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Object Technology Opens New Costing Horizons For Pratt & Whitney Canada
“Our manufacturing costs were killing us,” says Claude
Lévesque, manager costing operations at Pratt and Whitney
Canada. “We knew that we had to reduce them, but first we
had to determine what they actually were.” Lévesque
describes a typical problem for the manufacturer still using
traditional “standard costing” systems that allocate large
pieces of overhead to production processes, and bury
essential elements of manufacturing cost. These systems not
only create incorrect costs; they don’t provide the costing
accuracy or detail needed in today’s hotly competitive
business environment. It’s time for a paradigm shift in
costing methodology; one that measures actual costs by
manufacturing process, by product, by customer, or by any
other attribute that will lead to more knowledgeable
management action. That paradigm shift is well under way at
Pratt and Whitney, Canada.
The Canadian Operation of Pratt and Whitney leads the world
in the design and production of small and medium gas turbine
engines for business aircraft, helicopters, regional
transportation, military trainers, utility aircraft,
auxiliary power units, and industrial and marine
applications. However, until recently, this company of 6000
people, in five manufacturing plants, still relied on
traditional costing methods. “We needed to develop far more
cost wisdom than was enabled by our traditional standard
cost system,” adds Lévesque.
The five P&W plants each house different manufacturing
functions — engineering (Montreal and Toronto), assembly and
test (Montreal, Ledbridge and Toronto), and final parts
manufacture (Halifax and Montreal). Thousands of parts and
hundreds of manufacturing processes go into making the seven
families of Pratt and Whitney engines. P&W parts are sold as
spares as well. “We do a very large spare parts business,”
says Lévesque, an industrial engineer with a masters degree
in accounting. “But even the parts business is competitive,
since many independent suppliers now sell replacement parts
for our engines.” Finding a way to identify actual
manufacturing cost by every part and progressively roll up
the costs into subassemblies, assemblies and engines seemed
virtually impossible. “We needed a whole new type of costing
software package,” says Lévesque. “One made for complex
manufacturing, with enough calculation scope to model each
manufacturing process in detail, and with sufficient
flexibility to accurately accumulate manufacturing costs
right through to finished engine.”
Objects To The Rescue
The search led the team to review and ultimately select the
“Impact:3C” object-based costing software from 3C Software,
in Atlanta, GA. “The architecture of most cost accounting
software systems used today was created 20 or more years
ago,” says Peter Tezza, founder and CEO of 3C Software, and
a pioneer in costing software technology. “We formed 3C
Software to bring cost accounting applications to the same
technology level as other distributed information software
found in the many manufacturing companies,” adds Tezza.
“We’ve done that with the Impact:3C package.”
Impact:3C is object-oriented costing software that provides
great flexibility in its application. “We didn’t have to fit
into any fixed template,” adds Lévesque. That was very
important to us in the software selection.” He offers the
analogy of a word processor that lets you assemble the words
you desire, rather than use a system that provides a fixed
set of words from which you must choose. “We wanted to use
our own words,” he adds.
Developed in compliance with Microsoft standards, the
software runs on the Windows 95/98/NT platforms, and
provides a familiar, user-friendly interface to Windows
users. Its distributed, client-server architecture is fully
open to other systems. “Cost data can come from many places,
and the results sent to many places” says Lévesque. “So it’s
important that the costing software can easily communicate
with other software systems.”
The result is a new type of costing software, more
accommodating in managing costs, a technology that provides
quick overviews and easy drill-down capability to get to
great levels of detail. Importantly, this new software
technology is highly modular, providing great flexibility -
allowing companies to adopt their own costing methodology,
tailor it to individual plants, and periodically update it
as the manufacturing processes change.
“Giant Calculator” allows ABC Costing
The required costing detail called for huge calculation
capability, which is provided by “CostTalk,” a powerful
costing-engine. “CostTalk is like a giant calculator,” says
Tezza, “equipped with all of the mathematical relations and
calculations needed in designing a modern manufacturing
costing system.” CostTalk allows plants to develop the right
costing model for their processes and products, using their
familiar Microsoft tools as well.
“Once we found the right software tool, we knew it was
practical to implement Activity Based Costing (ABC) in our
plants,” says Lévesque. ABC is a costing discipline used to
correct the shortcomings in the over-generalized cost
systems of the past. It is a means of directing an
organization’s costs to the manufacturing activities that
required those costs to be incurred.
“We had heard from other companies that ABC had evolved
beyond the point of simply developing more accurate and
relevant product, process, and service costs,” adds
Lévesque. These firms had begun to use ABC to manage the
drivers of production activity, and be the basis of major
decisions on product lines, market segments and
manufacturing processes. Pratt & Whitney looked to make a
similar leap in company effectiveness. “Most ABC software
derive their costs from the chart of accounts,” says
Lévesque, “whereas the Impact:3C software derives its costs
from the actual manufacturing process operation, making it
uniquely suited for manufacturing companies.”
More than Just Accounting
To properly measure manufacturing costs, the P&W costing
team studied the routing of each and every part as it passed
through production, and assigned costs according to the true
behavior of the process and its demand on company resources
— direct and indirect (e.g. materials, machine usage,
energy, inspection, documentation). “It’s far more than an
accounting exercise,” says Lévesque. “We had to thoroughly
understand each manufacturing process, in order to properly
accumulate its actual costs as accurately and rationally as
possible.”
Each process step (e.g. sandblasting, drilling, deburring),
has a different set of rules for calculating its costs, and
these rules are implemented in the CostTalk engine. The
resulting calculation is then automatically defined as a
software object, usable in subsequent manufacturing. Step by
step, each object is rolled into downstream manufacturing
processes, accumulating its measure of costs along the way,
and its calculations packaged as a new intelligent object.
“The intelligent objects allow us to exactly replicate the
machining of every part made in the plant, says Lévesque.
“They accumulate the cost calculations according to the
model.” Hundreds of objects were defined for the many
manufacturing and non-manufacturing processes. “Without the
intelligent object technology, the job would have bordered
on impossible, since we would have to write lines of
software code for each and every manufacturing step,” he
adds. The result is a tailored methodology for developing
each level of manufacturing cost.
The sandblasting process quickly showed the merit of ABC
costing. Traditionally, overhead was applied to the
sandblasting process based on the number of hours of
operation. However, the cost analysis revealed that the
usage of sandblasting “beads” ñ from grains of sand to
almost BB size — contributed far more to the cost than the
operational hours. The specific part being processed (e.g. a
pin, blade or washer) strongly influenced bead usage.
Overhead was reapplied according to bead usage, and costs
changed significantly. “For some parts, the old standard
costs were off by 100% or more,” says Lévesque. Each process
(grinding, deburring, sandblasting, etc.) has its own
distinct methodology, resulting in tailored costing rules.
Even development and depreciation costs are included in the
final costs.
Lévesque provides an additional example of two manufactured
parts; one is very small (a washer) and purchased then
modified by P&W; one is very large (engine case) and made
and tested in a running engine, a very expensive operation.
The old standard costing practice used machine hours to
allocate overhead, so if both parts had the same machine
hours, they would get the same share of overhead,
incorrectly burdening the washer with the same overhead as
the engine. Now, each part carries just the direct costs and
overhead that are expended in making that part.
The old way showed costs by department, while the new method
reports cost by machine, which then translates easily to
costs per part moving through the machine’s process. “The
new activity-based costing is far more representative of
true cost,” adds Lévesque, though it requires a conceptual
shift for most managers.”
“We don’t rely on the standard costs at all in developing
the new costing,” says Levesque. Costs are derived from
purchased material plus each step in the manufacturing
process. All of this is calculated by the Impact:3C
software, in spite of the substantial Enterprise Resource
Planning (ERP) system also installed in the company. “Most
ERP systems don’t provide the flexibility that comes from
object-oriented technology. That’s why they need to be
supplemented with an object-oriented costing system,” adds
Lévesque.
To date, the costing team has completed the lowest costing
level - i.e. the two parts plants in Halifax and Montreal.
These plants represent the first steps in the manufacturing
process (about 450 people in each). When all levels of
manufacturing have been modeled, a cost rollup can be done
from the lowest activity level (the parts plant) to the
highest (assembly and test plants) resulting in a finished
engine. (See Figure 1) The rollup functionality consists of
the measures of facility, process, material and labor
required to make a specific part on a specific machine. The
present work covers 5 levels of the 12 level rollup.
Valuable Side Effects
The ABC costing also shows which machines are busy and which
are underutilized. “The machine-utilization data turned out
to be a valuable byproduct from the process,” adds Lévesque.
“In the middle of this exercise, I realized that we could
get capacity utilization in addition to cost with a slight
reconfiguration of the model.” So they changed the costing
model accordingly, since capacity utilization was such a
valuable piece of information.
“Once we get all of the infrastructure costs assigned, we
know what it costs us to have one hour of capacity for every
machine. Knowing that, we can pinpoint used and unused
capacity is for each manufacturing process.” 'Unused cost’
is calculated each month to determine where the unused
capacity lies. Conversely, costs with little or no unused
capacity show where the bottlenecks may be. “Our costing
models follow in accordance with the Theory of Constraints,”
says Lévesque. “So every month we can tell where the
bottlenecks and unused capacity reside.” Yield per part may
also be calculated using the unused capacity costing models.
Yield calculation is accomplished automatically for each
part and department. “This was a real breakthrough for us,
using the costing system,” says Lévesque.
Since the software will handle any numeric attributes, the
team decided to use it to roll up engine weight as well.
“Weight is a critical variable in aircraft engines,” says
Lévesque, “so why not use the costing software to calculate
it.”
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