Case Study

Topics: Cost, Productivity, Costs Pages: 7 (1884 words) Published: March 25, 2013
California-Illini Manufacturing

The California-Illini Manufacturing Company's (CI) plant operates in the rural central valley of California. It is family-owned and run. CI's plant manager, a grandson of the founder, went to school with many of the employees. Despite this family atmosphere, CI is the largest producer of plain and hard-faced replacement tillage tools in the United States. It averages annual sales of $13 million. Farmers use tillage tools to cultivate the land. Hard-facing, the application of brazed chromium carbide to leading edges, increases a tool's durability.

The Production Process

Historically, CI grew from the founders' original blacksmith shop, and today the production process is still relatively simple. The plant manager described the process as "You simply take a piece of metal. And then you bang, heat, and shape it until it's a finished product. It really isn't a sophisticated process. We just do it better than anyone else." The production process is like a flow following a routing from one cost center to another in a sequence of move, wait, setup, and runtime for each process. Work-in-process inventories in the move and wait stage litter the plant. Economic lot size rules determine the size of each batch while production schedules push jobs onto the floor.

The Cost System: Measuring Performance

CI uses standard unit costs to measure performance and profit potential. In this cost system, each materials and labor input is given a standard usage, and production managers are evaluated on their ability to meet or improve upon these standards. Differences from the standard were called “variances.” For example, if a certain manufacturing operation required at standard 5 minutes, the operator would be expected to complete a lot of 100 parts in 500 minutes. If actually 550 minutes were required, there would be a 50 minute unfavorable variance. Also, using the operator’s wage rate, the cost of the variance could be calculated.

CI’s Improvement Strategy

The depressed market in the mid-1980s caused a 1986 net loss of close to $1.8 million. Inventory turns were down to one and a half, and cash flow was poor. Facing these conditions, management adopted a new strategy stressing improvements in accounting performance and reduction of inventories. Their strategies for improvement included: increasing productivity, cost cutting (overhead control), improving technology, and increasing prices.

1. Productivity. Productivity improvements centered on direct labor productivity measures. Output per direct labor hour was the crucial factor. Accordingly, improving efficiency, by definition, consisted of keeping direct labor busy producing as much product as possible during regular working hours. Actions supporting this strategy were 1) reducing idle manhours between jobs, 2) increasing batch sizes to maximize runtime, and 3) reducing setup times.

The operational control system measured the "earned labor hours" for each department daily. While the plant manager only received these reports weekly, he was still aware of the daily figures. Budget reports, including variances, while processed monthly, were often two to three weeks late! Thus, they had little direct impact on day-to-day decisions. However, the plant manager knew what the accounting reports should be like from his daily earned labor hours information. The short-term results of these efforts were impressive because plant efficiency measures rose about 15%. There were, however, some negative, unanticipated side effects in work-in-process levels, scheduling, and overtime. First, work-in-process levels increased. In order to improve efficiency measures, departments kept processing large lots regardless of current demand. Once a machine had been set up, to economically justify large batches, the rationale was to provide for both current and future inventory needs. Consequently, finished goods grew from two to...
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