Effective Cost Strategies for Manufacturers March 27, 2014

√ What is Lean? o Activity Based Costing (ABC) o Implementing Lean (using ABC) – Case Study o Lean ABC Exercise

o Lean can trace its roots to the Toyota Production System o Came to the United States in the 1980’s (Manufacturing) o Spreading to other Industries, such as construction

o Making too much o Moving o Waiting o Storing Excess Inventory o Over-processing o Fixing mistakes

80%

8 VALUE ADDED NON-VALUE ADDED Inspection Set-up Break-down Batch queues Adjustments …and more Sustaining Tasks Example: Regulatory Authority requirements 80% 5%

o What is Lean? Activity Based Costing (ABC) o Implementing Lean (using ABC) – Case Study o Lean ABC Exercise

Price $$$ Distribution Transportation Accounts Payable Manufacturing Energy Costs Investment Costs Information Support Procurement Material handling Disposal InvisibleCosts Forecasting Inventory management Testing Design criteria Specifications

Count Products Expediting Transport Receiving Grn's Re-pack Inspection Materials Handling Materials Handling Stores Line Stock Point of Use Expediting Multiple transactions Large data bases Large no of Suppliers - Max Re-scheduling Admin Invoice $5 Check Orders/ Schedules/ Changes/ Mrp output Purchase Requisitions Etc Purchasing Accounting

Requisition / mrp Raise purchase order Supplier negotiations Expediting Receiving Inspection Storage and handling Point-of-use Invoice match and payment Price Total Cost

100% 200% 300% Direct Material Costs for Product ‘A’ Direct Labor / Machine Hours for Product ‘A’ Overhead Costs Direct Labor Activity Costs Direct Material Costs $$$$$ $$$$ PRODUCT ‘A’ DEPT #1 DEPT #2 … spread costs over products like peanut butter OVERHEAD COSTS DIRECT LABOR COSTS DIRECT MATERIAL COSTS

PRODUCTS & SERVICES $ OBJECTS X Standard Costing Practices Managing Gross Margin $ £ £ £ £ £ £ £ £ £ £ £ £ £ £ £ £ £ £ £ COSTS ACTIVITIES OBJECTS PRODUCTS & SERVICES CUSTOMERS / CHANNELS Activity Based Costing Managing Profit $ $ $ Activities consume resources

o What is Lean? o Activity Based Costing (ABC) Implementing Lean (using ABC) – Case Study o Lean ABC Exercise

16 Order entry process improvement project Measuring the impact of the Waste in the order entry process BEFORE: 100 orders Receive order Find to Customer data Put in the order data Define shipping type Define special prices <13% perfect order 2%40%35%50%36%  Fax received at reception  sent to the wrong internal address  Customer doesn’t know his customer number  No customer number on the fax  Stock outs  Delivery address different from that in the system  Individual typing for all orders  Price structure isn’t in system VA 33% NVA 57% SNVA 10% Process Mapping

17 sales information file Stapler & punch printouts notes 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 additional Information VA 33% NVA 57% SNVA 10%

18 BEFORE:AFTER: Order entry process improvement project Dramatic reductions in Order Entry times from 60–90% Process Mapping Capacity (orders/day) Warehouse (orders/day until in the warehouse) % 90%

19 More open environment … Faster communication Team motivated Easy to control Elapsed Time (in minutes for one order) BEFORE: AFTER:

20 Warehouse reorganization project Reduction in distance traveled (Spaghetti Diagram) BEFORE: AFTER: Warehouse Activity Based Costs Spaghetti Diagram 20 Receiving /Shipping Small Parcel OfficeOffice Large Customers Small Parcel OfficeOffice Large Customers ReceivingReceiving ShippingShipping

21 Warehouse Reorganization resulted in the following improvements: Analysis of Shipping and Rental Costs and collection of quotes resulted in the following cost savings: WAREHOUSE REORGANIZATION Cost (T DM) Elapsed Time (min/order) FTECapacity (orders/day) Warehouse (orders/day until in the warehouse) % 90%

o What is Lean? o Activity Based Costing (ABC) o Implementing Lean (using ABC) – Case Study Lean ABC Exercise

 By company do a current state process map of the order entry process  Or map out your Warehouse

Questions and Discussion