Question

Outline an accounting Kaizen plan of your choice- pick a department that can benefit from a re-assessment of their accounting processes.

Answer 1

Case Study

Zen Limited is a leading mobile manufacturing company and sells its mobile phone across the
world. In a fast-changing technological environment, Zen has been able to maintain its leadership
in smartphones segment for third year in a row now. Though the revenues have grown year on year,
the costs have increased at a higher rate in the mobile phone industry as a whole.
“We have been leaders in revenue. We must lead in cost reduction front as well. I believe we can
achieve this with improvements overtime, however minor they might be!”
– This is what the CEO of Zen has told its directors in a recently concluded board meeting.
The net profit margins of the company has fallen from 10% in 2018 to 8% in 2019 owing to rise in
raw material & repair cost. Another significant rise in the cost was on account of repairs of mobiles
which are under warranty. There was an increase in these repair costs by `1.5 crores which
represents 1% of the total turnover of the company.
The process of repairs/ replacement of under warranty product is outlined below:
▪ The company own 200 repair centres in various cities in India.
▪ A customer whose phone is under warranty and requires replacement/ repair visits any of
the 200 centres to deposit the faulty mobile phone.
▪ The technician at service centres examines the phone and the service centre sends the
phone to a centralised repair centre at Mumbai. The phones are sent to Mumbai even for
minor repairs which can be done locally if requisite infrastructure is provided to the service
centres.
▪ The phones are sent in batches. Each service centre creates 3-4 batches of mobile phones
in a day. (A recent study showed that the batches could be combined into a single batch per
day)
▪ The phones are repaired in Mumbai’s centralised centres and sent back to the respective
service centres for handing them back to the customer. The phones which are repaired are
sent in separate batches and those which are replaced are sent in separate batches.
Required
You are working as a Finance Manager in Zen. The finance director has approached you to
understand whether the minor improvement would be useful given the size of the company.
The Finance Director has asked you to examine the process of warranty repairs and
replacement and submit a report covering the following aspects:
(i) What is the CEO referring to when he says “minor improvements”? EXPLAIN.
(ii) LIST the benefits of such minor improvements.
(iii) APPLY the above process to the warranty claim process and explain how the process
can be improved.
(iv) Any other matter which you consider relevant.

Solution :-

Issue -
Zen limited is a leader in manufacturing of mobiles and is concerned about increasing costs. The
increase in warranty related costs has been significant in the current year as compared to
previous year. This has reduced the net profit of the company by 1% of sales.
Applicability of Kaizen Costing
“Kaizen” is a Japanese word which means “Change for Better”. In business parlance, Kaizen is
used to refer to small and continuous improvement across all functions, processes and
employees. Kaizen costing is a cost reduction system. Yashihuro Moden defines Kaizen Costing
as "the maintenance of present cost levels for products currently being manufactured via
systematic efforts to achieve the desired cost level.
Toyota Production System is considered as a pioneer in Kaizen Costing. Though the model was
used for eliminating wastage from production at factory initially, the concept can be applied in any
of the processes in a business. Since Kaizen is a continuous improvement process, a radical
change or disruptive innovation is not expected in Kaizen costing.
The following are the key features of Kaizen -
− Kaizen processes focus on eliminating waste in the systems and processes of an
organisation, improving productivity and achieving sustained continual improvement.
− Application of small, incremental changes routinely applied and sustained over a long period
can lead to significant improvements.
− It aims to involve workers from multiple functions and levels in the organisation.
− A value chain analysis helps to quickly identify opportunities to eliminate wastage
− Although incremental changes can often be too small to be seen, Kaizen can be very effective
in the long run. An airline which identified that 75% of its flyers would leave the olive from
salad, the airline decided to remove it from its servings. This saved the airline $ 40,000 per
year. Another example is where an airline stopped printing its logo in the rubbish bags as it
did not add value saved over $ 300,000 per year.
The CEO is referring to Kaizen costing when he mentions minor improvements to save costs over
time. Kaizen costing takes into consideration various costs such as costs of supply chain,
manufacturing costs, marketing, sales, distribution costs etc.
Benefits of Kaizen Costing
− Kaizen reduces waste in areas such as employees waiting time, transportation, excess
inventory etc., which leads to improved efficiency in overall business processes and systems.
− A company applying Kaizen philosophy can achieve cost reduction through small incremental
improvements and cost savings.

− Kaizen looks at functions and processes at all levels of organisation and requires participation
of all employees and massive as well as open communication system. This participative
approach improves teamwork across the organisation.
− Product improvement using Kaizen is likely to result in less number of defective products
leading to customer satisfaction and reduction in warranty related costs.
− The reduction in wastage, improved efficiency and cost reduction improves the overall
profitability of the company.
Implementation of Kaizen in the Current Case
The implementation of Kaizen as a cost reduction techniques can take several forms. The key
question to ask for implementation is - “Can we eliminate waste?”. The waste can take several
forms like -
− Unnecessary movement of material and men - Travelling for meeting in cases where a video
conferencing could help.
− Unwanted part in a product which if removed is not likely to impact the performance of the
product. (Nano sim card has reduced a significant portion of use fibre boards as compared to
the traditional sim cards.)
− Defects which involve extra cost in terms of reworks.
− Waiting time - A simple example could be locating for files in your computer which has not be
arranged properly. This leads to waste of time.
The above is just an indicative list where improvements can be made. However, an important
point to note is that reduction of waste should not be done by compromising the quality of product.
Apple launched iPhone 5c as a budget phone by using plastic material instead of Aluminium. The
market did not like the product as it was considered to be an inferior product as compared to
iPhone 5s.
Another way of looking at Kaizen is asking following questions -
− Can we eliminate functions from the production process without compromising the quality and
utility of end products? - Removing unnecessary movements of material and men.
− Can we eliminate some durability? - Use of unbreakable plastic for producing disposable
glasses would be waste of resources
− Can we minimise design? - e.g. use of Nano Sims.
− Can we substitute parts of the product being manufactured?
− Can we take supplier’s assistance to get better quality parts?
− Is there a better way? - This is a question which must be asked continuously to ensure that
the improvement is not a one-time exercise.

Application of Kaizen at Zen Limited
The current warranty claim process at Zen involves movement of mobile phones from various
service centres across the country to a centralised centre in Mumbai. The possible improvements
in the claim process is explained below -
− The company needs to analyse whether it requires to own 200 centres by itself across the
country. The company can evaluate closing down centres with less customer footfalls or
outsource the ones which are not located at the strategic location. This would save some cost
to the company.
− The current process requires each service centre to send the faulty mobile phones back to
Mumbai for repair or replacement. This is done even in case of minor repairs which can be
handled locally. The company can provide necessary infrastructure to the service centres to
carry out minor repairs locally. This would save logistics cost of sending the phones to Mumbai
and back to service centre. The company should analyse the past data to understand the
proportion of phones which require minor repair. Repairing the phones locally would also
reduce the turnaround time and the customer will get back the phone faster.
− The current process is to send phones in 3-4 batches in a day. This effectively means creating
3-4 consignments, documents for dispatches and incurring extra costs for transportation.
Combining the phones in a single batch would reduce the cost of transportation and
administrative cost as well.
− The phones can be sent back from Mumbai in single batch instead of creating multiple batches
to save transportation costs.
The above improvements must be revisited continuously to derive required benefit from Kaizen
process.
Apart from eliminating waste in the warranty claim process, the company must also identify root
causes of increase in warranty claims in the current year as compared to previous year. Every
phone being sent back for repair/replacement involves avoidable cost. The company must also
revisit the manufacturing process and quality control processes to eliminate wastage in production
process and improve quality.
− Zen can consider producing better quality mobiles at the manufacturing process to reduce the
warranty claims.
− The pattern of warranty claim must be analysed to understand whether there is certain
common problem related to repair claims. If the issue has some relation with parts used in
mobile, the issue can be taken up with supplier of such parts.