Financial analysis of a theoretical lean manufacturing implementation using hybrid simulation modeling

Many researchers have identified the negative impact that accounting methods have on reported profits as inventories are being rapidly reduced. This research explores the magnitude and duration of the negative impact on reported profits experienced during a lean manufacturing implementation. The effect on reported profit is evaluated under five accounting methods (full absorption costing, activity-based costing, direct costing, throughput costing, and order activity costing) and three levels of inventory reduction rate. The findings reported here indicate that the period-by-period gains in operational efficiency, resulting from process improvements brought by a lean program, will not counteract the negative impact from the accounting system on the income statement while inventories continue to be reduced. This could lead to the early termination of a lean program that is, in fact, bringing operational improvement in the present time, but the improvement is being erased by poor inventory control practices from past periods. This research uses a multi-period simulation model of a production operation that incorporates a manufacturing planning and inventory tracking system. A hybrid simulation approach is employed using Microsoft® Excel to model the Manufacturing Resource Planning (MRPII) function, while ProModel simulation software is used for the development and operation of the model production environment. Microsoft® Visual Basic® is used to create a bridge between systems for schedule dissemination and inventory updates. The integrated computer simulation modeling approach developed to conduct this research is novel in the sense that multi-period simulation, incorporating MRP, has not been widely used based on available literature.