Develop Rework Cost Model

The team conducted initial research about the client's mobility business to develop an understanding of the company’s products. We then visit the client’s plant in Detroit to have a realistic view of the production process and interview relevant staff to learn how the rework is reported and carried out.

The team developed project approaches, discussed them with the client, and eventually agreed to focus on two main goals:

●       Develop methodology and cost model to calculate the rework cost

●       Provide recommendations to reduce rework cost

Research:

The team applied primary research methods for this project. We developed interview questions and met internal stakeholders to understand the production process, where the rework happens, how the rework data is recapped, and the company’s current cost allocation method. The team conducted 11 interviews, including 4 interviews with Accounting, 3 interviews with Quality Engineers, 2 interviews with Warehouse Manager, 1 interviews with Operation Manager, 1 interviews with Resin/ Dispersion Unit Manager, and identified that:

●       The cost of Labor, Material, and other costs are reallocated to each type of product at the end of the financial year based on cycle time (times used to produce products)

●       There was no accounting method to reallocate cost to reworks.

●       There were no records of materials used per rework conducted.

Based on the nature of how rework data is recapped, the team identified the need to develop a methodology to calculate rework costs and conduct an excel model to populate the rework cost automatically.

 Root Cause Analysis & Recommendations Development:

Model development: the team conducted follow-up interviews with Quality Engineers to map reworks that happened during the production process, categorize the type of reworks, and how the system reacts when rework happens. The team then developed a cost structure for rework with details of the main cost drivers and sub-cost drivers, along with the methodology to calculate them. After verifying this methodology with accounting, we then made-up numbers and developed an excel model to estimate and capture rework costs.

Model testing and validation: The team connected with client's stakeholders to gather real information and conduct pilot tests. In total, we conducted 16 pilot tests, including 5 tests for resin, 4 tests for dispersion, and 7 tests for finished goods.

Recommendations development: results from pilot tests gave us typical costs of each type of rework. We then assumed all else equal to estimate rework costs of each type in the previous year. The estimation number allowed the team to answer critical requestions about identifying areas of focus for rework cost cutting:

●       Which production processes have the highest rework cost?

●       Which one of the Labor Labor/ Material/ Capacity losses is the key driver of high rework costs?

●       Which causes (Internal misload/ General appearance) of rework has the highest cost?

●       Is there any correlation between materials and the reason for rework?

Impact Assessment: By answering critical requests about identifying areas of focus for rework cost cutting, the team helps the client quantify savings if the cost-cutting recommendations are carried out successfully.

Truong Dinh

MBA2 - Michigan Ross