Calculate Volume and Performance Variances for Output-Based Control Case Study Scenario Letterkenny Army Depot Intermediate Cost Analysis and Management © Dale R Geiger 2011 Go to http://www.letterkenny.army.mil/Video%203.wmv to play the video © Dale R Geiger 2011 Terminal Learning Objective • Task: Calculate Volume and Performance Variances for OutputBased Control Case Study Scenario • Condition: You are training to become an ACE with access to ICAM course handouts, readings, and spreadsheet tools and awareness of Operational Environment (OE)/Contemporary Operational Environment (COE) variables and actors • Standard: with at least 80% accuracy • Describe the cost-rate-price structure at Letterkenny Army Depot (LEAD) • Calculate surcharge and price for depot services based on Accumulated Operating Result (AOR) • Discuss performance control issues in revolving funded organizations © Dale R Geiger 2011 © Dale R Geiger 2011 © Dale R Geiger 2011 © Dale R Geiger 2011 © Dale R Geiger 2011 © Dale R Geiger 2011 © Dale R Geiger 2011 © Dale R Geiger 2011 10 www.shingoprize.org • • • • The Shingo Prize for Operational Excellence is named for Japanese industrial engineer Shigeo Shingo who distinguished himself as one of the world’s leading experts in improving manufacturing processes Dr Shingo has been described as an “engineering genius” who helped create and write about many aspects of the revolutionary manufacturing practices which comprise the renowned Toyota Production System MISSION: The mission of The Shingo Prize is to create excellence in organizations through the application of universally accepted principles of operational excellence, alignment of management systems and the wise application of improvement techniques across the entire organizational enterprise We this by teaching appropriate roles and accountabilities throughout the organization VISION: Our vision is to be the Standard of Excellence for every organization The Shingo Prize was established in 1988 as the standard of excellence to educate, assess and recognize organizations that achieve the highest level of world-class operational excellence around the globe The philosophy of The Shingo Prize is that sustainable results are achieved through the application of universal, self-evident principles of operational excellence and the alignment of management systems and improvement techniques throughout an entire organization The Shingo Prize is administered by the Jon M Huntsman School of Business at Utah State University © Dale R Geiger 2011 70 me re ali gn En su EVSA Depot A3 Top level driven nt How we LEAN at Letterkenny Subordinate A3 Plan VSA Monthly LEAN Council Review Enterprise level alignment check Corrective action reviews and updates Act Do Tactical A3 RIE, Project, Do-it Continuous improvement, member involvement Check Monthly Scorecard and A3 Review Coach mentor / corrective action 71 A3 and Policy Deployment • • A3 is a Toyota problem solving method named for the size of paper it was produced on (roughly equals 11X17 paper) Policy Deployment is derived from the Japanese concept of Hoshin Kanri – Hoshin = compass needle – setting direction – Kanri = management of resources • • • • Our goals are driven from the Enterprise Level and cascaded down through the organization All goals align Resources needs identified Policy Deployment isn’t just about assigning targets, it follows the Deming cycle – Plan, Do, Check, Act It is about sharing and learning A A great great A3 A3 tells aa story story that we can all understand 72 VSA (Value Stream Analysis) • Helps us to understand where we are and develop an overarching roadmap for improving an entire value stream (product or process): – Value Added – any activity that physically changes the material being worked on and increases its value to the customer – Non Value Added – any activity that takes time, material or space but does not physically change the material or increase it’s value – When doing a VSA, we complete a current state map, an ideal state map a future state map and an action plan Non value added activities are waste, people aren’t! 73 LEAN Involvement …training, training, training ba Ge m • All new members receive “basic training” – LEAN 101 – 6S • • • • • Event Specific Training Management Trainee Program for non-supervisory members Lean Facilitator rotation 6S Champions Six Sigma Training You can’t learn LEAN from a book – all of our training involves “going to Gemba” and using what you have learned 74 The LEAN Council • The purpose of the LEAN Council is to ensure Depot wide: – – – – – – – Awareness of upcoming events and reason for them Best utilization of resources Achievement of goals / targets Proper alignment with all directorates That all events meet top level goals Critical “To-Do’s” are on track, coordinated and being supported Sustainment of LEAN Events • Events are tentatively scheduled to 12 months out (based on A3’s, VSA’s or 2P events) • Schedule is firm - months out • The LEAN Council meets once per month A firm schedule is necessary to give the Process Owner and Facilitator enough time to select team members, schedule them for training and to ensure enough time to weeks of prep 75 Why We Verify Sustainment • Events take time from our busy days and cost money – there needs to be a benefit • Our sustainment is not where we want it to be • Without sustainment, events don’t help make us better • We need to work together to help the members learn new processes after a change • We need to understand the root cause of failure if a change is not being sustained; then take corrective action – To that, we need facts, not opinions If you something for three weeks, it becomes a new habit 76 How we Verify Sustainment • Review these key items: – Did the key players fully participate? – Are we still doing what we said we were going to and are we still reaping the benefits we expected? – Are we on track implementing any “to-do” list items? – Do we have a communications board in the area and we use it? Do we have a production control board in the area and we use it to solve issues? – Is the process owner engaged and have they taken ownership of the change? – Is the new process well defined and is documentation clearly posted / followed? – Does the team deserve special recognition? – What corrective action is required to get back on track? 77 Types of Savings • Low cost / visibility or impact: (under $100,000) – Estimate benefit, verify that it is reasonable / defendable, document the savings and “take it” for the rolling three year period • High cost / visibility or impact: (over $100,000) – Estimate the benefit, verify that it is reasonable / defendable, document the savings and validate that the savings are in fact still taking place Army LSS regulations not require us to verify our numbers after the initial validation We it to ensure that we are receiving the benefit of large savings 78 Learning Check • What are the issues with using NOR as a performance measurement with revolving funded organizations? • What motivation exists to manage cost in these organizations? Group Exercise • Given the table on page for the case study • Assume no price changes between any given year’s budget and actual (stabilized pricing) • Assume no mix effects • Assume three different proportions of fixed cost (10%, 20%, and 30% of total cost) and no fixed cost variances • Calculate the three different analyses to determine volume and performance variances • • • • 2002 – Groups and 2003 – Groups and 2004 – Group 2005 – Group • Reconcile the scenario you think most likely with hypothetical explanations that include LSS impact © Dale R Geiger 2011 80 Teaching Note - 2002 sales 2002 budget vol var rev 152.5 16 vc 156.2 (16.3) fc 10% 17.4 0.0 tc 173.6 (16.3) nor -21.1 (0.3) 2002 budget rev 152.5 16 vc 138.9 (14.5) fc 20% 34.7 0.0 tc 173.6 (14.5) nor -21.1 1.5 2002 budget rev 152.5 16 vc 121.5 (12.7) fc 30% 52.1 0.0 tc 173.6 (12.7) nor -21.1 3.3 performance flex variance actual 168.5 168.5 172.5 (10.1) 182.6 17.4 17.4 189.9 (10.1) 200.0 -21.4 (10.1) -31.5 flex actual 168.5 168.5 153.5 (11.8) 165.3 34.7 34.7 188.2 (11.8) 200.0 -19.7 (11.8) -31.5 flex actual 168.5 168.5 134.2 (13.7) 147.9 52.1 52.1 186.3 (13.7) 200.0 -17.8 (13.7) -31.5 81 Teaching Note - 2003 sales 2003 budget vol var rev 175.4 69.5 vc 152.6 (60.4) fc 10% 17.0 0.0 tc 169.5 (60.4) nor 5.9 9.1 2003 budget rev 175.4 69.5 vc 135.6 (53.7) fc 20% 33.9 0.0 tc 169.5 (53.7) nor 5.9 15.8 2003 budget rev 175.4 69.5 vc 118.7 (47.0) fc 30% 50.9 0.0 tc 169.5 (47.0) nor 5.9 22.5 performance flex variance actual 244.9 0.0 244.9 213.0 (2.9) 215.9 16.95 17.0 229.9 (2.9) 232.8 15.0 (2.9) 12.1 flex actual 244.9 0.0 244.9 189.3 (9.6) 198.9 33.9 33.9 223.2 (9.6) 232.8 21.7 (9.6) 12.1 flex actual 244.9 0.0 244.9 165.7 (16.3) 182.0 50.9 50.9 216.5 (16.3) 232.8 28.4 (16.3) 12.1 82 Teaching Note - 2004 sales 2004 budget vol var rev 310.6 (10.7) vc 258.8 8.9 fc 10% 28.8 0.0 tc 287.5 8.9 nor 23.1 (1.8) 2004 budget rev 310.6 (10.7) vc 230 7.9 fc 20% 57.5 0.0 tc 287.5 7.9 nor 23.1 (2.8) 2004 budget rev 310.6 (10.7) vc 201.3 6.9 fc 30% 86.3 0.0 tc 287.5 6.9 nor 23.1 (3.8) performance flex variance actual 299.9 0.0 299.9 249.8 16.9 233.0 28.8 28.8 278.6 16.9 261.7 21.3 16.9 38.2 flex actual 299.9 0.0 299.9 222.1 17.9 204.2 57.5 57.5 279.6 17.9 261.7 20.3 17.9 38.2 flex actual 299.9 0.0 299.9 194.3 18.9 175.5 86.3 86.3 280.6 18.9 261.7 19.3 18.9 38.2 83 Teaching Note - 2005 sales 2005 budget vol var rev 356.1 16.5 vc 292.6 (13.6) fc 10% 32.5 0.0 tc 325.1 (13.6) nor 31 2.9 2005 budget rev 356.1 16.5 vc 260.1 (12.1) fc 20% 65.0 0.0 tc 325.1 (12.1) nor 31 4.4 2005 budget rev 356.1 16.5 vc 227.6 (10.5) fc 30% 97.5 0.0 tc 325.1 (10.5) nor 31 6.0 performance flex variance actual 372.6 0.0 372.6 306.1 6.9 299.3 32.5 32.5 338.7 6.9 331.8 33.9 6.9 40.8 flex actual 372.6 0.0 372.6 272.1 5.4 266.8 65.0 65.0 337.2 5.4 331.8 35.4 5.4 40.8 flex actual 372.6 0.0 372.6 238.1 3.8 234.3 97.5 97.5 335.6 3.8 331.8 37.0 3.8 40.8 84 ... http://www.letterkenny.army.mil/Video%2 03. wmv to play the video © Dale R Geiger 2011 Terminal Learning Objective • Task: Calculate Volume and Performance Variances for OutputBased Control Case Study... access to ICAM course handouts, readings, and spreadsheet tools and awareness of Operational Environment (OE)/Contemporary Operational Environment (COE) variables and actors • Standard: with at least... structure at Letterkenny Army Depot (LEAD) • Calculate surcharge and price for depot services based on Accumulated Operating Result (AOR) • Discuss performance control issues in revolving funded