Case Study 2: LeTourneau Technologies, Inc.

The LeTourneau Technologies, Inc. (LTI) companies include some of the world's leading innovators in manufacturing, design, and implementation of systems and equipment for mining, oil and gas drilling, offshore, power control and distribution, and forestry. LTI has two main manufacturing facilities (Longview, TX and Houston, TX) that are similar in terms of capability, product complexity, and size. One can see the dramatic differences between the two comparable campuses of Longview and Houston in the following information. To be very clear, the type of manufacturing is very similar in terms of both complexity and scale.

Beginning in 2005, the market began to take off for all LTI business segments. What is important to understand is that LTI has been through these boom cycles before. All previous times, however, LTI's inventory and expenses have dramatically risen at a similar rate as revenue along with deteriorating service levels. What is unique about this particular case is that the Longview facility using ASR (as well as a partial implementation of DBR) was able to dramatically control inventory and expenses while maintaining excellent service levels in the boom cycle.

FIGURE 12-11 Total revenue versus inventory.

Additionally, what should be noted is that all boom markets eventually end. One can see in the graphs in Fig. 12-11 that in 2008 the markets began to cool off. When those boom times are over, ASR minimizes exposure to inventory liabilities. The bottom line is that no matter what kind of economic times a company finds itself in, good inventory practices that minimize inventory exposure while maintaining service levels is always the right strategy.

This first graph in Fig. 12-11 shows Total Revenue versus Inventory from 2001 to 2008 from the Longview campus only. Note that beginning in 2005 there was rampant growth. Revenue grew by a factor of greater than 300 percent (over $400 million). Over that same period, inventory rose only by 80 percent (approximately $80 million).

This second graph in Fig. 12-11 shows Total Revenue versus Inventory from 2001 to 2008 from the Houston campus only. Note that at the beginning of 2005 there was the same rampant growth curve as observed in Longview. In this case, however, inventory ended up growing at nearly the same rate as revenue. There is about a six to nine month lag, but it is pacing at the same rate. Why is there a lag? As is typical with most MRP implementations, the plant is building to forecast.

Now, as can be seen in both graphs, when the market begins to turn at the beginning of 2008, LTI is exposed with a huge amount of inventory liability. In fact, due to the nature of forecasting and long lead times, there is a risk that the inventory will actually grow beyond revenue in the short run without massive course correction in the form of PO and MO cancellation or delay. This is a classic effect of traditional MRP driven environments.

It is very important to note that the people in the Houston facility are smart, professional manufacturing personnel. They simply did not have the tools and new approaches at their disposal to replicate what happened at Longview. The graph in Fig. 12-11 is not an indictment of those people; it is proof that traditional MRP represents a huge liability in the volatile and variable manufacturing environments that tend to be today's rule rather than exception.

For more on LTI's case study, see Chapter 14.

Summary

By bringing together rules, vision, and technology, ASR provides a practical real world solution to the MRP conflict found in so many companies today. ASR still allows the company to utilize its formal planning system and finally realize the ROI expected when the system was first implemented. The current ERP system is not ripped out and replaced. Instead, the components of ASR leverage all the good work done to date. The five components of the ASR approach effectively manage the volatility and variability plaguing your company to create the velocity and visibility necessary to provide a competitive advantage in today's hypercompetitive market. Isn't that better than disconnected sticky notes and Excel spreadsheets?

The authors have set up the Web site www.beyondmrp.com for interested readers to learn more about ASR. We welcome your thoughts and feedback on this innovative approach.

References

Aberdeen Group. 2006. The ERP in Manufacturing Benchmark Report. Boston: Aberdeen Group.

Blackstone Jr., J. H. 2008. APICS Dictionary. 12th ed. Alexandria, VA: APICS.

Masson, C., Smith, A., and Jacobson, S. 2007. "Demand driven manufacturing," AMR Research Report. January 2007, AMR-R-20105.

Orlicky, J. 1975. Material Requirements Planning. New York: McGraw-Hill.

About the Authors

Chad Smith is the cofounder and Managing Partner of Constraints Management Group (CMG), a services and technology company specializing in pull-based manufacturing, materials, and project management systems for mid-range and large manufacturers. Mr. Smith has a wide range of experience in successfully applying pull-based systems within a diverse scope of organizations and industries. Clients, past and present, include LeTourneau Technologies, Boeing, Intel, Erickson Air-Crane, Siemens, IBM, The Charles Machine Works (Ditch Witch), and Oregon Freeze Dry.

Since the late 1990s, Mr. Smith and his partners at CMG have been at the forefront of developing and articulating the concepts behind ASR as well as building ASR compliant technology. CMG's homepage is at www.thoughtwarepeople.com.

Additionally, Mr. Smith is an internationally recognized expert in the application and development of TOC, getting his formal training at the Avraham Y. Goldratt Institute Academy and working under the tutelage of Dr. Eli Goldratt, author of The Goal, for several years.

Contact him at csmith@thoughtwarepeople.com.

Carol Ptak is at Pacific Lutheran University as Visiting Professor and Executive in Residence after years of executive management experience at PeopleSoft and IBM Corporation as well as many years of consulting expertise. Most recently, Ms. Ptak served as the Vice President and Global Industry Executive for Manufacturing and Distribution industries at PeopleSoft.

Here she developed the concept of Demand Driven Manufacturing (DDM) as an overall product and marketing strategy to align product development, market awareness, and demand generation. Her innovative approach is credited with significantly improving the company's position in the manufacturing industry software market and earned her national recognition in publications such as CFO Magazine and the New York Times. Prior to her accomplished record at PeopleSoft, Ms. Ptak spent four years at IBM Corporation starting as a member of the worldwide ERP/SCM solutions sales team and quickly rising to the position of global SMB segment executive.

From 1993 through 1998, Ms. Ptak owned Eagle Enterprises, a consulting firm that promotes company-wide excellence through education and successful implementation. She worked with a wide-range of businesses including internationally known corporations such as Boeing and Starbucks.

Ms. Ptak, who holds her MBA from Rochester Institute of Technology, is also certified by the American Production and Inventory Control Society in Production and Inventory Management (Fellow level) and in Integrated Resource Management and completed additional graduate work at Stanford University. She holds a bachelors degree in Biology from the State University of New York at Buffalo. Contact her at ptakca@plu.edu.

SECTION IV.

Performance Measures *

CHAPTER 13.

Traditional Measures in Finance and Accounting, Problems, Literature Review, and TOC Measures

CHAPTER 14.

Resolving Measurement/ Performance Dilemmas

CHAPTER 15.

Continuous Improvement and Auditing

CHAPTER 16.

Holistic TOC Implementation Case Studies *

Problems with traditional accounting methods and other traditional measures are considered here. New methods for "Throughput Accounting" are discussed in terms of improving organizational performance. This method emphasizes financial measures that focus on global performance of the organization in contrast with measures that emphasize local/silo measurements. The erroneous traditional assumption that local optima accumulate to overall improvements in system performance is effectively challenged. In this context, the shortcomings of traditional cost accounting are discussed in depth.

Basic measures and processes of ongoing improvement that focus attention on indentifying local actions resulting in organizational improvement are presented. Elements essential for other measures encountered in production operations, projects, and services such as buffer management, quality measures, service response times, and the like are presented along with hands-on solutions for structuring and implementing them. Traditional measures create actions in one function or department that cause conflict with other functions or departments. Cross-organization conflicts that can be created by measures and the resolution of these conflicts are also discussed.

The last two chapters chapters describe the Process of Ongoing Improvement (POOGI) and the requisite auditing function and provide two detailed holistic case studies. Achieving POOGI in any organization not only requires a reliable focusing mechanism (to identify where and what to change and when and what not to change), but also a holistic decision support mechanism (to judge the system-wide or global impact of changes). Then, a fast and reliable feedback mechanism is needed for auditing progress/compliance or for identifying other important system performance gaps or variations.

CHAPTER 13.

Traditional Measures in Finance and Accounting, Problems, Literature Review, and TOC Measures

Charlene Spoede Budd

Introduction.

This chapter is a basic introduction to Throughput Accounting (TA). To provide historical perspective, the chapter provides a brief review of both the business environment and the development of cost accounting methodologies.

Accounting personnel usually are among the last people to be educated in Theory of Constraints (TOC) concepts. We are constantly amazed at the reported successful TOC implementations that have not educated accounting and finance people at all. Yet operations people expect that they can overcome resistance to their improvement plans. One very successful TOC implementation champion, strongly supported by the CEO, lamented that he could not understand why the accounting department had hired additional personnel to track the cost of each individual operation when he had established a seamless flow line. The accountants were doing what they had been taught to do. Without an understanding of TOC concepts, when they had sufficient information, they would begin questioning the cost of certain operations, reporting local efficiencies, and providing other misleading information such as unit costs.

I hope that this chapter will develop an appreciation of accounting and finance personnel-what they can do for you and what they can do against you-and provide a strong argument for educating accounting and finance personnel along with those in operations. TOC initiatives need collaborative partners rather than colleagues who constantly construct a maze of barriers. For accountants who have a suspicion that traditional accounting methodologies produce internal data containing weaknesses for decision makers, this chapter will point out where the weaknesses exist. To accomplish this ambitious goal, the chapter will: Copyright 2010 by Charlene Spoede Budd.

Briefly describe the history of traditional cost accounting and explain why it no longer provides the information needed to support the improvement initiatives made possible by TOC.

Survey, classify, and describe the limitations of the profession's various accepted (published) solutions to replace traditional internal measurement systems.

Discuss the breadth of TA and its impact on all TOC initiatives through a continuing case study.

Identify the need for future research in accounting and finance to support TOC concepts, including the development of relevant performance evaluation systems.

The final section of the chapter will introduce the remaining chapters in this section of the TOC Handbook.

Traditional Cost Accounting and Business Environment

Cost accounting is designed and developed to help managers make decisions. When cost accounting's assumptions mirror those of the organization, the information provided enables good decisions. Conversely, when accounting assumptions are not valid, managers make good decisions only by using their intuition or by chance and not by using the accounting information provided.