Case 10-1 Improving Performance

California-Illini Manufacturing Company (CI)

Aftab Usmani Alex Derevin Carla Daniels Shantanu Singh

Case Details

Producer of plain and hard faced tillage tools Production process routes WIP inventory from one cost center to another Economic lot size rules determine size of each batch Production schedules push jobs onto floor WIP inventories in more and wait stage littering plant Performance measured using standard unit costs Following net loss during downturn in market, new strategy adopted to improve accounting performance and reduce inventories

Incease productivity Overhead control to cut costs Improve technology Increase prices

Production Flow

Raw materials

Bang

Heat

Shape

Finished Product

Productivity Improvement Steps

Crucial factor: Output per direct labor hour

Reduce idle man-hours between jobs Increase batch sizes Reduce setup times Daily earned labor hours report

Efficiency rose 15%

Productivity Improvement Consequences

WIP levels rose

Large lots processed regardless of demand Justified large batches with reducing setups and providing for current and future demand Finished goods increased from 2 to 6 month supply
Machines kept on single jobs for long periods Difficult to adjust for production problems Difficult to do special and expedited orders

Scheduling problems, reduced flexibility

Large batch sizes caused increased overtime to maintain schedule

Operating expenses increased Reduced product variety

Effects of Overhead Improvements

Strategy

Direct cost reduction Reduce unit costs through high volume

High fixed obligations, potential savings minimal Producing to cover overhead instead of satisfying demand Sales did not increase, inventories rose 24% in three years Cash flow and earnings problems remained

Effects of Technology Improvements

Focus on reducing unit costs through technology improvement Assumed savings from each decision affected bottom line Use of robots appeared to create savings, sales rose from lower price Competitors reduced price and sales volume dropped Labor savings didnt happen

New operating expenses higher than increase in throughput

Workers replaced by robots moved to other areas in plant New hires required Robots caused increases in utilities and maintenance

Effects of pricing improvements

Competitive market Domestic market shrinking Management focused on improving plant performance, tried to increase sales domestically, and find new foreign markets

Successful relationship with Mexican distributor Unsuccessful contract in Saudi Arabia

Failure in Saudi Arabia

CIs parts were perfect for Saudi Market CI rejected Saudi offer, deeming 10% profit margin too low Accounting cost standards affected marketing decisions Profitable deal rejected on basis of low profit margins, while operating expenses, overhead and inventories climbing

Marketing vs. Production focus

Marketing said quality good, prices too high, and lead times inaccurate Production said marketing messed up production schedules Over 18 months, domestic sales decreased 11.5%, foreign opportunities turned away

Competitive Strategy

Current strategy is product differentiation: High quality producer in competitive market Seems to be attempting to adopt a cost leadership strategy Inappropriate because:

Cant do both in competitive market Havent really figured out cost controls

Cost Reduction Strategy

Motivated by losses during a market downturn Didnt work because it focused on unit cost reduction

Focused on Production, Ignored market demand Didnt improve production flows, inventory backups increased High fixed costs on bottom line couldnt be reduced

Standard Costing Effect on Cost Reduction Strategy

Under standard costing Standard materials and labor usages assigned Managers evaluated on ability to meet or improve standards Resulted in myopic view

Cost reduction strategy aimed to increase productivity, control overhead, improve technology, and increase prices, but

Too much focus on each production step, not production flow Increased efficiencies in some areas led to build up of WIP inventories Increased volumes didnt result in increased sales, fixed costs couldnt be reduced Technology improvements resulted in lower variable costs, but higher overhead Production strategy not in line with market forces No consideration given to cycle time, product profitability and product mix

New Production Control / Inventory Control (PCIC) Manager

Wants to process jobs in 100 to 150 part lots instead of 6000 May be on the right track. Need to improve flexibility, reduce built up inventories

Next steps for PCIC manager

Identify Constraints Determine most profitable product mix, given the constraints Maximize flow through the constraint Add capacity to the constraint Redesign Manufacturing process for flexibility and fast cycle time

Best Cost system for CI

ABC and the Theory of Constraints (TOC)

Both are used to assess profitability of products

TOC for short term ABC for long term

TOC takes into account resource constraints and capacities

Questions