Professional Documents
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Case study
Reference no 607-022-1
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Number of employees decreased to 350 people (including some 300 factory hands).
Personnel losses were not only quantitative, but also qualitative. The majority of those
who left the plant were young and active people.
In 1997 JSC Priborostroitel was established by a group of professionals. Life
compelled to save money on everything. The management of the company had to
simplify the structure of the enterprise and redistribute functions among its subdivisions.
Some functions were handed over from the plant management department to workshops.
The recession affected the computer infrastructure most of all. In particular,
central computer services were completely abolished. The replacement of outdated
computers of the SM EVM line (Soviet minicomputers) with the personal computers
incompatible with the previous ones resulted in the loss of program systems and
infobases made at the enterprise. The enterprise needed reconstruction practically in all
the spheres.
At present the Priborostroitel structure consists of management departments,
technical services and manufacturing workshops (fig.1). The enterprise is successfully
developing. The company managed to reestablish the connections with suppliers and
buyers. There is no problem with orders. In the last years the annual increase of
This case was written by Associate Professor Igor V. Ananyev and Assistant Professor Elena G. Serova,
Graduate School of Management, Saint Petersburg State University. It is intended to be used as the basis
for class discussion rather than to illustrate either effective or ineffective handling of a management
situation.
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Up until 1990 Vyborg Instrument-Making Plant was one of the largest enterprises
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production volume has varied from 30% to 40%. Major factor which restricts production
growth is the deficit of production facilities.
Priborostroitel JSC produces:
x Information security products for communication networks;
x Fire-extinguishing systems;
In three years Priborostroitel is planning to double the production and to bring
the annual sales volume up to 400 million rubles. Around 15% of the products are
exported to Finland. The enterprise is sustainably profitable.
Old equipment is being replaced with the more productive one. The growth rates
of key assets are impressive. During the 8 years of its operation, their cost (at comparable
prices) has increased almost twice. New production facilities are being constructed. Thus,
for instance, a new plating shop has been constructed which allowed the company to
increase added value of final products and even to receive new orders on coating.
Recently the production line for sheet metal processing and production of frames, casings
and stands for various devices has been modernized. Specifically for that purpose a new
building has been constructed and new bending and punching machines made by Finnish
company Finn Power were installed.
The task of technical retooling and modernization was solved mainly by the
company itself. During several years all earned revenue was spent on investments. The
company management had to save on everything, including the salary. It could not but
affect the personnel. The mean age of employees is high. It is obvious that in the nearest
future mass retirement will definitely take place (in fact, it is taking place right now).
There is a lack of factory hands, engineering and technical personnel, managers. While
solving the personnel problem the company will not be able to avoid growing expenses
for salaries.
3
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y
y
Management
departments
Maintenance,
Supply and
Procurement
Department
Technical services
Economics
Department
Personnel
Department and
Office
Accounting
Department
Export Department
Sales Department
Manufacturing
workshops
Technical Control
Department
Engineering and
Design Department
Labor Protection
and Safety
Department
Transport
Department
Mechanical
Workshop 1
Assembling
Workshop 2
Coating Production
Workshop 3
Engineering and
Mechanical
Workshop
Packaging
Department
working sites. 1 System: Accounting 7.7 is virtually the only business application
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The forthcoming increase of the production cost must be compensated for by the
increase in production volume. This, in turn, leads to ever more planning and accounting
procedures.
Senior Management:
general director;
deputy director on
production;
head power
engineering specialist
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Apart from economic departments, computers are used in the Engineering and
Design Department. However, this application is not relevant for management tasks,
therefore we are not going to dwell on it.
There are no well-developed information systems at the enterprise which could be
called CIS or ACS (Automatic Control System). Records management is carried out by
technologies. Production and financial planning is also done without integrated
information systems.
There is a strong need in such a system. Several months ago the company
management took a decision to create corporate information systems which would
specifically serve administrative and management accounting. CIS must cover the whole
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production cycle, thus allowing the management to gain current detailed information
about all the assets and liabilities, including cash assets1. The fundamental element of this
system is production planning and accounting tasks, as well as major functions of
technical preparation of the production.
Taking into consideration quite a non-typical situation, the management took a
decision to consider initially the option of ordering customized CIS. This decision can be
explained by several factors: the lack of the IT specialists in the company who are able to
develop the systems by their own, difficult interaction with remote consulting companies
which could install correct accounting systems, high cost of replicated CIS which can
manage the production. The company decided to place order of CIS development with a
small software company Expert-Balans which JSC Priborostroitel has long-term
relationships with.
Incidentally, the enterprise used to have rather good experience of utilizing
automated ERP. There is quite a number of employees in the company, especially topmanagers, who know the management automation first hand. They know CIS tasks for
discrete manufacturing, as well as feel clearly what degree of transparency and
completeness of the information circulating in CIS must have. They also have a clear
The function of the financial accounting can be split up into management accounts (inner financial
accounting) and classic (fiscal) accounting. The system to be made will comprise both tasks, however in
this case study we are not interested in accounting, therefore this part of CIS functions is not discussed
further.
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all available means, mainly without the use of advanced computer information
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idea about the problems that they may face upon the CIS installation and introduction
and are ready to overcome the difficulties connected with it.
There was signed an agreement on the plant examination, following which the
performer proceeded to business. Selected materials on examination are shown in the
Exhibit 2.
conceptual scheme (infological model) of the future information base in ERD notation
(Entity-Relationships diagram).
JSC Priborostroitel Basic Business-Processes
Management of orders and requests
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Respectively small (but still important) part of the goods is produced for stock.
These are goods which are in steady demand. There is always a certain stock level in the
finished-products storage area which is sufficient for immediate satisfaction of needs of
most customers. Only when the company receives an order which exceeds the usual
amount of stock, the production lot is manufactured specially for the customer.
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x The technical preparation of production is carried out (engineering and design);
x The planned production cost is calculated;
x The sales cost is calculated and agreed upon with a customer;
request
registration in
the Sales
Department
1
registered request
Engineering and
Design
development
Production
task
Set of engineering
and design
documents
1
Engineering and
Design specification
production cost
and price
calculations
production cost
and price
price
coordination
with a
customer
production
end product
5
Shipment of
products,
proceeds from
sale
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request
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The payment may be received only on account (cashless). However, the company
has two settlement (ruble) accounts in two different banks and one foreign currency
account.
Technical preparation of the production
carried out at the Engineering and Design Department (by the group of designers).
Then in the same department (but this time by a group of technologists) the
technological engineering is done: identification of materials which are to be used in the
manufacturing process, setting technological routes and contents of technological
operations, development of plate and paint-and-varnish coatings.
Designers distinguish:
x products final stock-list of products which go to the finished-products storage
area;
x assembly units which consist of spare parts and assembly units (an assembly unit
may be a product);
x parts made by the enterprise itself (usually a part is made of one material);
x materials;
x purchased components (in particular, fixing products and electronic and radio
components);
Designers also use a universal term Item.
Each item in a stock-list falls into one of the two categories: purchased or made at
the enterprise. Purchased products are atomic by definition that is they do not consist of
other components. Typical examples of purchased products are fixing system, electronic
components, materials.
The stock-list of products made at the enterprise comprises other stock line items.
The term own make is used in this meaning, not in any other meaning. Thus, parts are
items of own make because they "consist of" materials. The relationship between a spare
part and material (half-finished material) is considered to be the same as the relationship
between an assembly unit and assembled components.
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607-022-1
Item configuration is set forth by the designers specification which has the list of
next level item in the assembly tree. The specification line sets forth a constituent and
amount, usually in units or kilograms for one manufactured product. For the description
of the whole assembling tree they will need as many specifications as many assembly
units it has.
moment of time only one specification (the so-called current specification) is relevant.
The coating can be applied on both purchased item and item made by the
enterprise itself. Generally the product has several coatings.
In much the same way as the product configuration is stipulated by the
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Main inventory management discipline is made-to-order purchase scheme, in
other words the time of purchase and amount of material are determined by the order
fulfillment schedule (Fig. 3). A classic reorder point theory (statistic inventory control)
is used for fixing systems and materials of low value.
The plant director: We avoid having spare inventory. We purchase as much
arrives from St. Petersburg, and right after uploading material goes to working sites.
Head of Engineering and Design Department (EDD): When the need in
materials is calculated, the final list of deficit has only basic materials. All kinds of small
items (fixing system, paper, threads, glue and other cheap materials) are not calculated,
although they are included in the product configuration and in engineering specifications.
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signed
agreements
materials and
component parts
demand
materials and
parts invoice
1
materials and component
parts with accompanying
documents
11
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material as we need for the execution of an order. Every day a lorry with materials
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x Enhancing operational accounts management (at present they use accounting data
which shows the quarterly picture and is almost one month late);
x Making the return more analytical (as for expenses we would like to get results
separately for each center of financial responsibility, data on profit for orders
and even for requests);
in the accounting distort greatly the first cost of orders and cost of goods in
process);
12
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x Ensuring higher authenticity of return (methods and conventions which are used
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transformer steel rose in price by 40%. Other indicators (defect ratio, hourly base wage
rates of piece-workers) are also variable. That is why it is extremely important to
calculate not only the cost of order, but also the cost of each request.
Separate calculation of fixed and variable costs
JSC Priborostroitel is now replacing fixed assets and even constructing new
manufacture has achieved sufficient production volume which ensures profit and allows
to estimate its break-even level. This question can be answered with the help of the
popular direct costing method. The method is based on separate calculation of fixed and
variable costs. This method is interesting because it allows us to allocate the so-called
marginal profit. The marginal profitability of sales calculated using this method unlike
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profitability calculated by net profit, gives the right answer to the question of the amount
of extra profit which a product unit manufacture makes.
Director: Last quarter our net profit margin was 3%. So will the production of
one extra product give us only 3% of its sales? We dont have such products. When we
calculate price we consider that the profit should account for than 40% of the material
cost. I want to realize even before the production process starts what profit each extra
product from our backlog of orders will bring.
Correct calculation of goods in process
Along with production cost and Direct Costing Method, cost estimation of goods
in process is also important for identification of management indexes. In particular, this
allows the company to control average time of production cycle in each of the
workshops. Goods in process are essential part of circulating assets. Its correct
calculation is necessary for reflection of circulating assets in the management balance
and correct calculation of return rates from circulating assets.
To track goods in process per workshop it is necessary to record all cost transfers
of manufactured goods such as allocating materials to production, payroll accounting,
transfer of parts from workshop to workshop, delivery of goods from the workshop to the
finished-products storage area. As a matter of fact, it is necessary to follow and record all
transfers of parts to calculate goods in process.
transfer process because it is a simple way for the company to control order execution.
13
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production facilities. Therefore it is important for the company to see whether the new
607-022-1
Calculation of Centers of Financial Responsibility Expenses
Most expenses are calculated by the accountants without considering centers of
financial responsibility. This impedes the cost analysis and management.
First, superficial calculation of costs hinders the implementation of factor analysis
and cost behavior analysis.
achieving break-even point for a manufacturing enterprise only when we calculate the
fixed costs of each manufacturing subdivision.
Chief accountant: We provide our director with analytical information before the
annual meeting of stockholders. We necessarily choose costs which are connected with
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Second, we can speak about return on capital investments into production and
Table 1.1
Economics Department
3
Supply Department
2
Sales Department
1
Total
14
Almost all working sites need full modernization and re-equipment. Almost all
the computers available in the plant subdivisions are out-of-date. Many working sites
Costs for putting working sites up-to-date (computers and systems software) is
estimated as follows:
Table 1.2
$ 3000
Network equipment
$ 14000
$ 9800
Total
$ 26800
15
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607-022-1
users are relatively passive, as they do not enter data into the system. They are not
of data into the system. These users are expected to have profound knowledge of the
system and good keyboard skills. This category of users will need advanced training.
Distribution of users according to the departments is shown in table 1.1.
1C usage licenses
$2800
Examination
$10560 2 months, 8 hours/day, $ 30
Users training
$6000
Implementation support
$10560 2 consultants during 1 month
Total
$29920 Without software updating costs
$200 per license
consulting)
While working out the project the plant management also considered the option
its structure. Costs estimation for this option is shown in the table.
$14000
Examination
$15840
Users training
$18000
Implementation support
$15840
Software installation
$52800
Total
$116480
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607-022-1
platform usage (depends on the number of users) and cost of software customization (CIS
settings customized specifically for the enterprise). 1C: Enterprise is chosen as a platform
Table 1.3