Client
Fortune 20 electrical goods manufacturer.
Challenge
Estimate impact of changes in manufacturing operations (such as reconfiguring operations, introducing labor-saving equipment,
increasing production rates) on costs of existing products.
Background
This division of a large electrical manufacturer needed cost analyses that reflected changes in operations flow and technology.
The conventional financial cost accounting focused on tax costs, and had shortcomings for technical evaluation of new products
and processes. Two typical shortcomings of the financial cost analyses were:
- They lumped into overhead the cost of direct labor benefits and payroll taxes, indirect labor expense plus benefits and
payroll taxes, equipment maintenance, facilities expense, and administrative expense. For highly automated manufacturing
processes the labor overhead rate was over 600%.
- They did not track the accumulation of costs as manufactured units flowed through the process.
For these reasons, the cost impacts of changes in direct or indirect labor, equipment capital and maintenance costs, and
scrap rates were hard to estimate from engineering data. This was a problem in existing plants, and for new products, for
which the company had manufacturing engineering data, but not in a form that was consistent with the tax accounting categories.
Solution
Provide a cost models based on manufacturing work flow instead of tax accounting. Make it easy to estimate the cost impact
of changes in direct or indirect labor content, scrap and rework rates, process speed, and equipment cost and maintenance,
for each manufacturing process separately.
Client Impact
Improved decision support for manufacturing innovations. Restated manufacturing costs in this form for the largest lamp plant
in the US. Estimated manufacturing costs of two successful new products.
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