NEXT STEP IN A CELL CONCEPT

(1)

NEXT STEP IN A CELL CONCEPT

(2)

Acknowledgements

I would like to thank Pieter Kamminga from the University of Groningen and René van Doorn being my supervisor at Sulzer Eldim for their guidance and support to complete this thesis. Both not present when I started this journey, but there to support me at the finish line.

Furthermore a special thanks to Han Bloemendal who encouraged me to start my Master in Science Business Administration and to Thomas Gützwiller from Sulzer Metco who found my research interesting enough to make it part of a bigger project.

I am grateful to many people within Sulzer Eldim especially the members of the project team: Operations Manager Rob Janssen, Financial Controller Rob Noldus, Engineering Manager Wim Walsweer, Logistics Manager Roel Deckers and Head of Service & Support Huib Straatman. It has been a long journey, but a great pleasure to work with all of you and be part of the change culture within Sulzer Eldim.

Last but not least I would like to thank my parents who unfortunately cannot read this, but have always encouraged and guided me to achieve higher levels in my life. Also to my boyfriend, the rest of my family and friends who stayed patient and supportive when I could not always join the fun and the social events.

(3)

Abstract

The adoption of modern manufacturing technologies, e.g. Lean Manufacturing, Just-In-Time & Theory of Constraints all resulting in Cellular Manufacturing have become

widespread in many industries since the early 1990’s. Companies are now beginning to realize that Management Control Systems and with that traditional costing may conflict with the continuous improvements they are implementing. Consequently, the following research question can be raised: Which type of MCS is the best fit for a Cellular Manufacturing environment? Where MCS in this study can be seen as a combination of a cost accounting method and non-financial measurements.

(4)

Chapter 1: Problem Statement

1.1 Introduction

Increasing global competitiveness has forced manufacturing organizations to produce high-quality products more quickly and at competitive cost. In order to reach these goals, today's manufacturing organizations are required to compete with modern manufacturing paradigms such as Lean manufacturing, Just-In-Time (JIT) and Theory of Constraints (TOC), often resulting in a cellular manufacturing environment. It is not realistic to obtain all the advantages of these new production paradigms such as decrease throughput time, work-in-process inventory, setup time and increase quality without Management Control Systems (MCS) that support and sustain this business strategy. MCS should collect data, and report information to managers for purposes of planning, control and evaluation of product activities (Bruggeman & Slagmulder, 1995). Planning is basically the process of setting the goals for the organization as well as the means to attain those goals (Flamholtz, 1984). Control refers to the process of influencing the behaviour of people to increase the probability that people will behave in ways that lead to the attainment of organizational objectives (Choe, 2004). It includes pricing, budgeting, performance measurement, integration with financial accounts and investment analysis. It consists of all the information that is officially gathered to assess the performance of the company and to guide future actions (Ahlström and Karlsson, 1996).

In today's competitive environment, customers are looking for the best price with minimum lead-time. A Management Control System by itself produces no increase in productivity, no reduction in cost, no improvement in quality, no reduction in cycle time and no increase in customer satisfaction. Its true benefit can be measured only in the light of management's actions initiated based on information provided by the new MCS. Those actions should be directed toward continuously improving the organization's activities and business processes through better decision making (Miller in Lea and Fredendall, 2002).

1.2 Support Continuous Improvements

(6)

make the transition difficult. One of the most important but least understood of these roadblocks is current Management Control Systems who do not provide adequate information to companies to manage a production transition. Nowadays many firms are interested in determining and designing MCS to support the improvements.

MCS only designed to support financial reporting provides aggregated data about processes, products and services. The traditional accounting system satisfies financial reporting but fails to provide information managers need for decision making and control (Dixon, Nanni & Vollmann, 1990). Resulting in time consuming work-a-rounds and decisions made on gut feeling. For controlling factory operations traditional financial measures are: too irrelevant due to overhead allocations, too late due to accounting period delay, and too summarized due to the length of the accounting periods (Dixon, et al., 1990). Also Cooper and Kaplan (1998) state that traditional systems are ineffective for feedback and learning due to delayed reports, exclusive reliance on financial measures, top-down direction, focus on local task improvement, individual control, and adherence to historical standards. Most traditional systems fail to trace non-manufacturing costs to products and customers and make use of arbitrary allocation.

One of the main deficiencies of traditional accounting systems for operational control and improvement is the excessive emphasis on financial measures. Financial results are more difficult to understand and with all the variables costs are an effect and not a cause. To support continuous improvement a MCS should also emphasis on non-financial measures. Operational measures are more likely to lead to the root cause of problems and they are also reported more easily in real time.

Cunningham and Fiume (2003) maintain that performance measures chosen to support continuous improvement should:

• support the company's strategy;

• be relatively few in numbers;

• be mostly non-financial;

• be structured to motivate the right behaviour;

• be simple and easy to understand;

• measure the process, not people;

• measure actual results versus goals; and

(7)

Cunningham and Fiume also recommend displaying the actual performance measures visually. Graphs and charts, showing trend lines, for the key measures should be posted on display boards in the production cells. Cost information is not entirely irrelevant, but it is not the information used to drive continuous improvement efforts. Costs must be checked to ensure that the process improvements shown in the operational metrics are translated into the expected cost savings. Typically reviewing the trends in actual costs for each production cell or value stream on a monthly basis will be sufficient.

Kaplan (1984) notes that 'efforts to revitalize manufacturing industries cannot succeed if outdated accounting and control systems remain unchanged – yesterday's accounting undermines production'. He also states that poor accounting systems by themselves will not lead to organizational failure. Nor will excellent accounting assure success. However, cost accounting systems must be viewed as an integral part of modern manufacturing technologies.

Most companies that produce a narrow range of products make use of traditional cost accounting methods. Applying the same methods for a wide range of products with low volume will lead to distorted cost information. Accurate cost information; such as the production costs and other value-added activities are important since they are used as a decision base for management and control purposes, from production to marketing.

One of the major differences among cost accounting systems is overhead allocation. Traditional costing for instance computes the product cost based on direct labour, direct material and overhead allocation. This overhead allocation is based on the percentage of direct labour usage for each product. Value stream costing, on the other hand, traces the overhead cost based on product family that consumes the resources in the whole value stream. Cooper & Kaplan (1988) and Maskell (1991) argue that distortion of product costs, as result of inappropriate allocation of overheads, can lead managers to choose a losing competitive strategy by de-emphasizing and over-pricing products that are highly profitable and by expanding commitment to complex, unprofitable lines.

(8)

1.3 Problem Statement

Sulzer Eldim, which is located in Lomm in the Netherlands, is a company that has made a transition from a traditional job-shop to cellular manufacturing by implementing Lean manufacturing and making continuous improvement part of their business strategy. Sulzer Eldim treats and produces a wide variety of products, essential components in the airplanes and turbines of a large number of well known customers over the world. In the past these parts where acknowledged as 'exotic' products, but during the last years they have become more and more commodity goods and the price, becoming a driving factor for the customers, is under a lot of pressure. Streamlining of company processes and reducing waste through continuous improvements are key for Sulzer Eldim to meet customer demand in high quality, low lead times and low cost. Flow-lines around families of similar parts have been installed, physical relocation of machines took place and multifunctional teams, responsible for the production of the complete products, have been formed over the past years.

However, no changes to the traditional designed accounting system were made. It became clear that the standard cost calculation with the same overhead percentage for all parts brought the risk of offering work with the wrong Gross Margin, either too high or too low and it became more and more difficult for Sulzer Eldim to win high volume quotations. With this knowledge and several Long Term Agreements (LTA's) on the line the urge to change the standard calculation method became increasingly essential.

The purpose of this study is to adjust Sulzer Eldim's Management Control System in such a way that it better fits the lean philosophy, supports the organization to maximize the accountability (and therefore the performance) of the cell and start winning volume

quotations again by letting the parts pay for their actual overhead. This paper is not about implementing cellular manufacturing and the advantages for a production company, this business strategy has already proven itself.

Main question:

Which type of Management Control System is the best fit for a Cellular Manufacturing environment?

Supporting questions:

1. What is Cellular Manufacturing?

(9)

3. Which Management Control System supports working in a Cellular Manufacturing environment according to the theory?

4. Which type of Management Control System has Sulzer Eldim implemented? 5. What are the learning experiences and improvements with Sulzer Eldim?

6. What are the differences and similarities between the theory and the results Sulzer Eldim has implemented?

Answers to these questions can be found in the remaining of this paper in the literature (chapter 2: answers 1 till 3) and looking at a practical business case with Sulzer Eldim (chapter 4 & 5: answer 4 till 6).

1.4 Organization of the paper

This chapter briefly introduces the supporting role of Management Control Systems after implementing a modern manufacturing technology. It then proceeds to state the purpose and problem statement of this study.

Furthermore this study will explain the concepts of Cellular Manufacturing and Management Control System. It will compare three different Cost Accounting Systems in terms of alignment with cellular manufacturing. These systems are: traditional standard accounting, activity based costing and value stream costing.

(10)

Chapter 2: Literature

Before looking at the concepts of cellular manufacturing and management control systems this chapter describes what type of business strategy will lead to CM. Afterwards there will be an analysis on which way of cost accounting within the management control system will be the best fit for optimizing CM.

2.1 Business Strategy

Business strategy determines how a firm is operating and competing in markets. The role of strategy is to convey the long-term goals and objectives of the firm in such a way that the strategy will help managers to achieve the ultimate goals of the firm. Many companies are nowadays emphasizing customer-focused strategies. Customer-focused ideology is embedded in many manufacturing technologies, e.g. in Lean Manufacturing, Just-In-Time (JIT) or Theory of Constraints (TOC). These are all modern manufacturing philosophies based on planned elimination of waste, continuous improvement of productivity and minimizing costs.

Lean Manufacturing

Lean Manufacturing is a generic process management philosophy derived mostly from the 'Toyota Production System'. It is renowned for its focus on reduction of the original Toyota seven wastes in order to improve overall customer value. The seven wastes (being: overproduction, unnecessary transportation, inventory, motion, defects, over-processing and waiting) help with the identification of which steps add value in producing a part and which do not. Lean Manufacturing is a variation on the theme of efficiency based on optimizing flow; it is a present-day instance of the recurring theme in human history towards increasing efficiency, decreasing waste, and using empirical methods to decide what matters, rather than uncritically accepting pre-existing ideas. It is often seen as a more refined version of earlier efficiency efforts, building upon the work of earlier leaders such as Taylor or Ford, and learning from their mistakes (Womack & Jones, 1996).

Just-In-Time

(11)

primary elements include having only the required inventory when needed; to improve quality to zero defects; to reduce lead times by reducing set-up times, queue lengths, and lot sizes; to incrementally revise the operations themselves; and to accomplish these things at minimum cost. JIT is a complex and multi-dimensional construct as highlighted in the definition above by the American Production and Inventory Control Society (1992, p.24).

Theory of Constraints

Theory of Constraints is an overall management philosophy introduced by Dr. E.M. Goldratt in his 1984 book titled 'The Goal' that is geared to help organizations continually achieve their goal. TOC is based on the premise that the rate of the goal achievement is limited by at least one constraining process, also called the bottleneck, which first has to be identified. This can be a piece of equipment, but also lack of skilled people or a written or unwritten policy preventing the system from making more. Only by increasing flow through the constraint overall throughput can be increased. After identification it is important to make sure the constraint's time is not wasted doing things it should not do. In total there are five steps to ensure the ongoing improvement efforts also called the Process of Ongoing

Improvement. When the material flows in a sequence, such as an assembly line and also in a cell concept, the constraint is the slowest operation (Goldratt, 1984).

Manufacturing technologies need to be consistent with business strategy. This fit enables the successful deployment of technological resources in accordance with strategy. Successful deployment of technology helps to build a competitive advantage thereby enhancing organizational performance. A major purpose of the modern manufacturing

systems is to use less resources as compared with 'traditional' production systems (Womack, Jones & Roos, 1990). A basic principle in achieving this is through the elimination of waste – everything that does not ad value to the product, for example inventory, transportation and unnecessary movements (Monden, 1983). The reduction of waste takes place constantly. The production system is being improved continuously; perfection is the only goal (Hayes, 1981).

(12)

low high lo w hi gh functional_layout line layout cell layout va rie ty volume

Figure 1: Three types of plant layout.

When it is the strategy of a company, with medium variety and medium volume of parts, to create a competitive advantage by implementing a modern manufacturing technology the chances of this leading to Cellular Manufacturing are high.

1. Line layout

Machines and other workcenters are arranged according to the product's sequence of operations, also called assembly line. This way of producing is suitable for high-volume and low variety of products. In Henry Ford's 1923 autobiography "Henry Ford – My life and work" he quotes himself as saying "Any customer can have a car painted any colour he wants so long as it is black". He is often credited with the invention of the assembly line, although the reality of the assembly line's

development included many inventors. Therefore it is inaccurate to say that Henry Ford himself invented the assembly line, it is accurate to say that his sponsorship of its development was central to its explosive success in the 20th_{century. Ford's first}

moving assembly line first began mass production on or around April 1, 1913 (source: Wikipedia).

2. Functional layout

Machines of a specified type are grouped together in a so called job-shop

environment. All departments (and there employees) are specialized in a specific production process. This can result in large amounts of material handling, a large amount of Work In Process

(WIP) inventory, excessive setup times and long part-travelling times. The functional layout is best suitable to produce low-volume and high variety parts.

Figure 2: Functional layout / job shop

RAW MATERIALS DRILLING TO FINISHED STORES MILLING

GRINDING LATHE SAW HEAT TREATMENT RAW MATERIALS DRILLING TO FINISHED STORES MILLING

GRINDING LATHE SAW HEAT

(13)

3. Cell layout

In this setting the machines are arranged as cells, where each cell is capable of performing manufacturing operations on one or more family of parts. This is the third way to arrange the machines in a factory and is intended for medium variety and medium volume production environments. Cell layout has been proposed as an alternative to job-shops since they provide the operational benefits of flow line production. The way

the machinery is arranged on the shop floor is the main and most visible difference between the

conventional types of manufacturing and Cellular Manufacturing.

2.2 Cellular Manufacturing

Cellular Manufacturing (CM) is becoming more and more popular over the last decades, but it was originated by Group Technology (GT). GT is a manufacturing concept that seeks to identify and group similar parts to take advantage to their similarities in manufacturing and design. GT has been practiced around the world for many years as part of good engineering practice and scientific management. The concept of GT was originally proposed by Mitrofanov (1966). He defined GT as "a method of manufacturing piece parts by the classification of these parts into groups and subsequently applying to each group similar technological operations". A modern definition of GT is "the realization that many problems are similar, and that by grouping them, a single solution can be found to a set of problems, thus saving time and effort" (Shunk, 1987). This definition captures the true essence of GT that the population of entities or activities in a manufacturing system, or subsystem, can be replaced by a smaller number of families.

CM involves processing a collection of similar parts on a dedicated group of machines or manufacturing processes. A manufacturing cell can be defined as "an independent group of functionally dissimilar machines, located together on the floor, dedicated to the

manufacture of a family of similar parts" (Ham, Hitomi & Yoshida, 1985). Furthermore, a part family can be defined as "a collection of parts which are similar either because of geometric

Figure 3: Cell layout

worker in motion RAW MATERIALS DRILLING TO FINISHED

STORES MILLING GRINDING

LATHE SAW HEAT TREATMENT worker in motion worker in motion worker in motion RAW MATERIALS DRILLING TO FINISHED

STORES MILLING GRINDING

LATHE SAW

(14)

shape and size or because similar processing steps are required to manufacture them" (Ham et al., 1985). Usually it is preferable that a cell can be dedicated to a single part family, that each part family be preferably produced completely within its cell, and that cells in a Cellular Manufacturing System (CMS) have a minimum interaction with each other.

CM takes account of the fact that high utilization levels are more important for

manpower than they are for machine tools. Consequently the number of operators in a cell is generally less than the number of machines. In general, within each cell the manpower can be used very flexibly, thereby reducing the dependence of the company on specialized skills and developing the concept of multi-skill teams. In this concept each team member can operate more than one machine / work station and each machine / work station can be operated by more than one team member, creating a flexible workforce. These teams are often organized around a cell-based part of the product flow. Each team is given the responsibility to perform all the tasks in this part of the product flow. Not only the operation steps, but also handling tasks previously performed by indirect functions, such as

procurement, materials handling, planning and control, maintenance, and quality control, are integrated into the team's tasks.

Cellular Manufacturing attempts to lower part inventories, reduce material handling, simplify employee training, and reduce setup times. The simplified operations planning requirements of CMS lead to improved operating efficiency. CM has proven to be very successful when implemented properly. Prior studies (Pullen, 1976; Houtzeel and Brown, 1984; Wemmerlöv and Hyer, 1989) have shown the following dramatic improvements:

• Throughput time (5 – 90%) • Work-in-process inventory (8 – 80%) • Materials handling (10 – 83%) • Job satisfaction (15 – 50%) • Fixtures (10 – 85%) • Setup time (2 – 95%) • Space needed (1 – 85%) • Quality (5 – 90%) • Finished goods (10 – 75%)

(15)

customer-focused strategy. Figure 4 shows that if it is the business strategy of a company to create a competitive advantage by implementing a modern manufacturing system this will often result in Cellular Manufacturing. To keep the competitive advantage as high as possible Continuous Improvement (CI) must be a part of the companies' culture. A modern

manufactory technology is not something that is finished after implementation, but it is a philosophy and there is always room for improvement.

`

The problem after introducing CM is that most of the times companies limited the

implementation to the changes on the work floor, most visible: re-arranging the machines, not gaining the full benefits. For the multifunctional teams to perform in their cell as efficient as possible and according to the company's goals it is important that they are provided with good, timely information, directly in the production flow. To increase the probability that the organization's objectives will be achieved, are in control, and that the cell will perform as effective as possible, is an advantage that can only be gained when a properly designed Management Control System (MCS) is in place. Therefore figure 4 will be enlarged with a box on the right side 'Increase Effectiveness by implementing a Management Control System' as shown in figure 5.

CI

Create Competitive Advantage Modern Manufacturing Technology Cellular Manufacturing

Business Strategy

CI

Business Strategy

Figure 4: Business Strategy leading to Cellular Manufacturing

Increase

Effectiveness by

implementing a

Management

Control System

CI

Business Strategy

Increase

Effectiveness by

implementing a

Management

Control System

CI

Business Strategy

CI

Business Strategy

(16)

The ultimate goal of a cell concept is to have independent working teams that are responsible for all value adding activities within a cell, whereby cooperation between all disciplines is essential. To increase the effectiveness of such a cell the operators in these teams must be multi-skilled and also indirect functions are integrated into the team's tasks. To be successful in this, the team must be allowed to have some autonomy within the company. The biggest challenge when implementing cellular manufacturing in a company is dividing the entire manufacturing system into controllable cells that can be held accountable for their cell performance. It is important that by implementing or adjusting a MCS also the non-financial controls must be included to improve the effectiveness of a cell.

The remaining of this paper is not about choosing the right business strategy, implementing a modern manufacturing system or changing the organisation into a cellular manufacturing environment, but to increase the effectiveness of the cells once CM is in place by implementing or adjusting a MCS. The strategy defines how organizations should use their resources to meet their objectives and the knowledge of these objectives is a necessary prerequisite for the design of any MCS.

2.3 Management Control System

Up until now the most prevalent, and in many cases the only, Management Control System (MCS) in firms is the accounting system (Denna, Cherrington, Andros & Hollander, 1993). Accounting systems take two forms, cost accounting and financial accounting. The functions of these two forms of accounting are quite different: Financial Accounting helps to prepare external reporting and is focused on short-term whereas Cost Accounting plays an important role in the internal (operational) control and product costing (Fry, Steele & Saladin, 1998). Product costing should produce estimates that incorporate expenses incurred in relation to the complete process and control refers to the process of influencing the

behaviour of people to increase the probability that people will behave in ways that lead to the attainment of organizational objectives (Choe, 2004). One of the main reasons for

behavioural problems in an organization is the lack of direction (Merchant, 2003). Employees perform poorly simply because they do not know what the organization wants from them. They are not informed how their contribution increases the possibility to reach the

organizational goals. Womack and Jones (1996) wrote, "After 15 years of studying

(17)

cascading down the organizational goals to all levels in the organization. Informing all employees as to how they can maximize their contributions to the fulfilment of these goals and providing clear direction.

Poor accounting systems by themselves will not lead to organizational failure and excellent accountings cannot assure success, but cost accounting reports are often the only measurement of manager's performance and the operations managers will automatically make decisions to improve these numbers even if they run counter to the basic views of the manufacturing system. For example, the use of labour and machine efficiency within

traditional (financially focused) measurements encourages the production of large batches, which is further reinforced by the need to absorb large overhead cost (Clarke & Mia,1993; McNair & Mosconi, 1988). But by producing large batches the WIP will increase and the lead-time will become longer, whereas decreasing WIP and shortening lead-time are two of the listed improvements from implementing a modern manufacturing system (see paragraph 2.2 Cellular Manufacturing, page 14) If the cost accounting systems are not viewed as an integral part of implementing a modern manufacturing system the managers will incorrectly use the accounting system; in other words an inappropriately designed cost accounting system is likely to have a negative effect on the process of adopting a new modern

production strategy. Whereas a well designed accounting system could support the adoption and gain the full benefits of the new strategy (Kaplan, 1984; Johnson & Kaplan, 1987;

Ahlström & Karlsson, 1996; Maskell & Baggaley, 2003).

The need for making changes had been known at least since the early 1980s (Kaplan, 1983). However, the nature of these changes is not obvious and there is no clear

(18)

summarized in an overview before looking at the total control of the cell in paragraph 2.5 and answering the question: "Which type of Management Control System is the best fit for a Cellular Manufacturing environment?"

2.4 Cost Accounting

For most of this century, traditional costing has been the most popular cost accounting technique for establishing and measuring the various elemental costs within a function or department (Lea & Fredendall, 2002). Most companies assume that their current financial system is adequate to handle the change in manufacturing techniques from the standard method to a cellular approach, but there are calls for a new cost accounting approach to support CM (Womack & Jones, 1996; Maskell & Baggeley, 2003). It is important that such a system should be simple to understand and to practise, since the natural evaluation of continuous improvement is toward streamlining and simplicity of the whole company.

Three cost accounting systems will be compared to see which one can be identified as the most appropriate system to support cellular manufacturing: Traditional / Standard Cost Accounting, Activity Based Costing (ABC) and Value Stream Costing (VSC). One of the major differences among these three is overhead allocation.

1. Traditional / Standard Cost Accounting

Standard cost systems have been, and continue to be, the predominant management accounting system used in US manufacturing companies (Price-Waterhouse, 1989; Hilton, 1994). Traditional costing computes the product cost based on direct labour, direct material and overhead allocation. This overhead allocation is most of the time based on the

percentage of direct labour usage of each product. Research shows that the majority of firms operating in an advanced manufacturing environment still recover overheads on a direct labour basis (Ahmad, 2000). Consequently, management attention is directed to reducing direct labour by trivial amounts. To reduce their allocated costs, managers are motivated to reduce direct labour; since this is the basis by which all other costs are attached to cost centers and their products this can lead to distorted cost information which will be used as a decision base for management and control purposes.

(19)

product cost estimates that incorporate expenses incurred in relation to that product across the organization's entire value chain. To satisfy financial accounting requirements the

overheads are not casually related to the demands of the products, but they are allocated on the basis of direct labour hours. Therefore he claims that standard product costs usually bear no relation to the total resources consumed by a product. Cooper & Kaplan (1988) and Maskell (1991) also argue that distortion of product costs, as result of inappropriate allocation of overheads, can lead managers to choose a losing competitive strategy by de-emphasizing and over-pricing products that are highly profitable and by expanding commitments to

complex, unprofitable lines.

In addition to product costing, standard costing has also been used for internal decision-making process and operational control purposes. This costing emphasizes

maximum utilization for resources (machine, human) in order to minimize the total cost of the product and this encourages the non-cellular manufacturing behaviours, including:

manufacturing of over production, large batch sizes and holding huge inventory levels to show the balance sheets. As a result, traditional cost accounting is believed to be a major obstruction to modern manufacturing systems (Ahlström & Karlsson 1996 and Maskell 2000). Many researchers agree that traditional cost accounting may under cost the low volume complex products and may over cost the high volume simple products because overhead cost is allocated on direct labour hours or some other measure of volume (Johnson, 1991; O'Guin, 1991; Chalos & Zuckerman, 1993).

2. Activity Based Costing (ABC)

Activity-based Costing (ABC) was developed as a direct response to the problems that can arise as a result of the allocation of overhead on the basis of direct labour. Its main objective is to provide improved product cost information, using appropriate cost drivers as the basis for overhead allocation (Cooper & Kaplan, 1988). Based on resource usage by each activity it comprises a different, more logical approach to determine the product costs. It emphasizes the need to obtain a better understanding of cost behaviour and it divides

(20)

The two major goals of ABC are to calculate the activity cost and product cost. The total product cost is summation of various activity costs incurred in the manufacturing facility. Every activity cost includes direct and indirect cost associated with the assigned resources. In the literature, several researchers agree (Cooper & Kaplan, 1988; Brimson, 1991) that ABC can measure product complexity more accurate than traditional cost accounting. Surveys and interviews with managers using ABC indicate it is used to support a wide range of economic activities, such as product mix, pricing, and outsourcing decision (Cokins, 1996). However, evidence of enhanced "financial performance resulting from firms adopting ABC is somewhat limited". It is also seen as a very complex, unpractical and costly system which does not support the simplicity of continuous improvement.

3. Value Stream Costing (VSC)

Goldratt (1990) indicates that many of the assumptions underlying traditional cost-based accounting systems, as well as ABC, are no longer valid and that these systems are leading any companies to disaster. Value stream costing is entirely different from traditional approach. A value stream is a group of products that belongs to one product family and follows the same production routing. It not only considers the manufacturing processes (production steps) but also takes into account each activity that can reasonably be associated with a product or product line and adds value to the customer from order

placement to shipping of products. Simply, it creates value to the customer along the whole stream. Value stream costing allocates all the costs incurred for this stream as direct cost. Typically, the costs include product labour, direct materials, equipment usages and other support functions (e.g. engineering, shipping, selling & marketing, purchasing, etc.). These other activities will be converted in terms of cost and included in this value stream total cost calculation. For instance: space occupied by the value stream is allocated based on square footage cost of the facility. Value stream costing is simple because the detailed actual costs are not collected by production job or product. It reduces the overhead allocation process, which improves cost calculations and profit information. The non-value stream costs are

Value Stream

Production

Labour Production Materials Production Support Equipment Machine &

Operation

Support Maintenance Facilities & VS costs All other

(21)

inevitably small because most of the work of an organization will be associated with a value stream (Maskell & Baggaley, 2003). Figure 6 shows typical overall costs associated with a particular value stream for one or multiple product family of products.This accounting method computes maximum profitability based on creating the maximum flow of products through the value stream.

To conclude if a system is suitable for cellular manufacturing it is important to compare the systems on the following questions: Where was the system designed for?; What is the calculation method?; What type of overhead allocation is been used?; Is there a relation between the consumption of the resources?; Is it appropriate for the performance

measurement of a department?; and what are the advantages and risks of the system? In the following table the three systems are compared on these features.

Summarized: Traditional Costing ABC VSC

Introduction 1900s 1970s 2000s

Designed to

satisfy financial acc. requirements for inventory valuation

provide improved product cost information

support the value stream

Calculation method

direct labour, direct material and

overhead allocation

resource usage per activity

account each activity that can be associated with a product line Overhead

calculation

percentage of direct labour usage per product

cost drivers are the basis for overhead allocation

based on value stream

Resources

consumed no relation usage per activity per value stream

Performance

measurement not appropriate ?

yes, computes

maximum profitability

Advantage predominant system

measures product complexity better than traditional costing

simplicity detailed actual costs are not collected per product

Risk

can lead managers to choose a losing competitive strategy

it's a complex, unpractical & costly system

no cost on detailed level

(22)

The overview in table 1 shows that value stream costing appears to be better suitable for cellular manufacturing. With traditional costing there is no relation between the

consumption of the resources and the cost. It is also not seen as an appropriate system for performance measurement and it can lead managers to choose a losing competitive

strategy, because it may under cost the low volume and over cost the high volume products. The system encourages non- continuous improvement behaviour and is not suitable for CM. Activity Based Costing measures the product complexity better than traditional costing and the usage of resources is calculated per activity. However this system is seen as complex, unpractical and very costly and therefore not part of the streamlined, simplistic total vision of CM. Value Stream Costing on the other hand is designed to support the value stream. It calculates the consumed resources per value stream and the system is simple to understand and to practise. It is developed to compute maximum profitability and to create maximum flow and therefore suitable for CM.

The following example in which traditional costing and value stream costing will be compared in calculating two product prizes supports this conclusion. This example is based on the example in the book: Practicle Lean Accounting by Brian Maskell & Bruce Baggaley (2003), Chapter 1: Why is Lean accounting important? p. 6-7.

A company creates a dedicated cell to manufacture product A. The cell is capable of producing 10 parts per hour and the total costs of the production process (including all the support and overhead costs) are $580 per hour. The raw material cost is $42 per part. Total costs of product A must be $100 per part; conversion cost is $580 / 10 parts manufactured per hour + raw material.

The company introduces a second product, product B, into the cell. Product B has the same operation steps and belongs to the same product family as product A. Both products can be made interchangeable within the cell. The production rate for product B is also 10 parts per hour, but the individual labour and machine times (per production step) is higher than to produce product A.

Marking Grinding

Milling Inspect & pack Output per hour

6 minutes

6 minutes Product B Product A

6 minutes 3 minutes

(23)

Despite the difference in labour and machine time, the cost of product A and B are the same (assuming the costs for raw material are the same). The output, 10 parts per hour, for both products is the same and the cost of the value stream stays at $580 per hour. The total cost of product A and B are therefore both $100 per part.

Standard costs related to the products A and B:

Product A Product B

Labour @ $80 per hour Grinding @ $60 per hour Milling @ $70 per hour

Overhead = 50% ( total labour + machine cost) Raw Material $ 22.67 (17m) $ 3.00 (3m) $ 4.67 (4m) $ 15.17 $ 42.00 $ 32.00 (24m) $ 6.00 (6m) $ 7.00 (6m) $ 22.50 $ 42.00 Standard Cost $ 87.51 $ 109.50 Real Cost $ 100.00 $ 100.00

Conclusion Standard Cost Too Low Too High

This example is overly simplistic, but it does serve to show that when the strategy of a company is cellular manufacturing, and therefore the focus is on the flow of materials, the method of standard costing becomes misleading and unhelpful.

(24)

(Woodlock, 2000). Continuing traditional accounting in a cellular manufacturing environment shows how misleading the method of standard costing can be and can lead to the wrong conclusions.

Calculating machine tariffs, usual with standard costing, imply that the machines will be used for a fixed percentage of the total available time. This is a correct assumption when machines are located in a functional layout where the same type of machines are in one department and an expansion of the machine capacity will only take place once the current capacity is fully used. Like with Value Stream Costing an important characteristic feature from Cellular Manufacturing is that there is no use for calculating with machine tariffs anymore. Machines are designated to a certain area to guarantee a flow within that area. Meaning that it doesn't matter if the machine is occupied for 30% or 80% the depreciation cost are fixed.

2.5 Control of the cell

By producing according to CM it is important that also the management control system should be simple, supportive of the cell and that it computes maximum profitability. In general MCS is a much broader system, but in this thesis it is limited to financial control (cost

accounting method) and non-financial measurements in the form of Key Performance Indicators (KPI's). This combination should capture the true benefits of CM, because they both play an important role in judging the performance (effectiveness) of a cell. On the one hand the system should be capable of measuring and reporting progress toward total quality control, reducing inventory levels, faster setup times, reduced lead time, on time deliveries and new product launch times. On the other hand cells must be accountable for their own cost without being burdened with overhead and fringe costs. This cost breakdown needs to be provided for cost control and continuous improvements purposes. Without it, the cell is firing shots in the dark, hoping to hit something significant (Miller, 1999).

(25)

measure has a Specific purpose for the business, it is Measurable to really get a value of the KPI, the defined norms have to be Achievable, the KPI has to be Relevant to measure (and thereby to manage) and it must be Time phased, which means the value or outcomes are shown for a predefined and relevant period.

Which type of Management Control System can now be recommended as the best fit for a CM? It is important that it is a MCS with a combination of financial and non-financial measurements. The cost accounting system with the best fit is value stream costing (or a derivative of this system) and this should be completed with a number of KPI's defined on cell level in alignment with the KPI's on management level. These instruments of MCS can result in independent working teams on cell level that not only can influence and therefore increase the effectiveness of a cell, but also be held responsible for the performance of their team. By creating independent working teams the company is actually creating small

(26)

Chapter 3: Research methodology

The study has been performed at Sulzer Eldim, a manufacturing firm producing components for airplane engines and industrial gas turbines. After being with this company for over ten years and having several functions, one of them being the coordinator of Sulzer Eldim's continuous improvement program, my current job title is 'Business Analyst'. Being in this function combined with finishing my 'Master of Science in Business Administration' education the main role in the project for me was to introduce academic knowledge and theories about Management Control Systems, and in particular cost accounting methods, into the company. This happened mainly through daily interaction with the other project members and the information was used during the concept phase of the project before we started with the actual implementation. Given my interest in studying the ongoing change process, I found the clinical methodology useful for this exploratory research. This is characterized by the active participation of the researcher in formulating and observing the organisational change during and after implementation (Schein, 1987). Through my high degree of penetration and involvement in the organisation I was able to gain access to a richness of data and observe many aspects of the situation.

Three different methods were used during the empirical study within Sulzer Eldim to study a single phenomenon but overcome the weaknesses of single-method design (Campbell & Fiske, 1959). These methods are: interviews, content analysis of documents and direct observations. Interviews provide depth, subtlety, and personal feeling. Documents provide facts, but are subject to dangers of selective survival. Direct observation gives access to group processes, and can reveal the discrepancies between what is said and what is actually done (Pettigrew, 1990).

Interviews:

(27)

Furthermore there were also open interviews held with the overall project leader and the project leaders of the sub-projects. The operations manager is the overall project leader and he is supported by the engineering manager for master data routing, logistics manager for capacity system, financial manager for post-calculation and the head of service & support for the KPI project. From the beginning of the project it was apparent that the success of the project was depending on the cooperation between the different departments starting on the highest level.

Content analysis of documents:

In the end the project should lead to financial improvements and the trend can be followed in the 'cell summary' which is a new document for all the cells. Furthermore there are KPI's on company level since 2007 and these also must show improvements over the months. Another important document is an analysis between the planned and actual hours used in production to produce the parts. These documents will be further discussed in chapter 4 and this will answer the fourth question: "Which type of Management Control System has Sulzer Eldim implemented?"

Direct observation:

During the complete transition process of the total project, which started in January 2010 and took approx. 16 months, there was a lot of communication with all the employees. Not only with visits on the shop floor, but also through the company magazine, the quarterly town hall meeting and several trainings on all levels. Not only in the production cells, but also the team leaders, production leaders, management, engineering, quality and logistics

(28)

Chapter 4: The story of Sulzer Eldim

Sulzer Eldim, which is located in Lomm in the Netherlands, started out as one of the first to treat metal using the Electro Discharge Machining (EDM) method in 1970, hence the name Eldim. Since 2000, the company has been part of the multinational organization, Sulzer, the headquarters of which are in Winterthur in Switzerland. Sulzer Eldim treats and produces a variety of high quality metal parts, essential components in the airplanes and turbines of a large number of well known customers over the world. For example, the components are used in airplane engines made by Rolls-Royce, Pratt & Whitney, MTU, Honeywell, GE and Snecma, and in industrial gas turbines made by Alstom, Siemens, GE and Ansaldo Energia.

4.1 The first steps towards change

Over the past decade Sulzer Eldim began the adoption of LEAN manufacturing and changed from a traditional job-shop to cellular manufacturing for about 70% of production. Some of the major changes that took place included:

• Installation of flow-lines around families of similar parts, containing both equipment and activities for parts-manufacturing as well as for assembly.

• Physical relocation of manufacturing tasks and equipment between the company's two facilities.

• Inauguration of multifunctional teams responsible for the production of the complete products including quality control.

However, no changes to the traditional method of cost accounting were planned. Up until 2007 Eldim used standard costing to calculate pre- and post cost price. Standard costing computed each product based on direct labour & machine times per operation step multiplied by the calculated tariffs (per machine and labour) increased with 40% overhead allocation and direct material & subcontracting per part increased with 10% overhead allocation. The overhead costs were a total for all kinds of supporting activities like: quality, engineering, construction, maintenance, purchasing, logistics and warehouse support, but also for more fixed cost like: building lease, electricity, water, canteen facilities and other generic cost.

(29)

of an order put in the SAP system. In both systems it was possible to put in separate times for labour and machining and also for setting up the machine (which is a combination of labour and machine time). For post-calculation Sulzer Eldim had been using 'KABA' clocks since 1997 to register its employees' job times in order to calculate the cost price of

production. However, inputting the data was taking up too much of employees' time on the shop floor and needed a high level of discipline which was not supported by the production leaders. Furthermore the system was complex using different barcodes for the same machines on a machine template and still calculated with build in assumptions like the operator hours being linked to a machine for 100% of the time, but with a certain percentage of the labour tariff. Resulting in exceeding the calculated operator hours (even by a factor 2 or 3) relative to the time spent within the company. The system for instance calculated 16 or 24 operator hours by 1 operator where he was only within Sulzer Eldim for 8 hours. This could technically not be solved in the old system.

This method of post-calculation resulted in operational control information that was barely of any added value and because of the difficulties Sulzer Eldim had winning new quotations several discussions started about the cost price level. Adjustments to the cost accounting system became increasingly essential.

The urgent need for reliable actual information from and on the shop floor caused the adjustments to start with the post-calculation. Advancing insight thought Sulzer Eldim that is was not practical and also not necessary to register every single operation step, which sometimes could take longer than to execute the step. It did not add any value to the product and was not efficient for the total process which was a contradiction with the implementation of one of the modern manufacturing technologies (Lean, JIT, TOC). One of the starting points for these systems is that if an activity does not add value to the product it should be considered as waste and waste should always be reduces as much as possible. The idea was to get more information on scrap, First Time Yield (FTY), lead time, delivery to promise to the customer (DTP), work in process (WIP) and the total performance of a cell. What exactly the workers spent their time doing was felt to be of less importance than them reaching the targets on these non-financial goals. All costs that were directly allocated to the cell were to be split up evenly between the numbers of products manufactured.

With the implementation in January 2008 of SAP xApp Manufacturing Integration and Intelligence (SAP xMII), Sulzer Eldim linked production processes and time registration to the earlier implemented SAP ERP solutions for logistics and administration. Hours are not

(30)

including an individual barcode resulting in a photo on the right side of the main screen. Once the photos are visible on the screen the operators have activated themselves and will start generating actual

production hours. The production orders that the cell is working on must also be activated with a barcode (per production order) via the touch screen. These will

show on the left side of the main screen and they will collect production hours by way of a formula that divides the total actual production hours with the number of active production orders. Not only do these production orders collect actual production hours, but they also generate the planned hours calculated per material number via standard routings in SAP. This system is not meant to judge one order separately, but on a cell level a comparison between the total planned hours and the total actual hours during a certain period of time can be made. With this system the calculation for the post cost price changed. There are no separate tariffs anymore per machine and for the employees, but a cell tariff including all cost for the machines and employees is calculated. This was an intermediate solution and the total sum was still increased with 40% overhead.

According to the operations manager SAP xMII has given Sulzer Eldim much more and clearer operational control information on the shop floor. The visual aspect of the screens makes the system very easy to understand and accessible to all employees. By using colours for the status of an order it is clear at a single glance which production orders are behind in schedule. It also calculates the WIP; amount of production orders with the part quantities on the work floor in a particular cell.

4.2 Next Step in a Cell Concept

At this point in time the pre-calculation at Sulzer Eldim had not been changed and with the misalignment between pre- and post-calculation it was difficult to determine the level of under- and over costing for an individual part number or even for a cell. Pre-calculating the cost price was still related to an individual part number with the same overhead increase of

(31)

40% for low and also for high volume part numbers. The risks of accepting work with the wrong Gross Margin were high. From a simple exercise it appeared that, in the budget of 2010, 50 of the approx. total 280 parts (18%) resulted in 67% of the total revenues and therefore also covered the biggest portion of the overhead costs while in practise these 50 parts needed only a fraction of the total support. With this knowledge and several new (or extensions) Long Term Agreements (LTA's) on the line the urge to change the standard calculation method grew stronger by the day. Additionally to get to the next level of operational excellence Sulzer Eldim's need for more information on a cell level grew. Not only was there a need for more accurate financial information, but also non-financial

indicators to take the effectiveness of the entire organization to a higher level and to get clear accountability in production on cell level.

For the future Sulzer Eldim wants to have independent working teams that are responsible for all value adding activities within a cell and it became clear that working in a cell concept should contain a different approach from supporting departments, then their own separate traditional way. To reach this goal cooperation between all disciplines is essential and Sulzer Eldim started defining and implementing the necessary management tools to get disciplines accountable for the cell performance. Furthermore a new system for cost

accounting was necessary. A system that not only aligns pre- and post-calculation, but is also more in line with the Lean philosophy. This has been done in a project with the name: Next Step in a Cell Concept (N.S.C.C.), "next step" meaning that the business strategy (producing parts in a cellular manufacturing environment) has been chosen and this project is about increasing the effectiveness of the total company as shown in figure 7.

The scope of the project is Sulzer Eldim's internal value-added stream starting when the production order gets activated in a cell and ending when the inspection lot has been booked (this triggers the movement of the parts from the shop floor to the warehouse and

CI Create Competitive Advantage Modern Manufacturing Technology Cellular Manufacturing

Business Strategy

Increase

Value added

(Effectiveness)

CI Create Competitive Advantage Modern Manufacturing Technology Cellular Manufacturing

Business Strategy

Increase

Value added

(Effectiveness)

Figure 7: Next Step in a Cell Concept

(32)

therefore closes the production order). As shown in figure 8 the project structure contains four sub projects being: 1. Master Data Routing; 2. Capacity System; 3. Post-Calculation and 4. KPI.

The outcomes of the sub projects 'Post-Calculation' (changing the cost accounting method) and 'KPI' are part of the Management Control System. The capacity system can be seen as a link between production and finance. Since production is arranged according to cellular manufacturing it is very important to know what the maximum capacity per cell is in order to calculate the cell rate. Master Data Routing has a strong impact on the outcome and reliability of the other projects and can be seen as a layer over the other sub projects (figure 8). If the master data is incorrect the capacity system will not work, it will not be possible to compare pre- and post calculation and outcome of the KPI's will be questionable.

Before going in to more detail regarding the changes and the new chosen method for cost accounting all sub projects will be discussed to give an overview of the complete project within Sulzer Edlim.

1. Master Data Routing

During the quotation phase, engineering determines the recurring and non recurring costs of a component. Recurring costs are specified as up fronted material-, subcontracting- and manufacturing costs (labour and machine times) for a certain level of manufacturing robustness (learned out). When a purchase order is given, engineering is responsible for

S co pe P ro je ct S tru ct ur e

Input Value-added Stream Internally _{SULZER ELDIM (NL)} Output

Supply Chain

Production order inspection lot booked Production order

activate in cell

Master Data Routing

Capacity System Post-Calculation KPI

1 2 3 4 S co pe P ro je ct S tru ct ur e

Input Value-added Stream Internally _{SULZER ELDIM (NL)} Output

Supply Chain

Production order inspection lot booked Production order

activate in cell

Master Data Routing

1

2 3 4

(33)

realizing this level during the development phase and the control of correct input of SAP Master Data. After completion of the development, production is responsible for the efficiency and thus actual cost price level.

Following weaknesses were observed:

• Definitions for set up time, labour time, and machine time were not clear enough for all processes. No real net times were being measured and there was too much room for individual interpretations.

• Control of master data was not defined for the time period after development; after improvements were made this could result in significant differences between calculated and actual process times and thus interpretation of needed capacity.

• Efficiency measurements were not defined for the time period after development; this also could result in a wrong capacity assumption. Some engineers would include efficiency partially in the times per operation step, but it was also calculated in the hourly rates for labour and per machine.

• Level of consumable consumption was not specified enough per product. It was calculated as an average in the total machine tariff although the consumption of some consumables was a lot higher and there were also immense price differences (e.g. between a normal and a diamond grinding wheel). This could easily result in a wrong allocation of costs to the parts and therefore to the customers.

The objective of this sub project was to get clear definitions on the different aspects and correct Master Data Routing available for each part number during the product life time. This is essential for the second and third sub project. Without correct Master Data it will never be possible to make a good comparison between pre- and post calculation and use the capacity system up to its full potential and therefore make the cells accountable for their production performance.

2. Capacity System

Working in a Lean environment it is basic information to know how much capacity in terms of available people and machines are needed in a company to achieve their goals. Capacity planning is the process of determining the production capacity needed by an organization to meet changing demands for its products. In the context of capacity planning, 'capacity' is the maximum amount of work that an organization is capable of completing in a given period of time. A discrepancy between the capacity of an organization and the

demands of its customers results in inefficiency, either in under-utilized resources or

(34)

increasing or decreasing the production quantity of an existing product, or producing new products.

In the current situation the SAP capacity system has been taken into use which is now able to determine the number of operators and machine hours (both including efficiency) needed in a cell to produce the production plan requested by the customer. This system generates the number of operators per skill that are needed in a certain period of time to produce the required parts in a cell and the system checks if there is enough machine

capacity (on the bottleneck) available to do so. It is now easy to update the production plan if there are changes in customer demand or in the master data and it is easy to see if a cell is full or if there is room for more parts of that particular family. Important for the success of this system is the ability to take operators out of the cell if they are not needed to fulfil the

production plan in a certain period. 3. Pre- and Post calculation

Using standard costing to calculate pre- and post cost price does not support the lean philosophy. Applying standard costing in a cellular manufacturing environment will lead to distorted cost information which will be used as a decision base for management and control purposes. Starting with a new registration system in production (SAP xMII) the change after using standard costing for almost 40 years at Sulzer Eldim was not only necessary but also inevitable.

To get better accountability in production on cell level and to become more competitive on price for volume parts Sulzer Eldim decided to change to a derivative form of value stream costing and calling it 'cell costing'. Using this method all costs, including supporting activities and other indirect cost, must be associated with a cell. This way Sulzer Eldim was able to eliminate the 40% overhead that was generally spread over all parts which lead to becoming to expensive for the high volume customer and the risk of loosing these contracts.

Within cell costing design there is no overhead based on volume anymore. There are three main headings and the overhead cost are now allocated or distributed to the different cells.

• Direct Costs: directly linked to the cell personnel, factory, depreciation

• Allocated Costs: influenced by the cell support hours, tooling costs

(35)

To implement this new cell costing it is important that roles and responsibilities not only within the cell, but also within whole Sulzer Eldim are clear. There must be a clear distinction between the cost that occur during the development phase (learning curve in production and supporting non-recurring cost) and the 'normal' production phase (including the supporting cost in the cells) afterwards. Where production can only be held responsible for the second phase and engineering is responsible for the first phase. Furthermore it is also important that post and pre calculation are comparable again and new developed reports must support the accountability of a cell's performance. The subject of cell costing will be further described in paragraph 4.3 'Cost Accounting within Sulzer Eldim'.

4. KPI's on cell level

In the past several KPI's were defined on higher management level (with some

involvement of middle management) without alignment, not clearly communicated top down and not followed up on a periodic basis. Starting in 2007 a scorecard has been developed including KPI's from different focus areas (being: Business Volume, Health & Safety, Operational Performance and Customer Satisfaction) and monitored on a monthly basis. Although some of the KPI's improved over the years due to joint efforts between higher and middle management from the involved departments there still was no overall top down communication. During a survey with a cross section of approx. 30 employees the scorecard was a document that didn't ring a bell. Most of the times the employees guessed that scrap and deliver performance must be KPI's, but they did not know their role or the target that was set for the specific year.

As part of the new management control system it must be clear to all employees what is driving the performance. Therefore it is necessary to define KPI's on cell level and not only communicate these top down, but also make them visible in the different areas. To tackle the KPI's in the correct order and to keep focus on the priorities the definition phase started with a pyramid (figure 9).

Normal production output is acceptable and predictable (Production output KPI's)

Outside services KPI's

Quality of work is acceptable and predictable (Quality KPI's) People work in flexible environment, enabling to

cope with disturbances (Flexibility KPI's)

People work in safe environment (ESH KPI's)

(*)

3 2 1

(*)

(*) not part of this project

Normal production output is acceptable and predictable (Production output KPI's)

Outside services KPI's

Quality of work is acceptable and predictable (Quality KPI's) People work in flexible environment, enabling to

cope with disturbances (Flexibility KPI's)

People work in safe environment (ESH KPI's)

(*)

3 2 1

(*)

(36)

Not only does the pyramid show the importance of the KPI's, but also what is part of N.S.C.C. and what is not. The fundament of this pyramid is that all employees must work in a safe and healthy environment. Going up from here the first KPI within this project is

producing parts in an acceptable and predictable quality. If the quality is not under control it will disturb the total production process and cost will go up. Secondly the production output must also be acceptable and predictable. With the new capacity system in place a cell must be able to fulfil their production plan. Once the quality and production output are under control it is important to create a flexible workforce, enabling Sulzer Eldim to cope with disturbances in the market.

In 2010 Sulzer Eldim wants to move forward and get all employees to understand and to be involved in the defined KPI's. It must be clear for everybody what is driving the

companies performance. Therefore the defined KPI's are not only a monthly percentage, but they are visible, and updated per week, in all production cells on the SAP xMII screen (figure 10). For the production area it is important that there is no overload of KPI's. The choice has been made to start with two quality KPI's; being scrap percentage and First Time Right (FTR) and one production output KPI; being Deliver to Plan (DTP). Once a challenge has been tackled successfully the cell has to focus on the next KPI while remaining at or below the target level of the controlled KPI's.

4.3 Cost Accounting within Sulzer Eldim

Up until 2009 the Management Control System was seen as a pure financial concern with a monthly result that was shared among the management team. The team leaders and operators in production had to work according to a production schedule, but often did not know if the financial targets were made for Sulzer Eldim as a total and definitely not at all for their specific production area. One of the reasons for not knowing the total result had to do with poor top down communication, but the reason for not knowing the cell result had

NEXT STEP IN A CELL CONCEPT