Uhy Profit Core Spf

TM

The Profit CORE . . .
Corporate Opportunity for Regaining Earnings!

Profit & Process Improvement
Services
UHY Advisors MI, Inc.
26200 American Drive Southfield, Michigan 48034
(248) 355-1040

UHY Advisors MI, Inc.
Profit & Process Improvement Services

The Objectives
1. Incorporate results-driven consulting expertise to
identify opportunities that lead to improvements in
operating and financial performance.

2. Provide value-added recommendations and hands-
on implementation to maximize profitability by
achieving performance improvements.

3. Provide the tools, training and on-going support
needed to achieve and grow a company’s CORE . .
“Corporate Opportunities for Regaining Earnings”

1

Our Clients
1. Since 1996, UHY’s Profit & Process Improvement
team has worked with over 200 companies to
implement profit and process improvement
initiatives.

2. Industries have included aerospace, automotive,
industrial machinery, distribution, chemical, retail,
support services, software, and many others.

3. Client size has ranged from 4 employees to over
16,000 employees covering 400+ locations.

Our Client’s Profile

Underperforming Companies:
Objective – To provide the business advisory
services needed to dramatically and rapidly
improve operational and financial performance.

Growth Centered Companies:
Objective – To provide Strategic, Operational, and
Tactical recommendations and solutions that
maximize profitability while implementing Best In
Class performance measures.

2

The Process

Financial Strength Financial Strength
Leadership Leadership
Core Capabilities Market Penetration
Response Time Future Growth
Technology New Products
Growth Potential Innovation
Innovation Merger Status

Our Methodology

Financial Focus Based on a “Check Book” Approach:
• Cost Center verses Profit Center Management
• Identify and Correct Sources of Lost Revenue
• Managed Process Control to Achieve Consistency
• Systems to Establish Clean and Accurate Data
• Identify and Address Capital Structure
• Identify and Energize Core Leadership Team
• Implement Operational Tools to Sustain and Grow

3

A Client List

Big Medium Small
Con-Way
Con- Baxter Enterprises Modas LLC
Daimler-Chrysler
Daimler- Wainwright Reed Rubber
Yellow Freight Stevens Industries Bradhart Products
Black Box Corporation Illinois Road Contractors Oliver Hatcher
Gates Energy Division Accurate Gauge & Mfg. ONODI Tool
Allied Signal Aerospace National Machinery Event Solutions
Liebherr Aerospace Gentz Industries Hubbard Spring
Baker Concrete Taylor Machine Stanley Industries
Prime Wheel Britten Media Anderson Honda
Sunnen VAMP Company
Belle Tire Marshall Campbell
Finite Filter NYX
3 Dimensional Services Moeller Manufacturing
American Electric Vehicle Standard Die
GTR Builders Quasar Industries

The Timeline
Business Assessment:
3 to 5 on-site days by the UHY Consulting Team to assess
operations, identify opportunities and quantify financial
return with a 2 to 3 person UHY Consulting Team -
Includes Financial and Operational Expertise.

Model Development:
15 to 20 on-site work days over a 10 to 12 week period
with the UHY Consulting Team to address clean data,
labor/process efficiencies, corporate culture, and change
management.

Utilization of company-specific and UHY CORE tools to
establish baselines and manage data and processes.

4

The Timeline
Improvement Rollout:
10 to 12 on-site work days over a 4 to 6 week period to
provide training, implement UHY’s CORE Model and
integrate a profit-centered business strategy.

Provide Management Team direction and process-specific
improvement implementation actions.

Performance Maintenance:
2 to 4 on-site work days every quarter to work with the
Management Team to ensure profitability measures are
sustained and capable of growth.

Provide company-specific revisions and enhancements to
the UHY CORE Model as a comparison to financial results.

An Example
Metal Stamping, Machining & Tooling Operation - $25.2mil
Metal Stamping, Machining & Tooling Operation - $25.2mil
annual sales, 82 employees, 2 shifts. Losing $25,000/month
annual sales, 82 employees, 2 shifts. Losing $25,000/month

Products & Customers:
Machining Generated 48% of the Losses
Tooling Generated 38% of the Losses
Three Stamping Customers Generated Remaining 14%

Actions Implemented:
Bills of Material Verified & Updated
Costs Directly Allocated to Departments, Products & Customers
Tooling and Machining Departments Re-Organized
Value-Added Metrics Implemented and Monitored Weekly

Results - $300,000 in Profits within 8 Months

5

An Example
Injection Molding Operation - $28.4mil annual sales, 177
employees, 3 shifts. Losing $70,000 per month
Products & Customers:
Press Sizes Ranging for 225 Tons to 3,500 Tons
OEM and Service Business . . . 86 Molds . . . .9 Customers
Direct-to-Indirect Ratio = 1 to 1

Bills of Material Verified & Updated
Costs Directly Allocated to Products & Customers . . .Elimination!
Re-aligned Sales Efforts . . . .Low Tonnage to High Tonnage
Value Added Metrics Implemented and Monitored Weekly

Results – Breakeven within 4 Months

An Example
Road Contractor - $31.2mil annual sales, 5 unique business
units, running at breakeven for past 3 years
Business Operations
Roto-Milling, Sealcoating, Trucking, River Terminals, Materials
Subcontractor to Prime Contractor on 65% of jobs
Next Generations of Management plus Founding Fathers

Analysis of ’04, ’05 & ’06 Business Unit Profitability
Costs Directly Allocated to Business Units & Prime Contractors
Analysis of Equipment & Terminal Costs
Development and Implementation of Business Unit Cost Models

Results – On Track for $300,000 Net Profit

6

More Details
Jim Bauters, Managing Director
CPA, 26 years
jbauters@uhy-us.com
(248) 355-1040 ext. 474

Alan Lund, Consulting Principal
Manufacturing & Operations, 20+ years
alund@uhy-us.com
(248) 355-1040 ext. 447
(248) 496-9844

7


CORE PLAN

OAKLAND COUNTY 26200 American Drive Suite 500 P.O. Box 5004 Southfield, MI 48086-5004 (248) 355-1040 Fax (248) 355-1084
MACOMB COUNTY 12900 Hall Rd., Suite 500 Sterling Heights, MI 48313-1153 (586) 254-1040 Fax (586) 254-1805
www.uhy-us.com


The Challenge
As you are well aware, the last three to five years have been very difficult for a wide variety of companies
due to significant pressures to lower prices coupled simultaneously with escalating costs. Industry has
faced pressures such as:
• Downturn in the economy which has lowered demand for many services
• Increases in raw material and equipment costs
• Increases in labor costs mainly driven by increased health care

The Dilemma
These pressures have reduced, and in many cases, eliminated profit margins causing cash flow issues,
shareholder / owner dissatisfaction and increased pressure from banks and financial institutions.
Returning to profitability may not be possible under current legacy business models, strategies, cost
structures and processes that remain unchanged from the
previous days of high profitability. During those days, unprofitable
services, operational inefficiencies, mistakes and out-of-control
costs could be absorbed due to high profit margins on other
services. Good profit margins lead many companies to ignore
these problems. In the current business environment, all these
aspects of the business must be re-evaluated and integrated
into today’s business environment. Even though profitability is a
reasonable expectation, achieving results takes a successful
analysis and adaptation of the business, which can only be
achieved with adequate commitment, skills and expertise. UHY Advisors’ Profit &Process Management
Services Team has successfully assisted a wide variety of businesses to achieve and sustain significant
results.

The Return to Profitability
UHY’s Team combines financial, strategic and operational expertise to ensure that your business and
resources are aligned to understand and implement systems to achieve profitability. Our profit
enhancement methodology for companies includes:
• Studying current and future business environment and constraints in your specific industry

• Developing processes to uncover and validate “clean & accurate” data that can be used to
analyze the performance of your business.

• Developing a solid cost management strategy which includes:
Profitability data by service line and customer, based on accurate allocation of burden and overhead using
o
activity costs
Activity value analysis and associated costs
o
Loaded labor costs which include benefits, payroll taxes, etc.
o
Utilization and efficiency of direct labor
o
Realistic capacity and utilization rates for work centers
o
Indirect, general and administrative costs and their relationship to business volumes
o

• Benchmarking resulting data against competition and similar industries

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ISO 9001:2000 Certified


• Determining the appropriate business model, strategies and cost structures under which your
company can achieve the required profitability targets. Activities include:
Determining service lines or customers that cannot be profitable with their current pricing, no matter what
o
improvements are made

Determining target markets and customers where favorable profit
o
margins exist and focusing sales and marketing efforts in those areas

Establishing an accurate and usable quoting / estimating system that
o
ensures new work will meet the established profit margin targets

Establishing operational performance metrics that must be met in order
o
for your company to achieve the established profit targets for remaining
and new work. These performance metrics include labor costs, utilization
and efficiency, work center productivity, quality levels, indirect costs
ratios, etc.

Steps to Profitability
The attached diagram highlights the primary steps to uncovering, analyzing and establishing a strategy
for achieving profitability.

Developing. communicating, launching, measuring, and monitoring a Business Management
1.
Strategy based on urgency and sound Cost Management Principals. Understanding and
addressing the activities, services, operational practices, and customers that drive costs and
ultimately profitability. The UHY team has multiple years of experience successfully guiding
companies through the Strategic Planning Process. We incorporate planning tools such as
Balanced Scorecard, Strategy Maps, and Performance Management along with in-depth
industry experience and common sense.

2. Probably the single greatest barrier to profit and cost management centers on the issue that
most organizations do not know the true costs associated with their business operations – costs
associated with the services they provide and how specific customer requirements can
dramatically impact overall profitability. Benchmark data across 100 companies, 400 facilities,
10 industries, ranging from $25M to $1B indicated that less than 50% of orders, customers, and
services were profitable when analyzed at the net operating level. Our Business Analysis
includes an assessment of your company’s:

• Strategic Plans for Business, including sales, marketing and production
• Financial Strength and capability to finance future growth
• Adequacy & Utilization of Resources, including capital, direct & indirect labor, equipment,
technology & facilities
• Key Business Processes, including accounting, financial, administrative, operations,
maintenance, and support processes
• Management Leadership & Personnel Skills
• Business Profitability & Costing Capabilities, including availability and accuracy of data

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3. Our Costing Methodology incorporates a detailed analysis of your business operations including,
Labor, Machine/Equipment Efficiencies, Overhead, Process Capability & Performance, and your
deliverable Services.

The output of UHY’s process is a
company-specific Costing Model
that provides the financial and
operational detail needed to drive
your strategic decisions.

4. In order to achieve profitability, a disciplined Performance Management Framework needs to
be identified and established. Key Results Indicators (KRIs) provide the “Dash Board” to inform
management as to business health and goal achievement. KRIs must be measured, trended
and acted upon by senior management. KRIs include measures such as Customer Satisfaction,
Net Profit Before Tax, Profitability of Service, & Employee Satisfaction.

5. In order to sustain profitability, Key Performance Indicators (KPIs) need to be identified and
established for each business process. KPIs must be measured frequently (e.g. daily), trended
and acted upon by senior management. These indicators have a significant impact on the
whole organization and provide an early warning indication of pending process breakdown.
KPIs include measures such as Direct Labor Hours, Machine Rates/Hour, Errors & Omissions,
Rework, Cost Overruns, Revenue per Employee, Overtime Hours, etc.

Project Timeline:
Assessment:
Typical Format: 3 to 5 on-site days with 2 to 3 UHY consultants. The resulting Assessment Report provides
a preliminary roadmap as to financial strength, management/leadership concerns, operational
constraints, and costing strategies.

Model Development:
Typical Format: 15 to 20 on-site days over a 10 to 12 week period with 2 UHY consultants. Key actions to
address include access to “clean data”, labor/machine analysis, corporate culture, and your company’s
ability to manage change.

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Model Rollout:
Typical Format: 10 to 12 days on-site over a 4 to 6 week period with 2 UHY consultants. Our team works
directly with your management team to train key personnel on the resulting costing model, provide
hands-on assistance to implement the profitability model, and to provide the services required to
integrate a profitability business strategy throughout your operations.

Maintenance:
Typical Format: 2 to 4 days on-site every quarter with 2 UHY consultants. Our objective is to work closely
with your management team to ensure that your profitability model remains current and accurate.
During the maintenance phase, the UHY Team remains ready to provide on-going assistance and
recommendations to address changes in your business operations in conjunction with changes in market,
services and customer issues.

For additional information on UHY Advisors’ Profit & Process Management Services and/or a list of
reference companies, please contact
Alan Lund at (248) 355-1040 Ext. 447 E-Mail – alund@uhy-us.com

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CORE
CAPABILITIES
&
TEAM

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CORE CAPABILITIES
• Companies Served:
- Revenues of $5mil to $2.1bil
- Employee size from 4 to over 16,000

• Engagements:
- Profitability and Cost Management
- Change Management and Strategic Planning
- Process Mapping and Documentation
- Foreign Trade Zones
- Strategic Supplier Development
- Lean Management & Manufacturing
- Quality Management Systems – ISO 9001, AS 9100/9110, ISO/TS 16949
- Environmental Management Systems – ISO 14001
- Information Security Management – ISO 27001
- Financial Controls – Flowcharting and Risk Management
- Specialized Workshops – Problem Solving, Internal Auditing, Corrective Action
- State & Federal Grants

• Industries Served: Example Clients:
- Injection Molding Baxter Enterprises, OEM/ERIE
- Metal Stamping Wainwright Industries
- Tool & Die Richard Tool, Wainwright Industries
- Rubber Molding & Gasket Fabrication Reed Rubber Company
- Fiberboard Lamination Stevens Industries
- Transportation Con-Way Transportation Services (400 locations)
- Retail Belle Tire (61 locations)
- Aerospace Liebherr Aerospace, Gentz Industries
- Machinery National Machinery, Merritech, Tru Tech
- Construction Baker Concrete Construction, Oliver/Hatcher
- Financial Services Global Forex Trading
- Insurance Oakland Companies, Mason McBride Insurance
- Software Development Fourth Generation, CEBOS
- Machining Accurate Gauge & Mfg. Co.
- Military Greene Metal Products, Onodi Tool, Moeller Mfg.
- Distribution Black Box, Modas, Marshall Campbell
- Education Walsh College, Washtenaw Community College
- Medical Tru Tech Systems
- Program Management Air International, MODAS, Hayes Lemmerz

• Methodologies Incorporated:
- Business Assessment - Balanced Scorecard
- Lean Manufacturing / Lean Management - ISO 9000 / AS 9100 Quality Standards
- Value Stream Mapping - Process Mapping
- Supplier Assessment & Development - Inventory Management & Control

• Tools Utilized:
- Process Mapping - Business Assessment Tool - Financial Benchmarking
- Operational Benchmarking - Value Stream Mapping - Balanced Scorecard

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CORE TEAM
Jim Bauters
Professional Background
Mr. Bauters is a Managing Director of UHY Advisors MI, Inc. and has been involved with closely held
businesses since 1978, with a major emphasis on restructuring and growing businesses. He provides
financing solutions, cost controls and strategic planning initiatives that optimize opportunities for growth
and profitability.

Industry Expertise
He is the leader of the firm’s Manufacturing industry group and has extensive experience consulting
manufacturing companies in ways of improving operating efficiencies, profitability and competitiveness.
He has successfully developed and implemented strategic turnaround plans and secures financing for
growth and buy/sell opportunities

Academic Profile
He holds undergraduate degrees in Finance and Accounting from the University of Dayton and a
graduate degree in Business from the University of Notre Dame.

Alan Lund
Alan Lund is a consulting principal and has been with the firm since 1996. He has been actively involved
in assisting a wide variety of companies with profit and process improvement activities.
Industry Expertise
As a consulting principal, Mr. Lund manages a team of profit and process enhancement consultants. Mr.
Lund is a RAB/IRCA Certified Quality Systems Lead Auditor and has provided profit and process
enhancement assistance to companies in a number of industries, including: construction, tool and die,
rapid prototyping, plastic fabrication, distribution, chemical processing, software developers, metal
fabricators, engineering services, and retail service organizations.

Academic Profile
Mr. Lund received a Bachelor’s of Science in Mechanical Engineering from Iowa State University and has
over 20 years of industry experience.

Dawn Grego
Dawn Grego is a Consulting Manager and has over 16 years experience working in a professional
environment establishing systems to meet rigorous aerospace and FAA standards as well as FDA medical
standards. Dawn has conducted and managed internal/external audits, implemented subcontractor
review/evaluation tracking systems, developed and implemented company processes, procedures and
training, implemented and maintained ISO 9001:2000 and AS 9100 quality management systems while
effectively supporting organizations in continuous improvement efforts to increase efficiency and reduce
costs.

Industry Expertise
Dawn has worked for Michigan-based companies such as Gentz Industries, LLC, located in Warren,
Turbine Engine Support (Formerly The Stalker Corporation), located in Essexville, and Tru Tech Systems, Inc.,
Mt. Clemens.

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Congjie (Connie) Ku
Connie is a Senior Manager and is devoted to providing complete business and financial consulting
services to clients. She is a member of the firm’s Audit and Assurance Department and is responsible for
monitoring and implementing current accounting regulations. Connie is a licensed CPA in the state of
Michigan.

Industry Expertise
Connie provides financial and business consulting services to a wide variety of industries, including,
Automotive, Manufacturing, Real Estate, and Business Services. Connie has direct experience in tax
planning services, supervising audits and performing due diligence for companies ranging from $10
million to $200 + million in sales. Connie is fluent in the language of Mandarin and familiar with Chinese
culture. Connie assists in communication and translation, as well as China-related financial and business
consulting services.

Academic Profile
Connie has a Bachelor’s degree in International Accounting from International School of Shanghai
University, a Bachelor’s degree in Finance from International School of Shanghai University, and Master’s
degree in Accountancy from Southern Illinois University at Carbondale.

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CORE
EXAMPLE
REPORT

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Profitability & Process
Improvement Report

Results & Recommendations

Presented to

MOLDERS INC.

November 16th 2005

26200 American Drive, Suite 500 12900 Hall Road, Suite 510
Southfield, MI 48034-6173 Sterling Heights, MI 48313-1153
Telephone 248-355-1040 Telephone 586-254-8141
Fax 248-355-0157 Fax 586-254-9406

Web: www.uhy-us.com

Project Report

Table of Contents

1.0 PROJECT OBJECTIVE.......................................................................................................................... 1

2.0 PROFITABILITY COSTING MODEL ..................................................................................................... 1

3.0 ANALYSIS RESULTS AND RECOMMENDATIONS ............................................................................ 3
3.1 OPPORTUNITIES FOR IMPROVEMENT: ...................................................................................................... 3
3.2 PART PROFITABILITY ANALYSIS RESULTS:............................................................................................... 7
4.0 RECOMMENDED NEXT STEPS.......................................................................................................... 10

APPENDIX A: COST & PROFIT ANALYSIS GRAPHS ........................................................................... A1

Project Report

1.0 Project Objective
The objectives of the costing & profitability engagement were to:
• Assess the company’s operational and financial performance
• Build a profitability costing model
• Analyze the costs and profitability of individual processes, products and customers of
MOLDERS
• Identify the reasons behind excessive costs and lack of profitability associated with
individual processes, products and customers
• Provide recommendations regarding business strategy and accounting / operational
processes to improve profitability and increase the accuracy of costing information

2.0 Costing Model
To design the costing model, all business processes were mapped, assessed and categorized
into activities. All accounting information was also reviewed in detail to determine the costs
associated with each of these activities and identified the most appropriate drivers (stage 1)
that should be used for the allocation of those costs. Activity costs were then allocated using
appropriate drivers (stage 2) to specific products and customers.

The model consists of excel files linked together that perform all the appropriate cost and
profitability calculations.
• The first file is the labor cost schedule file. This file includes the average loaded labor costs
for the employees in each of the various manufacturing, indirect and administrative
activities
• The second file is the core cost model file. This file includes:
o Machine cost schedule providing the average hourly cost for each category of
equipment utilized in manufacturing activities. This average hourly cost includes all
fixed and variable operating costs associated with the equipment.
o Activity Cost allocation schedule providing a breakdown of the monthly operating
expenses by activity and detailing the activity drivers used in the allocation of the
costs to these individual activities. Detailed allocations using complex drivers are
performed on separate sheets linked to the main sheet.
o Direct input cost sheets. These are costs that need to be directly input in the model
for an accurate cost allocation. These include resin costs and various other part
specific data (scrap rates, average quantity per run, mold repair costs, etc.)
• The third file is the part profitability analysis file. This file contains the part costing sheet
which can be used to cost any part, whether it is produced in-house or outsourced. This
file also contains sheets and charts summarizing costs and profitability of all entered
parts.

The model is accurate for company revenue and expense for the period of January to
November of 2005. It is recommended that the model be reviewed and updated on a quarterly
basis to incorporate permanent and significant changes in the company structure, processes,
costs and revenues. Examples of these changes that require updating of the cost model are:

Molders, Inc. 11-2005 Page 1 of 10

Project Report

• Changes in employees and labor costs, including new hires, layoffs and changes in
payroll, benefits, payroll taxes, etc.
• Changes in manufacturing equipment and their operating costs such as new equipment
being added, changes in equipment capacity or utilization, etc.
• Changes in operating expenses. The model is based on average monthly balances for
each general ledger account and should not be changed to reflect monthly or seasonal
changes (such as building or equipment maintenance costs, manufacturing supplies,
etc.). Only permanent changes in average balances (such as change in rent,
equipment service agreements, warehousing costs, etc.) should necessitate a change in
the average monthly balances used in the model.
• Changes in sales prices for existing parts, such as price reductions or increases.
• Significant changes in business structure or operating processes such as changes in
departmental structure & responsibilities, outsourcing of processes, etc.

The existing general ledger accounts used for all operating expenses do not match the activity
structure in the costing model. This creates difficulties during reviews and updates of the model
which requires comparing costs in the model to actual costs in the accounting system. To
address this issue, each purchase order and associated invoice must be assigned a code to link
that expense to a specific category or activity. These codes can be entered in the Access
database used by the accounting department to record accounting transactions. The
recommended categories of costs that should be assigned codes are:
• Primary equipment maintenance (injection molding machines)
• Support equipment maintenance (equipment that supports manufacturing equipment
such as silos, chillers, compressors, etc.)
• Secondary equipment maintenance (equipment performing secondary manufacturing
operations such as assembly, welding, etc.)
• Material handling costs (such as forklifts leases, gas, forklift maintenance, etc.)
• General plant expenses (gloves, safety, cleaning, labor supplies, etc.)
• Equipment operating supplies (oils, cooling fluids, etc.)
• Occupancy costs (rent, facility maintenance, heating & cooling, grounds maintenance,
etc.)
• Mold maintenance (repair, freight, replacement parts, etc.) (requires mold number entry)
• Poor quality (sort / inspection costs, expedited freight, customer debits, etc.)(requires
part number entry)
• Engineering (software licenses, prototyping, resin for samples, etc.)
• Quality (certifications, CMM supplies, inspection gages, etc.)
• Packaging / Shipping costs which are not on the bill of material (tape, foam, barcode
labels, etc.)
• Inbound freight (for resin, components, etc.) (requires part number entry)
• Subcontract freight (to move material and parts between MOLDERS and its
subcontractors)
• Outbound freight (requires part number entry)
• General & administrative (paper, inks, stationary, postage, etc.)
• Special and specific costs such as greengarden, flocking, ownership, etc.


Project Report

3.0 Analysis Results and Recommendations
The results and associated recommendations identified during the project are the outcome of
two types of analysis performed at MOLDERS. The first analysis was performed during the process
of building of the costing model and focused on improvement opportunities in various
manufacturing, support, engineering, administrative and accounting processes. The second
analysis was performed on the results of the costing model and focused on the costs and
profitability associated with individual parts and customers.

3.1 Opportunities for Improvement:
• There is an excessive number of manufacturing support employees compared to direct
manufacturing employees. There are a total of 125 manufacturing support employees
and 99 direct manufacturing employees (includes 12 temporaries). The breakdown of
the manufacturing support employees is as follows:

Department # of Employees Direct : Support
Mold Setters 9 11 : 1
Process Techs 10 10 : 1
Quality Control 27 3.7 : 1
Shipping & Receiving 27 3.7 : 1
Utility 41 2.4 : 1
Maintenance 11 9:1
Total 125 1 : 1.25

This shows that for every one direct manufacturing operator the company needs 1.25
manufacturing support employees. The departments that show high ratios that are not
inline with industry averages are utility, quality control and shipping & receiving. A more
in-depth assessment showed that the main causes of this issue are:
o The high number of setups and color changes and resulting short runs cause
excessive material handling. This is due to scheduling inefficiencies and the fact
that several new parts are lower volume parts than what the company usually
produces
o The high number of quality problems requiring sorting, additional inspection and
re-handling of parts (it was observed that on average there were 7 employees
dealing with scrapped parts in one way or another)
o The complexity of the shipping processes due to the movement of products off-
site to the greengarden warehouse and due to the increased use of returnable
containers

Recommendation: The recommended approach to address this issue is a two step
approach. The first step involves identifying excess labor in each of
the departments that can be eliminated without any direct
impact on the work to be completed. The current workload can


Project Report

be carried out with the remaining smaller number of employees.
The second step is to the need for that high level of support
employees by addressing the issues listed above, which include
improved scheduling that allows for longer production runs,
focusing new business on higher volume parts with less secondary
operations, eliminating some losing jobs, improving the quality of
parts produced and reducing the complexity of shipping
processes.

• The annual costs associated with material and product handling total $2,965,805 which is
7.8% of sales. This is a very high number and is not inline with industry averages. The
breakdown of this total cost is as follows:

Cost Category Annual Amount % of Sales
Utility labor and operating costs $1,096,669 2.9%
Shipping & receiving labor & operating costs $1,074,100 2.8%
Off-Site Warehouse costs $795,036 2.1%
Total $2,965,805 7.8%

This problem is caused by the same reasons listed in the previous point.

Recommendation: The recommended approach to address this issue is the same
recommended approach listed in the previous point.

• Current labor tracking and reporting systems do not break down labor by process or
activity and several direct employees are not required to enter their time by job. The
result is that there is no way to identify whether labor hours are for molding, assembly,
rework, etc. This prevents the company from easily tracking labor performance by
process and identifying the source of any excessive labor. An analysis performed on all
2004 and 2005 labor hours by part number identified many part numbers that had
excessive labor hours compared to the number of operators required to run the job.
There was no simple method to find the reason and source for the excessive hours.

Recommendation: To be able to track labor hours accurately by process, there needs
to be a more detailed router set up for each part. The router
should include all steps a part goes through such as molding,
assembly, inspection, rework, utility, etc. All employees associated
with these steps must enter their time against a specific step on the
router. This tracking system cannot be implemented easily at
MOLDERS due to the limitations of its in-house developed
technology infrastructure. The recommended permanent solution
is to implement a comprehensive ERP system designed for high
volume automotive manufacturers.


Project Report

• Several departments are considered indirect labor / overhead although they work on
specific jobs. These departments include quality / inspection, utility, mold setters and
process technicians. Some of the time in these departments may be indirect, but when
the employees are working on a specific job, the time should be entered against that
specific job.

Recommendation: Routers must include multiple steps including setup, inspection,
utility and rework and employees must enter their direct time
against these steps for all jobs. The solution to this issue is similar to
the solution proposed for the previous point.

• Direct labor personnel are billing all their hours at the plant to specific job numbers, but
some of the billed time was not actual production time and should not be billed to the
job. A comparison of total hours billed to jobs to the total payroll hours for the month of
November 2005 showed that 91% of the hours paid were billed to jobs. This number is
unrealistic and too high, since the combined vacation, break, holiday time would be
more than 9% (would be about 10% - 15%), and if downtime and cleanup hours are
added, their expected efficiency would be around 75% - 80%.

Recommendation: Direct employees must be instructed and managed to ensure their
non-productive time (cleanup, downtime, idle, etc.) is not billed as
production time on a job, but should be billed as indirect time to
specific codes. This allows more accurate costing and decision
making.

• There is no practical and accurate method to track costs for certain activities using
existing accounting systems and processes. Various expenses are entered in a single
general ledger account. Examples are the Suppliers account 63500-530 and the Outside
Services account 65600-530. This difficulty impacts the company’s ability to review
accurate and specific process / department cost data for decision making and
updating of the cost model.

Recommendation: A long term solution would be to establish a departmental
structure in the accounting software in order to track expenses
within an account by a specific department or activity. A short
term solution that is easier to implement is to use the coding system
proposed in section 2 of this report to assign a code to each
purchase order and associated invoice to link the expense to a
specific category or activity. These codes can be entered in the
Access database used by the accounting department to record
accounting transactions.

• The annual costs associated with bidding / quoting jobs and launching / engineering
new jobs total $1,690,644 which is 4.4% of sales. These costs include all labor costs,


Project Report

suppliers and overhead but exclude actual machine time required to run prototype or
PPAP parts. These costs seem to be excessive and are not inline with industry averages.
The company is spending excessive resources to launch a new program to production.

Recommendation: The solution of this issue requires a more in-depth analysis of the
root causes behind the excessive costs. Causes may include poor
program management, error prone engineering processes, short
lead times to launch a program, etc.

• The method used to track tooling program costs is not accounting for all the costs
associated with the program. Due to the companies policy not to track costs less than
$1,000 against the program, a large number of tooling costs that were under $1,000 that
were expensed and not accounted for in the tooling program. The 2005 total of these
costs exceeded $200,000.

Recommendation: All tooling program costs should be tracked and accounted for
against the tooling program to increase the accuracy of the
program costs and budget. This includes costs under $1,000.

• The method used to track scrap is not accurate. Comparing scrap data entered in the
company’s production system to regrind data tracked for scrapped parts, it is obvious
that the scrap data entered in the production system is too low and does not account
for all scrap production. Examples are:

Part Scrap Scrapped in System Scrap parts Reground
Qty (%) Qty (%)
83141 4,403 (3.3%) 14,334 (9.7%)
83094 8,691 (2.1%) 27,729 (5.6%)
83086 7,229 (2%) 13,673 (3.8%)
82822 6,481 (1.4%) 19,895 (4.2%)
82728 1,836 (2.9%) 9,429 (13.3%)
82554 6,531 (4.64%) 18,978 (12.4%)
81047 3,108 (2.1%) 9,402 (6.2%)

Recommendation: The newly implemented bar coding system used to track scrap
may have increased the accuracy of the scrap data in the
production system, but this has to be validated. If not, an analysis
must be performed to identify when scrap data is not accurate
and address this issue. A control system must also be established to
identify when there is a problem with the data. This control system
should compare quantity scrapped in the production system to
quantity of scrapped part that were reground. This ensures any
discrepancies are identified and investigated.


Project Report

3.2 Part Profitability Analysis Results:
The developed costing model was used to cost the top 20 parts and analyze their profitability
based on 2005 data. The selected top 20 parts were based on the previous costing done by Ralf
Bruno. The results of the analysis sorted by sales amount are:

2005 Qty Sale 2005 Gross Gross Total Net 2005
Part # Customer Shipped Price Sales Cost Margin Cost Profit Profit
82601 Chrysler 992,712 $ 2.53 $ 2,516,326 $ 1.38 45.2% $ 1.51 40.1% $ 1,010,018
83084 General Motors 352,143 $ 5.55 $ 1,954,394 $ 4.93 7.5% $ 5.20 2.6% $ 51,708
82121 General Motors 114,590 $ 12.75 $ 1,461,216 $ 9.29 23.0% $ 9.91 18.2% $ 265,700
82513 Flex-N-Gate 850,500 $ 1.66 $ 1,411,830 $ 1.00 39.7% $ 1.08 34.6% $ 489,091
82392 AG Simpson 256,968 $ 4.99 $ 1,282,078 $ 4.44 -0.1% $ 4.66 -4.6% $ (58,909)
8296 A Chrysler 600,857 $ 2.07 $ 1,243,774 $ 2.26 -11.5% $ 2.36 -16.4% $ (203,845)
82785 Chrysler 143,247 $ 7.42 $ 1,062,850 $ 7.36 0.8% $ 7.74 -4.3% $ (45,621)
8306 Pew General Motors 340,055 $ 2.94 $ 999,762 $ 2.83 -2.8% $ 2.97 -7.5% $ (74,900)
82384 Chrysler 348,389 $ 2.57 $ 896,266 $ 1.91 20.4% $ 1.95 15.6% $ 139,882
82573 General Motors 197,010 $ 4.42 $ 870,688 $ 3.25 26.4% $ 3.48 21.3% $ 185,798
83145 AG Simpson 129,054 $ 6.06 $ 782,067 $ 6.16 -11.4% $ 6.44 -16.0% $ (124,990)
82179 General Motors 872,850 $ 0.89 $ 777,596 $ 0.87 1.1% $ 0.91 -3.9% $ (30,517)
82215 Chrysler 834,969 $ 0.90 $ 751,472 $ 0.95 -5.8% $ 1.00 -10.8% $ (81,222)
8296 B Chrysler 218,679 $ 3.39 $ 740,884 $ 3.62 -9.3% $ 3.79 -14.2% $ (105,186)
82836 Chrysler 87,263 $ 8.13 $ 709,623 $ 6.47 18.2% $ 6.87 13.2% $ 94,004
82767 Chrysler 166,390 $ 4.12 $ 686,026 $ 3.30 16.3% $ 3.50 11.5% $ 78,622
8262 A Intier 94,776 $ 5.92 $ 560,657 $ 6.21 -9.4% $ 6.50 -14.3% $ (79,914)
82823 Chrysler 223,550 $ 1.96 $ 438,829 $ 1.62 17.4% $ 1.72 12.4% $ 54,354
83095 General Motors 350,648 $ 1.17 $ 410,258 $ 1.44 -29.0% $ 1.50 -33.8% $ (138,469)
8267 RH Chrysler 84,227 $ 3.20 $ 269,147 $ 2.97 2.3% $ 3.13 -2.5% $ (6,742)
8267 LH Chrysler 85,927 $ 2.93 $ 252,153 $ 2.56 8.2% $ 2.70 3.4% $ 8,647
83166 General Motors 69,849 $ 3.44 $ 240,560 $ 3.89 -16.7% $ 4.06 -21.6% $ (51,953)
8262 B Intier 89,748 $ 2.24 $ 200,641 $ 2.64 -22.4% $ 2.74 -27.2% $ (54,563)
8306 Blue General Motors 28,024 $ 2.94 $ 82,391 $ 2.88 -4.5% $ 3.02 -9.2% $ (7,576)
8239 Gray AG Simpson 5,640 $ 4.49 $ 25,349 $ 4.37 -8.4% $ 4.57 -12.9% $ (3,276)
Total 7,538,065 $ 20,626,835 $1,310,139

Customer 2005 Profitability:

Customer 2005 Sales 2005 Profit / Loss % # of Parts
AG Simpson $ 2,089,494 $ (187,175) -9.0% 3
Intier $ 761,298 $ (134,476) -17.7% 2
General Motors $ 6,796,864 $ 199,791 2.9% 7
Flex-N-Gate $ 1,411,830 $ 489,091 34.6% 1
Chrysler $ 9,567,350 $ 942,909 9.9% 10


Project Report

Parts Ranked by Net Profit Percentage: Parts Ranked by 2005 Profit / Loss:

Part 2005 Profit / Loss
Part Net Profit %
8296 A $ (203,845)
8309 -33.8%
8309 $ (138,469)
8262 B -27.2%
8314 $ (124,990)
8316 -21.6%
8296 B $ (105,186)
8296 A -16.4%
8221 $ (81,222)
8314 -16.0%
8262 A $ (79,914)
8262 A -14.3%
8306 Pew $ (74,900)
8296 B -14.2%
8239 Black $ (58,909)
8239 Gray -12.9%
8262 B $ (54,563)
8221 -10.8%
8316 $ (51,953)
8306 Blue -9.2%
8278 $ (45,621)
8306 Pew -7.5%
8217 $ (30,517)
8239 Black -4.6%
8306 Blue $ (7,576)
8278 -4.3%
8267 RH $ (6,742)
8217 -3.9%
8239 Gray $ (3,276)
8267 RH -2.5%
8267 LH $ 8,647
8308 2.6%
8308 $ 51,708
8267 LH 3.4%
8282 $ 54,354
8276 11.5%
8276 $ 78,622
8282 12.4%
8283 $ 94,004
8283 13.2%
8238 $ 139,882
8238 15.6%
8257 $ 185,798
8212 18.2%
8212 $ 265,700
8257 21.3%
8251 $ 489,091
8251 34.6%
8260 $1,010,018
8260 40.1%

Parts with Excessive Labor Costs as a Percent of Sales Price:
Target %: Lower than 12%

Molding – Other
Labor
Part # Labor % Gross Margin %
1 : 4.3
8262 B 23.8% -22.4%
1 : 1.3
8309 19.4% -29%
1 : 3.8
8306 16.3% -4.5%
1 : 4.4
8296 A 16.1% -11.5%
1 : 13
8316 16.0% -16.7%
1 : 6.0
8296 B 14.5% 9.3%

Excessive labor is usually caused by a high amount of secondary operations required after
molding or by quality issues that require more inspection, attention, sorting, reworking, etc.


Project Report

Parts with Excessive Material Costs as a Percent of Sales Price:

Part # Material % Gross Margin %
8314 53.9% -11.4%
8296 49.2% -11.5%
8309 42.5% -29.0%
8262 B 41.1% -22.4%
8267 40.1% 2.3%
8239 37.7% -8.4%

Excessive material costs is usually driven by resin price increases or excessive shot weight
compared to quoted weight

Parts with Excessive Outside Processing (Molding) Costs as a Percent of Sales Price:

Part # O/P % Gross Margin %
8221 91.5% -5.8%
8278 86% 0.8%

For the above two parts, molding suppliers are paid too high compared to the prices paid by
the customer. The parts still have to get received, inspected and shipped by MOLDERS.

Parts with Excessive Component Costs as a Percent of Sales Price:

Part # Components % Gross Margin %
8316 72.6% -16.7%
8217 59.4% 1.1%


Project Report

4.0 Recommended Next Steps
For Molders to improve its financial performance, the following steps are recommended:

• Use 2005 data in the costing model to analyze the costs and profitability of the
remaining key part numbers. Total parts analyzed should account for at least 85% of the
company’s revenue. This will identify another set of parts causing the company to lose
money.

• Prioritize, plan, initiate and track the improvement opportunities identified in this report to
ensure their effective implementation and ensure that the expected improvements in
financial performance are achieved. A formal process is recommended which includes
outlining specific tasks, assigning personnel, setting specific timing objectives and
performing follow-up activities.

• Negotiating with customer, where possible, price increases or surcharges for the parts
with the unacceptable profitability. Also, negotiations should include eliminating under-
performing jobs with no opportunity for profit margin improvements. The elimination can
include outsourcing if supplier pricing is favorable. Impact of any elimination or
outsourcing of high volume jobs must be analyzed using the costing model.

• Update the costing model for 2006, which will require updating staffing in each
department, major changes in expenses and updating production volume projections.
This model can then be used to analyze the financial performance and profitability for
2006.

• Use the 2005 costing model to perform financial projections and validation for any
restructuring, cost cutting and any other business changes in order to determine the
impact on the financial performance of the company.


Project Report

Appendix A: Cost & Profit Analysis Graphs

Part Comparison Chart
Direct Labor % M/C % O/H %

120%

28.5%
100% 16.4%
27.7%
10.6%
9.9% 17.2%
1
17.2%
0.0% 9.7% 15.5%
6% Net Profit Line 0.0%
16.9% 1%
8.1
1%
9.1 1%
8.1 16.0%
4.1%
3.5% 6.0%
80% 9.1% 19.3%
5.4% 24.4% 9.7%
1
18.0%
2.7%
10.3%
13.2% 20.2% 14.5%
9.7%
7.9% 9.2% 5.6%
1%
6.1 9.7%
0.0% 14.0%
17.2%
7.1% 5.5%
9.5%
8.3% 23.8%
19.0% 8.7%
%

17.5% 0.0%
60% 7.8% 4.9% 16.3%
6.3% 1 .9%
1
1 .1
1% 1
2.1% 19.4%
7.8%
13.4%
1%
2.1
5.4% 17.0%
91.5% 14.4% 5.1% 86.0%
16.0%
8.3%
40% 75.6%
4.4%
68.8%
6.6% 67.7%
66.7% % 67.0% 66.5%
4.4% 5.1 61.8%
60.6%
57.2% 5.2% 55.1%
.8% 52.1% 50.2% 48.5% 52.4% 46.5%
51.7% 51
43.7% 41.0%
20% 38.3%
30.9% 30.7%
24.7%

0%
82 H

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LH
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12

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08

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A

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06 B
83 lue
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8
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ac

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62

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82 Gr
82

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82

82

82

82

82

82

83

83

83

83
B
67
67
Bl

82

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06
83
82

Part #

Material % of Sales Price

60%
53.9%
49.2%
50%
43.7%
42.5%
42.1%
41.1% 40.1% 41.0%
37.7%
40% 35% - Proposed
34.1%
Material % Target
Material %

30.1%
30%
24.4%
22.7%
21.0%
20% 17.3%
16.0%15.5% 15.5%
13.5%

10% 7.3%
3.0%
0.0% 0.0% 0.0% 0.0%
0%
H

LH
k

A

B

A

B

ue

w
y
12

17

21

38

51

57

60

76

78

82

83

08

09

14

16
ac
ra

R

Pe
62

62

96

96

Bl
82

82

82

82

82

82

82

82

82

82

82

83

83

83

83
G

Bl

67
67
82

82

82

82

06

06
39

82
39

82

83

83
82

82

Part #

Molders, Inc. 04-2005 Page A1

Project Report

Labor % of Sales Price

25% 23.8%

19.4%
20%

16.3% 16.3%
16.1% 16.0%
14.5%
15%
13.2%
Labor %

12% - Proposed
12.1% 11.9%
Labor % Target 11.1%

10% 8.7%
8.3% 7.9%
7.8%
6.6%
5.6%
5.2% 5.1%
4.4%
5%
2.1%

0.0% 0.0% 0.0% 0.0%
0%
H

LH
k

A

B

A

B

ue

w
y
12

17

21

38

51

57

60

76

78

82

83

08

09

14

16
ac
ra

R

Pe
62

62

96

96

Bl
82

82

82

82

82

82

82

82

82

82

82

83

83

83

83
G

Bl

67
67
82

82

82

82

06

06
39

82
39

82

83

83
82

82

Part #

Molders, Inc. 04-2005 Page A2

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