Lebanon Gasket Company Case Analysis

Creating a Lean Enterprise: The Case of the Lebanon Gasket Company

Creation of a lean enterprise is always the objective of most manufacturing companies and other processing businesses. When one ventures out to develop a business, their main objective is normally to maximize profits, while offering quality goods and services. Maximizing of profits means streamlining costs while maintaining the quality of the products and services for the customers. The creation of a lean enterprise is hence governed by customer driven motives that ensure the creation shareholders value while focusing on the specific needs of the customers. A lean enterprise therefore pursues perfection of the enterprise’s products while minimizing costs through cellular manufacturing, lean manufacturing and reduction of wastes in the manufacturing process.

The case study of Lebanon Gasket Company is based on the principles of creation of lean enterprises. Lebanon Gasket Company (LGC) had suffered reducing profits due to several issues related to its production process. There were a lot of wastes and excessive inventories, poor delivery performance of goods to customers and a reduction in the market share. The case is a clear scenario for the need of streamlining of the company’s processes so as to make it more efficient and lean in terms of expenditure and the manufacturing process.

The hiring of Walsh was therefore necessitated by the need to make LGC lean and as successful as Toyota Company where Walsh had worked for four years.

His long experience in the manufacturing management (20 years experience) was very vital in creating a lean, efficient and profitable firm out of Topeka. Walsh’s work bore unprecedented success in terms of creating a lean company. Within 18 months, there was a clearly lean transition of the plant.

The key measure put in place by Walsh was the introduction of 2 value streams as well as 4 manufacturing cells. These were clear manifestations of the change towards developing a lean company that was manageable and productive.

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This case is a fitting case to be used to analyse the impacts of lean operations within a company.

The drastic improvement of customer order-to-delivery cycle time was an indication that Walsh’s efforts of leaning the production and manufacturing process were bearing fruit. Naturally, and logically, we would expect that such significant measures put in place tom lean the operations would have a positive outcome in relation to the financial income from sales returns of the manufacturing plant. This was however not the case with Topeka. There was a significant drop of return sales. In the fourth quarter of 2004, the company had registered a returns-on-sale of 11.5%. The first and the second quarters of 2005, however, showed a significant drop in the returns-on-sale of 10.8% and 10.1% respectively.

So what went wrong with Walsh’s efforts of creating a lean and profitable production process? From the case study, there is an apparent conflict between the manufacturing process and the financial accounting of the company. While the creation of a lean manufacturing process reduces wastes and is aimed at achieving a significant reduction of costs involved in the manufacturing process, this is not always evident in the short-term. It is also worth noting that there is a significant role played by lean accounting in maximising profits. Just like Walsh, most engineers will be surprised by such outcomes.

Engineers do not have sufficient knowledge of the company accounting systems and are often made to believe that the sales returns of the company is directly proportional to the efficiency of the lean manufacturing process.

The case study therefore seeks to address the other financial issues that affect the financial outcomes of a lean enterprise. It seeks to link the financial accounting of a company that aid in value management of products, with the role of lean enterprising. As Walsh eventually resorts to hiring accounting consultant, there are several conflicting questions in his mind. Relating accounting with his efforts of overseeing a lean transformation within his company was his major challenge. There were apparent questions on operational control of the manufacturing process.

There was also the sensitive issue of employee capacity streamlining. Could the high cost and low profit margins be linked to the large headcount of the employees and could Dwyer’s proposition of laying off some of the employees be necessary?

An important aspect to be considered when streamlining operations of a company to create lean processes is the length and design of the manufacture prices or chain. Topeka had two main value streams; the injection molding value stream and extrusion molding stream. The use of two value streams introduced some form of specialization where employees would deal with a specific value stream. As opposed to mass production value streams would focus more on the efficiency of the production process rather than on the economies of scale. Each stream had a value stream manager and both were identical in terms of the operation structure, except for the number of machine operators. The injection value stream had 17 machine operators while the extrusion value stream had 23 machine operators. The use of a cellular lean approach by Walsh was aimed at enhancing customer-driven value.

The analysis of the various accounting aspects of the company is key to the development and implementation of lean enterprise operations. As manifested in this case, there is an apparent need to integrate various departments in the development of a lean profitable processing plan. Whereas the engineers will strive to put in place measures that ensure lean production, such efforts may go to waste or even have more negative implications if proper accounting and financial planning is not integrated to the process.

Case analysis
The analysis of the case of LGC will be based on the questions posed by Walsh. The analysis will present possible answers expected by Walsh from the accounting consultant he hired. The answers will, of course, be based on the production costs and the produced units based on exhibit 6 and exhibit 7. The analysis is a representation of the various financial, specifically accounting, policies and measures that should be adopted in a bid to create more efficient and profitable manufacturing g firm based on value added and non-value added works. The various accounting tools used by the company in solving the problem should be relevant in terms of financial and logical viability.

In my analysis, I will answer each of the three questions separately, before providing a general conclusion based on the answers provide.

Walsh’s first question is whether the traditional accounting practices that had been adopted by Topeka to support mass production were of any important value to the lean environment created by Walsh in the Topeka manufacturing plant.

As Dwyer, the financial manager of the company explains, the company uses a standard costing approach in its financial accounting, an approach opposed by welsh himself. The company had also adopted fixed financial conventions. The conventions were not dynamic as compared to the production process that had been reviewed over the time. The production process had experienced drastic changes since 1979 when Dwyer became the company’s finance manager.

The answer to this question is absolutely trivial. The traditional accounting practices that had been developed and maintained for more than 25 years could not add value to the lean environment.

First it is important to analyze critically the standard costing approach used by the company.

Standard costing is not an appropriate accounting practice when dealing with lean enterprises.

Though, standard costing will be appropriate for calculating production cost for mass production processes of companies, it is not suitable for lean companies. Standard costing has various impacts on the approximation of production costs. It tends to over-produce and reduce the flow of production. It also tends to create excess inventories within the company. All the three impacts are actually the reason why a company needs to adopt lean operations.

Standard costing therefore does the contrary of what leaning should do. While the traditional standard costing focuses on mass production with the major objective being to achieve economies of scale, lean manufacturing focuses on instantaneous production. It focuses on making of goods each at a time. Traditional standard costing lacks dynamism and may lead to poor decision making in the practice of management. It impacts on decisions such as make/buy and rationalization of products.

In this case of Topeka, standard costing is not sufficient for the lean manufacturing process. The introduction of such systems requires dynamic policies that merge with such changes. Using the same financial system for over 25 years does not allow the company to effectively accommodate the systematic changes. Such changes include increased inventory turns and reduced lead times.

It is important to note that in the short term, there may not be significant financial improvement after the implementation of lean production systems. In fact in most cases the contrary happens. Low operating profits margins may be experienced due to the reduced inventories or the cost of sales.

This often leads to increased cash flows. Failure to adopt good accounting strategies will therefore lead to major financial slumps in the long run.

The second question posed by Walsh is how accounting can function better to serve strategic planning, control, and decision making efforts of senior management in the lean environment adopted by Topeka. To answer this question, it is important to address issues related to capacity planning, aligning of employee incentives with lean goals as well as product mix decision making.

Lean accounting is definitely important to senior managers especially when it comes to capacity development. Capacity development entails determining the capacity of production resources that are important in meeting demand of the products. Developing an efficient lean management accounting requires the managers to make good use of cellular performance measurements that are used to manage capacity.

A box score is used for resource capacity planning. In this case study, a box score is required to determine optimum resources required to attain good production capacity of the company. This is useful to senior managers in terms of policy making. Accounting takes to consideration the relationship between the value streams’ production resources and the product per employee capacity. Lean data collection is therefore a necessary element for lean accounting. This data is used to eliminate operational transactions that are not necessary for the product process. A manager would always want to align the incentives of his employees with the lean gaols of the company. With a head count of 109 employees, LGC has a reasonable number that is manageable and affordable in terms of wages. The accounting process should not therefore lead to lay-offs of the employees.

As shown in exhibit 7, the annual salaries of the employees are manageable. With such conditions, it is easy to assume that the employees are satisfied hence have a high potential for service provision and production of goods. Considering that the company has two value streams, it is easy to create high customer value for the products manufactured. An efficient accounting should therefore ensure that all the components of the value streams are provided at optimal conditions.

Work-in-process tracking ensures good accounting in terms of employee management. The management needs to also put in place effective labour reporting platforms that ensure that all the employees are accountable.

Accounting provides senior managers with operational, capacity and financial accounts of manufacturing process. Some of the important elements of capacity accounting are productive capacity, non-productive capacity, and available capacities. All the data presented by the three capacities should be available to managers at any particular time.

Accounting also enables managers to develop performance measurements used to control the value streams. Accounting ensures that there is comparative cost reporting to the senior management. Comparative cost reporting is an analytical tool that provides detailed accounts for a given timeframe of the manufacturing process. Exhibits 6 and 7 provide necessary information necessary for the implementation of a suitable accounting tool. It is apparent from the exhibits that the value streams have varying cost dimensions in terms of sales volumes, resource capacity, and production units. The injection molding value stream produces and sells more units than the extrusion molding value stream. However, the sales-per-unit of extrusion value stream is significantly higher than that of intrusion molding value stream. This information is necessary for creating a credible accounting system that that evaluates each value stream separately.

Managers therefore need to use the various accounting tools such as value stream maps to initiate proper product lining. Other tools that can be used include process maps. Accounting gives a clear analysis of the products from each value stream that. This is necessary in deciding on product mix and on proper product lines to engage. Lean accounting is of no significance if it does not help the managers in decision making with regards to goods and services offered to the customers. All the information offered by accounting is important to senior management.

The last question put across by Walsh is how accounting could better serve the needs of the value streams. The major issue when relating lean accounting to value streams is the determination of the value streams’ profitability. Topeka has two value streams; injection molding and extrusion molding. Both value streams are related in terms of procedures and employee requirement.

Accounting for the two streams, however, requires different accounting modalities. This is due to the difference in the inventories and resources required by the two value streams, as well as the varying number of units produced and sold by each value stream. Injection molding value stream has three products while extrusion molding value stream produces two products. This means that the level of specialization would differ especially with respect to the, machine operators.

When accounting for a value stream, there are several factors to take into consideration. These include size of the value stream, machines in the value stream, and matrix of production flow of the value stream. To gauge profitability of the two value streams, Welsh and his colleagues need to develop performance measurement tools for both value streams. There are several parameters that need to be measured for the sake of proper accounting of the value streams. The parameters include sales per person, on-time shipment, Dock-to-Dock time, first time through, average cost per unit, and the accounts receivable days, among other parameters. All these parameters will be used to develop appropriate policies in relation to product capacity as well as optimum level of inventories necessary for improving profitability of the value streams.

Having nullified the traditional standard costing earlier on, there is need to develop another costing plan that will suit the lean processing. The appropriate costing model is the value stream costing.

Value stream costing entails calculation of inventory’s costs and putting in place proper accounting measures to solve problems related with the inventories.

The last and significant role played by accounting in increasing profitability of Topeka is the elimination of wasteful transactions. Proper value stream costing ensures that the transactions are made lean, in line to the lean processes already in place. This ensures that non-value-added transactions are eliminated. Wasteful transactions are eliminated through labour tracking, management of cost of materials, introduction of internal control systems within the value streams and implementation of inventory tracking. From this information it is necessary for personnel in the value streams to make use of sales, operational, and financial planning to achieve optimum performance of the lean process. The accounting models will enable the value streams to carry out the performance measures of employees. This helps in product quality assurance through value stream identifications.

Implementing a lean processing, model is often a challenge that requires a lot of patience from the management. As observed in the case analysis above, the implications of lean accounting and processing are long-term. Financial analysis cannot be therefore used in the short-term to determine the success or failure of the lean process model. As in the case of Topeka, there was a decrease in profit margins from 11.5% in the last quarter of 2004 to 10.8% and 10.1% in the first two quarters of 2005 respectively.

The analysis presents the need for effective accounting systems through proper value stream management. With proper management policies based on accounting of the various value streams, Walsh will be able to successfully implement the lean processing model within Topeka.

The analysis however, may be limiting in the sense that it is more hypothetical and may not be fully practical when implemented. It is based on the theoretical models that are ideal and hence may not be fully realised within Topeka.

The analysis is however important and with proper implementation, may lead to significant success of the lean process in Topeka.

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