No 1. Describe the quality management program initiated at texas.

What role did the new information system play in the quality program.
The Period Report is actually a well-designed system. Building from projections and commitments made in the budgeting process, as encapsulated in the Annual Operating Plan, the report is a sensible summary of period operations. It is flexed with respect to the volume and mix of actual output. The five variances help to identify the principal sources of variation of actual from budget, such as volume, mix, and external price changes. I particularly like how promised improvements from capital expenditures are linked into the standards. The thoughtful treatment of volume variances also deserves mention. In most companies, production managers receive favorable volume variances for producing in excess of budgeted amounts. Also, they are penalised with an unfavorable volume variance during a period when production falls short of budgeted amounts. This practice usually makes it impossible for an organisation to achieve just-in-time operations. Though told by JIT not to produce unless the next stage is ready for the product, department managers are penalised for following this discipline, and rewarded for overproducing even when the production could be of the wrong products or in excess amounts. At TEX, most volume variances are treated as noncontrollable at the departmental level. Favorable, controllable volume variances are earned only when demand exceeds rated capacity and the manager squeezes out extra yield and output to meet this demand. Conversely, a controllable unfavorable volume variance occurs only when production falls short of budgeted amounts and fails to satisfy existing demand. In summary, the TEX Departmental Period reporting system is a thoughtful, well-designed standard cost system, whose specifications are updated to reflect current operating conditions. Many companies have a lot worse.

No 2. Identify the strengths and weakness in the existing financial reporting sistem. What was the value of the period departmental costs sheets, in the information-rich operatimg environment of texas eastman.
The Period Report comes out much too late and at too aggregate an activity level to be useful for operators or department heads. What do the managers and operators say to the finance group when this report is issued? The typical response is "Too late, it's history; doesn't tell us about the future." What do the operators and managers tell us now? The answer, "Still too late!" The point, of course, is that even were the information available at the end of day 28, it is still too late for effective action.

No 3.
How have the operators in briley 3b cracking plant been using the new daily income report. At a behavioral level, Briley's actions are a wonderful example of "worker empowerment." Many organisations talk about empowering workers but few deliver. What better symbol of telling workers that they "own" the production process than to issue them shares of stock in their department (see the stock certificate in the exhibits). If workers are shareholders in

the department, I say, then aren't they entitled to a periodic statement of performance? The income statement helps operators to understand the economics of their department; the assets invested and the magnitude of materials, energy, and supply expenses that get used each day to produce output. This economic awareness provides the basis of encouraging them to take actions in the best interests of the enterprise. A vivid example of this appears in the case, when the midnight shift supervisor, on his own, ordered immediate and emergency repairs to the hydrogen compressor when it failed. Normally, he would have reported the failure on the shift report and Briley would have authorised the repair when he arrived the next morning. The shift supervisor, however, knew from the daily income statement that the value of the lost output was measured in thousands of dollars whereas the expedited repair was measured in the hundreds of dollars. He was empowered to act, had the information on which to act, and he acted

Why is this report useful to them?

1. The daily statement gives a timely summary report of the operating conditions of the preceding day. It lets the operators know when they had a good day (so that they can recall what they did right) but, more important, provides an early signal when operating conditions had deteriorated. This feedback is especially important in a complex production environment where the conversion process is not completely understood. Even though catalytic cracking is an easy process to diagram (inputs of feedstock and energy, outputs of ethylene, propylene and by­products like hydrogen and oxygen), the conversion process is one of the most complex chemical processes with thousands of control points (as described briefly in the case). The daily signal kept the operators focused on quality and provided a clear signal on the returns that were being earned from improvements in quality. Over time, as described in the case, the operators learned about the key parameters to focus on to keep quality and income up.

financial summary gave operators a signal about trade-offs among various factors. Everyone knows that we should improve quality, increase yield, and use less energy. The non-financial production types would give operators signals on quality, yield, and energy consumption and tell them to get better along all three dimensions. But, as the case notes, these parameters can be in conflict. By using more energy and running the plant at a higher temperature, more output can be produced but the quality may become less certain. Where is the optimal point among these three dimensions? Only a financial model can allow trade-offs to be made. Other trade-offs occur when the production mix-shifts from ethylene to propylene; output and yield decreases but more of the higher value product (propylene) is produced. Additional trade-offs are mentioned in the case such as the decision to take a normal 7 day shutdown for maintenance, or shut down for only 4 or 5 days, using overtime and 3rd shifts for maintenance to get the plant back on-line sooner. When demand is below capacity, is it more efficient to operate at capacity for 5 days and shut down for 2 days, or do we do better to operate at lower capacity utilisation continuously over 7 days. A financial model of the plant enables these decisions to be evaluated. 4. The financial report also helps to set priorities for operator attention. It guides them to areas where improvements will be most beneficial, and not have them make improvements to save $80 here and $100 there in a system consuming $200,000 worth of inputs every day. For

engineers, the financial model helps them decide which projects or investments will likely have the highest payoffs. 5. The financial model's treatment of quality enables the department to internalise costs that typically are measured elsewhere. For example, when quality is not high, implying a high level of contaminants in the transferred product, subsequent departments incur higher costs to purge the impurities and change their catalysts more frequently. With the new report, the costs of impurities get recorded in the 3B plant where they are created. The penalty for producing off­spec material is the central issue in the Daily Income Statement. It enables an "intangible", the quality of output, to be priced out just like any other output. Generalising from this example, if timeliness (such as on-time-delivery) is important for a department, the manager could estimate the penalty in $/day for delivering the product late or early. Through this mechanism, the cost of bad quality or late deliveries is internalised in the department where the problem is created not in the department that bears the consequences from the off-standard production.

No.4 What were the information requirements for the new report? Which factor change daily and which data stays the sam from day to day?
. Most important is that the statement requires accurate measurements of the quantities of inputs consumed and outputs produced each day. Also it requires an accurate assessment of the quality of the outputs produced. Fortunately, these data were already being produced as part of the extensive investment in information technology made by TEX, so no additional measurements were required for this report. This is an important point. It would be unusual for it to be worthwhile to make new measurements just to produce a financial report. But with the tremendous expansion of information collected about production processes, financial reports can be much more timely and comprehensive by building on to the new information freely available in production and production control systems. 2. In contrast to the accurate measurement of quantities and quality, Briley could rely on ballpark estimates of the prices of outputs and inputs. This is most clear in the case of the 50% discount for off-spec material. How did Briley know whether it was 50% or 52% or 49%? For the purposes he wanted, getting the quality discount approximately correct was fine. Similarly the prices of the intermediate products and the inputs to the production process need only be roughly estimated. This is an important point for organisations thinking about applying the Briley Daily Statement to their departmental operations. Accurate prices for the intermediate products, such as stuffed printed circuit boards or etched wafers, need to be roughly estimated to value the output, but detailed studies need not be performed. Should Briley change the prices of the output products and input factors daily in response to changes in market prices? I believe the answer to this question is "No." Changing the prices daily would focus operators' attention on changing the mix of inputs consumed and outputs produced based on daily fluctuations. This is not the mission of the 3B Department. Production targets and mix are determined centrally. The goal of the operators is to learn how to produce the desired mix most efficiently while maintaining quality. Changing prices daily can only confuse the operators and distract them from their fundamental- task. Only if the company wanted operators to change the mix of inputs used, or outputs produced, in response to external price changes [as occurs in some paper companies using a combination of expensive input chemicals] would it be helpful for them to see daily price changes. Should there be major changes in relative prices,

such as a dramatic increase in the price of energy or feedstock, or decrease in prices of outputs (ethylene and propylene) then these changes should be incorporated to signal the new economics of the cracking process. 3. It is also worth noting the treatment of capital cost. In order to make this concept real to the operators, the capital cost is treated as a mortgage payment to repay the company for use of the equipment. Most of the operators would be familiar with the mortgage concept, from incurring loans for their house, farm, automobile or truck. The mortgage analogy is even better than depreciation since it can include a return on capital (the interest rate) in addition to the return of capital. The equivalent daily mortgage payment for equipment employed was calculated by the TEX finance staff for Briley, and the amount held constant each day. Operators were not to take action based on this figure, but needed to see it to understand that much of the apparent profits from daily operation were needed to repay the heavy capital investment in the plant.

4. The report also allowed for loan repayments for special projects that were implemented to increase yield or quality. This allowed operators to formulate new investment proposals and see the cost of the investment in these proposals. The instructor can also note Briley's "manipulation" of the facts to place a 50% premium on the use of cooling water. As with the discount for bad quality, Briley is internalising his estimate of the long run cost of using an input resource beyond that currently reflected in the standard cost of that resource. No 5. What should pat kinsey, the chief accountant do next? How should the reporting environment in the texas eastman plant be modified in light of the experience in the 3B cracking plant?what role should be played by the central accounting and? finance group

the output prices established by 3B should be used as the input prices for departments that take 3B's The answer to this question leads to a discussion about the role for the finance group versus decentralised initiatives. Some argue that the finance group should just stay out of the way and let local initiatives flourish without encumbrance or formality. Others raise the conflict that will occur if department managers think they are doing well, but the periodic TEX financial reports show unfavorable trends. It would be confusing to have local income signals pointing in one direction, when the centralised, more official system points in the opposite direction. In general, we can conclude that the central finance staff can play a useful integration and support role in extending the 3B report: 1. Provide hardware and software support to reduce the burden on other department managers who wish to develop the new report. Briley prepared his department's report by hand for several months. Not everyone will be as committed as he in taking on all the extra work this involved. In fact, the TEX finance staff did work to find a user-friendly programming system, a download system from the main-frame computers, and a standard userinterface for department managers to use to prepare their customised statements. This process, however, took longer than expected and, to date, has slowed down the dissemination of daily income reporting. 2. Establish output. Otherwise, the finance staff will have to strip out inter-departmental profits and losses in attempting to get a global picture of the plant's operations. Attempting to have the output priced from one department be the value of inputs transferred to the next department will

encourage a dialogue about the value of intangibles such as quality, ontime-delivery, and adherence to budgeted product-mix. 3. Monitor external prices to determine when prices should change in local departmental models. Also monitor inventory levels between departments (if any) to reconcile between profits reported locally and profits reported at the plant. 4. In an ideal world, the finance staff might be able to produce its 4 Week Report by aggregating and reconciling the daily income reports from each department. In this way, the financial results would be prepared from managerial reports. This would be in sharp contrast to the situation in companies today where financial reports are prepared first and then mailed to managers who then try to extract useful information from them.