Chapter 7

The Conversion Cycle

 Introduction
A company’s conversion cycle transforms (converts) input
resources, such as raw materials, labor, and overhead, into
finished products or services for sale. The conversion cycle
exists conceptually in all organizations, including those in
service and retail industries. We begin with a review of the
traditional batch production model, which consists of four basic
processes:
(1) Plan and control production,
(2) Perform production operations,
(3) Maintain inventory control, and
(4) Perform cost accounting. The discussion focuses on the activities,
documents, and controls pertaining to these traditional processes.
 Cont..
We will examines manufacturing techniques and technologies in
world-class companies. Many firms pursuing world-class status
follow a philosophy of lean manufacturing. This approach evolved
from the Toyota Production System (TPS). The goal of lean
manufacturing is to improve efficiency and effectiveness in product
design, supplier interaction, factory operations, employee
management, and customer relations. Key to successful lean
manufacturing is achieving manufacturing flexibility, which involves
the physical organization of production facilities and the use of
automated technologies, including computer numerical controlled
(CNC) machines, computer integrated manufacturing (CIM),
automated storage and retrieval systems (AS/RS), robotics,
computer-aided design (CAD), and computer-aided manufacturing
(CAM).
 The Traditional Manufacturing Environment
The conversion cycle consists of both physical and information activities
related to manufacturing products for sale. The context-level data flow
diagram (DFD) in Figure 7-1 illustrates the central role of the conversion
cycle and its interactions with other business cycles. Production is triggered
by customer orders from the revenue cycle and/or by sales forecasts from
marketing. Purchase requisitions for the raw materials needed to meet
production objectives are sent to the purchases procedures (expenditure
cycle), which prepares purchase orders for vendors. Labor used in
production is transmitted to the payroll system (expenditure cycle) for
payroll processing. Manufacturing costs associated with intermediate work-
in-process and finished goods (FG) are sent to the general ledger (GL) and
financial reporting system.
 Cont..
Depending on the type of product being manufactured, a company
will employ one of the following
production methods:
1. Continuous processing creates a homogeneous product through
a continuous series of standard procedures.
Cement and petrochemicals are produced by this manufacturing
method.
2. Make-to-order processing involves the fabrication of discrete
products in accordance with customer specifications.
3. Batch processing produces discrete groups (batches) of product.
F I G U R E 7-1: Conversion Cycle In Relation To Other Cycles
 Batch Processing System

Batch Processing System provides a conceptual overview of the batch

processing system, which consists of four basic processes:
 Plan and control production,
 Perform production operations,
 Maintain inventory control, and
 Perform cost accounting.

Documents in the Batch Processing System:

Documents in the Batch Processing System will include the following:
 The production schedule.
 The bill of materials (BOM).
 A route sheet.
 Cont..
 The work order (or production order).
 A move ticket.
 A materials requisition.

Batch Production Activities:

Many organizations today, however, make data transfer digitally via computerized
systems that use data entry screens or capture data by scanning bar code tags. In
this section, we examine three of the four conversion cycle processes depicted by
the DFD in Figure 7-2. Cost accounting procedures are discussed later.
Production Planning And Control. We first examine the production planning and
control function. This consists of two main activities:
(1) specifying materials and operations requirements and
(2) (2) production scheduling.
 Cont..
Materials And Operations Requirements: The RM requirement for a
batch of any given product is the difference between what is needed and
what is available in the RM inventory.
Production Scheduling: The second activity of the planning and control
function is production scheduling. The master schedule for a production
run coordinates the production of many different batches. The schedule is
influenced by time constraints, batch size, and specifications derived from
BOMs and route sheets.
Work Centers And Storekeeping: The actual production operations
begin when workers obtain raw materials from storekeeping in exchange
for materials requisitions. These materials, as well as the machining and
the labor required to manufacture the product, are applied in compliance
with the work order.
 Cont.
Inventory Control: The inventory control function consists of
three main activities. First, it provides production planning and
control with status reports on finished goods and raw materials
inventory. Second, the inventory control function is continually
involved in updating the raw material inventory records from
materials requisitions, excess materials requisitions, and
materials return tickets. Finally, upon receipt of the work order
from the last work center, inventory control records the
completed production by updating the finished goods inventory
records.
An objective of inventory control is to minimize total inventory
cost while ensuring that adequate inventories exist to meet
current demand.
 Cost Accounting Activities

Cost accounting activities of the conversion cycle record the

financial effects of the physical events that are occurring in the
production process. The cost accounting process begins when
the production planning and control department sends a copy
of the original work order to the cost accounting department.
As materials and labor are added throughout the production
process, documents reflecting these events flow to the cost
accounting department. Inventory control sends copies of
materials requisitions, excess materials requisitions, and
materials returns.
Controls In The Traditional Environment
 World-Class Companies and Lean Manufacturing
The traditional conversion cycle described in the previous section
represents how many manufacturing firms operate today. Over the
past three decades, however, rapid swings in consumer demands,
shorter product life cycles, and global competition have radically
changed the rules of the marketplace. In an attempt to handle these
changes, manufacturers have begun to conduct business in a
dramatically different way. The term world-class defines this modern
era of business. The pursuit of world-class status is a journey
without destination because it requires continuous innovation and
continuous improvement. A recent surveys revealed that 80 percent
claim to be pursuing principles that will lead their companies to
world-class status. Skeptics argue, however, that as few as 10 or 20
percent of these firms are truly on the right path.
 WHAT IS A WORLD-CLASS COMPANY?
The following features characterize the world-class company:
 World-class companies must maintain strategic quickness and
be able to turn on a dime.
 World-class companies motivate and treat employees like
appreciating assets.
A world-class company profitably meets the needs of its
customers.
 The philosophy of customer satisfaction permeates the world-
class firm.
 Finally, manufacturing firms that achieve world-class status
do so by following a philosophy of lean manufacturing. This
involves doing more with less, eliminating waste, and reducing
production cycle time.
 PRINCIPLES OF LEAN MANUFACTURING
Lean manufacturing evolved from the Toyota Production System
(TPS), which is based on the just-in-time (JIT) production model.
This manufacturing approach is in direct opposition to traditional
manufacturing, which is typified by high inventory levels, large
production lot sizes, process inefficiencies, and waste. The goal of
lean production is improved efficiency and effectiveness in every
area, including product design, supplier interaction, factory
operations, employee management, and customer relations. Lean
involves getting the right products to the right place, at the right
time, in the right quantity while minimizing waste and remaining
flexible. Success depends on employees understanding and
embracing lean manufacturing principles. The following principles
characterize lean manufacturing:
 Cont..
 PULL PROCESSING: As the name implies, pull processing involves pulling
products from the consumer end (demand), rather than pushing them
from the production end (supply). Under the lean approach, inventories
arrive in small quantities from vendors several times per day, just in time
to go into production.
 PERFECT QUALITY: Success of the pull processing model requires zero
defects in RM, WIP, and FG inventory. Poor quality is very expensive to a
firm. Consider the cost of scrap, reworking, scheduling delays, and extra
inventories to compensate for defective parts, warranty claims, and field
service.
 WASTE MINIMIZATION: All activities that do not add value and maximize
the use of scarce resources must be eliminated. Waste involves financial,
human, inventory, and fixed assets.
 Cont.…
 INVENTORY REDUCTION: The hallmark of lean manufacturing firms is their
success in inventory reduction. Such firms often experience annual inventory
turnovers of 100 times per year. While other firms carry weeks and even
months of inventories, lean firms have only a few days or sometimes even a
few hours of inventory on hand.
 PRODUCTION FLEXIBILITY: Long machine setup procedures cause delays in
production and encourage overproduction. Lean companies strive to reduce
setup time to a minimum, which allows them to produce a greater diversity of
products quickly, without sacrificing efficiency at lower volumes of production.
 ESTABLISHED SUPPLIER RELATIONS: A lean manufacturing firm must have
established and cooperative relationships with vendors. Late deliveries,
defective raw materials, or incorrect orders will shut down production
immediately because this production model allows no inventory reserves to
draw upon.
 Techniques and Technologies That Promote
Lean Manufacturing
Automation is at the heart of the lean manufacturing philosophy. By
replacing labor with automation, a firm can reduce waste, improve
efficiency, increase quality, and improve flexibility. The deployment of
automation varies considerably among manufacturing firms.

Islands of Technology: Describes an environment in which modern

automation exists in the form of islands that stand alone within the
traditional setting. The islands employ the following technologies:
 Computer numerical controlled (CNC): machines that can perform
multiple operations with little human involvement. CNC machines
contain computer programs for all the parts that are manufactured by
the machine.
 Cont..
 Computer-integrated manufacturing (CIM): is a completely
automated environment with the objective of eliminating non–value-
added activities. A CIM facility makes use of group technology cells
composed of various types of CNC machines to produce an entire part
from start to finish in one location.
 Automated storage and retrieval systems (AS/RS): AS/RS are
computer-controlled conveyor systems that carry raw materials from
stores to the shop floor and finished products to the warehouse.
 Robotics: Manufacturing robots are programmed to perform specific
actions used in factories to perform jobs such as welding and riveting.
They are also useful in hazardous environments or for performing
dangerous and monotonous tasks that are prone to causing accidents.
 End

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