Continuous improvement and quality costs - Lean metrics cycl...

Learning Outcomes

By the end of this article, you will be able to explain the principles of continuous improvement and the main types of quality costs. You will understand how lean management uses metrics such as cycle time and waste identification to improve efficiency. You will also be able to apply these concepts in performance management scenarios and recommend methods to reduce costs and support ongoing improvement in operations.

ACCA Advanced Performance Management (APM) Syllabus

For ACCA Advanced Performance Management (APM), you are required to understand how quality management and continuous improvement methods can improve business performance. In particular, you should focus your revision on:

• The principles and implementation of continuous improvement and lean management
• Classification and management of quality-related costs (prevention, appraisal, internal and external failure costs)
• The role and calculation of lean metrics, such as cycle time and waste
• Methods for identifying and reducing waste in business processes
• The relationship between lean techniques, cycle time reduction, and overall business performance

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

1. Which of the following is a key aim of lean management?
   1. Maximizing inventory levels
   2. Reducing non-value-adding activities and waste
   3. Increasing the number of process steps
   4. Lengthening production cycle times
2. Which cost is classified as a prevention cost in quality management?
   1. Scrap due to defects
   2. Training employees on proper techniques
   3. Product recalls
   4. Customer refunds for poor quality

3. Define “cycle time” in the context of process performance measurement.

4. List and briefly describe the seven main types of waste identified in lean production.

5. Explain how reducing cycle time can improve an organisation’s efficiency and customer satisfaction.

Introduction

Continuous improvement focuses on making ongoing, incremental enhancements to products, services, or processes. High-quality outputs and efficient use of resources are essential for staying competitive. Lean management provides a framework for eliminating waste and optimizing value by identifying non-essential activities, reducing cycle times, and managing quality-related costs. This article covers the core principles of continuous improvement, explains key lean performance metrics, and outlines how to reduce waste and cost while continually raising standards of performance.

Key Term: continuous improvement
An ongoing approach where small, regular changes are made to improve products, processes, or services over time.

Continuous Improvement and Lean Thinking

Continuous improvement (sometimes called “kaizen”) is a management strategy where all employees seek to improve processes and performance each day. Rather than making large, radical changes, the goal is frequent, incremental gains that collectively result in significant improvement.

Key Term: lean management
A management philosophy that seeks to maximize value for customers while minimizing resources by systematically eliminating waste from all processes.

Lean Metrics: Measuring What Matters

Lean organisations rely on a small set of core operational metrics to monitor efficiency and highlight points for improvement. The two most important lean metrics relevant for ACCA students are cycle time and waste.

Key Term: cycle time
The total time from the start to the finish of a process or activity, including both work and waiting periods.

Key Term: waste
Any activity or resource usage that does not add value from the customer's point of view, and which could be reduced or eliminated.

Types of Waste in Lean

Lean identifies seven main categories of waste which commonly appear in business processes:

1. Over-production: Making more than is needed or before it is needed.
2. Inventory: Excess stock of materials, work-in-progress, or finished goods.
3. Waiting: Idle time when resources are not in use.
4. Defects: Errors that require rework or result in unusable products.
5. Motion: Unnecessary movement by people (e.g., searching for tools).
6. Transportation: Unneeded movement of materials or products.
7. Over-processing: Performing more work or using higher quality than required.

Eliminating these waste types means more resources can be devoted to value-adding activities.

Measuring and Reducing Cycle Time

Cycle time tracks the total elapsed time for a process, including both productive work and idle or waiting periods. The shorter the cycle time, the faster an organisation can deliver to its customers and respond to changes in demand.

Reducing cycle time involves:

• Eliminating unnecessary steps
• Streamlining workflow and removing bottlenecks
• Minimizing handovers and waiting periods

A focus on lowering cycle time is central to continuous improvement and lean management, as it frees up capacity and increases flexibility.

Quality Costs and Their Classification

Quality costs are all costs incurred to prevent poor quality or resulting from failures, both before and after delivery to the customer. These can be grouped as follows:

Key Term: prevention costs
The costs of activities that avoid defects and errors from occurring, such as employee training, quality planning, and process improvement.

Key Term: appraisal costs
The costs of assessing and inspecting products or processes to ensure quality standards are met.

Key Term: internal failure costs
The costs resulting from defects detected before the product reaches the customer, such as scrap, rework, or downtime.

Key Term: external failure costs
The costs that arise when defective products or services reach the customer, causing complaints, returns, or loss of reputation.

Continuous improvement aims to reduce failure costs by investing more in prevention and smarter appraisal methods.

Worked Example 1.1

Scenario:
A company has noticed its average cycle time from receiving a customer order to dispatch is 12 days. Analysis shows half of this time is spent waiting for paperwork sign-offs across departments. Process mapping identifies that three sign-off steps are unnecessary.

Question:
Explain how lean principles can help reduce the cycle time and what impact this could have.

Answer:
By removing unnecessary approvals, the company can eliminate non-value-adding waiting periods and reduce handovers. This might bring the cycle time down to 6 days, freeing resources for more productive work, increasing customer satisfaction through faster delivery, and lowering operational costs.

Worked Example 1.2

Scenario:
A manufacturer incurs the following annual quality costs:

• Employee training: $30,000
• Inspections: $20,000
• Scrap and rework: $15,000
• Warranty repairs: $25,000

Question:
Classify each cost using the standard categories of quality-related costs.

Answer:

• Employee training: Prevention cost
• Inspections: Appraisal cost
• Scrap and rework: Internal failure cost
• Warranty repairs: External failure cost

Exam Warning

In performance management scenarios, carefully distinguish between costs that prevent problems (prevention/appraisal) and those that arise from failures (internal/external). This is a common source of error in ACCA exam questions.

Improving Performance: Waste Reduction Methods

Organisations can apply various methods to cut down waste and support continuous improvement:

• Streamline processes to reduce unnecessary steps, leading directly to shorter cycle times and lower costs.
• Standardise work procedures to minimize errors and rework.
• Enable employees to suggest improvements and act quickly on ideas (the continuous improvement or “kaizen” mindset).
• Visual performance systems (such as process maps or KPIs displayed on dashboards) can highlight bottlenecks and prompt targeted action.

Summary

Continuous improvement uses small, regular changes to raise business performance. Lean management relies on key metrics—especially cycle time and waste—to identify inefficiencies and drive process improvement. Managing quality costs means shifting spending towards prevention and smarter appraisal, while reducing costly failures. Success comes from systematically seeking and eliminating non-value activities.

Key Point Checklist

This article has covered the following key knowledge points:

• Define continuous improvement and explain its importance in performance management
• Identify and classify the main types of quality costs, including prevention, appraisal, internal and external failure
• Explain the lean management approach and its focus on waste reduction
• Describe how cycle time is measured and why its reduction is valuable
• Recognize the seven types of process waste in lean operations
• Apply lean metrics and quality cost concepts to analyse performance and recommend improvements
• Distinguish between cost categories when evaluating quality-related spending

Key Terms and Concepts

• continuous improvement
• lean management
• cycle time
• waste
• prevention costs
• appraisal costs
• internal failure costs
• external failure costs