Under standard cost accounting systems, reductions in inventories lead to falling reported profits. Rapid reductions in inventories intensify the impact to the bottom line. When a company embarks on an improvement programme such as lean manufacturing, a likely result will be an initial drop in reported profits due to the leaning out of inventories. This paper examines the impact of the adoption of such strategies on the key external financial performance measure of net profit as reported by the GAAP and SEC approved financial accounting methods and others. ANOVA analysis of data generated using a simulated manufacturing environment that includes a discrete event model of a manufacturing operation and a Microsoft Excel-based ERP system are discussed. The paper analyses both the magnitude of the reduction in reported profits and the span of reporting periods affected under three inventory reduction scenarios. This research was not concerned with finding justification for lean manufacturing strategies. Rather, it evaluates the inadequacies of standard financial reporting methods to accurately reflect operational improvements through the early stages of a lean programme.
The onset of global competition in the 1970s began to change the manufacturing environment drastically. The advent of the computer created an opportunity for the developers of material requirements planning (MRP) concepts to automate many of the manual practices employed in manufacturing for acquiring and tracking of materials. This resulted in more efficient manufacturing operations in terms of labor for planning activities and better material control. Technology was expanded to include capacity planning and production schedule control. The acceptance in industry for the new “tool” was monumental and soon a new industry was born. For some time MRP allowed manufacturers to perform at higher levels of proficiency. However, the demands and expectations of the customers have continued to change and manufacturers wishing to keep pace with competition are beginning to question if MRP is still a valid tool for production planning and control. As a result new concepts have begun to emerge. These new approaches call for an abandonment of some of the foundational components of MRP.
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