Can someone please provide me a solution to this case? I have attached the case (with the questions at the end) and the requirements file?

ISSN 1940-204X Creating a Lean Enterprise: The Case of the Lebanon Gasket Company Peter Brewer Miami University Frances Kennedy Clemson University IntroductIon Exhibit 1 LGc Absorption Income Statements For the quarters ended March 31 and June 30, 2005 The Lebanon Gasket Company (LGC) hired Tom Walsh as the plant manager of its Topeka, Kansas, facility in January 2004. LGC was impressed by Walsh's 20 years of experience as a manufacturing engineer, including four years of employment as a manager in Toyota's Georgetown, Kentucky, facility. Walsh's charge at Topeka was to turn around a plant that had been suffering from declining profits and margins, excessive waste and inventory levels, unsatisfactory on-time customer delivery performance, and shrinking market share. His game plan for overcoming these problems was to focus on one core strategy - operational excellence. He intended to abandon the mass production mindset that had guided the Topeka plant since its inception in 1979 in favor of the lean thinking approach that he had seen work effectively at Toyota. After 18 months on the job, Walsh and his co-workers had accomplished many goals related to the plant's lean transition. Two value streams and four manufacturing cells were up and running. The lean training program was proceeding on schedule. The production, engineering, and maintenance employees had started to buy in to lean thinking. Customer order-to-delivery cycle time had drastically improved, which in turn was growing sales. Nonetheless, the financial results were disappointing. The absorption income statements shown in Exhibit 1 indicated that the plant's net operating income and return on sales had continued to decline from the 11.5% that was reported for the fourth quarter of 2004. To make matters worse, organizational in-fighting was at an all-time high - the Finance Department was blaming the Production Department for the plant's declining performance, and vice versa. I M A Ed u c AtIo nA L c A S E JournAL Quater ended 3/31/2005 Quarter ended 6/30/2005 $4,022,755 $4,182,214 2,909,477 3,049,357 1,113,278 1,132,856 Direct Material Variance 24,485 28,065 Direct Labor Variance 31,380 37,562 Overhead Variance 64,527 88,880 Sales Cost of Goods Sold Gross Profit @ Standard Adjustments: Scrap 34,392 181,289 958,494 951,568 96,006 Gross Operating Margin 26,782 154,784 Total Variances 97,670 Operating Expenses Selling Expenses Shipping* 429,797 432,047 Total Operating Expenses 525,803 529,717 $ 432,691 $ 421,851 10.8% 10.1% Net Operating Income Return on Sales *Shipping expenses include salaries, occupancy cost, and supplies. As Walsh stared at his plant's 2005 quarterly income statements and reflected on his stressful refereeing duties between Finance and Production, he wondered aloud, \"Where do I go from here?\" Perhaps it was time to have a conversation with his Finance Manager to explore the role accounting should play in a lean enterprise. 1 V OL. 1, N O. 4, ART. 2, DECEMBER 2008 Brewer, P., & Kennedy, F. (2008). Creating a lean enterprise: The case of the Lebanon Gasket Company. IMA Educational Case Journal, 1(4), article 2. Reproduced with permission. thE PLAnt And ItS ProductS is cooled using a combination of water and air. The mold eventually opens and the completed part drops onto a conveyor belt where it continues to cool until it reaches a machine operator. The injection molding machines are expensive pieces of equipment that constrain the pace of production within this process. In the extrusion molding process, small pellets are heated and transformed into a liquid compound. However, instead of shooting a predetermined amount of compound into a mold to form a completed part, the liquid compound flows in a continuous stream through a shaping mold. The resulting tubular product is then heated treated and either cut to a specific length or spliced into hollow circular seals to meet the customer's requirements. The heat treating activity constrains the level of output from this process. Topeka's headcount had held steady in recent years at about 109 employees (see Exhibit 2 for an organization chart as of January 2004). The plant relies on two main manufacturing processes - injection molding and extrusion molding - to produce a variety of rubber sealing systems for automotive, healthcare, plumbing, and telecommunications applications. Three main product families - OS1, TX4, and KC13 - are produced in the injection molding process. More than 100 product models are produced across these three product families. Two main product families - LX22 and KB8 - are produced in the extrusion molding process. More than 75 product models are produced across these two product families. In the injection molding process, small resin pellets are fed into a machine where they travel down a large screw that carries them to the molding cavity. As they move down the screw, the pellets are melted to form a liquid compound that is injected into a mold. While in the mold, the liquid Exhibit 2 Lebanon Gasket company organizational chart Prior to Lean reorganization (total headcount = 109 employees) Plant Manager Executive Assistant Finance Manager Production Manager Maintenance Manager Human Resources Manager Process Engineer Supervisor 5 Techs 25 Machine Operators Process Engineer Supervisor 5 Techs Production Clerk 19 Machine Operators Mechanical Engineer Maintenance Clerk Purchasing Agent Purchasing Clerk Shipping Manager Sales Manager Mechanical Engineer Cost Accountant Supervisor General Accountant Supervisor GL/AP Clerk GL/Cost Clerk Payroll Clerk Engineering Manager HR Clerk Supervisor 10 Lift Operators Sales Rep Supervisor 10 Lift Operators Sales Rep Shipping Clerk Facilities Engineer Facilities Engineer Engineering Clerk I M A EducAt Io n A L cA SE J o ur n A L 2 V OL . 1 , N O . 4, A R T. 2 , DE C E MB E R 2 0 08 Brewer, P., & Kennedy, F. (2008). Creating a lean enterprise: The case of the Lebanon Gasket Company. IMA Educational Case Journal, 1(4), article 2. Reproduced with permission. thE LEAn orGAnIzAtIon As Exhibit 3 indicates, Topeka's lean plant layout contains two value streamsone for the injection molding process and one for the extrusion molding process. Each value stream team is represented by one value stream manager. Although the value stream manager can be chosen from any of the functions represented on the value stream core team, the individual selected should have substantial manufacturing process knowledge and strong leadership skills. Both value stream teams report directly to the Production Manager and have cross-functional representation from every department within the plant except the Human Resources Department.2 Each value stream contains two manufacturing cells as Exhibit 3 shows a Topeka plant organization chart as of June 2005. A total of 109 employees are shown in this chart, which corresponds to the total number of employees shown in Exhibit 2.1 The fact that these two numbers correspond is not an accident because Walsh had made a conscious effort to retain all employees when transitioning to lean production, based on the belief that layoffs would lower employee morale and decrease the likelihood of a successful lean implementation. Exhibit 3 Lebanon Gasket company Lean organization chart (total headcount = 109 employees) Plant Manager Executive Assistant Finance Manager Maintenance Manager Human Resources Manager Production Manager GL/AP Clerk Maintenance Clerk HR Clerk Production Clerk GL/Cost Clerk Payroll Clerk Sales Manager Engineering Manager Shipping Manager Engineering Clerk Shipping Clerk Facility Supervisor Facilities Engineer Shipping Supervisor 8 Lift Operators 3 Facility Techs Facilities Engineer Shipping Supervisor 8 Lift Operators Injection Molding Value Stream Manager Extrusion Molding Value Stream Manager Process Engineer Accountant Process Engineer Accountant Mechanical Engineer Sales Rep Mechanical Engineer Sales Rep 2 Cell Team Leaders Production Supervisor 2 Cell Team Leaders Production Supervisor Maintenance Supervisor Purchasing Agent Maintenance Supervisor Purchasing Agent Value Stream Core Team 2 Lift Operators 3 Maintenance Techs Value Stream Core Team 17 Machine Operators 2 Lift Operators Injection Molding Value Stream 3 Maintenance Techs 23 Machine Operators Extrusion Molding Value Stream 1 The value stream managers depicted in the dotted line boxes shown in Exhibit 3 are chosen from the members of the value stream core team. Therefore, it would be redundant to count the value stream manager boxes when tabulating the headcount of 109 employees. 2 Each employee on the value stream teams maintains dotted-line accountability (which is secondary in importance to their primary accountability to the Production Manager) to their respective functional manager. I M A Edu cAtI on A L cA SE Jo ur n AL 3 V O L. 1 , N O . 4 , A R T. 2 , DE C E MB E R 2 0 0 8 Brewer, P., & Kennedy, F. (2008). Creating a lean enterprise: The case of the Lebanon Gasket Company. IMA Educational Case Journal, 1(4), article 2. Reproduced with permission. indicated by the fact that there are two cell team leaders on each value stream team.3 to minimize changeover costs. Work-in-process inventory was stored as needed in between work stations. Supervisors administered strong oversight to ensure that front-line workers met productivity standards. The purchasing agent frequently pitted numerous suppliers against one another in a bidding war to drive down raw material costs. As a point of contrast, Exhibit 5 shows one of the two manufacturing cells within the Topeka plant's extrusion molding value stream. The goal of the plant's cellularoriented lean approach is to deliver customer-driven value. Resources are organized in a manner that mirrors the linked set of activities that deliver products to customers. Units of production are pulled through manufacturing cells in a onepiece flow in response to actual customer orders. Cross-trained cell workers are empowered to collaborate with one another to continuously improve performance within the cell. Raw materials are frequently replenished by a limited number of long-term suppliers through the use of visual cues called kanban cards. MASS vErSuS LEAn ProductIon Implementing the lean approach dramatically changed the goal of the Topeka plant's manufacturing processes and the routings for all of its products. Previously, the goal of the plant's mass production process was to achieve the lowest possible cost per unit by maximizing employee and equipment productivity. Exhibit 4 shows the plant layout that was used to achieve this goal. (The arrows in the exhibit depict the routing for products made in the extrusion molding process.) Notice that all of the plant's resources were organized functionally. In other words, its heat treating, assembly and pack, cutting and splicing, injection molding, and extrusion molding resources were maintained in physically separated and autonomously managed departments. Units of production were scheduled based on a forecast of expected customer demand and then processed in large batches Exhibit 4 topeka Plant: Functional Plant Layout (arrows depict extrusion molding product routing) Extruders Injection Mold Machines Cutting and Splicing W A R E H O U S E Material Storage Racks Assembly and Pack Heat Treating *The product routing depicted above covers approximately 300 yards. The cell team leaders are shown as machine operators in Exhibit 2. 3 IM I M A Ed uc At Io n A L cA S E J ou rn A L 4 V O L . 1 , N O . 4 , A R T. 2 , D ECEM B E R 2 0 0 8 Brewer, P., & Kennedy, F. (2008). Creating a lean enterprise: The case of the Lebanon Gasket Company. IMA Educational Case Journal, 1(4), article 2. Reproduced with permission. Exhibit 5 topeka Plant: Extrusion Molding Manufacturing cell (arrows depict extrusion molding product routing) Cutting and Splicing Heat Treating Raw Material Supermarket Assembly and Pack Extruders W A R E H O U S E *The product routing depicted above covers approximately 140 yards. thE FInAncE FunctIon operational control on the manufacturing floor, and (3) incentive system that is used to evaluate and reward the performance of employees within each department. Dwyer argued that the plant's poor performance was due to three operational inefficiencies. First, the purchasing agents were paying too much money for raw material inputs as indicated by the unfavorable direct materials variance on the income statements shown in Exhibit 1. Second, direct labor inefficiency was at an all-time high as indicated by the unfavorable direct labor variance on the income statements. Dwyer suggested that the low labor inefficiency highlighted a cost-cutting opportunity that could be realized by laying off a few laborers. Finally, the plant's equipment utilization and overhead cost recovery were nose-diving as highlighted by the unfavorable overhead variance on the income statement. Tom Walsh was an engineer, not an accountant. He always believed that if he properly managed the manufacturing floor, the financial results would take care of themselves. Yet, after his first 18 months at the Topeka plant, his rule of thumb had not held true. In an effort to understand the plant's unsettling financial performance, Walsh decided it was time to truly acquaint himself with the role of the finance function within his plant. He set up a meeting with his Finance Manager, Mike Dwyer, and asked him to provide an explanation for the plant's shrinking return on sales. Dwyer focused his comments on defining the attributes of the plant's standard costing system. He explained that the standard costing system provides the foundation for the plant's: (1) cost-plus pricing system that is used by the sales staff to bid on new business opportunities, (2) monthly variances analysis reports that are used to facilitate I MA Ed u cAt I on A L c A SE J o urnAL 5 V OL . 1 , NO. 4 , AR T. 2, DE C E M BE R 2 0 0 8 Brewer, P., & Kennedy, F. (2008). Creating a lean enterprise: The case of the Lebanon Gasket Company. IMA Educational Case Journal, 1(4), article 2. Reproduced with permission. thE nExt StEP had more than 30 years of experience with standard costing and it defined his view of how to run a manufacturing facility. Furthermore, Dwyer was planning to retire in the near future and didn't have an interest in critically reviewing his department's procedures and reporting practices. Walsh decided he needed a fresh perspective on the role accounting should play within his plant. Although he tended to have an adverse reaction to the word \"consultant,\" he realized that consulting advice was exactly what he needed. After reviewing proposals from three consulting firms, Walsh hired Lean Enterprise Development from Chicago, Illinois. He asked the consulting firm to help him answer three questions: After Walsh's meeting with Dwyer, four things became very clear. First, Walsh was confused by the language of accounting. Terms such as variances and overhead absorption were difficult for him to understand, to say the least. Second, Walsh was not comfortable with the thought of laying off employees. He felt that his employees were intellectual assets that should be optimized to grow sales, not an expense that should be minimized whenever possible. Third, Walsh had a \"gut feel\" that something was not quite right with the standard costing approach. The accounting conventions that Dwyer described had been in place since 1979 when he was hired as the plant's Finance Manager. It seemed to Walsh that if the production process had been changed dramatically, the finance function ought to adapt accordingly. Fourth, it was obvious that Dwyer was disinterested in the whole lean concept. He 1. Do the traditional accounting practices that the Topeka plant adopted in 1979 to support its mass production process have value in a lean environment? Explain the specific reasons that support your answer. Exhibit 6 Lebanon Gasket company Product Family Information (unit cost information is averaged across all product models) Injection Molding tx4 oS1 Kc13 Extrusion Molding Lx22 KB8 Unit Cost Material $ 0.093 $ 0.148 $ 0.129 $ 0.587 $ 1.101 Labor $ 0.046 $ 0.069 $ 0.050 $ 0.261 $ 0.289 OH $ 0.086 $ 0.148 $ 0.148 $ 1.650 $ 1.400 $ 0.225 $ 0.365 $ 0.327 $ 2.498 $ 2.790 Total Unit Cost Sales Dollars March $ 195,118 $ 399,642 $ 432,003 $ 1,227,003 $ 1,768,988 June $ 187,599 $ 375,366 $ 414,282 $ 1,323,012 $ 1,881,954 Units Sold March 542,960 684,319 825,694 350,853 452,890 June 556,900 685,600 844,612 365,261 465,247 March 534,290 662,498 808,723 354,972 442,099 June 550,900 650,430 885,900 360,890 450,890 Units Produced Units Processed per Hour Extrusion n/a n/a n/a 1,080 1,110 Injection 2,040 1,650 2,050 n/a n/a Heat Treating n/a n/a n/a 970 920 Cutting and Splicing n/a n/a n/a 1,250 1,280 Assembly and Pack 2,760 2,600 2,400 1,100 1,150 Facility Information March 2005 June 2005 Utilities, Insurance, Property, Taxes, Insurance, etc. $ 372,000 $ 396,000 Janitorial, Security, and Grounds Maintenance* $ 62,000 $ 54,000 Facility Maintenance Personnel $ 87,835 $ 95,835 $ 84,874 $ 97,670 Occupancy Costs Corporate Allocation *These services are performed by outside contractors. I MA E ducAtI on A L cA SE Jo ur n A L 6 V OL . 1 , N O . 4 , A R T. 2, D E C E MB ER 2 00 8 Brewer, P., & Kennedy, F. (2008). Creating a lean enterprise: The case of the Lebanon Gasket Company. IMA Educational Case Journal, 1(4), article 2. Reproduced with permission. Exhibit 7 Lebanon Gasket company value Stream Information Injection value Stream Extrusion value Stream March $ 156,920 $ 372,690 June $ 142,450 $ 368,759 Ending Inventory June $ 112,461 $ 333,048 Material Purchases March $ 237,594 $ 691,189 June $ 231,789 $ 672,426 March $ 79,850 $ 156,980 June $ 56,750 $ 102,578 June $ 32,698 $ 34,890 March $ 120,568 $ 230,890 June $ 78,493 $ 187,432 Ending Inventory June $ 60,361 $ 58,126 Equipment Related Costs March $ 139,098 $ 357,826 (repairs, depreciation, parts, etc.) June $ 106,699 $ 384,116 Other Costs March $ 8,407 $ 14,799 (selling supplies, travel, etc.) June $ 9,840 $ 15,030 Square Footage** March 57,500 s.f. 112,500 s.f. June 47,500 s.f. 105,000 s.f. raw Material Inventory Beginning Inventory In-Process Inventory Beginning Inventory Ending Inventory Finished Goods Beginning Inventory ** There is 250,000 square feet in the facility, 62,500 feet of which is in the warehouse. The remainder is shared office space and unused production space. AvErAGE AnnuAL SALArIES* Position Salary Amount Plant Manager $ 125,000 Executive Assistant $ 33,000 Sales Representative $ 72,000 Clerks $ 27,500 Accountant $ 52,000 Engineer $ 65,000 All Managers $ 80,000 All Supervisors $ 45,000 Technicians $ 36,000 Forklift Operators $ 32,000 Machine Operator $ 26,000 *Salary amounts do not include 30% fringe (e.g., insurance, payroll taxes). I MA Ed u cAt I on A L c A SE J o ur n AL 7 V OL . 1 , N O. 4 , AR T. 2 , DE C E M BE R 2 0 0 8 Brewer, P., & Kennedy, F. (2008). Creating a lean enterprise: The case of the Lebanon Gasket Company. IMA Educational Case Journal, 1(4), article 2. Reproduced with permission. 2. How can the accounting function better serve our senior management team's strategic planning, control, and decision-making efforts within its current lean environment? Specifically, address issues related to capacity planning, aligning employee incentives with lean goals, and product mix decision making. 3. How can the accounting function better serve the needs of our value stream teams and manufacturing cells in their efforts to optimize performance? Specifically address issues related to value stream profitability analysis, linking strategic goals to operational performance measures, and eliminating non-value-added transactions and activities. ABout IMA With a worldwide network of nearly 60,000 professionals, IMA is the world's leading organization dedicated to empowering accounting and finance professionals to drive business performance. IMA provides a dynamic forum for professionals to advance their careers through Certified Management Accountant (CMA) certification, research, professional education, networking and advocacy of the highest ethical and professional standards. For more information about IMA, please visit www.imanet.org. In an effort to answer these questions, the consulting firm reviewed the Topeka plant's operations and accounting practices for two weeks and gathered the data shown in Exhibits 6 and 7. Walsh anxiously awaited the answers to his questions as well as the firm's overall recommendations. thE ASSIGnMEnt Assume that you are employed by Lean Enterprise Development. The principal in charge of this engagement has asked you to create a draft of the presentation that answers Walsh's questions. SuPPLEMEntAL rESourcES B. Maskell and B. Baggaley, Practical Lean Accounting, Productivity Press, New York, 2004. K.M. Kroll, \"The Lowdown on Lean Accounting: A New Way of Looking at the Numbers,\" Journal of Accountancy, July 2004, pp. 69-76. I M A E du c AtI o n A L c A S E Jo u rn A L 8 V O L . 1 , N O . 4 , A R T. 2 , D ECEM B ER 2 0 0 8 Brewer, P., & Kennedy, F. (2008). Creating a lean enterprise: The case of the Lebanon Gasket Company. IMA Educational Case Journal, 1(4), article 2. Reproduced with permission