Challenges and Typical Model Purposes
Manufacturing requires Cost Transparency Models for many different reasons. Of course it is to calculate standard cost followed by doing calculations with true costs to identify variances and follow up on profitability. Besides profitability, these models are used for optimization of processes, production sizes and many more reasons within production execution. The actual & standard cost model can then be turned and used for budget, planning and forecasting. Besides this, models are also used for Transfer Pricing calculation and documentation.
To make models for manufacturing, it is of cause important to understand the processes. Either you produce standard- or customized products. Regardless, it is not a problem creating and defining the model. But each product type has its challenges that are unique for that industry. Some challenges that we have met and solved are:
1) Within paper/pulp production, the energy is circular as they purchase energy at the same time they generate energy. Much of the waste from paper cutting is send bach to the pulp process and used again.
2) In cheese producing, you end up with waste from cutting edges for instance that are used in grated cheese as a part of the materials. And within cheese, you have a product that become another product just by being stocked for a longer period.
3) In many industries you have semi-finished products that are end products as well. This means you have to be able to handle the product structure, where an semi product/ ingredient also appear as an end product. Examples of this is Pulp in paper production, Resins in Paint production and electronic components.
Many manufacturing companies have very skilled production controllers, all having their spread sheet calculations about product cost. Challenge is often that their methods are not similar. It is a challenge when it comes to management from a group perspective. Imagine a factory producing car engines and 3 assembly sites that all are in the need of engines. Who do you send the first engines to? The nearest, the one that screams loudest, the one with highest production or the one with the best profitability per car or customer? And to be able to take that decision, it is important you have a generic model and methodology to base your decision on.
A DANISH MANUFACTURE OF PRESCRIPTION-, NON-PRESCRIPTION MEDICINES AND SPORTS NUTRITION had 66 different brands and within them different sizes, in total about 320 products. The company had existed for many years and was well know for some of their brands, which were cash-cows. A product profitability model including production, QA, purchase and warehousing was designed and implemented in few months together with resources from the company. When the model was presented, there was silence in the room and it showed up the cash cow was a loosing business. Sales people though margins was higher and therefore they gave discounts. At Christmas and Easter they normally used another box with Santa/eggs on, which was a bit more expensive, they was aware of that, so they adjusted discounts a bit. But what none really was aware of and had not included in their calculations was, that the packaging machine had to run slower due to the slightly thicker material, which effected the unit price of cause. The model also highlighted a problem related to the production planning, where they never included the machine stop in the calculation as it was normal to do stops between products to clean. But the cleaning process for non-prescription and prescription medicines are very different. Previously they did not really planned the production order that well but it was just following the sequence in which orders was received but when they saw it in terms of money that a stop was not just a stop, a lot of changes was introduced. The model showed several non profitable products and some of them were all in same brand, so one total brand was so un-profitable that only alternative was to close, sell or outsource.
For ONE OF THE LARGEST PULP AND PAPER MANUFACTURER IN EUROPE, we designed a generic solution to be used at all their production sites, where they could do budget, forecast and actual profitability per product per ton. They did not produce the same products at all sites but the solution had a flexibility to handle it and allow differences at lower levels.
We designed a recipe solution that is the base of the model, where there is a recipe for each process step in the production with ingredients and usage per produced ton. A recipe is then an ingredient in the recipe at the next step, if it is not an end product. There are different types of pulp and thereby different recipes but one of them are ingredient in several of the following recipes. So at the last step, there are many more recipes then in the beginning. There is even a recipes for the energy generation. This flow of recipes control all variable expenses and budget for variable expenses are simply done by doing a backwards calculation, where sold volumes are entered and by using recipes, ingredients and volume backwards, they end up with total need of materials. Then it is just required to enter expected material costs and the budget for variable expenses is done. Fixed expenses are free of the recipe logic. Same procedure for the forecast.
When it comes to actual, the model distribute used materials to recipes based on different factors as time and volume, and actual used volumes vs. volumes according to standard cost identify waste at each step. In the end of the actual model you can analyze products, product groups etc. and see variable and fixed expenses, accumulated waste and much more. From the model you can analyze each process step and single paper machines are each factory. This is useful not only for profitability but also when having internal discussion about moving production volumes between sites, or close down a paper machine.
Not only do the models ensure similar calculation methods across sites, it also reduces the staff dependency as they now easily can do the calculation for another mill in case a mill controller is ill. And it makes is possible to bench-mark products across mills.
Few months before the Cost Transparent Project started, the company had just introduced a new common ERP system among others with streamlined procedures. But the Cost Transparency Project went so deep into structures and methods that they realized that they had to work with the ERP system as things was not as streamlined as required, which is just one of the derived benefits of a Cost Transparency Model.