D.4. Supply Chain and Lean Management for CMA® Part 1

What is supply chain management?

The active management of supply chain activities by the members of a supply chain with the goals of maximizing customer value and achieving a sustainable competitive advantage.

A supply chain consists of all the organizations involved in moving a product or service from suppliers to the end-user, the customer.

Supply chain management involves coordinating product development, sourcing, production, logistics, and information systems.

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What are the two main types of flows that link together the organizations that make up a supply chain?

Physical flows
Information flows

Physical flows involve the movement, storage, and transformation of raw materials and finished goods, while information flows allow the various supply chain partners to coordinate their long-term plans and to control the day-to-day flow of goods and material up and down the supply chain.

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What is vendor-managed inventory?

A practice whereby a retailer allows a distributor to manage its (the retailer’s) inventories or a distributor allows a manufacturer to manage its (the distributor’s) inventories, shipping product automatically when inventory gets low.

Also called supplier-managed inventory.

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What is the Toyota Production System?

(TPS)

A philosophy and system of manufacturing developed by Toyota, focusing on providing the highest quality, at the lowest cost, in the shortest lead time by optimizing resources while respecting humanity.

The TPS emphasizes Just-in-Time inventory management and production, while ensuring that production problems are addressed immediately by giving all employees the authority and responsibility to halt production if a problem arises.

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What is lean thinking?

A way of thinking about the roles of companies and functions in managing the flow of value creation from concept to the final customer. The emphasis in lean thinking is on adding value to the customer while cutting out waste.

Waste is anything that does not add value to the customer, such as defects, overproduction, inventories of goods waiting for further processing or completed goods waiting to be sold, unnecessary processing, and delays, among others.

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What are the principles of lean thinking?

Specify value as the starting point
Identify the value stream, that is, all the specific actions needed to provide a good or service
Create continuous flow from one process to the next without using assembly lines or batches
Establish pull, meaning the customer pulls the product from the producer as needed
Pursue perfection, that is, continuous improvement
Have respect for people— employees, customers, shareholders, business partners, and communities

These principles aim to enhance value creation and eliminate waste.

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What does kaizen, a part of lean manufacturing philosophy, entail?

It is a Japanese term meaning “improvement,” implying continuous improvement in all areas of business operations.

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What does kanban, a part of lean manufacturing, entail?

Kanban, a Japanese term, facilitates the flow of production from one process to the next.

A kanban is any device used to signal that a production process needs more products or parts from a previous process. It contains the exact specifications for the item needed from the previous process.

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What is lean accounting?

A system of costing by value stream rather than by individual products or departments, used to support lean resource management. Lean resource management focuses on an entire value stream, from suppliers, to manufacturing, and ultimately to the customer.

Standard costs and variances are not used. Many lean accounting systems treat materials as period costs, expensing them in the period in which they are purchased, because their direct material and work-in-process inventories are minimal.

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What are the benefits of lean resource management?

Quality performance, fewer defects, less rework
Lower levels of inventory
Greater efficiency
Improved delivery performance
Improved employee morale and supplier relations
Lower costs due to elimination of waste
Greater customer satisfaction

Lean resource management leads to higher operating income due to elimination of waste and due to increased business because of improved responsiveness to customers.

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How does lean resource management apply beyond manufacturing?

It can be applied to health care, warehousing, and service organizations to reduce waste, improve efficiency, and enhance customer satisfaction.

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What are the benefits of lean accounting?

Simpler than traditional product costing because very little overhead allocation is needed when costing is done by value stream.
Focus on value streams and minimizing costs supports continuous improvement in the value stream from suppliers to customers.
Individual product costs are not needed if decisions are made at the product-line level.

Lean accounting emphasizes value creation for the customer over individual product costs.

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What are the limitations of lean accounting?

Its usefulness for decision-making is limited to product-line decisions.
Decisions are based solely on value stream costs, which could make a product line appear more profitable than it is because not all costs are included. To compensate for the excluded costs, prices need to be set to include a large markup on the value stream costs.
It does not comply with GAAP for inventory accounting. However, if lean production is done properly, inventories can be kept so minimal as to be immaterial.

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What are the benefits of Just-in-Time (JIT) production and inventory management systems?

Reductions in the cost of carrying inventory
Improved quality and the virtual elimination of rework costs due to resolving production problems quickly
Batch setup time is reduced, making production of smaller batches more economical and leading to shorter manufacturing lead times.
Typically require less floor space than traditional systems do, leading to reduced facility costs.

JIT minimizes inventory storage costs and reduces risks such as damage, theft, and obsolescence.

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How does a JIT system differ from traditional inventory systems?

JIT is a demand-pull system
Traditional systems are push systems

In a demand-pull system, production is based on actual customer orders, while push systems rely on forecasted demand.

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What is a requirement for the success of a JIT system?

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Close coordination between workstations
Reliable suppliers and production equipment
High-quality manufacturing without errors

JIT systems require timely delivery of quality materials and efficient production processes to avoid disruptions.

What are the major principles of kanban?

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Works from upstream to downstream based on customer orders.
Upstream processes produce only what has been withdrawn.
Only defect-free products continue in production. Defects are recognized and corrected immediately, before any more defective units can be produced.
The number of kanban should be decreased over time. By constantly improving production control and reducing the total number of kanban, continuous improvement is facilitated while the overall level of stock in production is reduced.

Kanban principles support continuous improvement and inventory reduction.

What is the role of Material Requirements Planning (MRP) systems?

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To determine what raw materials to order for production, when to order them, and how much to order.

MRP is a system for ordering and scheduling of dependent demand inventories. Dependent demand is demand for items that are components, or subassemblies, used in the production of a finished good for which the demand is dependent on the demand for the finished good.

What are the differences between MRP, MRPII, and ERP systems?

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MRP focuses on managing raw materials inventory for manufacturing.
MRPII integrates information regarding the entire manufacturing process, including functions such as production planning and scheduling, capacity requirement planning, job costing, financial management and forecasting, order processing, shop floor control, time and attendance, performance measurement, and sales and operations planning.
ERP integrates applications that are used to collect, store, manage, and interpret data across the organization.

ERP systems provide a single database for planning, manufacturing, order fulfillment, and other purposes.

What information does MRP use to determine necessary outputs and order timing?

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Demand forecasts for finished goods
Bill of materials for each product
Inventory quantities of materials and components

Accurate inventory records and cost estimates are crucial for effective MRP implementation.

What is the primary focus of Material Requirements Planning?

(MRP)

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Management of raw materials inventory for manufacturing.

MRP is mainly concerned with ensuring that the right materials are available for production at the right time.

What additional functions does Manufacturing Resource Planning (MRPII) integrate beyond MRP?

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Production planning and scheduling
Capacity requirement planning
Job costing
Financial management and forecasting
Order processing
Shop floor control
Time and attendance
Performance measurement
Sales and operations planning

MRPII is a more comprehensive system that integrates various aspects of the manufacturing process.

What is the main advantage of an Enterprise Resource Planning (ERP) system over MRPII?

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Integration of non-manufacturing functions with manufacturing functions.

ERP systems provide a unified platform for managing all business functions, including logistics, sales, marketing, and human resources.

What are the components of an ERP system?

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Production planning
Integrated logistics
Accounting and finance
Human resources
Sales, distribution, and order management

Note: Any subset of any of the above components, such as customer service, is not a component of an ERP system.

What is a key benefit of cloud-based ERP systems for small and mid-sized businesses?

Reduced investment in hardware and IT personnel. ## Footnote Cloud-based ERP systems allow smaller and medium-sized businesses to access only what they need, making them more cost-effective.

What is the primary purpose of **outsourcing**?

To purchase goods or services from an outside supplier rather than producing them internally. ## Footnote Outsourcing can help companies focus on their primary operations and reduce costs.

What is **offshoring**?

Outsourcing to suppliers in lower-cost countries. ## Footnote Offshoring is a strategy to reduce costs by utilizing cheaper labor markets.

What is the theoretical production capacity level?

The capacity level that assumes the company will maintain production at its absolutely most efficient level, with no breaks and no downtime. ## Footnote Theoretical capacity is unattainable in practice.

What is the practical production capacity level?

The most a company can reasonably expect to produce in a year’s time. It is the theoretical level reduced for idle time and downtime, but not reduced for any possible decreases in sales demand.

What is the master budget production capacity level?

The amount of output expected during the budget period based on expected demand. ## Footnote Master budget capacity is used for planning based on forecasted sales.

What is the normal production capacity level?

The level of annual activity achieved in the long run that will satisfy average customer demand over a period of 2 to 3 years. ## Footnote Normal capacity reflects a more stable and long-term view of production levels.

Why is practical capacity preferred for pricing decisions?

When under-production occurs due to lack of customer demand, use of practical capacity is important for use in making pricing decisions so that costs used in pricing decisions do not include fixed overhead costs for unused capacity. ## Footnote Using practical capacity helps avoid a downward demand spiral by not passing the cost of unused capacity to customers.

What happens when manufacturing overhead is under-applied?

The actual overhead incurred is greater than the overhead applied to production achieved. ## Footnote Under-application occurs when production is lower than anticipated.

What is the effect of using master budget or normal capacity on operating income rather than theoretical or practical capacity to allocate overhead when variances are closed out 100% to cost of goods sold?

Operating income will be higher than if theoretical or practical capacity is used. ## Footnote This is because more manufacturing overhead is allocated to each product produced.

What happens to **manufacturing overhead allocation** when using master budget or normal capacity rather than theoretical or practical capacity to allocate overhead?

More manufacturing overhead is allocated to each product, resulting in higher finished goods and work-in-process inventories on the balance sheet.

How does closing out variances 100% to cost of goods sold affect operating income when master budget or normal capacity is used rather than theoretical or practical capacity to allocate manufacturing overhead to production?

When variances are closed out 100% to cost of goods sold, no adjustment is made to inventories as part of the closing entries, so inventories under master budget or normal capacity will remain higher than under the other methods. Since inventories are higher, cost of goods sold will be lower and operating income will be higher.

When variances are pro-rated among finished goods inventory, work-in-process inventory, and cost of goods sold, how will the choice of capacity level used for allocating manufacturing costs affect the financial statements?

The choice of the capacity level used for allocating manufacturing costs will have **no effect** on the end-of-period financial statements when variances are pro-rated among finished goods inventory, work-in-process inventory, and cost of goods sold.

Under what condition will final operating income and inventory balances be the same regardless of capacity level used?

When variances are pro-rated among inventories and cost of goods sold based on the overhead allocated during the current period.

# True or False: If variances are charged to cost of goods sold only, operating income and inventory balances will be the same as if actual incurred overhead had been allocated.

False

D.4. Supply Chain and Lean Management Flashcards

Explore supply chain strategy, lean resource management, JIT, ERP, and capacity planning. (39 cards)