A two-stage cost allocation scheme to support quick response manufacturing

We propose a two-stage overhead allocation system relevant to the Quick Response Manufacturing (QRM) philosophy of lead time reduction. Our framework considers the motivational aspects of overhead allocation. Manufacturing cells are key to QRM implementation. Consequently, we develop our framework using models focused on cellular manufacturing. In the first stage, we allocate common overhead to the cells based on their cell lead time pool values, i.e., the sum of the demand weighted lead times of all the products in a cell. This approach is similar to a time based costing scheme, which uses the lead time pool as an allocation basis. For the second stage of overhead allocation to products within a cell, we show that the time based costing scheme is inefficient in minimizing the cell lead time pool. This is primarily because of the influence of the externalities on the lead times of products. For the second stage, we introduce a new allocation basis called the cell time burden. In this measure, the total waiting time of a cell is distributed to individual products based on both the waiting times at individual resources and the utilization of those resources. Using queuing theory and game theory, we analyze stylized models of QRM firms and show that the cell time burden allocation basis has superior performance to the time based costing method in motivating reduction of the cell lead time pool.