ITACNews December 2010

For the manufacturing companies that ITAC serves, Cost Accounting entails using business practices and systems to gain better understanding and control over the material, labor and machine time that is consumed in the production process. Cost Accounting often leads to more accurate financial statements for external reporting, and it should also make it possible for management to fulfill the goals of the organization, by answering questions such as these:

• Which are my highest profit margin products, which we should attempt to grow, and which are the low profit margin products, that need to be addressed?
• How does our Cost of Goods Sold compare to what we should be able to achieve?
• What is the "low hanging fruit" that should be addressed first for us to improve our Cost of Goods Sold and improve profit?
• If gross margin is eroding over time, what are the underlying causes?

A leading ethnic food manufacturer in New York City already had the required systems platform in place to do cost accounting, but the company was not using it fully or confidently. With ITAC’s help, the client cross-checked and updated the cost accounting files so that they accurately corresponded with the latest bill of materials, and began publishing monthly material usage reports for senior management. With the additional focus on accurate monthly cost accounting results, the client was able to take actions to reduce waste, leading to material savings in the hundreds of thousands of dollars, as well as improved quality on many of their keyproduct offerings.

Obstacles to Success

It is possible to set up a Cost Accounting system for any type of manufactured product. Most of the companies we visit have a lot of room to improve in this area. Systems, people and culture are usually the factors that hold companies back from successful Cost Accounting. Let’s addres these one at a time:

• Systems – Some companies do not have a Cost Accounting system that is appropriate for their needs, or they may have an Enterprise Resource Planning (ERP) system with Cost Accounting functionality that they have not yet licensed or adopted. In the long run, it makes sense for any major Cost Accounting initiative to dovetail with an overall systems strategy, to achieve a solution that is scalable and efficient, with data shared between purchasing, inventory and cost accounting modules. But we also have taken the opportunity to achieve smaller wins without waiting for the perfect Cost Accounting system to be purchased and implemented, for example, by modeling cost of goods sold in Microsoft Excel for a $2 million sausage manufacturer so they could validate their pricing decisions and react to changes in commodity costs on a timely basis.
• People – Small manufacturers do not usually have the cash flow or the business needs that would lead them to dedicate staff to focus on cost accounting. As manufacturers grow beyond $5 million of sales, there is usually a very good Return on Investment by giving Cost Accounting some additional attention from their finance or accounting team. Usually management will want to see some proof of these benefits of the Cost Accounting initiative before agreeing to permanent part/full time staffing for the effort. Therefore, at the earliest stages of a Cost Accounting project, it is typical to "borrow" internal resources with a range of skills that makes them qualified to contribute to a Cost Accounting project.
• Culture – In order for a Cost Accounting initiative to help a company achieve Cost Management objectives, with all of the benefits described above, the company culture must promote trust, communication, accountability and rewards. Simply put, people on the production floor have to understand and care about cost trends, and see how what they do in this area contributes to the company's success as a whole. With the right programs in place, this is achievable.

The author of this article, David Rudofsky, President, Rudofsky Associates, helps ITAC clients with cost management and accounting. Please contact Sam Brookfield, ITAC’s Client Service Assoicate, at 212.442.5211 or sbrookfield@itac.org for more information.

Resa Dimino, Special Assistant Commissioner's Policy Office, New York State Department of Environmental Conservation presents 2010 Environmental Excellence Award to David Calligeros, Owner, Remains Lighting.

The New York State Department of Environmental Conservation presented the award to the company in November at the seventh annual New York State Environmental Excellence Awards ceremony in Cooperstown, NY.

David Calligeros, Remains Lighting Owner said, "Remains Lighting is deeply honored to receive the NYS Environmental Excellence Award as it recognizes the significant commitments and contributions we’ve made to sustainable manufacturing in New York. We are very happy to be able to forge a path for sustainable manufacturing operations in Brooklyn and believe this award will broaden awareness of green and sustainable issues."

In 2008 Remains Lighting purchased a 25,000 square foot industrial building and renovated it to operate entirely on renewable energy sources by using on-site solar panels and purchasing wind power. Electricity consumption reductions total 18 thousand kilowatts annually and carbon dioxide emission reductions equal removing approximately 22 automobiles from the road. During the renovation process, an average of 84 percent of the 32 tons of construction waste was separated and recycled.

The New York State Department of Environmental Conservation program recognizes projects that demonstrate how innovation combined with commitment and leadership can result in actions that improve and protect New York’s environment and have positive impacts on the economy.

A major focus of the two-hour meeting was to accomplish key tasks towards establishing the first-in-the-nation New York City Regional Sector Coordinating Council (RSCC) of critical manufacturers. Held at 26 Federal Plaza, the event was enormously successful.

The RSCC identified its first Executive Committee members:

Sector Chairman - Darryl Do, VP, Delbia Do

Sector Vice Chairman - Ben Englander, VP, Engineering, Rosco, Inc.

Sector Secretary - Steve Kempf, Chief Executive Officer, Lee Springs Co.

Lisa Sobolewski, DHS’ Small Business Innovation Research (SBIR) Director, provided insight into the current SBIR funding opportunities and application process, underscoring that the SBIR program provides necessary funding for start-up entrepreneurs to conduct research and development in areas relevant to the DHS mission. Franklin Madison, ITAC’s Technology Program Director, introduced Colleen Gibney, ITAC’s SBIR Regional Specialist, who helps companies throughout the application process. SBIR funding does not need to be paid back.

Ms. Sobolewski went on to say, "We are all about deliverables; we are a mission-oriented agency, and the SBIR program seeks to develop technologies that meet our partners requirements. I invite you to review our solicitations and to consider submitting proposals to the SBIR program." Ms. Sobolewski’s presentation led to a lively question and answer period with the manufacturers.

Michelle Shea, DHS, gave an overview of the Homeland Security Information Network (HSIN), a web-based portal for information sharing and collaboration between government and private sector partners to brainstorm ideas, dialogue around common issues, and exchange documents.

Stuart Ferency, DHS Critical Manufacturing Sector-Specific Agency Chief, moderated the day. DHS representative, Patti Escatel, outlined the Department’s history, the National Infrastructure Protection Plan, and the mission of the Critical Manufacturing Sector, and Kerry O’Connor, DHS, introduced the proposed Charter for this regional effort.

Wishing to capitalize on the meeting’s momentum, the Council agreed to meet in December, now scheduled for December 13, 2010. During this meeting, Council members will finalize the proposed Charter, in anticipation of signing it into effect in January 2011, formally establishing the New York City RSCC.

The Department of Homeland Security chose to partner with ITAC because of its relationship with advanced critical manufacturers in New York City.

To read about the National Infrastructure Protection Plan, click here.

To read about the Critical Manufacturing Sector within the Plan, click here.

Please contact Colleen Gibney, ITAC's Technology Project Manager, at 212.442.6889 or cgibney@itac.org for more information about using the Small Business Innovation Research (SBIR) program to fund your R&D.

Please contact Franklin Madison, ITAC's Technology Program Director, at 212.442.2990 or fmadison@itac.org for more information on the NYC RSCC.

Key Points

• The ISO9000 and QS9000 quality standards provide a quality management framework to monitor and ensure both process and product quality and consistency.
• The Toyota Production System (TPS), including Just in Time (JIT), Kaizen, 5S, and so on, are used for maximizing value to the customer, eliminating waste, improving flexibility and reducing customer order lead time.
• Six Sigma is a quality philosophy based on customer-focused goals and achieving near-zero defects by identifying and minimizing product and process variability.

http://www.sxc.hu/

The following descriptions provide insights into the most commonly used quality improvement tools:

The ISO9000 and QS9000 series—the internationally recognized Quality System Standards—provide a formal, highly structured, quality management framework for addressing typical activities that assure product and process quality and consistency. For a company seeking to establish or improve its quality image in the marketplace or to enhance its internal quality management systems, instituting an ISO-certified quality management system is a good place to start. The resulting consistency will make it easier for Kaizen or Six Sigma teams to identify problems and make changes. The auto industry, among others, has pushed these quality programs down through their supply chain and has instituted the TE-9000 standards (Tooling and Equipment) as a supplement to QS. Many companies, including these OEM suppliers, must implement ISO to maintain their major clients or as a requirement for exporting product overseas, especially if they want to penetrate the European marketplace.

The Toyota Production System (TPS), including Just in Time (JIT), Kaizen, VSM, 5S, and other Lean tools are used for stabilizing process consistency and product quality, maximizing customer value, eliminating waste, improving flexibility, and reducing customer order lead time, giving companies a key competitive advantage in today's global marketplace. Lean activities engage all employees in reducing cycle times, inventory, changeover times, and space used, while increasing productivity and quality performance. Value Stream Mapping, 5S (Housekeeping and Workplace Organization, through Sort, Straighten, Shine, Standardize, and Sustain), SMED (set-up reduction), TPM (Total Productive Maintenance), Cellular Manufacturing, and Pull/Kanban Systems are deployed by internal teams that are continuously trained to implement these concepts and reach these goals. Typically, Lean is applied across all functions, so for most small and medium–sized companies, Lean is the most practical and hands-on approach to apply.

Six Sigma emerged from the Motorola Corporation in the 1980s, leading them to become one of the first recipients of the Malcolm Baldridge National Quality Award. A statistical unit that measures the amount of variation in a particular process (specifically 3.4 defects per million opportunities), Six Sigma is a quality philosophy based on customer-focused goals and robust statistical analysis to minimize product and process variability and achieve near-zero defects. Typically, Six Sigma users deploy a small number of highly trained staff (typically called Greenbelts and/or Blackbelts) to guide specific, high-impact improvement projects (often identified during a Kaizen event) that will significantly reduce process variability and affect the company's bottom line. This quality philosophy can be applied in manufacturing, finance, human resources, insurance, etc.

Please contact Rich Lanna, ITAC’s Senior Vice President of Operations and Lean Champion, at 212.442.4596 or rlanna@itac.org for more information.

Key Points

• Each energy–consuming department must perceive energy use as an integral part of their total cost.
• Energy management integrates energy cost into production area planning for total manufacturing cost control.
• The philosophy behind energy management is "using energy at only the exact time, location, and quantity required to produce a quality product."

www.epa.gov

The wide variety of energy-intensive processes makes it difficult for manufacturing facilities to track and manage energy costs. While the cost to purchase energy is a significant operational expense, often too little attention is paid to what happens to that energy once it is used in the production process, or how demand affects the amount that the utility company charges for ‘spikes’ in usage. There is no lack of opportunities for manufacturers to trim energy consumption, but a lack of knowledge can hinder the ability to take advantage of these opportunities. In order to manage energy consumption effectively, companies must measure their costs–tracking, reporting, and reacting to changes.

Conventional energy management practices focus primarily on building–oriented systems, such as lighting, space conditioning, and building envelopes. While these are important, the majority of energy use in a typical manufacturing facility is devoted to production. To optimize energy savings, an energy management plan should incorporate elements of industrial processes as part of the program to improve efficiencies.

The use of electric tools, gauges, drives, and controls to replace pneumatic tools, for example, can minimize the need for compressed air—a very expensive utility. Energy management solutions also incorporate uninterruptible power supplies, high–efficiency motors, power quality measurement systems, peak demand systems, emergency/back-up generators, and energy management software.

Energy Management for Production

Manufacturing processes are quite diverse, but the following examples illustrate where savings can be found with attractive payback periods.

Finishing Operations. Minimize the total air supply and energy cost required to provide proper paint booth air flow by minimizing booth length and cross–sectional areas, and increase the use of painting automation, energy-efficient heating and humidification systems, variable frequency drives for air supply fans, and automatic booth balance systems. In addition, switch from wet paint operations to the new powder coating technology that eliminates the need for costly baking ovens (Xiom technology).

Machining Operation. An electric control valve can be installed in the coolant supply piping to each machine to feed coolant only when the machine is in operation. The optimum coolant amount can be determined by checking the lowest allowable pressure that does not negatively impact tool life.

Cleaning Operations. The run-time of spray wash pumps on automatic parts washers can be reduced to two hours instead of the continuous eight-hour operation during a work shift. This reduction in run-time minimizes energy waste and can be accomplished with a standard electric timer shutdown circuit. In addition, a variable frequency drive (VFD) motor can be installed to allow normal speed operation of the pump drive during the required washing and flush cycle, and reduced speed during non-washing periods.

Quantifying Potential Savings.Take a look at the following example to see how taking small steps to cut energy use can yield significant savings on your energy bills. Consider the factors in a typical compressed air leak:

• Cost of electricity: $0.10 per kilowatt-hour (kWh), a conservatively low estimate for the NYC metropolitan area
• Air pressure for a reciprocating compressor: 100 pounds per square inch gauge (psig)
• Operational hours: 8,760 per year
• Leak: 5 cubic feet per minute (cfm).

The cost of this air leak works out to $660 per year (5 cfm * 0.20horsepower/cfm * 0.75kilowatts/horsepower * 8,760hours/year * 0.10$/kWh). Considering the average cost of electricity in New York City is closer to $0.20 per kWh, the actual cost of a 5 cfm leak is more than $1,200/year! This assumes there is no refrigerated filter and/or dryer. The costs only increase if the air compressor system includes a refrigerated filter and/or dryer.

Refrigeration Systems. Equipment is sized for peak capacity requirements, but often it is over-sized for the existing load. This means that fans, pumps, compressors, and other rotating equipment, waste electrical energy. A variable speed fan control on the evaporator fan and the use of control hardware on the condenser and compressor can significantly reduce energy costs by using this equipment only when it is needed, and at the level that is appropriate.

Robotic Systems. The energy use of an electric and a hydraulic robot can vary greatly for the same function. In order to start an action smoothly, the hydraulic equipment for robots has to operate whether the robot is in motion or idling, this consumes large amounts of energy. An electric robot can consume much less power, perhaps showing a 70% reduction in energy costs, depending on the required tasks.

Direct Fire Technology. Energy–efficient direct fire gas technology can replace steam systems.

Measuring for Control

The energy management process integrates the energy cost element into production area planning for continuous improvement in total manufacturing cost control. Analysis of data from production area energy meters brings about process accountability, monitoring, and control. Each energy–consuming department must perceive energy use as an integral part of their total cost. Moreover, they need real-time data in order to identify waste and make improvements in a timely manner. Unnecessary energy use in the production process is eliminated wherever possible.

Training and Employee Involvement

On the manufacturing floor, one key factor in a successful energy–management program is to involve production employees in work groups to continually fine–tune equipment operating parameters, such as run time, flows, pressures, temperature, and humidity. This is especially needed after initial installation of energy–reduction equipment, and practices to provide valuable feedback to continually improve initial equipment designs.

Let the ITAC Sustainable Business Unit provide energy reduction awareness training to your employees

Energy Management Impacts the Bottom Line

When effectively implemented and maintained, energy management process improvements can provide a significant competitive advantage. Refining existing programs to include these practices means taking existing programs to the level of a totally integrated energy management process. A 20% to 30% efficiency improvement—beyond conventional manufacturing practices—can provide significant energy savings that will have a direct impact on the bottom line.

Please contact Matt Goodman, ITAC’s Sustainability Program Associate, at 212.442.5216 or mgoodman@itac.org for more information.

You have probably heard the warnings—Euphorbia pulcherrima (Poinsettia) are poisonous and should be kept away from children and pets for fear of ingestion. This is a fable, thought to have started in 1919 when the two-year-old child of a U.S. Army officer became ill and died, purportedly after consuming the leaf of a Poinsettia. The assumed cause of death was never confirmed, and recent studies have proven the plant is non-toxic.

In fact, after extensive testing by the American Society of Florists and the Ohio State University more than 20 years ago, researchers confirmed that no part of the Poinsettia plant is toxic. While the leaves may cause minor skin irritation, and consuming any part of the plant could result in a stomachache,

Tom Fawls http://www.sxc.hu/

there is no documented evidence that ingesting any part of a Poinsettia would be life–threatening.

Seasonal and/or everyday houseplants, which can cause severe reactions (even death), include holly, ivy, rhododendrons, and azaleas. Please keep these plants away from children and pets. If accidental ingestion occurs, contact the American Association of Poison Control Centers at 800-222-1222.

Fun Facts About Poinsettias:

• Poinsettias are native to Mexico, where the Aztecs used them from the 14th century until the 16th century for medicinal purposes, and for making dye.
• Joel Robert Poinsett, the first United States ambassador to Mexico, introduced the plant to the United States in 1825.
• They are now grown commercially in all 50 states.
• They represent over 85% of the potted plant sales during the holiday season.
• December 12th is National Poinsettia Day.