Kaizen Budgeting

KAIZEN BUDGETING BUDGETING is a budgeting approach that projects costs on the basis of future improvements, improvements, rather than current practices and methods. The key point is that the budget cannot be achieved unless improvements are made. Kaizen, in Japanese, means "continuous improvement," improvement," that is "changing for the better." The word Kaizen denotes a principle. It shouldn't be confused with any specific guidelines or standards. The underlying principle behind the term is that even small and insignificant looking decisions, when effectively taken in business, can bring relatively larger output in terms of  efficiency, productivity and thus profitability. The Kaizen principle is basically a systematic approach to business decision making guided by practical and logical metrics. Those companies which wish to adopt Kaizen decision making in business should effectively understand Kaizen budgeting. In business, there is always pressure from a variety of sources. Consumers demand improvements improvements in the quality of products. The producers of goods and services also compete among each other in order to gain a larger market for their products. They are under constant pressure to improve the quality of the product as well as after sales service so that they can control larger share in that particular product market providing them a leadership role. Even the small business decisions, effectively taken, can provide much-needed much-needed continuous improvement. This effective business decision making for continuous improvement improvement is nothing but the Kaizen principle in action.  After the works works of Frederick Frederick Taylor and and Frank Bunker Bunker Gilbreth, Gilbreth, it's now very well-known well-known that, not only in production process, but in every aspect of business there is always room for improvement. improvement. As termed t ermed by Taylor's 'mental revolution', this improvement can be brought about by a harmonious cooperation between management and workers on the one part and between various divisions of management management like l ike finance, personnel, and even high management on the other. The approach of Kaizen budgeting stress cost reduction as a basis of any such improvement.  A businessman businessman needs to be very creative creative in order order to succeed. Habits have no place in effective effective decision making. Sometimes, Sometimes, we keep working in a similar manner due to customary practices and routine, habitual nature of the work, even though there is no scientific requirement for that established routine. This needs to be done away with. Creativity requires that businessmen search and develop a true science of work by finding best possible methods of doing a work  with the same or better output.

The search for a true science of work will force you to be analytical and innovative. The search for one best way to do a job will go a long way to turn you into a performance-oriented leader instead of task oriented one. The urge to improve performance will constantly force you to innovate and experiment with new ideas. You may feel the need to use machines, computers, and better equipment to simplify tasks and increase output. A true science of work will certainly eliminate all irrelevant activities to increase productivity. This true science of work can be implemented not only at the shop floor level, but at the planning and managerial level as well. You can analyze and remove unnecessary process from all management activities, including budgeting making it an efficient financial system. Subordinates can be encouraged to adopt a 'true science of management' not only by effective economic motivation, but by infusing democratic decision-making as a policy as well. The pedagogy and system of Kaizen is not new. It has long been effectively practiced by management thinkers like Frederick Taylor and Henri Fayol. Japan's economic strength today stands in testimony of this strategy of continuous improvement. The decreasingly allocated budgets of Japans' managers force creative thinking for cost reductions much like Wal-Mart which usually expects ten percent cost reduction from its suppliers. This is the essence of  Kaizen budgeting that developing a true science of work will require less resources.

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Identification •

Kaizen budgeting cuts business costs that focus on incremental changes to a budget or practice. The thinking goes that with small changes, not only will costs steadily decrease, but these changes will have a ripple effect, decreasing costs in other areas as well.

Limitation 1: Dependence on Communication and Analysis •

 A key component of kaizen budgeting is the identification of flaws in a system or areas in which a system can be improved. Because kaizen budgeting relies on frequent small tweaks to cut costs, managers must micro-manage processes. Managers must also identify each and every problem with a process. That requires a total breakdown of  communication barriers between managers and employees. Kaizen budgeting also requires managers to consistently identify flaws and improve employee actions. Both of  these requirements can be difficult to reproduce quarter after quarter, and make no allowance for outside factors that affect businesses.

Limitation 2: Diminishing Returns •

While kaizen budgeting may help consistently cut costs for several quarters, a barrier will be reached eventually. All costs of running a business can only be cut so much, but kaizen budgeting focuses on many small changes. Like whittling a piece of wood, there are only so many ways to pare down day-to-day operations using kaizen budgeting.

 Advantages •

Kaizen budgeting does have its advantages. The process can be especially useful for manufacturing companies, or businesses that rely on regular daily processes to produce a product. Kaizen budgeting can put managers' heads in the right place; instead of  focusing on a silver bullet budget cut, managers can become intimately knowledgeable about their company's processes and consistently budget responsibly quarter to quarter.

Usefulness The process of designing a Kaizen Budget encourages analysis of performance improvements and cost savings. The cost/benefit of any improvement can be analysed in terms of best fit for the company. For example, if a department states a predicted saving of £x by changing a process, but to do so would lead to increased costs of > £x in another, it should be analysed in more detail. This is an example of sub-optimisation - “Situations where a sub-system is configured such that its performance appears to be optimal, yet the performance of the larger system is prejudiced.” [2] The success of a Kaizen budget depends not only on achieving the numbers, but also on delivering the anticipated improvements.

1.

Ordering

Batch-level

$90.00

$89.82000

$89.64

Delivery

Batch-level

82.00

81.83600

81.67

Shelf-stocking

Output-unit-level

21.00

20.95800

20.92

Customer support

Output-unit-level

0.18

0.17964

0.179

The March 2008 rates can be used to compute the total budgeted cost for each activity area in March 2008:

Ordering $89.64 14

×

14; 24;

Delivery $81.67 19

×

×

$1,255

$2,151

$1,255

$ 4,661

Batch-level

980

5,064

1,552

7,596

Output-unitlevel

335

3,598

1,966

5,899

12; 62;

Shelf-stocking $20.92 94

Batch-level

16; 172;

Customer support $0.179

×

4,600;

Output-unitlevel

823

6,122

1,924

8,869

$3,393

$16,935

$6,697

$27,025

34,200; 10,750 Total 2. A kaizen budgeting approach signals management’s commitment to systematic cost reduction. Compare the budgeted costs from Question 6-24 and 6-25.

Question 6-24 Question 6-25 (Kaizen)

$4,680

$7,626

$5,922

$8,919

4,661

7,596

5,899

8,869

The kaizen budget number will show unfavorable variances for managers whose activities do not meet the required monthly cost reductions. This likely will put more pressure on managers

to creatively seek out cost reductions by working “smarter” within FS or by having “better”  interactions with suppliers or customers. One limitation of kaizen budgeting, as illustrated in this question, is t hat it assumes small incremental improvements each month. It is possible that some cost improvements arise from large discontinuous changes in operating processes, supplier networks, or customer interactions. Companies need to highlight the importance of seeking these large discontinuous improvements as well as the small incremental improvements.