A Suggested Cost Rationalization Approach to the Short Life-Cycle Deteriorating Products Remanufacturing - Empirical Analysis
Mahmoud Mohamed Zain;
Abstract
Every product has a life-cycle represents the stages through which any product shall go, starting from the idea of producing that product and until fading away. The life-cycle of the products doesn’t have the same length in all types of products but there are some long term and medium term products. Due to the rapid growth and the quick innovation of the industry, the life-cycle of some products have been shortened resulting what’s known as “The short life-cycle products”. The short life-cycle products are those products with a life-cycle between three months and one year, mostly are the fashion based and technology based products.
The short life-cycle products have a unique nature and special characteristics such as the lack of the historical sales data, the volatility in the prices of the parts of production, the huge uncertainty of the demand, and the speed deterioration of the inventory. The lack of the historical sales data enlarges the problem of the demand uncertainty which results extra costs to the organization and these extra costs called “The mismatching costs” which are the costs resulting from the mismatching between the supply and the demand which consequently, result from either in the first scenario a loss from the disposal or calling back these products to be remanufactured with the new features in case the supply exceeds the demand, or in the second scenario a loss from losing a potential customers in case the demand exceeds the supply.
In order to reach the desired cost rationalization, the organization should focus only on eliminating or minimizing the waste as any arbitrary cutting of the costs would result a declining in the quality of the products. The efficient and effective Rationalization of the costs requires examining the costs of these products all over the supply chain. There were some problems facing the cost rationalization process all over the supply chain,as for the research and development stage it is too difficult to keep up with the rapid growth and the high speed introduction of new developed products,a matter that affects the costs of designing new products. Regarding the supply stage, the prices of the parts are not stable which makes it difficult to determine the costs of acquiring the parts needed in the production. When it comes to the manufacturing stage, we can find that, the problem is not only the demand uncertainty which makes it difficult to determine the quantity to be manufactured and supplied in the markets to avoid the mismatching costs,but also the complex production activities that may contain non-core activities or non-add value activities which represent a cost burden over the organization. The sales stage also is facing a problem of the different response of the customers to the different marketing and sales channels. Finally, the after sales stage has a problem of a relatively high costs compared to the traditional types of products.
The speed deterioration of the inventory and the lack of historical sales data create another problem in dealing with the traditional costing systems which is no longer appropriate for the short life-cycle products due to their unique nature, as we can find out that many of the traditional costing methods that used for the traditional products cannot be effective and efficient for the short life-cycle products.
The effective and efficient cost rationality should overcome all the previous problems of the short life-cycle products all over the supply chain and all over its life-cycle. A combination of the Total quality management (TQM) techniques and the six sigma shall enable the organization to solve some of the problems of the short life-cycle products. Using the benchmarking technique can help the organization to keep up with the best usage of the resources which shall result a cost saving. Using also a modified concept of the well-known Just in time (JIT) which requires the organization to divide its production into a smaller periods of time –could be quarters- in order to make sure that the market has absorbed the already manufactured and introduced quantities and ready for more which helps to avoid the mismatching costs. Using the design to cost as a sub-technique of the “Lean production” would help the organization to design a product that meets all the quality requirements and customers’ needs within a targeted cost. Also using the should costs which is also a sub-technique of the lean production shall enable the organization to has an insight in the cost structure of its suppliers which consequently, supports the organization’s negotiation position and helps the it to acquire the desired parts with the best fair price. On the other hand, using the six sigma technique shall help the organization to reach customer requirements and also production defect prevention in order to maintain the customers’ loyalty. Using the Famous activity based costing (ABC) technique that analyzes the activities in order to detect and eliminate the non-add value activities shall provide the organization with a cost saving.
The short life-cycle products have a unique nature and special characteristics such as the lack of the historical sales data, the volatility in the prices of the parts of production, the huge uncertainty of the demand, and the speed deterioration of the inventory. The lack of the historical sales data enlarges the problem of the demand uncertainty which results extra costs to the organization and these extra costs called “The mismatching costs” which are the costs resulting from the mismatching between the supply and the demand which consequently, result from either in the first scenario a loss from the disposal or calling back these products to be remanufactured with the new features in case the supply exceeds the demand, or in the second scenario a loss from losing a potential customers in case the demand exceeds the supply.
In order to reach the desired cost rationalization, the organization should focus only on eliminating or minimizing the waste as any arbitrary cutting of the costs would result a declining in the quality of the products. The efficient and effective Rationalization of the costs requires examining the costs of these products all over the supply chain. There were some problems facing the cost rationalization process all over the supply chain,as for the research and development stage it is too difficult to keep up with the rapid growth and the high speed introduction of new developed products,a matter that affects the costs of designing new products. Regarding the supply stage, the prices of the parts are not stable which makes it difficult to determine the costs of acquiring the parts needed in the production. When it comes to the manufacturing stage, we can find that, the problem is not only the demand uncertainty which makes it difficult to determine the quantity to be manufactured and supplied in the markets to avoid the mismatching costs,but also the complex production activities that may contain non-core activities or non-add value activities which represent a cost burden over the organization. The sales stage also is facing a problem of the different response of the customers to the different marketing and sales channels. Finally, the after sales stage has a problem of a relatively high costs compared to the traditional types of products.
The speed deterioration of the inventory and the lack of historical sales data create another problem in dealing with the traditional costing systems which is no longer appropriate for the short life-cycle products due to their unique nature, as we can find out that many of the traditional costing methods that used for the traditional products cannot be effective and efficient for the short life-cycle products.
The effective and efficient cost rationality should overcome all the previous problems of the short life-cycle products all over the supply chain and all over its life-cycle. A combination of the Total quality management (TQM) techniques and the six sigma shall enable the organization to solve some of the problems of the short life-cycle products. Using the benchmarking technique can help the organization to keep up with the best usage of the resources which shall result a cost saving. Using also a modified concept of the well-known Just in time (JIT) which requires the organization to divide its production into a smaller periods of time –could be quarters- in order to make sure that the market has absorbed the already manufactured and introduced quantities and ready for more which helps to avoid the mismatching costs. Using the design to cost as a sub-technique of the “Lean production” would help the organization to design a product that meets all the quality requirements and customers’ needs within a targeted cost. Also using the should costs which is also a sub-technique of the lean production shall enable the organization to has an insight in the cost structure of its suppliers which consequently, supports the organization’s negotiation position and helps the it to acquire the desired parts with the best fair price. On the other hand, using the six sigma technique shall help the organization to reach customer requirements and also production defect prevention in order to maintain the customers’ loyalty. Using the Famous activity based costing (ABC) technique that analyzes the activities in order to detect and eliminate the non-add value activities shall provide the organization with a cost saving.
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| Title | A Suggested Cost Rationalization Approach to the Short Life-Cycle Deteriorating Products Remanufacturing - Empirical Analysis | Authors | Mahmoud Mohamed Zain | Issue Date | 2016 |
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