Case 3 Replacement Lebanon Gasket Lean Enterprise

2006 Student Case Competition

CREATING A LEAN ENTERPRISE

The Case of the Lebanon Gasket Company

B Y P E T E R C . B R E W E R , C PA ,

AND

The Student Case Competition is sponsored annually by IMA to promote sound financial/ accounting analysis and presentation skills.

F R A N C E S A . K E N N E D Y, C PA

T

he Lebanon Gasket Company (LGC) hired Tom Walsh as the plant manager of its Topeka, Kans., facility in January 2004. LGC

was impressed by Walsh’s 20 years of experience as a manufacturing engineer, including four years of employment as a manager in Toyota’s Georgetown, Ky., facility. Walsh’s charge at Topeka was to turn around a plant that had been suffering from declining profits and margins, excessive waste and inventory levels, unsatisfactory on-time customer delivery performance, and shrinking market share. His game plan for overcoming these problems was to focus on one core strategy—operational excellence. He intended to abandon the mass production mind-set that had guided the Topeka plant since its inception in 1979 in favor of the lean thinking approach that he had seen work effectively at Toyota.

September 2005

I

S T R AT E G I C F I N A N C E

45

After 18 months on the job, Walsh and his co-workers had accomplished many goals related to the plant’s lean transition. Two value streams and four manufacturing cells were up and running. The lean training program was proceeding on schedule. The production, engineering, and maintenance employees had started to buy-in to lean thinking. Customer order-to-delivery cycle time had drastically improved, which, in turn, was growing sales. Nonetheless, the financial results were disappointing. The absorption income statements shown in Table 1 indicated that the plant’s return on sales had continued to decline from the 11.5% that was reported for the fourth quarter of 2004. To make matters worse, organizational infighting was at an all-time high—the Finance Department was blaming...