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Analysing the impact of the implementation of lean manufacturing strategies on profitability

Author

Listed:
  • D J Meade

    (Western Michigan Univeristy)

  • S Kumar

    (University of St. Thomas)

  • B White

    (Western Michigan University)

Abstract

Under standard cost accounting systems, reductions in inventories lead to falling reported profits. Rapid reductions in inventories intensify the impact to the bottom line. When a company embarks on an improvement programme such as lean manufacturing, a likely result will be an initial drop in reported profits due to the leaning out of inventories. This paper examines the impact of the adoption of such strategies on the key external financial performance measure of net profit as reported by the GAAP and SEC approved financial accounting methods and others. ANOVA analysis of data generated using a simulated manufacturing environment that includes a discrete event model of a manufacturing operation and a Microsoft Excel-based ERP system are discussed. The paper analyses both the magnitude of the reduction in reported profits and the span of reporting periods affected under three inventory reduction scenarios. This research was not concerned with finding justification for lean manufacturing strategies. Rather, it evaluates the inadequacies of standard financial reporting methods to accurately reflect operational improvements through the early stages of a lean programme.

Suggested Citation

  • D J Meade & S Kumar & B White, 2010. "Analysing the impact of the implementation of lean manufacturing strategies on profitability," Journal of the Operational Research Society, Palgrave Macmillan;The OR Society, vol. 61(5), pages 858-871, May.
    • Handle: RePEc:pal:jorsoc:v:61:y:2010:i:5:d:10.1057_palgrave.jors.2602657
    DOI: 10.1057/palgrave.jors.2602657
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    References listed on IDEAS

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    1. Lea, Bih-Ru & Fredendall, Lawrence D., 2002. "The impact of management accounting, product structure, product mix algorithm, and planning horizon on manufacturing performance," International Journal of Production Economics, Elsevier, vol. 79(3), pages 279-299, October.
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    Cited by:

    1. Klingenberg, Beate & Timberlake, Rachel & Geurts, Tom G. & Brown, Roger J., 2013. "The relationship of operational innovation and financial performance—A critical perspective," International Journal of Production Economics, Elsevier, vol. 142(2), pages 317-323.

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