Original Date: 08/07/1995
Revision Date: 01/18/2007

When Lockheed Martin Tactical Aircraft Systems (LMTAS) made the strategic decision in the early 90s to become a Lean Manufacturer, the company recognized that the goal would require significant improvement in productivity, systems, quality, schedule, and cost. These improvements would also have to be realized within a declining business base environment. Cost quickly became the primary metric in this phased approach to implementing Lean Manufacturing initiatives. In 1993, the Operations division teamed its Finance counterparts to analyze and comprehend the cost impacts of operations. A cost management organization the Dedicated Cost Team, comprised of members from Finance and Operations was therefore created within the Operations Department.

The purpose of this Dedicated Cost Team was to identify areas of opportunity and then plan and implement strategies for continuous improvement. Cost was used as a basis for restructuring the organization. Best practices often based on input from production workers were identified and implemented, and direct cost teams worked to identify and track all elements of cost on the factory floor. A support cost team was established to do the same for support costs. As cost drivers became understood, cost metrics became a tool for control and improvement. A bottom-up plan was developed that included detailed management of cost at all levels.

Two important concepts that guided LMTAS to success as a Lean Manufacturer were “Beans in the Box” and Cost Per Equivalent Unit (CPU). Beans in the Box was also known as Activity-Based Cost (ABC) Management. Traditional accounting methods combined all processes in cost pools such as Direct Labor, Overhead, Fringe Benefits, other charges, Material, and G&A cost drivers. ABC Management segregates cost information into more detailed but manageable pieces. Figure 2-1 illustrates how operational process costs are broken down. This approach provides resource managers improved cost management data, is flexible, and results of changes are quickly discernable. Under ABC Management, manpower is assigned to particular manufacturing processes. Cost management data is used to challenge management and support ratios, and drives decisions to outsource. The data is also tied to the MRP system and helps determine increases or decreases to staffing levels.

The CPU attempts to capture all costs of an aircraft, and is intended as a consistent and reliable method to determine if reduction of aircraft costs is being achieved. Since 1991, production at LMTAS has decreased by more than 50%, yet the CPU has remained constant. ABC management has made it possible to reduce or eliminate most non-value- added cost drivers, enabling LMTAS to reduce the flyaway cost to the government by $3 million per aircraft for the F-16.

An automated operations financial system was brought on line in 1994 to help all levels of Operations personnel receive financial data in a timely manner. It is used to control Operations efficiently and helps drive continuous improvement.

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