Zodiac Sound Co. manufactures audio systems, both made-to-order and more mass-produced systems that are typically sold to large-scale manufacturers of electronics equipment. For competition reasons, the company is trying to increase its processing cycle efficiency (PCE) measure. As a strategy for improving its PCE performance, the company is considering a switch to JIT manufacturing. While the company manager s have a fairly good feel for the cost of implementing JIT, they are unsure about the benefits of such a move, both in financial and nonfinancial terms. To help inform the ultimate decision regarding a move to a JIT system, you’ve been asked to provide some input. Fortunately, you’ve recently attended a continuing professional education (CPE) workshop on the costs and benefits of moving to JIT and therefore feel comfortable responding to management’s request.

Required

1. Define the terms value-added time, non-value-added time, and process cycle efficiency (PCE). Conceptually, how are activities included in the first two categories determined? (That is, how does one know what activities are considered “value-added”?)

2. Define the terms cycle time and processing (manufacturing) time. How can processing time be broken down further?

3. Given the estimated data below, calculate and interpret the PCE for both the current manufacturing process and the proposed process after implementing JIT:

	Minutes
Activity	Current System	After JIT Implementation
Storage	60	20
Inspection	30	15
Moving	45	15
Processing	60	30

4. What is the percentage change in average PCE anticipated under JIT?
5. What additional nonfinancial performance indicators might management monitor in conjunction with the move toJIT?

Transcribed Image Text:

1. The terms "value-added" and "non-value-added" are defined from the perspective of the customer (i.e., an external perspective is taken). Because the perspective is extenal, the notions of "value-added" vs. "non-value-added" are not strictly or uniquely defined. The key qu estion in classifying activities is whether the consumer would "pay" for the activity. This is one way to oper ati onalize the two terms. We note here in passing that these terms are derived from the literature of activity-based costing (ABC). The purpose of this part of question #1 is to have students think about the differen ce between an internal and an external perspective when developing appropriate performance indicators (metrics) With an understanding of the terms "value-added" and "non-value-added," the student is now in a position to understand the notion of "processing cycle efficiency (PCE). The term "processing time" or processing cycle time refers to actual production time (i.e time expended for the product to be made). Excluded from this measure are "non-value-added" times associated with moving storing, or inspecting the product. A measure of processing time efficiency is called "processing cycle efficiency (PCE)," which is defined as follows: PCE-“Value-Added Time"/"Total Manufacturing Cycle Time" of PCE = Processing Time (Processing Time + Moving Time + Storage Time+ Inspection Time) 2. Cycle time is the total time required from the start of production to completion of outputs. Process (or processing or manufacturing) time represents the time actu ally required for processing. As such, process time excludes waiting time, storage time, moving time, set-up time, an d inspection time, all of which can be considered "non-value-added" from the standpoint of the customei As shown in text Exhibit 14-14, we might begin by defining Custom er Response Time (CRT), as the difference between when a customer places an order and when the cu stom er actually receives the order. This total lapse of time can be broken down into the following three components: receipt time (time between when manufacturing receives an order and the time the customer placed that order), manufacturing lead (cycle) time (time between when an order is received by manufacturing and the time that order is completed), and delivery time (time between when an order is completed and when that order is received by the customer). As shown in Exhibit 14-14, we might further break-down manufacturing lead (cycle) time into waiting time and manufacturing (or, production cycle) time. Finally, manufacturing time can be decomposed into the elements reflected above in the formula for PCE