INSTEEL WIRE PRODUCTS:ABM AT ANDREWS

TEAM 1AJAT SHATRU KAUSHALRAGINI SHARMASRIKANTH AYITHYDIVYA SRI CHOKKAKULASUJIT INDAVARAPURAGHUVEER KODALIGOPI KRISHNA

MYRA SCHOOL OF BUSINESS.

INTRODUCTION▪ About the company : Insteel wire products is a division of Insteel industries and manufactures and

markets a broad range of wire products .

▪ The company’s primary markets are a) Construction, b) Home furnishings, c) Appliance, d) Agricultural industries.

▪ The company is operating eight manufacturing facilities and has an annual sales revenue of about $300 million.

▪ Andrews CS Plant : has 4 product lines :1) Steel wire of different gauges, 2) Galvanized wires of different gauges, 3) Wire mesh, 4) Nails.

▪ Nails production is from two mills :▪ Mill A – Commodity nails and sinkers▪ Mill B – Pallet nails, heading and threading specifications.

▪ Spread across these four product lines are 477 individual products.

ABC INITIATIVE AT INSTEELIn 1996, Management decided to start ABC analysis at Andrews Plant on account of Increase in pricing pressures and capacity constraints.

Before the ABC initiative:

1) The price of basic Raw Material, Steel Rod, was used to estimate materialcost s of all of Insteel Products by multiplying the weight of product by the price of the steel rod.

2) No specific product or customer based costing information was there.

3) Sales strategy : Volume-oriented.

ABC AT ANDREWS PLANT : 1995 -96

Major findings of the ABC Analysis:

1) 45% of customers and 45% of Products were unprofitable.2) Galvanized wires (considered profitable) and mesh products (break-even) were losing

money. 3) The nail business previously thought to be moderately profitable, was actually the

company’s most profitable business.4) Within nails – Pallet nails turned out to be the most profitable.

PRODUCT GROUP SALES

MATERIAL COSTS PRODUCTION

COSTSCUSTOMER

COSTSBUSINESS/ FACULTY

SUSTAINING COSTS

TOTAL COSTS PROFIT

Bright Wire 10.462 6.763 1.235 1.499 0.416 9.913 0.549

Galv wire 12.866 8.816 2.057 1.567 0.545 12.985 -0.119

Nails 30.613 19.902 6.585 1.327 1.219 29.033 1.58

Mesh 5.07 4.277 0.708 0.504 0.24 5.729 -0.659

ACTIONS ON ABC ANALYSISBased on the intensive investigation, to make unprofitable products profitable various Process Improvement areas were identified and actions taken in

a) Quality.

b) Preventive Maintenance.

c) Freight Handling.

d) Change in Product and Customer Mix.

ACTIONS ON ABC ANALYSIS▪ Pallet nails were the most profitable product

▪ Production Plants for Pallet nails was running at full capacity,

▪ Considering opportunity, Insteel decided to increase the number of plants for pallet nails from 2 to 4 in two phases with immediate expansion with 3rd line and plan for 4th afterwards if product continued to perform well.

▪ Insteel Spend $900,000 on additional machine with zero salvage value at end of 10 years.

▪ The third plant didn’t go into production until June 1997 due to delay in machine delivery.

Follow-up ABC Analysis in 1997Results

▪ Sales increased by $5.9 million, profits increased by $0.5 million.

▪ Quality costs reduced by $1.8 Million

▪ Freight costs reduced by $555,000

▪ Raw material prices increased during the year

▪ Pallet nails (previously, the most profitable product of insteel) had become

one of the most unprofitable product.

LOSSES

Was third line required?

why….???

  1995-96 1996-97

Sales ($M) 1.95 2.1

Sales in tones 2600 2817

Material costs ($M) 0.9 -1.1

Conversion cost ($M) 0.859 1.271

Net profits ($M) 0.191 -0.271

EXHIBIT 4 : ( Galvanized pallet nail-related overhead cost information, 1995-96 and 1996-97)

Cost pool Cost hierarchy Cost driver 1995-96Driver volume

1995-96Spending

1995-96Driver volume

1995-96Spending

Cleaning house Unit Tons cleaned 100000 $210000 110000 222000Depreciation wire drawing machine Unit Tons drawn 100000 $420000 110000 420000

Depreciation Nail Galvanizer Unit Tons galvanized 40000 $623000 45000 623000

Depreciation- heading and threading machine Unit Tons headed/ threaded

2600 $50000 2817 140000

Material handling Batch Number of moves 4000 $305000 4500 350000

Dies retooling Batch Tool shop hours 3000 $352000 3300 382000

Wire drawing changeovers Batch No of changeovers 700 $267000 700 272000

Quality inspection Batch No of inspections 1000 $407000 1000 420000

Pricing and advertising Product Traced to products $300000 287000

Order processing invoicing Customer Number of orders 3000 $163000 3000 143000

Invoicing Customer Invoices ordered 3000 $87000 3000 92000

Freight Customer Traced to customers $1110000 1290000

Information systems Faculty Tons produced 100000 $1287000 110000 1330000

EVN on wire drawing equipment Unit Tons produced 100000 $1800000 110000 1724000

EVN on nail galvanizer Unit Tons galvanized 40000 $1800000 45000 1688000

EVN on Heading/ threading machine Unit Tons headed/ threaded

2600 $90000 2817 227000

Inventory EVN Unit Tons produced 100000 $692000 110000 703000

Exhibit 6 other costs assigned to galvanized pallet nails; 1995-96 and 1996-97

Cost pool Spending in 1995-96 Spending in 1996-97

Pricing and advertising $10000 $9000

Labor $400000 $600000

Freight $30000 $31000

Inventory EVA @ 18 % $18000 $18000

Equipment EVA @ 18 % $253800 $376800

Driver Pallet Nails Corrected Cost Cost CostsConversion Cost 12,70,616 8,43,618Materials Cost 11,00,000 11,00,000Total Cost 23,70,616 19,43,618Sales 21,00,000 21,00,000Profit -2,70,616 1,56,382Cost of Excess/Inaccessible Capacity 4,27,000Profit -2,70,616Reconciliation of cost of inaccessible capacity

Depreciation 90,000 EVA on equipment 1,37,000 Labor 2,00,000 Total 4,27,000

Corrected Calculations for 1997

  1995-96 1996-97

Sales ($M) 1.95 2.1

Sales in tones 2600 2817

Material costs ($M)

-0.9 -1.1

Conversion cost ($M)

-0.859 -1.2

Net profits ($M) 0.191 -0.2

1997-98 (Proposed)

3.1

4200

-1.6*

-1.3*

0.2

Budget for 1997-98

* Considering increase in raw material quantity required for third line

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