To what extent can improvements in productive flow and product quality lead to an increase in sales and profit? Use examples to critically examine the links.
Sales and Profit are both critical goals in a company. If managers don’t achieve these goals, the company is gradually going to consume its capital and inevitably fail. That’s why they put so many attention on them and why they are always searching for new methods to increase them. In fact, there are many ways that can help making sales and profit grow. A company can cut labor costs, outside costs or production costs, but sometimes it will not be enough and therefore it has to find alternative ways of improvement. Sales depend from a great number of factors. The first important factor that we have to take in mind is pricing. The price of the product we are going to sell to our customers drives the gross margin as a function of product cost. So, the cheaper it will be to produce it, the cheaper it will be sold to customers still allowing to keep constant the gross margin. Therefore, the product will then be more appealing for them and sales will increase. Someone could argue that to reduce production costs, we could firstly reduce labor costs by moving the production in countries with low wages and salaries. But that could dramatically undermine the product’s quality of the company. The only way to reduce production costs while maintaining high quality products is to improve the productive flow, so that nothing is going to be wasted and product quality is going to be enhanced, as well. To do it, different methods have been experienced in the past. The first method I am going to talk about is the so called “Just-in-time” (JIT), an inventory strategy developed by Taiichi Ohno. The fundamental point of this strategy, also known as the Toyota Production System, is that inventory is waste and products must be delivered on time. Companies have to improve their processes to maximize the reduction of inventory in them. The three main principles of this strategy are the following:
• The Pull System
• Continuous flow processing
• Takt time
When we talk about Pull System, we mean the system where processes are based on customer demand. The goal is to build a final part in the exact time that the customer expected to be delivered. The second principle, Continuous flow processing, states that every product of a batch must be assembled, before starting with another one, instead of dividing the flow in different steps. Statistical analysis and Toyota’s experience demonstrate how this process increases productivity, builds in quality (it is easier to spot defective parts sooner), is more efficient and reduces costs by reducing inventory. Finally, the last principle of the JIT strategy is “Takt time”. With “Takt time” we mean the time spent to produce a product. Every employee of the productive process knows it and tries to complete the work in less than the Takt Time in order for the product to be completed within the assigned time. A.Harrison, author of “Just-in-time manufacturing in perspective” tells us the advantage of companies using such a strategy: “Because of the key role of delivery speed in fashion-conscious markets, manufacturers with JIT manufacture and delivery capability will continue to win orders from those who are weak in this area” In fact, these “weak” companies have two “extra sources of waste caused by mismatches between sale and production”:
• Excess production of goods which there is no demand
• Loss of sales potential of needed goods for which there is no stock available.
In conclusion, A.Harrison argues that “JIT is about doing the simple things well, and gradually doing them better. It is about developing competence and simplification in the way we do things”. Another method of improving the productive flow and productive quality is strictly related to the previous one and is called “Kaizen”. Kaizen means...
References: Haslam, C., Neale, A., & Johal, S. (2000) Economics in a Business Context 3rd ed. London: Thompson Learning.
Harrison, A.(1992) Just-in-time manufacturing in perspective, Prentice Hall Intenational Ltd.
Radford, J.D., Richardson, D.B. (1968) The management of production. Second edition Macmillan, St.Martin’s press.
Handfield, R.B., Nichols, E.L. jr. (1999) Introduction to Supply Chain Management. Prentice Hall, Inc.
Monden Y. (1983), Toyota Production System, IIE Press, Atlanta, GA
Stoddard, W., Rhea, N. (1985) Just-in-time manufacturing: The relentless pursuit of productivity. Mater. Handling Eng. 40 3, pp. 70–76
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