of Business Administration Degree
By:
Robin Kuriakose
November 2008
Supervisor: Prof. Norman Faull
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This report is not confidential. It may be used freely by the Graduate School of Business.
I wish to thank Prof Faull for his guidance and knowledge sharing through the iterative
processes of this research. I would also like to thank Mr Faeez Abrams for allowing me his
time and resources for the purpose of making this research report possible.
I certify that except as noted above the report is my own work and all references used are
accurately reported in the bibliography.
Signed:
Robin Koodalil Kuriakose
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Contents 1. Abstract ........................................................................................................................................................ 6
2. Area of Study ............................................................................................................................................... 6
3. Proposed Research ...................................................................................................................................... 7
3.1. Research Questions ................................................................................................................................ 7
3.2. Research Hypotheses ............................................................................................................................. 7
4. Literature Review ........................................................................................................................................ 9
4.1 History of Lean Manufacturing ............................................................................................................... 9
4.2. A3s ........................................................................................................................................................ 12
4.3. Value Streams ...................................................................................................................................... 13
4.4. Lean Accounting .................................................................................................................................. 15
5. Research Methodology .............................................................................................................................. 18
5.1 What is Action research? ...................................................................................................................... 18
5.2. Why is AR appropriate? ....................................................................................................................... 19
5.3 The importance of critical refection in action research. ....................................................................... 21
6. Hypothesis Testing ..................................................................................................................................... 22
6.1. Testing hypothesis 1 ............................................................................................................................. 22 6.1.1. Planning ........................................................................................................................................ 22 6.1.2. Assumptions and Limitations ....................................................................................................... 23 6.1.3. Carrying Out the Test ................................................................................................................... 24 Without the use of A3s ........................................................................................................................... 24 6.1.4. Checking on the Results ............................................................................................................... 34 6.1.5. Reflection ...................................................................................................................................... 34
6.2. Testing Hypothesis 2 ............................................................................................................................ 35 6.2.1. Planning ........................................................................................................................................ 35 6.2.2. Assumptions and Limitations ....................................................................................................... 37 6.2.3. Carrying Out the Test ................................................................................................................... 38 6.2.4. Checking on the Results ............................................................................................................... 39 6.2.5. Reflection ...................................................................................................................................... 43
7. Final Reflection .......................................................................................................................................... 44
8. Bibliography .............................................................................................................................................. 46
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List of Figures
Figure 1: The name changes of TPS, Adapted from: Papadopoulou & Ozbayrak, 2005 _________________ 9Figure 2: The “TPS House” _______________________________________________________________ 11Figure 3: The Action Research Process ______________________________________________________ 18Figure 4: Master A3 ____________________________________________________________________ 28Figure 5: A3 - Making custom orders _______________________________________________________ 29Figure 6: A3 – Not holding a strategic amount of doors ________________________________________ 30Figure 7: A3 – Having a high mark up ______________________________________________________ 31Figure 8: A3 - Customers are not aware of Q Doors brand ______________________________________ 32Figure 9: A3 – No marketing activities ______________________________________________________ 33
List of Tables
Table 1: Differences between research methodologies ................................................................................... 20Table 2: Summary of the problem, causes and how to fix them as per QGD management 5th October .......... 25Table 3: The summary of the A3 process as done with Mr. Faeez and the Researcher, 5-6th October ............ 27Table 4:Summary Income Statement August .................................................................................................. 40Table 5: Summary Income Statement September ........................................................................................... 40Table 6: Summary August Income Statement By Value Streams .................................................................... 40Table 7: Summary September Income Statement By Value Streams .............................................................. 41Table 8: Meranti Value Stream Costing ........................................................................................................... 41Table 9: Meranti Unit Cost Costing .................................................................................................................. 42
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Glossary
Mass production accounting
It refers to the current accounting practices in use, which promote the build up of inventory.
TPS -Toyota Production System
A system of manufacturing developed by the Toyota Motor Company.
Kanbans
Physical signals for parts replacement.
Heijunka
Maintenance of levelled production.
Jikoda
Stopping a system when a problem is identified in an attempt to solve it immediately.
Takt Time
Refers to the net available time to work divided by the total quantity demanded.
Kaizen Burst
An activity of continuous improvement on a specific aspect of the business.
A3
An A3 size sheet of paper on which Toyota employees would identify and plan actions to correct a problem
Value Stream
A sequence of processes that are interlinked in an organization, that have an aim of adding value to a customer.
Lean Accounting
A relatively new ideology of accounting that measures how well lean manufacturing organizations are performing.
ISO 9001
An accreditation from the International Organisation for Standardization for consistent manufacturing processes.
ROI
Return on investment, is the amount of money gained or lost relative to the amount initially invested.
Pastel
An accounting package that is extensively used in South Africa to manage the finances of companies.
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1. Abstract
Cunningham & Fiume (2003) state that Opening the Kimono, was a term coined in the
1980’s to describe the influx of Western people to Japan to see what was going on at the
Toyota Motor Company. During this period, Toyota was known to be a fast, high quality
manufacturer of cars that was outperforming its Western rivals. The Researcher wanted to
‘Open the Kimono’ by unravelling the benefits of lean principles in specific A3 problem
solving and lean accounting at Quality Garage Doors. QGD is a medium sized garage door
manufacturing company based in the Athlone Industrial area in Cape Town, South Africa.
The purpose of this research report is to firstly unravel the effectiveness of A3s in
understanding and outlining a plan to deal with problems at QGD effectively. Secondly, it
tests the hypothesis that lean accounting principles paint a clearer picture of the
performance of QGD in comparison to the standard mass production accounting model
that they currently use.
2. Area of Study
Quality Garage Doors (QGD) was started in 1994 by Mr Faried Abrahams and his son Mr
Faeez Abrahams. Mr Faeez Abrahams continues to manage the business with his brother
Adnaan Abrahams. In 2004 QGD was ISO 9001 certified and has a staff complement of 27
people.
The owner, Mr Faeez Abrahams, is a member of the Lean Institute Africa. He has
extensive knowledge of lean principles and has tried to implement them at his company.
This journey into the adoption of lean processes started in 2006 and has been a slow, yet
steady process over the last two years. In the two years since lean adoption, QGD has
reduced its inventory holding by manufacturing on a demand pull basis only. Kaizen bursts
happen on an intermittent basis, when required. This however, is not part of the daily
functioning of the business.
The owners of the company revealed to the Researcher during interviews conducted in the
research period that they do not have a comprehensive method of identifying problems and
dealing with them in an organised and timely manner. On various occasions, the owners
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would let problems slide because they could not understand the problem and did not know
how to get around it effectively.
The owners lack formal training in business management and have never kept track of how
well the business is doing. It was not until June 2008 that they started to keep records of
monthly production output, expenditure and also month-on-month budgets. For the months
of June to October 2008, traditional accounting metrics – using the unit cost of a product
to measure performance - were used to monitor the relative success of the business.
Considering that the company now uses lean principles of production based on demand
pull, it is questionable whether the usual metrics are sufficient in understanding the true
position of the business.
3. Proposed Research
3.1. Research Questions
1. Do A3’s allow Quality Garage Doors to identify problems more effectively?
2. Will the use of A3s allow for a clear roadmap to be created that will effectively deal with some of the problems that QGD is facing?
3. Does lean accounting provide more informative summaries on the financial position of QGD in comparison to the mass production accounting system currently in use?
4. Is the use of mass production accounting methods causing QGD to make wrong decisions when considering pricing and capital investment?
3.2. Research Hypotheses
Hypothesis 1: The use of A3s helps QGD, a small manufacturing firm, to understand the problems it faces, more clearly.
As at the beginning of 2008, QGD had a 25% market share in the garage door
manufacturing industry in Cape Town. This market share growth, since the company’s
1993 inception, was not as a result of active planning or strategising. Currently QGD’s
market share is declining. Sales are dropping because of problems in areas such as
marketing, product pricing and the (mis)management of customer accounts. Over the past
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couple of months, particularly, the owner has realised that the latter is fuelling the decline
in the business’s market share. However, there was no concrete way of addressing these
issues systematically in an effort to increase sales and boost profits.
The Researcher tested whether A3s can be used in a small manufacturing firm as a strategy
to aid in the understanding of the underlying problems and potential solutions that may
increase market share and profits. Ideally, this will result in the business looking towards
the future with this strategy in mind.
Hypothesis 2: The implementation of lean accounting metrics over the standard metrics that were made based on mass production, will allow for a better understanding of how well QGD is performing as a business.
One of the major problems at QGD is that they were receiving management accounting
information six months after the business year end close as this function was being
outsourced to a third party. In an attempt at finding a solution, they have been trying to
manage this information in-house. The management information generated over June to
October 2008 is based on existing mass production accounting principles. The question
then arises whether existing management accounting principles are accurate measures of
QGD’s performance, bearing in mind that it is a manufacturing company that is in a lean
transformation programme.
The Researcher tested if lean accounting provides a clearer picture of the performance of
this small manufacturing firm. The research also tested whether, by using mass production
accounting models in existence today, QGD can make the wrong decisions in their
attempts to increase sales, market share and profits.
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4. Literature Review
4.1 History of Lean Manufacturing
Cunningham & Fiume (2003) state that lean thinking essentially originated from the Ford
manufacturing model. Post World War II consumers were demanding a variety of models
for purchase. The process flow production for Ford’s Model T was the inspiration for
Kiichiro Toyoda, of Toyota Motor Corporation, in developing the Toyota Production
System. Cunningham & Fiume (2003) further emphasize that the Toyota Production
System took the continuous flow production of Ford and tweaked it to allow for the
manufacture of different models via the same flow. Furthermore, it is well noted that the
‘elimination of waste’ is central to the Toyota Production System. In this context, ‘waste’
refers to the unnecessary inventory and process steps involved in manufacturing.
Cunningham & Fiume (2003) state that Toyota is the second largest vehicle manufacturer
today, recently overtaking Ford Motors. Womack & Jones (2005, p.3) assert that the
success of Toyota has been mainly due to the production methods that are enshrined in the
Toyota Production System. Womack & Jones (2005, p.3) further emphasize this by
stating, it is expected that Toyota will soon beat General Motors to the number one spot.
While it is this original ‘Toyota Production System’ that has evolved and been perfected
over time, the practice has undergone numerous name changes. The name changes were
also a result of improvements made to the TP System. Papadopoulou & Ozbayrak (2005)
emphasise this fact, stating that the new name changes have been as a result of
additions/deletions to the original TP System.
Figure 1: The name changes of TPS, Adapted from: Papadopoulou & Ozbayrak, 2005
1980’s 1990’s 1995 Post 2005
Lean Production
Toyota Production System
Extended Lean Production
Just in Time Production
TIME PERIOD
NAME CHANGE
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Schonberger (2005) asserts that lean production is a notion that worked well in the 20th
century. He holds that changes in technology and human perception in the 21st century
imply that lean production might be losing steam. An updated school of thought - extended
lean production - is progressing, based on the actions of companies such as Dell Inc. and
Wal-Mart. He argues that the fundamental difference in extended lean production and its
root principles, is the higher degree of inter-company collaboration as opposed to the
teacher/pupil relationship that lean production promotes.
Womack & Jones (1996) who are the fore runners in using the term ‘lean manufacturing’
state that there are essentially five principles that define a lean organisation:
1. Value – All activities in the organisation should be based on the premise that value should be created for the customer.
2. Identification of the different value streams – The organisation needs to break down its operation into value streams. This allows for better waste identification.
3. Flow – There needs to be a flow in the value streams which, in a way, normalises operations.
4. Customer Pull – Allowing customer demand to determine the production level.
5. Pursue perfection – Through kaizen bursts, there should be a continual improvement of systems and processes.
Maskell & Baggaley (2004) take this model further and incorporate ‘empowered people’
as the sixth element. This is based on the premise that to achieve perfection and flow, the
people involved in the process need to be empowered to seek out ways of achieving these
aspirations.
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Figure 2: The “TPS House”
Adapted from: Liker (2004, p. 33) and Davidson G, the Manufacturing Director, Toyota South Africa, 1983 cited in Faull (2008).
The modified “TPS House” in Figure 2 above provides a clear picture on what lean
manufacturing is and has been used as a base for explaining more about it. Liker (2004, p.
33) states that the central ideology of lean manufacturing is continuous improvement. The
Researcher however believes that at the heart of the whole lean production methodology is
the fact that “thinking individuals” (Davidson G, 1983 cited in Faull, 2008) who in effect
are the greatest assets of the whole production system, are being nurtured. Workers are the
life-blood of the entire lean production ideology, as they cause continuous improvement to
happen. A lean organisation is further characterised by its internal workings and
operational ideologies. Liker (2004) states that the foundation of the lean principles is
levelled production (Heijunka) and standardised processes. To ensure that Heijunka is
maintained, standard operating procedures, visible standard operating procedures need to
be implemented in various workstations.
STABLE AND STANDARDISED PROCESSES
LEVELLED PRODUCTION (HEIJUNKA)
JIT –
Kanbans
JIKODA -
A3s
EMPOWERMENT - CONTINUOUS IMPROVEMENT
WASTE REDUCTION
BEST QUALITY – LOWEST COST –SHORT LEAD TIME – BEST SAFETY – HIGH MORALE
THIINKING PEOPLE
Lean Accounting
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Liker (2004) further iterates that the pillars of lean thinking are Just in Time (JIT) and
Jikoda. ‘Just in Time’ refers to a system in which the right part arrives at the right
workstation at the right time. Larco, Bortolan & Studley (2008, p. 25) state that “the
objective of a JIT operation is to run with as little inventory as possible, while still being
able to maintain the level of service goal a company has set in order to meet its customers’
needs.” JIT is implemented via the use of Kanbans; visual signals that replacement parts
are required in a specified quantity. Kanbans placed in the correct areas, close to the
respective working environment, ensure that the right part in the right amount is delivered
to the production line at the right time. Liker (2004) emphasises the fact that ‘Jikoda’ is a
principle used in lean manufacturing: it refers to the practice of stopping an entire system
when a problem is identified, with a view to immediately resolving it. This is done to
ensure that problems are tackled when they happen and that in the future, problems of this
nature do not recur.
Within the pillars of the lean house in Figure 2 are softer areas such as empowerment of
the workforce by allowing for continuous improvement (Kaizen Bursts) and waste
reduction. Worker empowerment is instilled in workers through the continuous culture of
development that exists in the organisation. The culmination of these efforts is the
achievement of better quality, lower costs, shorter lead times, better safety and higher
morale amongst workers.
4.2. A3s
In light of the TPS house model presented above in Figure 2, Jimmerson (2007, p. 1) aptly
states that “learning and living the simple, but powerful, A3 process poses one easy but
effective way to achieve the transition to thinking organisations.” A3s are a function of
Jikoda. The Researcher’s understanding of A3’s is that it is a tool that is used in
identifying the root causes of a problem and ensuring that it does not occur again. Sobek &
Jimmerson (2008) define an A3 report as one which a company can use to present
solutions to a specific problem, while at the same time giving an updated status on existing
problems. As the term suggests, “A3” was so named because it is a report drawn up on A3
size paper.
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Literature regarding A3’s is very limited thus the Researcher extensively used the most
prominent and available literature by Cindy Jimmerson in her book, A3 Problem Solving
for Healthcare, 2007 as a basis for this report.
Jimmerson (2007) states that an A3 report is made up of 6 parts, namely:
1. Theme and background – This is a descriptive section that contextualises the problem in relation to the environment in which it is being experienced.
2. Current Conditions – The problem is explained in detail, with a focus on how it is affecting the process in which it is being experienced.
3. Target/Goals – The future state of the process (in which the problem has been eradicated) is explained.
4. Analysis – The impact that the problem had on the system is analysed and a deeper understanding of the root cause of the problem is established.
5. Proposed Counter Measures – A set of solutions are provided, based on industry experience and what will work in practice.
6. Plan – The planned implementation of the potential solutions to the problem is listed in this section.
7. Follow Up – The dates and people responsible for checking the effectiveness of the proposed counter measures is listed in this section.
(Sobek & Jimmerson, 2008, p. 5) state that there are three reasons why A3 reports are an
effective tool in problem solving:
1. Unlike other approaches, A3 demands documentation of the nature of the problem and its potential solutions.
2. As A3 reports are written by people closest to the problem, they are in a better position to solve it rather that work around it.
3. The A3 report is comprehensive; from problem identification to intervention implementation and result evaluation.
4.3. Value Streams
While A3s can be regarded as a microscopic view of a specific process, value streams can
be viewed as a tool that allows people to view a sequence of processes from 10 000 feet,
Jimmerson, (2007, p. 51). Womack & Jones (1996) state that a value stream is a sequence
of processes by which raw material is processed into a product that is deliverable to a
customer. This sequence of processes, when mapped on a paper, is called a value stream
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map (VSM). VSM’s are tools used mainly in the centre of the TPS House in Figure 2, to
identify and eliminate waste.
The essence of value streams is that value for the customer is not created via a single
action or part of the organisation. The horizontal length of the organisation is involved in
creating value for the customer. For example, Maskell & Baggaley (2004, p 105-106) state
a customer calls in to make an enquiry about a product thus the sales department is
involved. The customer then pays for the product – the accounts division is involved. The
production team manufactures the product – thus operations are involved. And the delivery
team makes the delivery to the customer’s house. They further state that the wide spectrum
of value added to the customer’s experience emphasises the reason why companies should
identify and manage their businesses via value streams that are divided per product family
with similar production processes.
Jimmerson (2007 p. 51) states that identifying bottlenecks, waste, cell production times
and the flow of work are the key outcomes of a VSM exercise. Ohno (1978, p 129)
identifies 7 forms of waste that can be found via value stream mapping. These are: defects,
over-production, inventories, unnecessary processing steps, unnecessary movement of
employees, unnecessary transport of goods and employees that wait for a process to finish
or for upstream delivery of a product. Maskell & Baggaley (2004, p. 98) take this notion
further by stating that there are three benefits to using value streams as a management tool:
1. Focus – the focus to improve processes and eliminate waste is more concerted.
2. Accountability – there is no blame shifting for failures and people are pre-assigned to a value stream.
3. Simplicity – the complexity of the organisation decreases as there are defined work teams performing specified functions. Thus less overlapping of human resources between value stream teams and more importantly less confusion.
The Researcher understands that value streams cover two areas of concern to lean
methodology users. Firstly it analyses at a sequence of processes and if necessary maps the
process in a value stream map in an attempt to understand the process and to cut waste
activities. While secondly it also looks at segregating an organization to look at itself in
value streams for the different product families it sells. This is for the purpose of better
control and decreasing the lead time from when a customer places an order to when the
delivery is made.
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4.4. Lean Accounting
Lean accounting facilitates an external examination of the TPS House in Figure 2, to
measure the performance of the lean organization. Maskell & Baggaley (2004) state that
lean accounting is a relatively new field; work began on it in the late 1980’s. It developed
out of the inadequacy of traditional accounting methods which were unable to capture the
value added by lean manufacturing. Furthermore, with the emphasis of lean manufacturing
being on the reduction of waste, standard accounting procedures and policies were seen to
be a waste of time as they did not add value to customers. At the forefront of lean
accounting are two sets of experts. The first is Jean Cunningham and Orest Fiume, while
the second is Brian Maskell and Bruce Baggaley. Both have written books on lean
accounting. While the latter are more specific in terms of actionable tools that can be
implemented in an organisation, Cunningham and Fiume take a more generalist view of
lean accounting and emphasise the fundamental differences between lean accounting and
traditional accounting. As lean accounting is in its infancy, the Researcher has not cited
literature over and above these experts. This is because the above mentioned authors
provide an in-depth account of its theory and implementation.
Maskell & Baggaley (2004) state that it is important to note that lean accounting works for
organisations that are moving towards lean manufacturing or that have already turned to it.
They emphasise that there are two fundamental questions addressed by lean accounting
practices:
1. What metrics should a business use to measure its performance in light of the fact
that it will not hold unnecessary inventory?
2. What non customer value adding activities that the accounts division performs
should be removed?
Cunningham & Fiume (2003, p. 20) state that traditional accounting is good at using
complicated metrics like ROI (return on investment) to measure the performance of
companies. The problem with measures such as ROI is that they rely on one number to
explain a series of interrelated events. This means that employees and in certain instances
staff in the financial department fail to grasp what the number really reveals. Lean
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accounting, implemented though the management using value streams, allows for
simplified accounts which include the essential information necessary for understanding
the financials of the business. This means that employees can better use the figures to
improve their performance, Maskell & Baggaley (2004). The premise for the development
of lean accounting was that the current accounting systems were developed for mass
production. A classic example is evident when we consider a company that calculates per
unit costs of a product, using traditional accounting and makes decisions based on it. These
per unit costs do not include important information like the percentage of free capacity or
the flow of products through the system and thus does not paint an accurate picture.
Cunningham & Fiume (2003, p 12) emphasise this fact by stating that “unit costs are only
an estimate given the number of subjective allocations that go into the sum, and often lead
to poor decisions.”
Lean accounting proposes accounting by ‘value streams’. A company divides itself into
different horizontal value streams that include everyone involved from the accounts person
down to the delivery person. Managing by value streams can be mistaken with the
traditional activity based costing (ABC). However there is a fundamental difference
between the two. Cunningham & Fiume (2003, p. 95) state that “in ABC, costs are
allocated based on cost drivers, which are defined as activities that give rise to costs.”
Thus ABC involves dissecting and measuring per unit cost of a particular activity.
Thereafter, the unit costs are allocated to the product lines to which they belong.
Cunningham & Fiume (2003) identify three reasons why activity based costing does not
help a lean organization. Firstly like traditional costing, ABC is still an allocation method
that aims to express estimates in very precise terms. Secondly ABC is very expensive to
maintain as sophisticated tracking software and more human resources are required.
Thirdly, it promotes mass production with the justification that the only way to reduce unit
costs per cost driver is to push more raw materials though the process and thus build
inventory.
The difference between management with value streams and activity based costing is that
in value stream management there is no allocation of costs as the value streams are
independent of each other in terms of the machinery and the staff. Thus the profitability of
each value stream is easily measurable and needs no further financial tweaking. While
ABC promotes allocations of costs to the different product lines as per their use, this
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becomes a back flushing process of cost allocation of a more precise nature than traditional
accounting. The Researcher understands that one of the tenets of managing using value
streams is the fact that allocation of costs is eradicated, Cunningham & Fiume (2003).
In traditional accounting, the matching principle is applied where cost and incomes
pertaining to a certain month are recognised in the months in which they are incurred. This
allows for a different accounting profit to be reached compared to the cash flow balance.
One of the benefits of lean accounting, as a result of the fact that goods are only produced
when required, is that expenses and incomes are accounted for when they occur,
Cunningham & Fiume (2003, p.35). Thus the profit situation - income less total costs -
would be the same as the current cash flow of the business. This in itself is a waste
reduction procedure: there would not have to be reconciliations between the income
statement and the cash flow from operations as happens in the financial world today.
Maskell & Baggaley (2004, p. 228) assert that accountants have a role to play in the
organisation but not as grave diggers but rather in the role of change agents who are
involved in kaizen bursts.
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5. Research Methodology
5.1 What is Action research?
For the purposes of testing the hypotheses of this research, the writer will be using the
action research methodology. The origins of action research date back to the mid 1940’s
and have been increasing in prominence ever since. (Levy & Brady, 1996, p. 35) define
action research as “the process of research as a series of iterations, containing piloting and
assessment.” This is seconded by (Dick, 2002, p. 159) who states that “action research
profits from the use of a spiral or cyclical process in which the Researcher alternates action
with critical reflection.”
Figure 3: The Action Research Process
Source: Perry & Zuber-Skerritt, 1992, p. 204
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Figure 3 shows how the action research process works. The iterative nature of action
research is emphasized in the core action research stage, with the continuous cycles of
plan, do, check and act. The core reflection stage is the last part of the action research
process. This stage is where the researcher detaches from the research work done and
analyses the research carried out and how better it could have been done.
The Researcher understands that it must be noted, in action research there are various
forms that it can take, each one specializing in a specific field of research. Avison, Lau,
Myers & Nielsen (1999) state that there are four different types of action research:
1. Action Research – focusing on change and reflection in social groups.
2. Action Science – trying to resolve conflicts between espoused and applied theories.
3. Participatory Action Research – where there is an emphasis on participant collaboration.
4. Action Learning – for programmed instruction and experiential learning.
5.2. Why is AR appropriate?
It is easy to assume that action research, action learning and traditional research
methodologies are similar or identical to one another. The Researcher would like to
differentiate between the three methodologies to justify the use of action research for the
purposes of this research. The table below distinguishes between them.
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Action Research Action Learning Traditional Research
It focuses on a work group
all of whose members are
involved in
plan/act/observe/reflect
cycle.
Although it focuses on a
group, the individuals
learn from isolated
experiences which do not
involve others in the
group.
The Researcher is
separated from the system
being researched; with
only a part of the system
being analysed, while the
rest of the system is held
constant.
Action research involves
action learning. Involves
social systems of which
the Researcher is part.
Action learning does not
involve action research.
Appropriate for clearly
defined “non social”
research.
Table 1: Differences between research methodologies
Adopted from: Perry & Zuber-Skerritt, 1992
It is evident that action research is more suited to the research being conducted at QGD as
it involves a group of employees who are subjected to a change and a reflection period to
analyse the change. Altrichter et al. (1991) cited in (Perry & Zuber-Skerritt, 1992), state
that there are three key characteristics of action research. First is that there is a group of
people at work together. Secondly that this group of people is involved in the cycle of
planning, acting, observing and reflecting on their work more deliberately and
systematically than usual. Thirdly a public report of that experience is written in the form
of a thesis.
Dick (2002) emphasises that the advantage of action research is firstly that it improves the
Researcher’s practical experience. Secondly the outcome from such research is beneficial
to the institution or community at large. One of the purposes of this research is to test
whether adopting lean tools improves management competencies in that management are
better equipped to make more informed and timely decisions. Traditional research would
have been appropriate if management competencies were defined as merely conceptual
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and analytical, (Perry & Zuber-Skerritt, 1992). Management competencies, however,
involve the interplay between employees, systems and processes which are all part of the
organisation, in the area being researched.
Perry & Zuber-Skerritt (1992) emphasise that when management research extends to the
practices of work groups, then action research is more appropriate than traditional
research. In the case of QGD, the hypotheses that will be tested involving A3’s and lean
accounting all have employee groups, who work in the processes around which they need
to be tested. The Researcher understands that assessing the benefits of these lean tools
cannot be done by questionnaire because the organisation has not used these tools before.
An inference from other organisations cannot be made as no two organisations are exactly
similar in size, knowledge, area of operation and growth stage. Considering that non-
contact analytical research cannot be done, it thus renders traditional research methods
ineffective in testing the hypothesis. Thus the Researcher can only test the hypotheses by
involvement in the research with a ‘plan, do, observe and reflect’ principle.
A risk identified by Dick (2002) pertaining to action research, is that the Researcher might
have expectations based on prior learning that could result in a bias. This risk is negated by
the fact that the outcome of the research is evaluated by all the participants in the process.
The employees of QGD could be considered to be neutral since they are not influenced by
any theory. This allows for a relatively fair evaluation of the research process and negates
the risk of Researcher bias.
5.3 The importance of critical refection in action research.
The highly reflective nature of action research is emphasised by Tripp (1990, p.160) who
states that “One cannot plan without referring to data, thinking about it, and acting upon
the plan, so the planning activity is itself a form of reflective action”. The research process
is such that it allows for there to be an understanding of what happened, but will not
necessarily mean a full and final answer to the situation. (Tripp, 1990, p.160) also states
“in this respect, action research involves a process of reflection on reflection, but it can
never be exhaustive, can never ‘arrive’ at an end point of full understanding”.
Perry & Zuber-Skerritt (1992) state that the last link in an action research process is
reflection by the Researcher and the people who were involved in the research. The
Researcher understands that action research attributes much of its efficacy to the level of
22
reflection that happens during the process. The Researcher would better understand what
was undertaken by detaching himself from the work done and then reflecting on the
process. This also allows for an analysis of what could have been done differently if the
Researcher was to do this again. Looking forward, the reflective process would aid in
future research because of the availability of lessons learnt and the opportunity that exists
to improve on them. To this extent the Researcher has dedicated the final section of this
report as a reflection on the action research process.
6. Hypothesis Testing
6.1. Testing hypothesis 1
6.1.1. Planning The initial discussion with QGD revealed that the major problem they face is declining
sales. Based on this problem, the Researcher used a series of A3s that are interlinked and
portray a road map to QGD solving this problem. A3s allow for a structured way of
thinking that begins with the identification and articulation of a problem that limits a
system, Jimmerson (2007, p. 23). The series of A3s should drill down and reveal the
underlying causes so as to clarify the bigger picture; declining sales. In addition to
revelation and clarification, solutions should also become evident. In addition to this, the
A3 exercises will map out an action plan that the role players in the organisation will
adhere to, so as to bring about the desired results.
Conversations around the various issues at the company were started in May 2008 when
the Researcher first visited QGD. Following up on this there were subsequent meetings
with Mr. Faeez Abrams regarding the way forward for QGD. At each meeting the
Researcher and Faeez would agree on the issues at hand that needed to be resolved.
However, subsequent to the meeting there would be no action undertaken. A good
example of this lack of action was the issue with the accounting package, Pastel which was
giving wrong financial positions. This problem was so extensive that cost of sales figure
was higher than the sales figure on a month-on-month basis. This was due to the capturing
of data in the wrong sections of Pastel. The outcome of discussions based on this issue was
that a Pastel expert needed to be called in to sort out the problem. However considering
that the accounting function was outsourced to external accountants, the Pastel expert and
23
the accountant needed to make the changes on Pastel at the same time so that everyone
was on the same page. Although the management of QGD understood this dilemma, they
did not take the necessary steps nor did they put the appropriate pressure on the
stakeholders to sort the problem out. Upon reflection on this issue the Researcher, was
convinced that because management is so involved with the day-to-day operating of the
business, they neglect or forget to solve the issues which have a long term impact on it.
With this as a backdrop, the Researcher thought that it would be of benefit to QGD to
investigate the benefits of A3 as a problem solving tool in the context of a small
manufacturing firm. Jimmerson (2007) states the effectiveness of A3s by emphasising that
A3s are a logical, sequential and clearly defined way of problem solving. For the purposes
of this report, the Researcher thought that it would be beneficial to have a ‘control state’
against which to compare the A3 problem solving tool. In this regard, the managers of the
firm would be interviewed to understand their perspective on the problem and reveal their
proposed solutions for solving the declining sales issue. The managers were also asked to
map a plan to solve the problem as they saw it. Finally, they were asked for a proposed
timeline for the resolution of these problems.
The Researcher then, through action research, guided the managers of the firm in drawing
interconnected A3s based on the declining sales problem. The initial idea was to evaluate
the results of the A3 process solely. However, the Researcher decided that in order to get a
clearer picture of the effectiveness of A3s, it would be better to compare it to the ‘control
state’.
6.1.2. Assumptions and Limitations The A3 process was carried out over two consecutive days (5-6 October) with the owner
Mr Faeez Abrams. The fact that co-owner, Mr. Adnaan Abrams, was not involved in the
process might allow for personal bias in the responses from Mr. Faeez Abrams. One owner
was used in the A3 process because of the degree to which they are both involved in the
hands on production process; getting them both together at the same time is not possible.
Leading up to the discussion on A3s, the Researcher and the owner had several meetings
where the root causes of the problems and potential solutions were discussed. The
Researcher understands that the A3 process is a reflective one and as such will go through
24
many modifications before the final one is completed. This ideology is shared by
Jimmerson (2007, p. 27) who states that “A3’s require multiple iterations before successful
completion, and almost always this results from an inadequate understanding of the current
condition.” In the same light action research as shown in Figure 3 – core action research -
is also an iterative process. For the purposes of this research, and given the time constraint,
only one full run of the A3 process was done contrary to the theory regarding both A3s
and action research. The assumption was that the previous meetings had given the owner
enough time to reflect on the issues, causes and solution at hand.
A control state was used to compare the A3 process, whereby the Researcher asked the
owner about the issues, solutions and timelines to interventions. Every effort was made to
give the owner enough time to allow for his thoughts to flow. It must be recognised that
there is a potential error that could have happened with regards to the accuracy of the
control state, as the owner might have misinterpreted the need to be specific when
answering the questions. This is despite the fact that the Researcher made every effort to
make it explicit to the owner.
6.1.3. Carrying Out the Test
Without the use of A3s For the control state, the Researcher asked the management team at QGD about the major
problems at the company, what the causes of those were, whether they knew of any
potential solutions to them and what the time line on implementing these solutions might
be. The answers to these questions were as per table below. It can be easily recognised that
the management team understood the problem and its causes but did not have an action
plan to clearly identify the variables and their current and future states. The cost and
benefits of each potential solution were not quantified. Furthermore, the timeline was said
to be a continuous process with no finite dates by which to meet certain goals.
25
Questions base Description
Problem Declining sales trend
Causes 1. High mark-ups
2. General economic downtrend with high interest rates and credit act.
3. Small garage door manufacturers sprouting up.
Solutions 1. Reduce the mark-up
2. Hold a strategic amount of garage doors.
3. Standardize specific doors to decrease lead times.
4. Start a branding campaign with a new logo with contact details on the
doors.
5. Start a marketing campaign with adverts in malls, radios,
Time line Continuous process. No timelines.
Current implementation
status of solutions
1. Mark up: Brought down to 20% from 40%.
2. Trade mark registration of Q Doors has come through.
3. Marketing has been outsourced to “Out of the Blue”
Table 2: Summary of the problem, causes and how to fix them as per QGD management 5th October
With the use of A3s
The Researcher then proceeded to guide the management team to understand the problem,
its causes and potential solutions using a series of interlinking A3s.
26
Issue Description Quantified Time line to implement
Person In charge
Net benefit (Monthly)
Problem Declining sales trend To increase sales so that the NP is R50 000 per month.
End Mar 2009
Faeez, Adnaan.
R112 000 gross income+ branding value potential.
Causes 1. High mark-ups
2. General economic
downtrend with high
interest rates and credit
act.
3. Small garage door
manufacturers sprouting
up.
1. Currently at
20%
2. Interest rates
at a high of
15%. Credit act
in 2008.
3. Numerous
garage door
companies have
closed down
thus the workers
now venture on
their own
businesses.
Solutions 1. Reduce the mark-up
2. Hold a strategic amount
garage door inventory
3. Standardize specific
doors to decrease lead
times.
1. From 20% to
15%
2. Hold 20
garage doors at
any given point
of time.
3. Have SOP’s
in place and
standardize
work cells to
cater for making
standard
products
1. Mid Nov
2008
2. Mid Oct
2008
3.End Oct
2008
1. Adnaan
2. Faeez
3. Faeez
1. R30 000
2. R32 000
3. R30 000
27
Table 3: The summary of the A3 process as done with Mr. Faeez and the Researcher, 5-6th October
4. Start a branding
campaign with a new logo
with contact details on the
doors.
5. Start a marketing
campaign with adverts in
malls, radios,
4. New
trademarked
logo has to be
designed.
5. Make
brochures, start
ads in malls and
radio and
website
upgrade.
4. End Dec
2008
5. End Mar
2009
4. Faeez
5. Faeez
4. unlimited
potential
5. R 20 000
Current
implementatio
n status of
solutions
• Mark up: Brought
down to 20%
from 40%.
• Trade mark
registration of Q
Doors has come
through.
• Marketing has
been outsourced
to “Out of the
Blue”
• • • •
DATE: 3 October 2008 WRITTEN BY: Faeez Abrams/ Robin Kuriakose ISSUE : The current trend of declining sales TARGET CONDITION:
BACKGROUND: Many door manufacturing companies closed down recently, thus the people who worked there have started their own small informal garage door manufacturing operations. While the economy is in a down turn with the Credit Act coming in and interest rates rising, people have less disposable income.
COUNTER MEASURES: 1. Start a marketing campaign 2. Reduce the selling price margins. 3. Standardize certain garage doors for ease of manufacture. 4. Hold a strategic amount of doors on hand to allow for quicker sales and lead times to delivery.
CURRENT CONDITION: IMPLEMENTATION PLAN: 1. What: Marketing campaign, Who: Faeez, When, Feb 2009, Outcome: Increased sales and demand. 2. Branding, Who: Faeez, When: Oct end 2008, Outcome: home owners to demand Q doors. 3. Holding strategic amount of finished doors, Who: Adnaan, When: Nov end 2008, Outcome: faster turnaround time. 4. Standardization, Who: Tasneem, When: Mar 2009, Outcome: lower lead times. 5. Mark up decreases, Who: Accounting officer, Faeez, When: Oct end 2008, outcome: Survival of business and giving back the jobs lost. COST BENEFIT: 1.
Details Cost Income Benefit Marketing Campaign
Monthly R10000 R30000 R20000
Branding of doors Once off R20000 Unquantifiable Standardization Monthly R30000 R60000 R30000 Holding Strategic Inventories
Monthly R32000 R64000 R32000
decreasing mark up by 5%,
Monthly R30000 R60000 R30000
Total R 112000
PROBLEM ANALYSIS: Declining sales. Why? They weren’t sure if they were making a profit so increased margins drastically/ making custom doors which delays orders/not holding a strategic amount of doors/ no marketing activities/no branding of doors Why? No co-ordination to move the business in the right direction as per changes in the economy and the consumer Why? No strategic leadership shown by management who are busy with day to day issues Why? Lack of formal business training for management
TEST: Checking the monthly figures from the income statement.
FOLLOW UP: Overall there should be a, monthly audit of all of the above. While an annual review should be conducted.1. Score cards for checking up standardization and holding strategic inventories - all staff must be present in this meeting- by measuring against what was planned. 2. Watching the sales trend from month to month - the outsourced marketing company should attend reviews. 3. See how the financials are doing - the accounting officer should attend meetings.
Figure 4: Master A3
Pricing
Economy Down
Competition
QGD
Declining Sales
Customer
QGD
Customer Increasing Sales
29
DATE: 3 October 2008 WRITTEN BY: Faeez Abrams/ Robin Kuriakose ISSUE : Making custom orders TARGET CONDITION:
BACKGROUND: The company set out to meet customer’s needs and thus would take measurements and manufacture accordingly. COUNTER MEASURES: 1. Setting up the factory by making jigs to allow for
standardization. 2. Design workstations that allow for standardization. 3. Creating standard operating procedures.
CURRENT CONDITION: IMPLEMENTATION PLAN: What: set up standardizes workstation cells with SOP's. Who? Faeez. When: Oct 2009. Outcome: Higher Productivity and efficiency
COST BENEFIT: Net Benefit: R30000 PROBLEM ANALYSIS: Making custom orders decrease sales. Why?
Manufacturing cannot be levelled thus higher lead times. Why? Customers have different door specifications. Why? Buildings have different garage door sizes. Why? Architects in Cape Town are drawing different plans. TEST: The fibre glass sectional door department was cleaned up with and standard
operating procedures were put in place. FOLLOW UP: 1. Using score cards in each cell that are signed off by the team leader. 2. Productivity in terms of inventories done by the cell need to be measured.
Figure 5: A3 - Making custom orders
QGD Customer
Manufacturing
Custom orders
Manufacturing Custom orders
Standard orders
Customer
HIGH PRICE
LOWER PRICE
30
Figure 6: A3 – Not holding a strategic amount of doors
DATE: 3 October 2008 WRITTEN BY: Faeez Abrams/ Robin Kuriakose ISSUE : Not holding a strategic amount of doors TARGET CONDITION:
BACKGROUND : the company never used to hold inventory because they used to be enough orders that kept them busy.
COUNTER MEASURES: 1. To hold stock 20 fast moving doors. Which is equivalent to two weeks’ worth of work.
CURRENT CONDITION IMPLEMENTATION PLAN: What: Hold two weeks’ worth of stock. Who: Faeez. When: Mid Oct 2008. Outcome: Levelled production meeting customers’ needs quicker.
COST BENEFIT: Net Benefit: R32000 PROBLEM ANALYSIS: Not holding a strategic amount of doors in inventory
decreases sales. Why? There are long lead times to make doors sometimes up to 20 days, thus customers get impatient. Why? Because the doors are customer made. Why? To meet customers’ needs. Why? Because customers demand it. TEST: 1. The company is currently doing a test run with 10 doors, and checking is there
is a levelling of manufacturing.
FOLLOW UP: 1. Re-strategizing the quantity of inventory held on a monthly basis.
QGD Customer Manufacturing
Supply
Demand
No Inventory holding
Manufacturing 20 doors inventory holding
Supply
Demand
Customer QGD
31
DATE: 3 October 2008 WRITTEN BY: Faeez Abrams/ Robin Kuriakose ISSUE : Having a high mark up TARGET CONDITION:
BACKGROUND: The mark-up was increase of late because of concerns about the losses being made over the last three financial years. This was also done as a safety since the data capturing of financial became problematic over the last year. The mark-up was a high as 40% and now is at 20%. COUNTER MEASURES: Decrease the mark up to 15% above cost for doors sold.
While maintaining the high installation fee.
CURRENT CONDITION: IMPLEMENTATION PLAN: What: Drop the mark-up by 5% to 15%. Who: Adnaan, When: Mid Nov 2008. Outcome: To maintain a net profit of R50000 per month by an increase in sales.
COST BENEFIT: Net Benefit: R30000
PROBLEM ANALYSIS: A high mark-up decreases sales and profitability overall. Why? The product becomes expensive. Why? Since the mark-up is too high. Why? It is a precaution to ensure that a profit is made.
TEST: 1. Dropped mark up from 40% to 30%, which increased sales a little. 2. Dropped mark up from 30% to 20%, which caused sales to rise dramatically and improve profitability. The last two months have been profitable for the business.
FOLLOW UP: Check the financial documents on a monthly basis to validate the sales growth maintenance.
Figure 7: A3 – Having a high mark up
QGD Customer Lower sales
trend
High margins
Making a profit
QGD Customer
Lower margin
R 50 000 Net profit from more sales
Increased sales
32
Figure 8: A3 - Customers are not aware of Q Doors brand
DATE: 4 October 2008 WRITTEN BY: Faeez Abrams/ Robin Kuriakose ISSUE : Customers are not aware of the Q Doors brand TARGET CONDITION:
BACKGROUND: The company did not initially focus on branding especially because the garage door fitting companies did not want to buy branded doors. But later QGD did so with the brand Q Doors, which they managed to push into the market because it had no contact details but just the name Q Doors. ( traders did not want QGD contact details on the doors)
COUNTER MEASURES: A new logo with a website address is being designed.
CURRENT CONDITION IMPLEMENTATION PLAN: What: New Logo design. Who: Faeez and the marketing company Out of the Blue, When: End Dec 2008. Outcome: New branding on all doors manufactured which should allow for future sales to take place.
COST BENEFIT: Net Benefit: unquantifiable PROBLEM ANALYSIS: 1. Garage door fitting companies don’t want to buy doors
with QGD's details on them. Why? Because customers can by pass them to QGD next time. Why? Customers always want to go direct. Why it is cheaper. 2. Customers are not aware of the brand. Why? Since the doors have a Q Doors stamp on it which does not link it to QGD. Why? Because of garage door fitting companies not wanting there to be a link. Why? So that no sales slip past them. Why? So that they can make money.
TEST: 1. The preliminary testing was with the logo without contact details. It was a check to see how the market would react. Although the company lost a few customers - the garage door fitting companies. It nevertheless managed to continue with its business.
FOLLOW UP: Keep a monthly track on the sales orders from companies. 2. Do a brand awareness survey yearly to see if people relate garage doors to Q Doors.
QGD
Customer
Temporary QGD logo fixed on doors with no contact details
Customers are not demanding the brand QGD
QGD
Customer
Good branding
Customers demand QGD doors
33
DATE: 4 October 2008 WRITTEN BY: Faeez Abrams/ Robin Kuriakose ISSUE : No marketing activities TARGET CONDITION:
BACKGROUND: Previously there used to be enough business to keep the company busy. If any more business came their way the quality of work would decrease. Thus no marketing activities were carried out. However the recent declining sales have led to some thought being given to marketing activities to promote sales. COUNTER MEASURES: Out of the Blue a marketing company has been asked
to quote a range of pamphlets and advertisements in shopping centres.
CURRENT CONDITION IMPLEMENTATION PLAN: What: Brochures. Who: Faeez and the marketing company Out of the Blue, When: Dec 2008. What: Ads in malls: Who: Faeez. When: End Nov 2008. What: Web site upgrade. Who: Faeez. When: End Nov. What: radio Ads. Who: Faeez. When Dec 2008. Outcome: New branding on all doors manufactured which should allow for future sales to take place.
COST BENEFIT: Net Benefit: R20000
PROBLEM ANALYSIS: No marketing activities in place. Why? There was no need for more business as the company was already at max capacity. Why? Business was good at that time. Why? Financing the marketing activities is a problem. Why? The company is still reeling from a three year loss. Why? Because of declining sales. Why? Bad economic situation.
TEST: As marketing is a requirement at present it will be rolled out in phases regardless.
FOLLOW UP: Out of the Blue will do a market survey to see the responsiveness of the various media used to improve sales. Thus the company can then focus on that specific media.
Figure 9: A3 – No marketing activities
QGD
Ads at a mall dysfunctional
Web site advertising
Temporary Logo used
QGD Marketing outsourced- to “Out of the Blue”
New Logo Brochures
Radio Ad’s Website Ad’s
6.1.4. Checking on the Results Upon reflection, the A3 process gives an in depth understanding of the problem, the
solutions and the causes for why the solutions were not implemented earlier. In
addition, the A3 process highlighted the people in charge of the various solutions that
needed to be implemented, ensuring accountability. There was also clarity on the time
it would take for the solutions to be implemented as well as the benefit that will be
derived on a monthly basis.
The five outlined solutions are expected to take up to the end of March 2009 to be
fully implemented and will address the problem of declining sales. This would then
allow for the full benefit of R112000 in extra sales income being created which would
result in a higher net profit. It must be noted that this is dependent on the
implementation of the A3 plans.
It is evident from the process of action research followed above that using A3s are a
more comprehensive way of looking at problems and how to solve them. The method
focuses on the finite factors such as time lines, people in charge and potential benefits
of the action. This process provides more clarity and creates a template for a strategic
plan that can be revisited from time to time in an effort to measure performance.
6.1.5. Reflection The A3 problem solving process was a focused one that asked questions that
encouraged the person involved to really think about the issues at hand. For example,
when it comes to timelines and cost-benefit analyses there is more insight gained
about the countermeasures to the problem. In this regard, executing the A3 process
was a rewarding experience for both the owner of QGD and the Researcher. The
benefits of the A3 problem solving process are that the outcomes are in the form of a
concise, clear plan of action with people highlighted as the responsible parties and
delivery dates specified. This acts as a strategic plan of action to solve the problem.
It must be noted that after conducting the A3 process, there is a need for measuring
the progress of the countermeasure plans which must be done separately. This is the
most crucial part of ensuring the success of the A3 process. The Researcher also
believes that it would have been effective to do the A3 process with co-owner Adnaan
Abrams to see the differences in the two owners’ thought processes. This, however, is
35
not part of the scope of the research conducted. The Researcher would recommend
that for future A3 research work, the implementation of the A3 counter measures
would be an interesting area at which to look. This is an area that is not governed by a
standard format or tool and as such can lead to the failure of the benefits of going
through the A3 process.
6.2. Testing Hypothesis 2
6.2.1. Planning In testing the second hypothesis, the Researcher took selected months of financial
data pertaining to QGD and used standard present day accounting measures to
determine how well QGD is performing as a company. Thereafter, through action
research the Researcher, with the management of QGD, used the same data and
examined it from the lean accounting perspective. The two methods were compared
against each other and the Researcher tested if mass production accounting or lean
accounting is more suitable to be used as a basis for performance measurement in
terms of pricing and capital expenditure decisions in a firm that is turning lean.
QGD has been having some issues with their accounting system and the numbers
being generated from Pastel (accounting software) were unreliable. To overcome this,
the management of QGD agreed to start capturing sales, purchases and expenses in
Microsoft Excel so as to ensure the quality of the numbers as well as to function as a
control check to compare with the figures generated by Pastel. QGD accepted this
method of Excel tracking when the reports being pulled out of Pastel were showing
the cost of sales to be higher than sales.
Thus in the beginning of June 2008, the Researcher together with the data capturer at
QGD, Mrs Kashiefa Moos, created an Excel template that would facilitate the capture
of financial data. The Excel sheet contained three pages. The first page was all the
sales, the second page was the purchases of raw materials and the third page
contained all the expenses. The management of QGD was quite supportive of the
initiative even though it meant that there would be double capturing of the data in
36
Pastel and Excel. The understanding was that this would continue for a few months
until the errors in Pastel could be rectified, and thereafter, Excel would fall away.
The aim in maintaining the sheets was also for the Researcher to get reasonably
reliable data that could be used to identify the benefits of lean accounting for QGD.
The Excel sheets were implemented in June. They did, however have to go through
some modifications in the month of June and July 2008 for e.g. more columns were
inserted for better tracking purposes. The need for this only became evident once the
data capture had commenced.
It must be noted however that traditional accounting was never fully utilised by QGD
management in making decisions. It was done for ensuring tax compliance and in
compliance with the regulations of Closed Corporations of which QGD is one. Thus,
the benefits of understanding the effectiveness of lean accounting at QGD will have
less of an impact for the management. The Researcher and management at QGD do
hope, however that the lessons from reflecting on lean accounting will lead to
management making an effort to understand the business better by closely monitoring
the financial numbers as a guide through their lean journey.
Over the period from June to October 2008 there has been some progress sorting out
the functional issues in Pastel, however both the Researcher and the management of
QGD agree that it will take a couple more months, possibly till the end of February,
2009, the end of the financial year until Excel can be phased out. The simplicity of
Excel, is that all the numbers are visible to the eye and not stored in the background of
a computer program. This has allowed for the involvement of Mr Faeez’s wife (who
once in a while helps out in the business) to compare the Pastel figures with those of
Excel and start asking questions. This process of identifying differences between the
two mediums of data storage allowed for questions to be raised; in most cases, Excel
would be right and Pastel wrong. Subsequent to this, a Pastel expert was hired to
come on a weekly basis for two hours to sort out the problems identified in Pastel
during the week. This has led to more clarity and better results from Pastel. Despite
the fact that from time to time, new issues arise, there seems to be better clarity and an
end to the Pastel problems in sight.
37
The Researcher, in consultation with the management of QGD, decided to use data
relevant to the manufacturing division of QGD and did not take into account the pure
trading of garage doors, which QGD does, for the purposes of this research. The
trading side of the business is clear-cut and the margins could easily be identified;
QGD buys finished goods and sells them, as is, to customers. The manufacturing side
of QGD was the area where there was concern as the pricing of garage doors was not
based on any financial information. The management of QGD found it more
beneficial to look into the manufacturing financials in particular, because it was the
backbone of the business. The figures generated in the months of August and
September were used to test the hypothesis. For the two months mentioned, QGD was
satisfied that there was a profit being generated from the garage door manufacturing.
The researcher also understands that since the data for two months were used this in
effect means that only two iterations of the action research would be accomplished.
These would pertain to the months of August and September.
The Researcher intended to compare the use of standard accounting methodologies
versus the use of lean accounting principles of managing with the use of value
streams. Standard accounting methodologies can be characterised by the fact that the
unit cost is used to make decisions like pricing and mark up. Lean accounting can be
characterised by the division of the business into different units, each of which makes
a category of products, and the management of the units with these categories or value
streams.
6.2.2. Assumptions and Limitations QGD has never used value streams for management purposes and as such, the
financial data for August and September was allocated between among the three value
streams (meranti, fibreglass and steel) as identified by the Researcher and QGD
management for this purpose. This, in itself, is a source of potential error particularly
since the costs and expenses might not have been correctly distributed. Every effort
was made to ensure that the allocation as per value stream was as accurate as possible.
The lengthy period of time invested in ensuring that the accounting figures of QGD
were accurate, which in itself was an iterative process, took almost 3 months to get
right. This meant that there were only two months of relatively reliable data for the
38
months of August and September to test the hypothesis. Thus it implies two iterative
processes for purposes of the action research.
The figures presented below include only the doors that QGD manufactures under its
manufacturing division. Thus it is not a full reflection of the total sales made or
purchases and expenses that the company has incurred. It must also be noted that the
manufacturing division is treated as a separate company and in essence sells all its
products to QGD which then retails to outside customers. Thus the sales income
generated is not a clear indication of the amount generated by the company as a
whole.
The fact that the data used was captured on Excel by the QGD data capturer in
addition to being captured on the accounting package, Pastel, means that there could
be data that was not captured into Excel because of an oversight. This could
potentially change the outlook of the figures. This is highly unlikely because at the
end of each month, there is a check done between the Excel sheet and Pastel. QGD
does not manage by value streams at present in that it has not clearly divided its
activities and resources into such. Thus, for the purposes of this report, the Researcher
has allocated some of the costs as mentioned above in order to test the hypothesis.
6.2.3. Carrying Out the Test On the 7th October 2008, the Researcher and the data capturer of QGD looked at the
months of August and September to try and divide all the sales, purchases and
expenses into the three value streams of meranti, fibre glass and steel. The
Researcher, in discussions with the management of QGD, identified that QGD
essentially has three major garage door product families that it produces. These
include: meranti garage doors, fibreglass garage doors and steel garage doors. In each
family there are tip up or sectional doors that are made. The size of the doors in each
family also varies from sale to sale depending on the dimensions of the customer’s
garage. The months of August and September were chosen to be used as part of this
thesis as it was the most recent information available and also because there was
assurance from the data capturer that the data for those two months was up to date.
The data capturer then, allocated the sales, purchases and expenses for both months to
39
the value stream to which they belonged. Thus the data was split into meranti,
fibreglass and steel value streams. The allocation was verified by other members of
staff when necessary, to ensure that it was done as accurately as possible.
Thereafter, using the filter function on Excel, the data was split via value streams and
the totals calculated for sales, purchases and expenses. This allowed for condensed
income statements to be generated for the three value streams. The profitability of the
value streams were then matched together in terms of how much they add to the
overall profitability of the manufacturing section of the business.
At the same time, the Researcher wanted to test how managing by value streams and
not using traditional unit costing to make decisions, can impact QGD. The Researcher
proceeded to compare the effect of traditional unit costing and costing by value
stream on the decision to make new doors. The reasoning behind it was to test
whether managing by value streams makes a difference to decision making as much at
it potentially could on showing a clearer picture of the profitability of the business.
The one test looks at past performance and the second test looks at potential future
performance of the company. The combination of these two tests would allow for an
indicative conclusion being drawn on the effectiveness of lean accounting with
regards to QGD.
6.2.4. Checking on the Results The summary income statements of August and September show that QGD made a
healthy profit. To test the hypothesis the summary income statement was broken
down into a summary income statement by value stream. It must be noted that
material costs includes all the costs related to buying of materials to make the doors.
While expenses refers to the costs related directly to the month/value stream. It
includes items such as wages, staff welfare, telephone expenses etc. Considering that
QGD has been in existence for over 15 years, the machinery that they use has been
fully depreciated. However depreciation would be taken into account under expenses
in normal circumstances.
40
Table 4:Summary Income Statement August
August Rands Sales 337 362.48 Less: Purchases 206 759.27 Gross Profit 130 603.21 Less: Expenses 83 108.06 - NET PROFIT 47 495.15
Table 5: Summary Income Statement September
September Rands Sales 266 511.48 Less: Purchases 140 171.35 Gross Profit 126 340.13 Less: Expenses 85 422.14 - NET PROFIT 40 917.99
Looking at the summary income statements we see that QGD made a fairly consistent
profit for the months of August and September. However if we look at the income
statement per value stream then a different picture emerges. It can be seen that the
fibreglass division which is a substantial part of the company is actually doing quite
badly in both iterations of the action research for the months of August and
September. Especially in the month of September it made a loss. Thus the initial
impression from the summary income statement that the business was doing fairly
well has been overshadowed by the poor performance of the fibre glass value stream.
The poor performance of the fibreglass value stream could be attributed to high
expenses or potentially incorrect lower mark up for the fibreglass garage doors.
Table 6: Summary August Income Statement By Value Streams
August Meranti Fibreglass Steel Total Sales 56 840.40 82 344.48 198 177.60 337 362.48 Less: Purchases 18 368.37 37 307.73 151 083.17 206 759.27 Gross Profit 38 472.03 45 036.75 47 094.43 130 603.21 Less: Expenses 31 808.08 44 799.98 6 500.00 83 108.06 - NET PROFIT 6 663.95 236.77 40 594.43 47 495.15
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Table 7: Summary September Income Statement By Value Streams
September Meranti Fibreglass Steel Total Sales 79 232.28 93 138.00 94 141.20 266 511.48 Less: Purchases 28 437.12 57 140.63 54 593.60 140 171.35 Gross Profit 50 795.16 35 997.37 39 547.60 126 340.13 Less: Expenses 30 827.97 47 594.17 7 000.00 85 422.14 - NET PROFIT 19 967.19 -11 596.80 32 547.60 40 917.99
Maskell & Baggaley (2004, p.142) state that “when using value streams, it is not
necessary to know the cost of specific products to make decisions on these issues.”
This is quite contrary to traditional accounting which makes decisions based on the
unit cost of a product. Maskell & Baggaley (2004) further state that decisions which
relate to make or buy should be looked at from the point of view of the value stream
in question and not the unit cost of the individual products. In the case of QGD, the
three value streams of meranti, fibre glass and steel have individual products which
can be described by the sizes of the doors (single garage/ double garage door) and the
type of door (tip up/ sectional) The reasoning behind this statement is the fact that if
there is excess capacity available in the value stream then manufacturing more
products will not have an adverse effect on the financials. While if we were to look at
the unit cost per product and make a decision it does not take into account the
capacity factor and thus could lead to the wrong decision being made.
Table 8: Meranti Value Stream Costing
MERANTI VALUE STREAM COSTING
August profitability -
14 doors
September Profitability - 23 doors
Total profit for 9 additional doors
A Sales 56 840.40 79 232.28 22 391.88
B Material costs 18 368.37 28 437.12 10 068.75
C Expenses 31 808.08 30 827.97 -980.11 Negligible difference
(A-B-C) Value stream profit 6 663.95 19 967.19 13 303.24 Contribution of the new order
42
Table 9: Meranti Unit Cost Costing
MERANTI UNIT COST COSTING
Manufacture of 14 doors
A
Sales 56 840.40 B
Material costs 18 368.37
C
Expenses 31 808.08
D (B+C)/14 Per meranti door cost 3 584.03 E A/14 Per meranti door sales price 4 060.03 F E-D Profit Margin per door 476.00
F*9 doors Total profit for 9 additional doors 4 283.97
The second part in establishing if lean accounting provides a better financial
representation of QGD, involved testing lean accounting to see whether it would
allow for better make/buy decisions to be made by QGD. In the month of August
there were 14 meranti doors produced. If the owners at QGD were to use traditional
unit costing to make a decision on pricing regarding September when 23 doors were
made then the total profit for 9 additional doors would be R4 283 as per Table 9.
With costing by value streams in Table 8, we see that for QGD to make the 9 doors
there is no extra expense incurred. This is because there is extra capacity with regards
to machinery and human resources that allow for the 9 doors to be made without
additional expense costs. Thus taking on the new orders equates to an additional
R13 303 income to the business. This when compared to R4 283 in Table 9 is a
significant difference in income.
The difference in the profit margins of value stream costing and unit costing can have
a significant impact on the business. The savings could be transferred to the consumer
in the form of lower prices which would then relate to faster and higher sales. Thus
understanding the impact of spare capacity on production has a profound effect on the
profits that QGD makes. This is more evident since it produces on a demand pull
basis. Thus, there is no build up of inventory which would decrease the unit cost of a
meranti door, thus skewing the true picture of profitability of the business.
43
6.2.5. Reflection The hypothesis being tested is indeed a relevant one in today’s context where many
SME’s close down in their early stages. Traditional accounting systems used at QGD
which look at the overall picture can certainly be a misrepresentation of what is
happening in the value streams that exist within the company. In this regard, it is
worthwhile for QGD to manage by value streams. This allows for a more focused
look on cost control while at the same time gives a magnified view on exactly what is
going on within the company. The Researcher hopes that testing this hypothesis has
shed some light on the effectiveness of QGD to divide its machinery and staff
complements and segment them into value streams, thus allowing for clear and more
effective accounting information that can be used to make future company related
decisions.
Given a chance to do this research again the Researcher would have chosen a
company that manages by value streams to test the effectiveness of lean accounting.
While given more time the Researcher would have liked to do two more iterations
(two more months) to test lean accounting so as to get more evidence in testing the
hypothesis. One of the tenets of lean accounting is that the allocation of costs is
eradicated, Cunningham & Fiume (2003).To this extent some of the material costs
and expenses were allocated for the purposes of this research because QGD does not
manage by value streams. This in its self is contradictory to the essence of lean
accounting.
Going forward, the Researcher believes that a good follow up research on the theory
lean accounting would be on whether lean accounting converges or diverges from the
Generally Accepted Accounting Principles (GAAP). This would test the hypothesis
whether lean accounting can be incorporated in GAAP and as such be used as an
acceptable accounting methodology in the mainstream accounting world.
44
7. Final Reflection
On the 24th November Mr. Faeez Abrams, Prof. Norman Faull and the Researcher met
for a final reflection regarding the A3 and lean accounting hypotheses which were
tested. Mr Faeez was asked whether going through the A3 process was beneficial to
him. He acknowledged that the process was beneficial to him and that the more
iterations one does using the A3 process the better the understanding of the root
causes and the potential solutions. Mr. Faeez emphasized that he would be continuing
to use A3’s as part of his daily business operations as a problem solving tool. To this
extent he has created a training room wherein staff will be introduced to the A3’s and
other lean tools so that they are engrained in the daily work practices. Mr. Faeez also
expressed his eagerness to use the A3’s jointly created with the Researcher as a road
map that he will try to stick to going forward. This being said there is no assurance
that the A3 outcomes will be carried out as discussed by Mr. Faeez. A good follow up
research to this one would be a look at whether Mr Faeez managed to follow the
outcomes of the A3 process and if not what hampered him from doing so.
The Excel capturing of data has proved to be useful in the interim for QGD as the
errors in Pastel become evident when the two data collections are compared. Mr
Faeez to this extent was happy that more effective progress was being made to solve
the incorrect information that Pastel is providing. He also emphasized the fact that by
managing by value streams he would be able to put more effort to the value stream
that is making a loss. This would ensure higher profitability and greater efficiencies.
Mr. Faeez acknowledged that by looking at an income statement not broken down by
value streams he was unable to understand which part of his business needed more
attention to realize better profits. When asked by Prof. Norman whether he understood
what the Researcher did with the financial numbers in demonstrating managing by
value streams , Mr Faeez was able to explain in depth the process followed. He also
most aptly stated in demonstrating his understanding of lean accounting that overhead
costs for e.g. salaries of the owners, would not be included in the value stream as they
would be controlled separately. This being said the Researcher is aware that it is
45
highly unlikely that lean accounting will be used to measure the performance of the
QGD going forward. The reason for this is the lack of commitment (caused by time,
work and capacity constraints) from QGD management to continue with analysing the
finances via lean accounting. However the fact that Mr. Faeez is aware of lean
accounting means that he is in a position to use it.
In conclusion when asked what could have been done differently by the Researcher in
retrospect, Mr Faeez stated that he would have preferred if the Researcher spent more
time with the QGD, in terms of time spent on the testing the lean tools. As a closure to
the reflection meeting, there was a consensus that if the process was to have been
done again there should be a contract signed between the Researcher and the company
with regards to the time that will be spent on the research topic by both parties. It
must be noted that the set up time in preparing for the action research iterations took
long. The Researcher also feels that had there been more time to do more iterations of
the action research it would have helped in gaining a better understanding of the
effectiveness of the lean tools at QGD.
46
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