Why do you keep making losses in manufacturing? : QA in business administration “The profit comes from production-the issues of standardized cost analysis-“

This time, Inamori* spoke about the above motto in his book : Practical Accounting -Business Administration and Accounting -.

What Inamori said is quoted with “”.

“Question: What are the principal issues on standardized cost analysis?”

“Answer: The analysis is done in a department other than production, production is the core of the profit drivers. “

Here, Mr. Inamori talks about the issues and improvements of standardized cost analysis methods.

Let me explain one by one.

1. Market system to be shared

“ Market can not be predicted beforehand. When a competitor’s product with slightly different features comes out, our product looks obsolete, and unless the price is significantly reduced, it won’t be sold, and the price comes down to the breakeven point. Even if the manufacturer originally planned to secure a 20% margin, later on the selling price keeps dropping, so the margin keeps decreasing as well, and in the end, only a few percent can be remained. In even worse cases, for example, as seen in the semiconductor industry, once market prices begin to collapse, the price keeps falling, resulting in huge deficits in both distribution and manufacturers.” 

→ I believe that each person working at a company needs to keep an eye on market trends, economic phenomena and quickly understand the impact of those trends on the business that they are involved in. For example, if the war in the Middle East continues, the logistics are damaged, raising the crude oil costs, raising the manufacturing costs by X %. So how can we cut costs? We need to get used to this kind of simulation.

2. Production must analyze the cost structure

“People believe that the manufacturing department is not the one to set cost standards, compare and analyze the actual costs. Instead, they believe that the cost evaluations and improvements come from the cost control department or cost accounting department. Those administrative functions are comfortable in setting out the slightly better target and analyzing how to achieve it. Their efforts unfortunately do not impact much on the profit improvements. The cost needs to be proactively and efficiently analyzed by the production, which is not under the control of the administrative function. The producer is the one to be responsible for producing the marketable and profitable products.”

→In Japan, we tend to think it’s better to leave some items to professionals. We may have to be more flexible and consider the production as the core of the profit center. This is the same in the service industry. We must get rid of the preconceived idea that a certain service must be provided or that has naturally to be delivered. We must quickly develop a management accounting system that considers profits from the on-site service.

3. Production is responsible for the market driven sales price

“With amoeba management, the manufacturing division must be faced with a dynamic market. They are responsible for the prices, which are directly linked to fluctuating market prices. The system is designed to reduce expenses and increase profits. Also, the target sales profit is such that the manufacturing department can raise to a drastically high figure by improving  its own profitability. Furthermore, within such a challenging system, cost items are easy to understand and manage, resulting in thorough and precise cost reductions. In this method, manufacturing is literally the only way to drive profits. People in the production, under the Amoeba system, are considered as the main role in leading profitability.”

→For those working in manufacturing, it may be difficult to deliver the creativity, imagination, fulfillment of others, or satisfactory contribution to the growth of the society and economy. However, if everyone thinks that they are the main role in the business, he/she will take the task seriously. He/she will be motivated to perform at his/her best. I think it’s a system designed with how to mentally fulfill us, human beings. 

Further queries or doubts, please email to ytomizuka@abrilsjp.com

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