Effective Cost Strategies for Manufacturers
March 27, 2014
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What is Lean?
Activity Based Costing (ABC)
Implementing Lean (using ABC) – Case Study
Lean ABC Exercise
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Lean can trace its roots to the Toyota
Production System
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Came to the United States in the 1980’s
(Manufacturing)
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Spreading to other Industries, such as
construction
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Making too much
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Moving
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Waiting
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Storing Excess
Inventory
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Over-processing
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Fixing mistakes
Inspection Process
Value added actvity
Review previous
days paper work
Drive to first site
Read Terry’s
letters, letters to
tenants
Down load info
to hand helds
N
Is site correct
(Y/N)
If site is still
not correct call
Terry for
correct
addess
N
Check email
Check phone
messages
Add inspections
to list
Knock on
door
Review schedule
Create the route
for the day
Is tenant home
(Y/N)
Y
N
Look in
Thomas
guide
5-15 min
Leave card at
door
Code E1 or E2Inform office of
no show
Find and print
out directions
Enter
residence
greet tenant
Get directions
To first
inspection
Complete
inspection room
by room to verify
it’s safe and
livable
Write notes
on the
Inspection
Checklist
A
VALUE ADDED
NON-VALUE ADDED
•
•
•
•
•
•
Inspection
Set-up
Break-down
Batch queues
Adjustments
…and more
5%
Sustaining Tasks
Example: Regulatory
Authority
requirements
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What is Lean?
Activity Based Costing
(ABC)
Implementing Lean (using ABC) – Case Study
Lean ABC Exercise
Price
$$$
Design criteria
Invisible
Costs
Transportation
Procurement
Accounts
Payable
Material
handling
Specifications
Information
Support
Distribution
Inventory
management
Disposal
Manufacturing
Investment Costs
Forecasting
Energy
Costs
Testing
Mrp output
Purchase
Requisitions
Etc
Purchasing
Orders/
Schedules/
Changes/
Large no of
Suppliers
Expediting
Re-scheduling
Invoice
$5
Transport
Check
Accounting
Grn's
Receiving
Multiple transactions
Large data bases
Products
Count
Re-pack
Admin
Expediting
Point of
Use
Line
Stock
- Max
Inspection
Materials
Handling
Expediting
Stores
Materials
Handling
Point-of-use
Invoice match and payment
Storage and handling
Inspection
Receiving
Expediting
Raise purchase order
Supplier negotiations
Requisition / mrp
Price
Total
Cost
… spread costs over products like peanut butter
DEPT #1
300%
Overhead Costs
200%
DEPT #2
100%
Direct Labor /
Machine Hours
for Product ‘A’
Direct Labor Activity Costs
$
Direct Material
Costs for
Product ‘A’
$
$
$
$
Direct Material Costs
$
$
$
OVERHEAD
COSTS
DIRECT
LABOR
COSTS
DIRECT
MATERIAL
COSTS
$
PRODUCT ‘A’
Activities consume resources
Standard Costing Practices
COSTS
X
$
$
Activity Based Costing
COSTS
$
$
£
£
ACTIVITIES
£
£
£
£
£
£
$
£
£
£
£
£
£
£
£
£
£
£
OBJECTS
OBJECTS
PRODUCTS
& SERVICES
Managing Gross Margin
PRODUCTS
& SERVICES
CUSTOMERS /
CHANNELS
Managing Profit
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What is Lean?
Activity Based Costing (ABC)
Implementing Lean (using ABC)
– Case Study
Lean ABC Exercise
Order entry process
improvement project
BEFORE:
• Measuring the impact of
the Waste in the order entry
process
100
orders
Receive
order
2%
 Fax received
at reception
 Email sent to
the wrong
internal
address
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Process Mapping
Find to
Customer
data
Put in
the order
data
Define
shipping
type
40%
35%
50%
 Stock outs
 Delivery
address
different from
that in the
system
 Individual
typing for all
orders
 Customer
doesn’t know
his customer
number
 No customer
number on the
fax
Define
special
prices
36%
 Price
structure
isn’t in
system
<13%
perfect
order
NVA
57%
VA
33%
SNVA
10%
NVA
57%
additional
Information
VA
33%
SNVA
10%
The need to use
additional paperwork
and “aide memoirs”
demonstrates the
inability to enter orders
right first time, where
known information is
not held in the SAP
system
file
sales
information
17
notes
printouts
Stapler &
punch
Order entry process
improvement project
• Dramatic reductions in Order
Entry times from 60–90%
50
Before
After
42
40
32
30
20
13
12
6
10
5
0
Customer
Stream 1
BEFORE:
Customer
Stream 2
Customer
Stream 3
820
AFTER:
90%
660
45%
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Process Mapping
Capacity
Warehouse
(orders/day)
(orders/day
until 14.00 in the
warehouse)
More open environment
…
AFTER:
• Faster communication
• Team motivated
• Easy to control
BEFORE:
Elapsed Time (in minutes for one order)
50
40
Average
42
Optimum
32
30
20
13
6
10
12
5
0
Customer Stream 1
19
Customer Stream 2
Customer Stream 3
Warehouse Activity Based Costs
Spaghetti Diagram
Warehouse reorganization project
BEFORE:
Office
• Reduction in distance traveled (Spaghetti Diagram)
Small
Parcel
AFTER:
Small
Parcel
Office
Receiving
/Shipping
Large
Customers
Receiving
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Shipping
Large
Customers
Warehouse Reorganization resulted in
the following improvements:
Analysis of Shipping and Rental
Costs and collection of quotes resulted in
the following cost savings:
LOGISTICS AND WAREHOUSE IMPROVEMENTS
WAREHOUSE REORGANIZATION
120%
1660
820
1120
90%
80%
660
27
100%
60%
20
45%
18
40%
15
20%
0%
Cost
Elapsed Time
FTE
Capacity
Warehouse
(orders/day)
(orders/day
until 14.00 in the
warehouse)
(min/order)
(T DM)
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Shipping Costs
Rent Costs
Distance Travelled
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What is Lean?
Activity Based Costing (ABC)
Implementing Lean (using ABC) – Case Study

Lean ABC Exercise
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By company do a current state process
map of the order entry process
Or map out your Warehouse
Questions and Discussion