Company B is a manufacturer of large, complex electrical motors. It has been making them 'to order', in order quantities of, typically, one-four in a jobbing/batch production system for many years. A typical selling price may range from £3,000-£20,000 per motor. The manufacturing system is typical of traditional UK engineering companies because the factory has a functional layout, employing skilled machinists and using general purpose machine tools. Although it is not technologically complex, the task of managing the number of jobs passing through and scheduling them onto the plant is highly complex. A piece-rate system has been in operation as long as anyone can remember, because of the difficulties of maintaining productivity levels in the complex environment. This piece-rate system 'drives' the product costing system, in that all overhead is recovered on a labor hour basis, based upon the piece-work system returns sent in by shop-floor employees. Its performance measures are output driven, because of the importance of maintaining a steady output of finished product. Management accepts that there is scope to improve this system, especially in terms of quality and work-in-progress levels.
The sales team have recently achieved a major coup, because, for the first time in the company's history, they have taken a very large order for over 3,000 identical motors, at a price of about £5,000 each. From the start of the contract, production will steadily increase from two units in the first month to over 100 units per month in about the sixth month. Demand will be steady for over a year and then ramp down towards the end of the contract. There is a possibility that other orders, for the same product, will follow upon completion of this contract. Future contracts are at an early stage of negotiation.
Engineering and production managers realized that the new order may cause some capacity, WIP and scheduling problems in their existing production facilities. They decided, after careful analysis, to set up a purpose-built production line in one of their empty buildings on the same site. A considerable number of changes to the manufacturing system were planned. The production system for this contract has been designed as a flowline, using dedicated machinery, where appropriate. Many sub-assemblies are made in cells in the same building and they feed directly into the flowline, thus reducing transportation on site. Some parts, that traditionally would have been made on site, have now been sub-contracted to general engineering contractors because of the capacity constraints in the system. (Since the contract has a comparatively short lifespan, engineers have found it difficult to justify capital expenditure for some dedicated machinery.) A few parts, which require specialized processes, are still to be made in the 'old' facilities which will continue with its jobbing activities.
It is clear that the new production line involves a completely different production method and the opportunity for different approaches to costing and management information. Management have now recognized that there will need to be changes in their approach to the management of the new manufacturing operation. The old 'jobbing facility' is difficult to schedule, has very high levels of work in-progress and produces a stream of one-off problems which require swift solutions. By contrast, the repeatability of the new line process should enable operators to learn their tasks and production engineers to 'fine-tune' all the manufacturing processes.
One manager posed the question of the suitability of the piece-work system for the new environment (currently the management relies heavily on this system for both costing and performance measures) and
how the workforce would react if any change were proposed. Some aspects of the new system will, however, make costing and control easier to achieve. The cellular production methods mean that the majority of the in-house manufacturing cost is contained within the one building, and so the system does not have to be integrated into the existing piece-work system. The steady output rate is another positive characteristic of the new method of manufacture which the management must bear in mind.
Productivity measurement will be an important issue, but since the bottlenecks of this line will be fixed, plant utilization measures can concentrate on these machines. Production output can be measured against the contract schedule and not against the maximum feasible production.
The management took a strategic decision in quoting for this business in order to bring work to the plant. They were familiar with the technology and the sourcing of some components but there was little prior knowledge of the costs of the line. It was an 'act of faith' on their part and made in the hope of further business from the client. This further business will be critical to any measure of long-term profitability of this new product. Taken from a life cycle perspective, if no further orders are received and all design and development costs are applied to this product, it will hardly be profitable. But, once the line is established, if further orders are obtained it will be a source of additional profit.

You are required to contrast the characteristics of the two production methods, with particular reference to the system, to generate product costs and performance measures. Should the company use labor hours to cost the new units? What do you think the key management tasks in the old facilities? Do they still apply to the new product environment?

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