| Creating a Lean Enterprise|
CREATING A LEAN ENTERPRISE:
THE CASE OF THE LEBANON GASKET COMPANY
I. Summary of facts
* Lebanon Gasket Company’s Topeka, Kansas Facility began operation in 1979. * The company had operated in using mass production.
* In January of 2004 LGC had about 109 employees.
* The LGC Topeka plant relies on two main manufacturing processes – injection molding and extrusion molding. * The injection molding process has three main product families- OS1, TX4 and KC13, more than 100 product models are produced across these three product families. * The extrusion molding process has two main product families-LX22 and KB8, more than 75 product models are produced across these product families. * LGC hired Tom Walsh as the plant manager of its Topeka Facility in January of 2004. * Tom Walsh has 20 years of experience as a manufacturing engineer; his knowledge in accounting is very limited. * Walsh’s job at LGC was to turn around the plant that had been suffering from declining profits and margins, excessive waste and inventory levels, unsatisfactory on-time customer delivery performance, and shrinking market share * The plan to achieve this was to focus on one core strategy, “Operational Excellence”, by focusing on a lean production strategy. * 18 months later the LGC, with Walsh and his co-workers had accomplished many goals related to the plans lean transition. * Implementing the lean approach dramatically changed the goal of the Topeka plant’s manufacturing processes and the routings for all of its products. Previously, the goal of the plant’s mass production process was to achieve the lowest possible cost per unit by maximizing employee and equipment productivity. * Even after a successful transition in the plant’s production strategy, the profits continued to decline. * The Financial and Production Departments are blaming each other for the issues with the declining profits. II. Major Problems
Tom Walsh’s strategy at the Topeka facility was to focus on operational strategy. Following this approach he started a transition to lean production. Even though the lean training program helped to improve order-to-delivery cycle and consequently sales, the financial results were still unfavorable. The goal of the plan’s cellular oriented lean approach is to deliver customer-driven value and Tom Walsh believed that once this goal was achieved by properly managing the manufacturing floor, financial results would improve. However, this was not the case. Walsh asked for the assistance of his Finance Manager Mike Dwyer to explain the reason for declining profits. Dwyer pointed out three operational efficiencies: 1. Purchasing agents were paying too much for raw materials (Unfavorable direct materials variance) 2. An unfavorable direct labor variance indicated a high level of labor inefficiency; and 3. An unfavorable overhead variance indicated poor equipment utilization and overhead cost recovery. Dwyer suggested that the costs could be reduced by laying off a few laborers due to the low level in efficiency. Walsh is not comfortable with the idea of laying off employees and believed that if the production process had been changed dramatically, the finance function had to change as well. In addition, he believed that since Dwyer was planning on retiring soon, he had no interest in critically reviewing the department’s procedures and reporting practices. Three main questions would help solve the problems at the Topeka plant: 1. Do the traditional accounting practices adopted in 1979 support the new lean environment? 2. How can the accounting function aid in decision-making regarding capacity planning, aligning employee incentives with goals and product mix decisions? 3. How can the accounting function aid value stream profitability analysis, linking strategic...