Case 10-1 Improving Performance California-Illini Manufacturing Company (CI)

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Case 10-1 Improving PerformanceCalifornia-Illini
Manufacturing Company (CI)

• Aftab Usmani
• Alex Derevin
• Carla Daniels
• Shantanu Singh

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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

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Production Flow
Finished Product
Bang
Heat
Shape
Raw materials
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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

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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
• Scheduling problems, reduced flexibility
• Machines kept on single jobs for long periods
• Difficult to adjust for production problems
• Difficult to do special and expedited orders
• Large batch sizes caused increased overtime to
  maintain schedule
• Operating expenses increased
• Reduced product variety

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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

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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
• Workers replaced by robots moved to other areas
  in plant
• New hires required
• Robots caused increases in utilities and
  maintenance
• New operating expenses higher than increase in
  throughput

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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

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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

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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

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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

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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

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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

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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

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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

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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

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Questions
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