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

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Case 10-1 Improving Performance California-Illini Manufacturing Company (CI) Aftab Usmani Alex Derevin Carla Daniels Shantanu Singh Case Details Producer of plain and ... – PowerPoint PPT presentation

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


1
Case 10-1 Improving PerformanceCalifornia-Illini
Manufacturing Company (CI)
  • Aftab Usmani
  • Alex Derevin
  • Carla Daniels
  • Shantanu Singh

2
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

3
Production Flow
Finished Product
Bang
Heat
Shape
Raw materials
4
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

5
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

6
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

7
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

8
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

9
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

10
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

11
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

12
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

13
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

14
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

15
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

16
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

17
Questions
?
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