Case Study: Cost Tracking, Heavy Equipment Manufacturing
This case study describes how Gagnon Associates helped a client improve the accuracy of its cost-tracking process, thereby protecting critical profit margins on multi-million-dollar pieces of equipment.
A global manufacturer of heavy equipment for the mining industry.
Variance by as much as 5 to 7% between predicted and actual cost of a multi-million-dollar piece of equipment. Since the machine build-cycle extends over more than one year, and price commitment to the customer must be made at the start of the build cycle, client’s inability to accurately track and predict actual, final machine cost significantly erodes profit margins on completed equipment.
Company CEO mandates a high-focus, fast-track team approach to solving variance problem and sets target to get machine-build cost estimate to within 3% of actual final machine cost.
Problem-solving team members include representatives of the following functions, among others: business analysts, cost-accounting, Original Equipment planning, commercial management, product specialists, mechanical and industrial engineering, manufacturing, planning and field communications, project management and the group controller function.
In the course of an intensive three-day work session designed and facilitated by Gagnon Associates consultants, the cost-tracking improvement team analyzes this critical process, identifies deficiencies and develops an action plan for closing the cost variance across the next machine-build cycle. Recommendations include: locking in “build-specs” earlier in the build process; expanding cost-accounting measures; identifying and correcting outdated and inaccurate routings; resetting standard costs more frequently; measures to improve manufacturing tracking; and retraining subcontractors, among other measures.
In order to accelerate implementation of all fixes, the CEO and his team attend the final hours of the team’s three-day session, and review and approve all team recommendations before the session’s close. Over the next twelve months, team progress in implementing their recommendations is both monitored and supported by senior-most Company leadership, including the executive sponsor of this effort, the Company’s CFO.
One year later, the Team Leader of the cost-tracking improvement team reports to management that the cost variance has been reduced to 1%, beating the CEO’s target of 3% by two points.
Team Leader also reports that the team continues to work to close the variance even further.