Kaizen Costing

Kaizen is a Japanese term for continuous improvement in all aspects of an entity's performance at every level.

Often associated with total quality management, many firms limit Kaizen to improving production.

Characteristics

• Kaizen involves setting standards and then continually improving these standards to achieve long-term sustainable improvements.
• The focus is on eliminating waste, improving processes and systems and improving productivity.
• Involves all employees and all areas of the business.

 Illustration - Kaizen

Many Japanese companies have introduced a Kaizen approach:

• In companies such as Toyota and Canon, a total of 60-70 suggestions per employee are written down and shared every year.
• It is not unusual for over 90% of those suggestions to be implemented.
• In 1999, in one US plant, 7,000 Toyota employees submitted over 75,000 suggestions, of which 99% were implemented.

What is continuous improvement?

Continuous improvement is the continual examination and improvement of existing processes and is very different from approaches such as business process re-engineering (BPR), which seeks to make radical one-off changes to improve an organisation's operations and processes.The concepts underlying continuous improvement are:

• The organisation should always seek perfection. Since perfection is never achieved, there must always be scope for improving on the current methods.
• The search for perfection should be ingrained into the culture and mindset of all employees. Improvements should be sought all the time.
• Individual improvements identified by the work force will be small rather than far-reaching.

Eliminating waste

 Kaizen costing has been developed to support the continued cost reduction of existing components and products. Cost reduction targets are set on a regular,e.g. monthly basis and variance analysis is carried out at the end of each period to compare the target cost reduction with the actual cost.

One of the main ways to reduce costs is through the elimination of the seven main types of waste:

• Over-production - produce more than customers have ordered.
• Inventory - holding or purchasing unnecessary inventory.
• Waiting - production delays/idle time when value is not added to the product.
• Defective units - production of a part that is scrapped or requires rework.
• Motion - actions of people/equipment that do not add value.
• Transportation - poor planning or factory layout results in unnecessary transportation of materials/work-in-progress.
• Over-processing - unnecessary steps that do not add value.

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