Determination of Costs Resulting from Manufacturing Losses: An Investigation in White Durables Industry

Transcription

1 Proceedings of the 2012 International Conference on Industrial Engineering and Operations Management Istanbul, Turkey, July 3 6, 2012 Determination of Costs Resulting from Manufacturing Losses: An Investigation in White Durables Industry İzlem Tekin Department of Management Engineering Istanbul Technical University, Macka Istanbul, Turkey Sıtkı Gözlü Department of Management Engineering Istanbul Technical University, Macka Istanbul, Turkey Abstract In this study, OEE (Overall Equipment Effectiveness) metric is used for identifying the performance of individual manufacturing units. OEE is formulated as the function of availability efficiency, performance efficiency, and quality efficiency and used in this study to identify the manufacturing losses of the manufacturing unit. There have been a limited number of studies that have addressed to methodology of investigating cost of manufacturing losses. The purpose of this study is to develop a methodology called Analysis of Costs Resulting Manufacturing Losses based on the ABC model in order to measure costs resulting from manufacturing losses, to provide a decision support tool for the managerial staff of companies to reorder cost reduction priorities and to provide a useful approach for estimating the cost of recovered manufacturing losses as a result of TPM (Total Productive Maintenance) activities. The methodology is applied for studying a real life case in a white durables manufacturing company. It is concluded that it can be usefully applied in real life area and a useful decision support tool for management. Keywords Activity Based Costing, Manufacturing Losses, Costs, OEE 1. Introduction Effectiveness in manufacturing organizations is essential to reduce costs for success in global competition. The key to manufacturing cost reduction is first of all to study various manufacturing losses and classify them. Then, the relationships between the losses and their cost and cost factors must be studied. There have been a limited number of studies that have addressed to methodology of investigating cost of manufacturing losses. The purpose of this study is to develop a methodology called Analysis of Costs Resulting Manufacturing Losses based on the ABC model in order to measure costs resulting from manufacturing losses, to provide a decision support tool for the managerial staff of companies to reorder cost reduction priorities and to provide a useful approach for estimating the cost of recovered manufacturing losses as a result of TPM activities. In the literature, we can find studies focused on the manufacturing losses. In Yamashina and Kubo (2002), manufacturing cost reduction is the main problem area in the production environment. They proposed a method based on cost reduction using cost definitions. In Huang et all [2003] is proposed an OEE based method using constraint theory and sensitivity analysis. Muchiri and Pintelon [ 2008] is tried to categorize the production losses to analyze the differences between theoretical and practical applications. In this study, an analysis of costs resulting from manufacturing losses is conducted and an application of a case study is presented. The steps of the methodology are as follows: First, the manufacturing losses must be identified for various losses in the manufacturing systems; their locations and durations are determined using the TPM 16 big losses categories. Manufacturing loss rate and equipment performance rate are measured by using OEE Nakajima [1988]. Second, the manufacturing cost and also manufacturing unit cost are computed by using ABC (Activity Based Costing) because ABC systems provide accurate computation. Activity - based costing was introduced by Kaplan and Cooper [1998] 352

2 as an alternative to traditional accounting techniques. ABC was suggested as an appropriate tool by Ohwoon Kwon and Hong Chul Lee [2004] for determining the savings from the TPM activities in the manufacturing. In Rezaia et all [2008] proved that ABC method more confidential than the traditional accounting method. Methodology includes such steps as identifying activities, determining activity cost drivers, computing the activity costs, and finally identifying the manufacturing unit or product costs. All sources of costs in the manufacturing unit are computed. Third, losses are converted into manufacturing costs. Losses and relationships of cost factors are determined and their equations are presented in the study. For example, to calculate the breakdown cost in the systems, total breakdown time in the manufacturing period, source of breakdown loss for consumption rate and sources of costs are needed. After estimating the total costs of each loss, we can determine priorities for manufacturing losses and their recoverable costs and organize improvement activities like kaizen methods in TPM. The priority of improvement programs can be adjusted according to the results of this analysis. As future research, estimated recoverable costs would be used as a controllable cost of kaizen costing method, which targets the elimination of the losses completely. These estimated loss costs would be used for the computation of the target reduction rate, which is the ratio of the target reduction amount to the cost base. 2. Case Study 2.1 Identification of Manufacturing Performance Losses Injection Molding Machine In this section a case study is presented of a plastic production plant of a white good organization that produces several plastic parts such bottom chassis, upper chassis, front bearing. In the plastic production plant there are 8 plastic injection molding machines. First, raw plastic materials are injection molded. After molding, the parts are transferred to the chassis grouping line. Bottom and upper chassis parts are grouped with other purchased components in order to produce plastic chassis. Then, grouped chassis is transferred to the final assembly line for white good product (Bottom Chassis ) (Upper Chassis) Chassis ) Chassis) Chassis Assembly Line ÖNYATAK ŞASİ Front GRUPLAMA Bearing Assembly Line BANDI TERRA ASSEMBLY LINE LUNA ASSEMBLY LINE Figure 1: Plastic Production Flow Chart Identification of Manufacturing Losses In this study manufacturing losses identified for various losses in the manufacturing systems; their locations and durations are determined using the TPM 16 big losses categories injection molding machine is chosen and OEE used to determine its productivity. OEE is formulated as a function of availability efficiency, performance efficiency, and quality efficiency. This formula quantifies losses in the production area, such as breakdown, set-up, 353

3 idling and minor storage, reduced speed, and quality defect and rework. Conventional formula for OEE is in Table 1. The performance rate of was 64.11%. See Figure 1. Table 2: Conventional formula for OEE (min) Formulation A-Working Time (Month) 44,640 =31*24*60 Planned Maintenance 81 Break Time 232 Managerial Downtime 16,012 B- Planned Downtime 16,325 C- Planned Production Time ( A - B) 28,315 = 44,640-16,325 Mechanical Downtime 491 Electrical Downtime 2586 Mold Failure 530 Set-up 273 Robotics Failure 681 D- Unplanned Downtime 4561 E- Operating Time ( C - D ) 23,754 =28,315-4, Availability (A) ( E / C) 83.89% =(23,757/28,315) F- Total Production Quantity 14,780 Theoretical Cycle Time 75(second) G- Total Production Quantity * Theoretical Cycle Time 18,475 =14,780*75/60 Speed Loss 5279 =23,754-18, Performance Rate (P) (G/E) 77.78% =18,475/23,754 Scrap Quantity 257 H - Good Product Quantity 14, Quality Rate (Q) (H/ F) 98.26% =14,523/14,780 Scrap Loss 321 =(257*75)/60 OEE = 1*2* % * 77.78% * 98.26% = 64.11% Determining of Production Costs Determination of costs resulting from bottom chassis production operation on machines will be possible by determining production costs of bottom chassis. In the plant, instead of total operating cost method, production unit cost distribution is preferred and FTM method principals are adopted Identifying Plant Activities Number of activities differs from organization to organization Cooper and Kaplan [1999]. In our company Nine (9) activities are specified in inner production team after analyzing of cost data, according to observations. Specified activities cover all production processes performed in the team. The activities performed during the inner production can be divided into the following categories that are given in Table

4 Table 2: Inner production team activities list Activity No Inner Production Team Activities 1 Direct labour activities 2 Technician activities 3 Material handling 4 Die/Mold maintenance 5 Breakdown maintenance 6 Auxiliary plant operations 7 Material movements 8 Engineering operations 9 Administrative operations Determining Activity Costs In order to perform the activities required costs should be transferred to activities, after the determination of activities. Therefore, a correlation needs to be set between costs and activities by observation and measurement. If it is possible to transfer the costs directly to production units, then use of a cost driver will be unnecessary. In our study; energy, depreciation, repair and maintenance costs are generating directly transferrable costs on production unit basis. Cost drivers are shown below, which are fundamental concepts in FTM, transferring costs to activities described in Alkan [2005]. Activities cost according to their cost drivers. 355

5 Table 3: Cost Drivers Allocation List Cost Type Direct Labour Indirect Labour White Collar Wage Cost Drivers Man-hour*Production Qty. Number of Indirect Labour Number of White Collar Activity Centre Prod Qty Treatment Manhour*Prod Ratio handling maint. Material Die/mold Manhour/Qty ician. Opr. Op. Hanger,lab Techn Maint. SAP facility, uction Qty. Opr. Opr. Op Engineers Team Leader Terra Upper Chas. Molding 17, , Terra Bottom Chas Molding 17, , Luna Chassis Molding 4, , Front Bearing Molding 55, , Chassis Grouping 18, , Front Bearing Grouping 28, , Mechanical Production Paint Shop Table 4: Cost Consumptions of the Activities Employee Social Other Production Costs Overheads Indirect Labour (TL) White Collar (TL) Expenditures Cost Drivers Indirect Labour White Collar Indirect+Direct Labour Indirect+Direct Labour Total Monthly Amount 28,615 TL 20,375 TL 4,281 TL 685 TL Technician Activities Material Handling Die/Mold Maintenance Breakdown Maintenance 12, Auxiliary Plant Operations Material Movements 1, Engineering Operations Administrative Operations

6 Determination of Production Units Cost After the determination of activities costs, second stage is transferring these costs to products in Baykasoğlu and Kaplanoğlu [2008]. For this study, production costs will be calculated only for machine operations, in proportion to its consumption. Activities cost drivers given in Table 5 used for distribution of activity costs to production units. Consumption proportions of production units are also given in Table 6. Production Unit Table 5: Activities Cost Drivers Technician Operations Ratio of Time Consumption (%) Repair and Maintenance Machine Downtime - Mechanical and Electrical (min) Die/Mold Maintenance Die/Mold Breakdown + Set-Up (min) Material Movement Ratio of Time Consumption (%) Engineering Operations Time Consumption - Team Engineer Team Leader Operations Time Consumption - Team Leader Team Technician Time Consumption. (%) Table 6: Activities Cost Drivers Machine Downtime - Mechanical and Electrical (min) Die/Mold Breakdown + Set-Up (min) A total monthly working hours analysis was 28,315 minutes, previously. As it can be seen in Table 7, hourly cost of production process is calculated dividing monthly working period by monthly costs. Table 7: Machine Production Costs SAP Operator Time cons. (%) Team Engineer Time Consumption (%) Team Leader Time Consumption (%) Terra Upper Chassis Injection Molding Terra Bottom Chassis Injection Molding Luna Chassis Injection Molding Front Bearing Injection Molding Chassis Grouping Front Bearing Grouping Mechanical Production Paint shop

7 Monthly Hourly Cost(TL/Month) Cost(TL/Hour) Direct Labor Operations 1, Technician Operations Die/Mold Maintenance 1, Repair and Maintenance 3, Indirect Labor Operations 4, Engineering Operations Managerial Operations Administrative Operations Operating Equipment 0 Inventory Stock (small) 0 Fixed-Asset Repair and Maintenance Repair and Maintenance Operations Electricity 1, Water Depreciation TOTAL COST 9, Cost Analysis of Losses In principle, if there are any downtimes in process, cost corresponding to that period means "loss". However, not all costs realize during a downtime. For example, a machine partially consumes energy or does not consume energy at all, during a downtime. In order to specify loss-resource consumption ratio matrix" (TKiDj) is used, showing which losses cause which costs on operations. Total monthly losses of costs are obtained by multiplying total monthly loss hours by hourly cost and loss-resource consumption factor. Formulation of cost of losses is identified as (I): Resources will be shown in the order Ki (i= 1, 2 12), like direct labour K1, technician operations K2, etc. Losses will be shown in the order Dj (j=1, 2.16). These losses are obtained in the stage of identifying production losses. Resource hourly costs are shown as (MKi). Consumption of operation costs and loss causing ratio of losses are shown as (TKiDj). (1) 358

8 Table 8: Loss - Activities Costs Matrix Monthly Total Loss Time (Actual) Mechanical Breakdown Electrical Breakdown Die/Mold Breakdown Set-up Robot Malfunction Speed Loss Loss due to defective product Hourly cost (TL/Hour) Direct Labor Operations Technician Operations Die/Mold Maintenance Repair and Maintenance Indirect Labor Operations Engineering Operations Managerial Operations Administrative operations Operating equipment Inventory Stock (small) Fixed-asset repair and maintenance Repair and Maintenance Operations Electricity Water Depreciation TOTAL HOURLY COST TOTAL MONTHLY COST of LOSSES 1,

9 Figure 2: Machine loss-transformation cost chart It can be seen that there is a loss of 1, TL, corresponding to 20.16% of total losses on machine costs. This shows the importance of losses which could be recovered if required improvement activities are performed successfully. 3. Conclusions and Future Research In this study, losses obtained from OEE analysis are identified on cost analysis and financial basis. Also, recoverable losses through TPM studies are determined. FTM method is employed during the study, though it is not available to apply the method systematically. If it is considered entirely for departments and plant, the model presented in the study will ease detecting and responding processes, which cause maximum cost of losses in production operations. Transformation costs can be decreased, kaizen topics can be determined for continuous improvement, and these can be implemented by departments with the presented method. In this study, a method is developed intending to identify production cost of losses and to calculate the proceeds of improvement activities and proposed an basis methodology for the decision support tool for the managerial staff of companies to reorder cost reduction priorities. The methodology is applied for studying a real life case in a white durables manufacturing company. It is concluded that it can be usefully applied in real life area and a useful decision support tool for management. Although more clear results can be obtained if the model runs over annual costs of the plant, the ultimate constraint is a more detailed and time consuming study requiring to apply the method on factory-wide. Future research directions involve obtaining the cost value of losses from this study can be used to apply "kaizen costing" method for distributing cost-cutting goals of company over departments. Cost values calculated here will form the "controllable costs" in kaizen costing method. References 1. Alkan, A., Faaliyet Tabanlı Maliyet Sistemi Ve Bir Uygulama (Activity Based Costing: An Application) (in Turkish), Selçuk Üniversitesi Sosyal Bilimler Enstitüsü Dergisi, no.13, pp.39-46, Baykasoğlu, A., Kaplanoğlu, V., Application of Activity Based Costing to a Land Transportation Company: A Case Study, International Journal of Production Economics, vol.116, no.2, pp , Cooper, R., Kaplan, R.S., Measure cost right: Make the right decisions. Harvard Business Review (65), 5, pp , Cooper, R., Kaplan, R., The Design Of The Cost Management Systems, Prentice Hall, 211, Huang, S.H., Dismukes, J.P., Shi, J., Shi, Q., Wang, G., Razzak, M. A., Robinson, D.E., Manufacturing productivity improvement using effectiveness metrics and simulation analysis. International Journal of Production Research. vol. 41, no. 3, pp , Kwon, O. and Lee H., Calculation methodology for contributive managerial effect by OEE as a result of 360

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