I.

Reduce Costs and Enhance Value

The output from a manufacturing process is 3.6 tonnes per productive hour. The product is sold for $110 per tonne. Costs of production include:

Direct materials rocess !ages 'e!or$

$45 per tonne of materials input $4"#00 per !ee$ %for a normal !or$ing !ee$ of 3# hours& $#0 per !ee$

'epairs to machiner( $)50 per !ee$

10* of materials input are currentl( lost in the process and some of the output has to +e re!or$ed in another department" at times as a result of customer complaints. ,n average" sihours per !ee$ are +eing lost due to +rea$do!n of machiner( leaving onl( 31 productive hours. .ales are +eing lost as a conse/uence.

0nvestment in ne! machiner( is not feasi+le at the present time +ut" !ith a vie! to improving the current situation" management has underta$en a value anal(sis e-ercise and is introducing /ualit( control and assurance procedures. 1s a conse/uence of this" it is no! e-pected that output tonnage can +e increased from )0* of materials input to )2* and that the need for re!or$ can +e eliminated.

1dditional 0nformation:

The factor( manager has suggested that a s(stem of routine preventative maintenance +e considered. This !ould ta$e the form of a maintenance team" !or$ing outside normal !or$ing hours. This could +e either on a night shift or +( .aturda( !or$ing.

0ncremental costs !ould +e incurred on the routine maintenance team +ut reductions !ould +e e-pected in: %i& 3achine +rea$do!n time !ith a corresponding increase in productive time4 %ii& 3achine repair costs4 The ta+le +elo! summarises the forecast effect of the introduction of routine preventative maintenance.

'outine preventative maintenance 5ight shift 3aintenance team: 0ncremental cost per !ee$ 3achine +rea$do!n time 3achine repair costs reduced to 61"200 #5* saving 6350 per !ee$ 6600 40* saving reduced +( 40* .aturda( !or$ing

8se performance indicators to identif( potential improvements

%2.2&

9uide: :ou ma( calculate performance indicators as follo!s: erformance indicators Calculations Current value 3aterials input loss Total materials input loss ; 10* percentage Total materials input Total material input< Total material output; %100*=10*& <3.6;0.)<4 Total input loss< Total input > Total output < 4= 3.6< 0.4 roductive hour loss roductive hour loss ; 16.22*
2

percentage

Total normal !or$ing hours < %3#=31&;3# ,utput tonnage to 3aterials ,utput tonnage ; 3aterials )0* input input ,utput tonnage <31-3.6<111.6 tonnages 3aterials input < 31-4< 124 tonnages Total failure cost percentage Total failure cost ; Total cost 13.)6* Total failure cost < Total material input cost loss ? 'e!or$ ? 'epairs to machiner( < %645-0.4-31& ? 6#0 ? 6)50 < 655@? 6#0 ? 6)50 < 61"5#@ Total cost < Direct 3aterial input cost ? rocess !ages cost ? 'e!or$ cost ? 'epairs to machines cost < %645-4-31&? 64"#00? 6#0? 6)50<611"300 Total failure cost to Total Total failure cost ; Total 12.@5* sales sales Total failure cost < 61"5#@ Total sales < 6110 - 3.6 - 31< 6 12"2#6 A %(ou should thin$ a+out other erformance indicators different from the a+ove suggested ones&

1fter calculations" (ou should ma$e comments on the results of the erformance indicators. Bor e-ample" The 3aterials input loss percentage !hich is currentl( 10* is /uite high" the compan( should do A. and doA to save the materials cost much more. %'ead 1ctivit( 5" page 104 a+out ho! can !astage +e reduced&

1lso" read te-t+oo$ part 4. 'educing costs and 1dding value %page 103& %and also in m( slides& to ma$e good recommendations.

II.

Improvements to reduce costs, enhance value and quality

%Cints: Calculate the cost of direct materials per !ee$ in the current situation4 Calculate the cost of direct materials per tonne of output: if output tonnage is increased to )2* of materials input. Calculate the increase in !ee$l( profit that !ill +e e-pected to result from the improvement in materials efficienc( and the elimination of product re!or$. 'ecommend !hether routine preventative maintenance should +e introduced" and if so !hether on a night shift or +( .aturda( !or$ing. 1ssume: 5o change to the current levels of material !astage or re!or$4 rocess !ages remain at $4"#00 per !ee$4 1dditional output can +e sold.& 9uide: :ou ma( provide schedules as follo!s: T,T1D C,.T ,B 31TE'01D. 05 8T E' FEEG Cost per tonne of materials input roductive hours 645.00 31 hours

,utput tonnage per productive hour 3aterials input loss rate 3aterials 0nput per productive hour Total materials input per !ee$ Total cost of materials input

3.6 tonnes 10* 4 tonnes 124 tonnes 65"5@0

D0'ECT 31TE'01D. C,.T E' T,55E ,B ,8T 8T Hefore 1fterI

4

Total cost of materials input 65"5@0 ,utput tonage rate Total ,utput tonage Direct materials cost per tonne of output Hefore: Total materials output roductive hour Direct material per input tonnage )0*

65"#04 )2*

111.6 tonnes 114.0@ tonnes 65"022 65"133.6

3.6 tonnes 31 hours 645 65"022 3.6@ tonnes 31 hours 645 65"133.6

Direct materials cost per tonne of output 1fter: Total materials output roductive hour Direct material per input tonnage Direct materials cost per tonne of output

rofit per !ee$ is included revenue and e-pense. 1s (ou can see on the ta+le of direct materials cost per unit of output" it sho!s that the total output tonnage changes %from 111.6 tonnes to 114.0@ tonnes& !hen output tonnage rate change %from )0* to )2*&" so that it sells more to customers and revenue of factor( is increased o Difference of total output tonnage Total output tonnage after introducing Total output tonnage +efore introducing Difference of total output tonnage o 0ncrease on revenue Difference of total output tonnage .elling price 0ncrease on revenue
5

114.0@ tonnes 111.6 tonnes 2.4@ tonnes

2.4@ tonnes 6110 62#2.@

E-pense included direct material" process !ages" re!or$ and repairs to machiner(. 1+out direct material" it is not changed +ecause it has the same production materials such as input and output. Hase on the fact of process !ages" it remains at 64#00 per !ee$" so that it is not changed and repair to machiner( also is not changed. 1s a conse/uence of this" it is no! e-pected that output tonnage can +e increased from )0* of materials input to )2* and that the need for re!or$ can +e eliminated.Burthermore" it has not re!or$ +ecause factor( has s(stem of routine preventative maintenance that it is /ualit( control s(stem to improve production process" so that factor( !ill not pa( an( cost for re!or$ that it ma$es more profit to factor(. o 0ncrease on profit !ee$l( 0ncrease on revenue 'e!or$ 0ncrease on profit !ee$l( 62#2.@ 6#0 6342.@

I 1fter introducing /ualit( control and assurance procedures

',8T05E 'EJE5T1T0JE 3105TE515CE

5ight shift 3aintenance team: 0ncremental cost per !ee$ 3achine +rea$do!n time 3achine repair costs reduced to 61"200 #5* saving 6350.00 per !ee$

.aturda( !or$ing

6600 40* saving 40* reduction

roductive hour loss 3achine +rea$do!n time saving 1dditional output tonnage %3.6 tonne;hour&

1.5 hours 4.5 hours 12#.@ tonnes

3.6 hours 2.4 hours 120.24 tonnes

5o! %)0*& ,utput tonnage Direct materials input Direct materials input cost Total cost Total failure cost 'e!or$ 111.6 tonnes 124 tonnes 655@0 611300 615#@ 6)50

5ight .hift 12#.@ tonnes 142 tonnes 663)0 611510 6165) 6350

.aturda( !or$ing 120.24 tonnes 133.6 tonnes 66012 611352 61261.2 65#0

1ddition 5ight .hift .aturda( !or$ing @.64 tonnes ).6 tonnes 6432 652 643.2 63@0

,utput tonnage Direct materials input Direct materials input cost Total cost Total failure cost 'e!or$

16.2 tonnes 1@ tonnes 6@10 6210 6@1 6600

5o! %)0*& Total cost of materials input rocess !ages 'e!or$ 'epairs to machiner( 0ncremental cost per !ee$ Total e-pense 611300 655@0 64#00 6#0 6)50

5ight .hift 663)0 64#00 6#0 6350 61200 612#10

.aturda( !or$ing 66012 64#00 6#0 65#0 6600 611)52

5o! %)0*& Total output tonnage 111.6 tonnes

5ight .hift 12#.@ tonnes

7

.aturda( !or$ing 120.24 tonnes

.elling price .ales revenue

6110 6122#6

6110 61405@

6110 613226.4

5o! %)0*& .ales revenue Total e-pense rofit per !ee$ 6122#6 611300 6)#6

5ight .hift 61405@ 612#10 6134@

.aturda( !or$ing 613226.4 611)52 612#4.4

1fter calculating profit per !ee$" the finger sho!s that the factor( manager has suggested that a s(stem of routine preventative maintenance in night shift %6134@& +ecause night shift earned more profit per !ee$ than .aturda( !or$ing %6#3.6&.

I 1fter introducing /ualit( control and assurance procedures

Bor the 2nd re/uirement" (ou can choose to one of the follo!ing 2 !a(s of comparison +et!een 5ight .hift and .aturda( !or$ing

3ethod 1 = Compare the differences +et!een the t!o options

',8T05E 'EJE5T1T0JE 3105TE515CE 5ight shift 3aintenance team: 0ncremental cost per !ee$ 3achine +rea$do!n time 3achine repair costs reduced to reduction 61"200.00 #5* saving 40* 6350.00 6600.00 saving per !ee$ 40* .aturda( !or$ing

roductive hour loss 3achine +rea$do!n time saving 1dditional output tonnage %3.6 tonne;hour&

=1dditional output leads to !hatK 1dd: =Fhat costs and ho! much savingK

Dess: =Fhat costs and ho! much increasedK %additional costs& = 1dditional profit Then" (ou should compare +et!een: = Current status %Hefore 'outine preventative maintenance& = 5ight shift = .aturda( !or$ing To suggest one option for the compan(.

,' 3ethod 2 = Compare the differences in Total profit +et!een the three options %see ne-t page&

',8T05E 'EJE5T1T0JE 3105TE515CE 5,F 5ight shift ----------9

.aturda( !or$ing ---------

Total ,utput tonage --.elling price --.ales revenue

Total cost of materials input ---

A%please specif( more e-penses& A A --rofit per !ee$ -----------

Then" (ou should compare +et!een: = Current status %Hefore 'outine preventative maintenance& = 5ight shift = .aturda( !or$ing To suggest one option for the compan(.

10