Komtek C Cost of Scrap Blank Read the Komtek case and then compute the cost of scrap for the Zimmer order using the attached Excel solution template. Note

Komtek C Cost of Scrap Blank Read the Komtek case and then compute the cost of scrap for the Zimmer order using the attached Excel solution template. Note that the rows 1 through 160 represent sequential operation steps. Also the case indicates at what operation steps units are scrapped. BAB094
Revised May 30, 2004
KomTek (C)
I cannot believe the price-to-cost ratio on the Zimmer order. We somehow
missed the fact that we were performing poorly on this order. I didn’t expect to
reach our P-C target of 1.33 for this product, but 1.08 is unacceptable. At this rate
we will lose our shirts if all of our customers begin asking for the distal tip. Do
we know where our problems are occurring?
Paul Keisling
Team Leader, The Screaming Eagles
The Company
KomTek was the leading producer of cobalt chromium hip prosthetics (Exhibit 1) in the
U.S with more than 60% of the U.S. market share. KomTek sold hip joints to five bio-medical
companies, which put together total hip replacement kits that sold for around $3,000 – $4,000.
The cobalt-chromium (co-ch) prosthetic hips accounted for 30-40% of KomTek’s annual sales
dollars.
KomTek was the first forge shop in the country in the late 70s to forge cobalt chromium
(co-ch) alloys. In forging processes, metals and alloys were heated in a furnace and formed into
required shapes by beating or hammering. The forgings produced by KomTek were used in many
diverse applications such as blades for gas turbine engines, high pressure stainless fittings, valves
for petrochemical and semiconductor industries, and hip prosthetics used in total hip replacement
kits.
The Product – Prosthetic Hips
Nearly 50% of the total hip joint cost was material (co-ch alloy rods). The incoming
quality of the co-ch alloy rods is, therefore, very critical. The tensile strength of these rods had to
satisfy ASTM (regulatory group) requirements, which specifies a maximum of 0.35% carbon
content in the alloy. KomTek’s internal requirements, resulting from their advanced research and
development activities, caused them to specify higher standards, which require KomTek suppliers
to limit the carbon content to 0.01%. This improved the metallurgy of the product in terms of
grain size and tensile strength. The grain size affected the temperatures needed to hammer the
Professors James Hunt, Elaine Landry and Jay Rao, Babson College, prepared this case as a basis for class discussion
rather than to illustrate either effective or ineffective handling of an administrative situation.
Copyright © by Babson College 2000 and licensed for publication to Harvard Business School Publishing. To order copies or
request permission to reproduce materials, call (800) 545-7685 or write Harvard Business School Publishing, Boston, MA
02163. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any
form or by any means – electronic, mechanical, photocopying, recording, or otherwise – without the permission of copyright
holders.
KomTek (C)
BAB094
hips into shape. These strict standards caused KomTek to develop very close relationships with
their primary suppliers: Carpenter Steel in PA, Teledyne Olvac in NC and Firth Rixon in
England.
KomTek produced the prosthetic hips only when a customer placed an order. The average
order size runs between 200 – 600 pieces. The aggregate monthly demand for KomTek’s hips
was around 2,800 pieces. This demand was originally evenly distributed over the year, but lately
demand had become highly variable. In addition, customers were requiring order lead-times of
less than two weeks.
The Process
KomTek’s major global competitor was Thronton Forge, based in England. Thronton’s
process was different from KomTek’s. Thronton used press forging while KomTek used stamp
forging, which utilized specialized forging tools, that landed 15-20 blows per minute on the redhot alloy with a 20,000-pound computer controlled air hammer. Stamping produced products with
better physical properties and strength. The press forging process used by Thornton made it easier
to have dimples and patterns (Exhibit 1) in the hip joint but the processing times were longer due
to extensive re-heating. Dimples were small round nicks made just below the collar of the hip that
created better grasp properties for the hip.
KomTek received the raw material (12 foot rods of co-ch alloy) from its three suppliers.
When KomTek received an order from one of its bio-medical customers, the order was released
on to the plant floor. Exhibit 2 briefly describes each of the steps, the setup and run times. The
rods were cut to length and prepared for extrusion. The preparation involved grinding sharp edges
and coating the piece with a ceramic glass lubricant. In extrusion, the rods were pushed through a
special extrusion tool (with a hole), which brought the material to the correct thickness.
The die set was then mounted between the base and the hammer on the stamping
machine. The die set gave the hip joint its shape. The forging involved two distinct steps. The
rods went into the furnace on a conveyor and as they came out of the furnace the operator
removed the red-hot piece and placed it on the die set and the 20,000-pound hammer beat the
piece into shape. The furnace along with the Banning Air Hammers were very expensive to
operate, costing KomTek around $275 per hour. Next, the person assisting the Forge operation
trimmed the excess material (flash) around the hammered piece and dropped it in the water for
cooling. The flash was sent back to the supplier for recycling.
In order to prepare them for visual inspection, the pieces were then cleaned using a
solution. Following the visual inspection parts were ground to check for parting line cracks. If
any line cracks were found the hip was scrapped. Before the hot coin process the hips were all deburred. This de-burring removed any remnants of flash that might get imbedded into the hip
during the subsequent hot coin process.
Next, the dimples were hammered in, using a coin that formed the dimples. After this
stage, 2 pieces from a batch of 200 were randomly selected and shipped off to tensile testing. This
was a destructive testing process, which KomTek outsourced. It took approximately a week for
KomTek to receive tensile testing results. Meanwhile the batch continued along through the
2
KomTek (C)
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remaining stages of the process. Very rarely had there been a need to scrap an entire batch due to
tensile strength failures. The hot coin was a hammering process. This might cause the centerline
(Exhibit 1) to be off-center. Hence 100% of the batch was tested. Parts that failed the test went
through the straightening process.
The chemical polish and ultrasonic cleaning processes were also outsourced. The hip
prosthetics were sent to Springfield, MA in batches of 200. The supplier took about a day to
process each batch. Including transit, the polishing and cleaning process took about 3-4 days. On
receipt, 100% of the parts went through non-destructive testing (NDT). Those that failed were
reworked immediately at NDT. In the next stage, the hips were tested for acceptable quality level.
It included testing results and certification. This was the final step before the hips were stamped,
bubble bagged and boxed.
Zimmer
Zimmer was one of KomTek’s primary co-ch prosthetic hip customers, accounting for
nearly 40-50% of their total hip sales. Zimmer was one of KomTek’s earliest hip customers. In
their 8-year relationship, KomTek had improved its process significantly due to Zimmer’s
product design expertise. Lately, Zimmer had been facing stiff competition from hip-kit suppliers
and a year ago Zimmer introduced the distal tip modification to their hip prosthetic. The distal tip
was a protrusion at the base of the hip. According to Zimmer, the distal tip gave the hip better
anchoring capabilities and improved overall flexibility of the new hip joint.
KomTek incorporated this change into their process quite easily. The change appeared to
had an insignificant impact on the die set material and labor costs. Even though KomTek had not
reached its usual p-c ratio of 1.33 for this product, the ratio was around 1.15 for the previous two
orders and showing signs of improvement.
The Screaming Eagles Meeting
The Screaming Eagles quality improvement team was in-charge of the prosthetic hip
product line. They met every Tuesday at 1:30 to review the previous week’s work orders. The
team consisted of the following members:
Member
Paul Keisling
Art Briggs
Designation
Team Leader, VP Operations
Accountant
Bob Burke
Quality Control
Keith Vickers
John Daly
Scott Myers
Bill Simmons
Forge shop supervisor
Extrusion
Straightening lineman
Die shop assistant
Comments
14 years at KomTek
Tracks costs and maintains the MRP
system
Internal QC and coordinates with
suppliers
17 years at KomTek
2 years at KomTek
11 years at KomTek
4 years with the Die-Casting
department
3
KomTek (C)
BAB094
The last three members of the team were USWA members. In one of their recent
meetings, as usual, Art accessed the previous week’s work order review (Exhibit 3) on the
computer and printed a copy for each of the team members. Their focus was serious, as was the
mood in the room. This was a team that was used to exploring problems, so they could do so
without being defensive. There was no finger pointing. There were no interruptions. Each person
listened intently. No one changed the subject. An outside observer couldn’t tell who was
management and who was labor. Paul served as the leader when he was present, but functioned
more like a facilitator. He didn’t tell people what to do; he explores issues with them. On this day,
almost instantly, the team’s attention turned to the Zimmer order (work order number 811073 –
Exhibit 3) and the following conversation ensued.
Paul:
I cannot believe the price to cost ratio on the Zimmer order. We somehow missed the fact
that we were performing poorly on this order. I didn’t expect to reach our p-c target of
1.33 for this product, but 1.08 is unacceptable. At this rate we will lose our shirts if all of
our customers begin asking for the distal tip. Do we know where our problems are
occurring?
Bob:
This was an unusually large order.
Paul:
But we handled larger orders in the past.
Bob:
Not with the distal tip.
Art:
The average distal tip order sizes have been between 200 and 400.
Paul:
So why should the cost per piece be affected by the batch size?
Keith: Well, Zimmer did place a rush on the 811073 order.
Paul:
Anyway, Art, can you pull up the material review for this work order?
[Art turned to his computer and printed the material review (Exhibit 4).]
Paul:
What is the average scrap level for this product?
Bob:
It is usually between 2% and 6% without the distal tip but it is above 10% for this order.
Scrap at the straightening, non-destructive testing and quality control areas appear to be
well above normal levels.
Art:
Mind you, the data (Exhibit 2) does not include the usual tensile testing sample that is
sent out after the hot coin. This was a large order and we had to send out 10.
Paul:
Looks like there has been a lot of rework at straightening as well. The labor and overhead
costs are much higher than the standard.
[Keith pointed to the labor and overhead costs for straightening in the Zimmer
order (Exhibit 5).]
Keith: Seems as though we have been straightening almost 50% of them. I have a feeling that
the distal tip is not handling the hot coin hammering so well.
Scott: That should really not affect the distal tip; the dimples are being hammered in at the
opposite end of the distal tip.
Art:
How is the part handled, during the hot coin process?
4
KomTek (C)
BAB094
Keith: It is held along the c-c and b-b, to minimize straightening operations. We have been using
this instrument for years.
Paul:
Does it have proper clearance for the distal tip?
Keith: I will have to check on that.
Scott: We started having a lot of rework and scrap towards the end of the order. So, we had to
release more pieces to the shop floor.
Paul:
What was the total number of pieces released?
Bob:
1200.
Paul:
Was the die set changed as well?
Art:
The computer indicates that only one die set was used.
Bill:
Well, these die sets can handle up to 1000 hammer blows. This was an order for 1025 and
we did not think it was necessary to change. Moreover, I was told this was a rush order
and we did not have time to wait for another die set.
Paul:
Have there been any problems incorporating the distal tip into the die set?
Bill:
We had warned the forging shop about our problems with the die set re-enforcement
around the distal tip. We recommended they use the medium hammer.
Keith: We have been using the heavy hammer ever since we had the dimple problems with the
last two orders. Apparently, they were not cosmetically acceptable. Some of the dimples
were not deep enough.
Scott: In addition to the hammering, I have a feeling that the de-burring operation is affecting
the distal tip as well. Granted this is a trimming operation, but it might still require
considerable force, which can easily bend the distal tip off the centerline. As I recall, a
number of pieces were beyond the point where they could be straightened. So, I had to
scrap them.
Paul:
Scott, could you please bring us the data for the straightening check process?
[Scott leaves the room to go down to the shop floor to pick up the previous week’s
straightening-check data.]
Bob:
Well that only accounts for the shape. We still have to consider the scrap due to line
cracks and laps.
Paul:
Is there anyway that we can check for the cracks and laps before it goes out for polishing
and cleaning? If we can do that, it will be great. For one thing, we can start working on
the extra pieces needed to cover the order earlier, which might even save us some money.
Art:
Don’t get carried away Paul. It is going to cost us some money to do a check before
going in for polishing so the savings may be minimal.
Paul:
Won’t we save in terms of labor at processes 150 (Quality Control) and 160 (Final Prep)?
Art:
You are right.
5
KomTek (C)
Paul:
BAB094
Oh Boy! We have a bunch of issues to address. Bob, can you please start a fishbone
diagram on the blackboard? I will get a cup of coffee while Scott is getting the
straightening check data (Exhibit 6).
[As Paul was pouring his coffee, he couldn’t help wondering how they did on their lead
time target.]
6
KomTek (C)
BAB094
Exhibit 1
Hip Prosthetic
7
KomTek (C)
BAB094
Exhibit 2
The Process
Operation
No.
Description
Comments
Setup Time Run Time
(mins)
(mins)
1
Kitup
Release work order to floor
0.3
10
Abrasive Cutting
Cut bars to length
15
Grind Slugs
Grind off sharp edge of bar
1.002
20
Wheelabrate
Clean bars before coating
0.402
30
Coat Slugs
Coat slugs for extrusion
40
Extrude
Extrude
50
Wheelabrate
Clean before forging
60
Forge
Forge in tolerance per print
150
1.5
65
Helper
Help hammerman in lubrication,
flash removal
150
3
80
Alox 90
Cleaning process
90
Staging for Inspection Parts waiting for inspection
100
Visual
100% inspection
103
Parting line sample
Grind sample (10%) of parts for line
cracks
105
Deburr
Rework marked indications
110
Hot Coin
HC parts into tol. per print
111
Tensile testing
Test 2 pieces per heat for tensile
115
Straighten
Check straightness per print, 100%
120
Chem Polish
Outside service
130
Cleaning
Outside service
140
NDT Facility
Non destructive testing 100%
150
Quality Control
Acceptable Quality Level (AQL)
160
Final Prep
Package and Ship
18
1.002
0.6
120
1.5
0.402
1.5
0.3
1.002
120
4.998
120
1.5
2.4
4.998
120
0.6
8
KomTek (C)
BAB094
Exhibit 3
Work Order Review (for week ending 8/29/97)
Work Order
Expected Cost Actual Cost
Selling Price
PC Ratio
Reason
PWA
43.14
62.23
81.91
1.32
Visual Inspect
Delavan
26.82
26.48
36.36
1.33
—
86091F 52.72
54.55
61.88
1.13
Saw, Rework
92150F 101.25
105.16
119.70
1.14
Visual Inspect
EDO Corp.
UAP
21.87
19.69
38.02
1.93
—
Zimmer
133.18
142.16
153.00
1.08
Scrap, Rework
Exhibit 4
Material Review
Order #
Date Received
Operation
Quantity
Reject Reason
Status
811073
8/15/97
100 (Visual)
5
Cracks/laps
Scrap
8/15/97
103 (Parting Line)
19
Cracks/laps
Scrap
8/15/97
115 (Straighten)
65
Bent
Scrap
8/22/97
140 (NDT)
27
Cracks/laps
Scrap
8/22/97
150 (Quality Control)
17
Cracks/laps
Scrap
9
KomTek (C)
BAB094
Exhibit 5
Standard Costs and Zimmer Order Costs
Standard Costs
Opr Description
Zimmer work order 811073 Costs
Labor OH Cost Outside Total
Cost
($/pc)
Cost
Cost
($/pc)
($/pc)
($/pc)
Labor
Cost
($/pc)
OH Cost
($/pc)
Outside
Cost
($/pc)
Total
Cost
($/pc)
1
Kitup
10
Abrasive Cutting
0.33
0.83
1.16
0.32
0.83
1.15
15
Grind Slugs
0.27
0.70
0.97
0.29
0.70
0.99
20
Wheelabrate
0.21
0.21
0.22
30
Coat Slugs
0.17
0.42
0.59
0.17
0.42
0.59
40
Extrude
0.78
6.29
7.07
0.91
7.13
8.05
50
Wheelabrate
0.21
0.21
0.21
60
Forge
0.96
12.63
13.59
1.05
13.74
14.79
65
Helper
0.97
1.58
2.55
1.07
2.38
3.45
80
Alox 90
0.37
1.06
1.43
0.46
1.38
1.83
90
Staging for Inspection
0.42
0.42
0.44
0.44
100
Visual
0.26
0.70
0.97
0.33
0.90
1.24
103
Parting line sample
0.33
0.84
1.18
0.28
0.72
1.01
105
Deburr
1.31
3.52
4.83
1.16
3.09
4.25
110
Hot Coin
0.72
0.72
0.93
111
Tensile Testing
115
Straighten
2.38
1.14
120
Chem Polish
130
Cleaning
140
NDT Facility
1.44
3.52
4.96
2.72
7.01
9.73
150
Quality Control
0.35
0.84
1.19
0.49
0.92
1.41
160
Final Prep
0.16
0.42
0.58
0.14
0.34
0.48
Subtotal Costs
9.51
35.48
53.00
11.89
43.42
0.69
1.69
7.00
7.00
1.00
1.00
8.00
0.22
0.21
0.93
3.40
4.54
7.00
7.00
1.00
1.00
8.00
63.30
Material, Die and Tooling Costs
Material Labor OH Outside Total
Material-CO-Base,Rd,Med
55.20
Die, Forge
1.12
Extrusion Tooling
0.40
55.20
1.80
2.88 0.04
5.83
0.01 0.83
1.23
Subtotal Costs
62.27
Die, Forge, and Extrusion Tooling costs are based on 1000 pieces
Tensile Testing Costs
$250 for 2 pieces
10
KomTek (C)
BAB094
Exhibit 6
Selected Data from the Straightening Check Process
Unit #
971
972
973
974
975
976
977
978
979
980
981
982
983
984
985
986
987
988
989
990
991
992
993
994
995
996
997
998
999
1000
1001
1002
1003
1004
1005
1006
1007
1008
1009
1010
1011
1012
1013
1014
1015
1016
1017
1018
1019
1020
Tip-Length
0.251
0.260
0.248
0.251
0.248
0.255
0.255
0.248
0.248
0.240
0.246
0.254
0.251
0.242
0.246
0.248
0.251
0.243
0.248
0.251
0.252
0.255
0.251
0.246
0.254
0.244
0.248
0.246
0.248
0.241
0.252
0.245
0.244
0.258
0.242
0.252
0.247
0.245
0.252
0.251
0.254
0.246
0.248
0.241
0.248
0.249
0.251
0.246
0.247
0.256
Straightness
-0.002
0.001
-0.006
0.010
0.007
0.009
0.003
-0.007
-0.006
-0.003
0.000
-0.002
0.005
-0.008
0.005
-0.002
0.006
0.004
-0.005
0.003
0.006
-0.019
0.005
-0.014
0.016
-0.018
-0.012
-0.014
0.012
-0.008
0.009
0.012
0.002
-0.006
-0.009
-0.006
-0.008
-0.013
0.005
-0.006
-0.015
0.005
-0.021
-0.011
-0.004
0.029
-0.013
0.011
-0.014
-0.013
Unit #
1021
1022
1023
1024
1025
1026
1027
1028
1029
1030
1031
1032
1033
1034
1035
1036
1037
1038
1039
1040
1041
1042
1043
1044
1045
1046
1047
1048
1049
1050
1051
1052
1053
1054
1055
1056
1057
1058
1059
1060
1061
1062
1063
1064
1065
1066
1067
1068
1069
1070
Tip-Length
0.252
0.254
0.246
0.250
0.237
0.250
0.241
0.257
0.255
0.242
0.236
0.250
0.249
0.246
0.235
0.238
0.239
0.252
0.247
0.238
0.244
0.252
0.242
0.251
0.257
0.241
0.241
0.245
0.259
0.239
0.239
0.250
0.247
0.243
0.255
0.239
0.254
0.241
0.241
0.234
0.239
0.251
0.232
0.255
0.236
0.246
0.248
0.256
0.251
0.231
Straightness
0.016
0.002
-0.009
0.011
-0.006
0.001
-0.007
-0.011
-0.004
-0.005
0.015
0.002
0.007
-0.008
0.002
0.014
-0.002
0.005
0.018
0.010
0.012
0.004
0.006
-0.005
0.004
0.000
-0.013
0.005
0.013
0.003
0.010
0.004
-0.001
0.001
-0.009
-0.005
0.019
-0.009
0.003
0.012
-0.003
-0.005
-0.011
0.003
0.013
0.004
0.014
0.004
0.013
0.002
11
Opr.
1
10
15
20
30
40
50
60
65
80
90
100
103
105
110
111
115
120
130
140
150
160
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