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Unformatted text preview: Aero Gear, Inc.: Performance Measurement, Cost Management and Product Costing in a Lean Transition Larry Grasso Central Connecticut State University “Our labor efficiency numbers have lost their meaning. We just don’t know what to replace them with.” Doug Rose, President of Aero Gear. In January 2001, Aero Gear’s President Doug Rose reviewed the monthly and year-to-date financial statements and performance reports with John McDermott, Vice President of Sales and Marketing, and Everett Smith, Vice President of Operations. Doug and his management team had become increasingly dissatisfied with the performance reports. In the past, they felt the reports had provided reliable information on labor efficiency and on the profitability of their jobs. In 1998, however, Aero Gear had begun a transition to Lean business practices. The accounting system and reports had not changed. Doug, John and Everett did not trust the numbers reported by their accounting system in the new production environment. They felt they had lost the ability to monitor the efficiency and productivity of their machinists and they were no longer confident they knew which jobs were most profitable and which were unprofitable. They wanted their accounting system to provide a means to monitor productivity and efficiency and manage costs, and to provide accurate product costs. BACKGROUND With the encouragement of Pratt & Whitney, which was looking for a local source for carburized and hardened gears, Doug Rose and his father Walter founded Aero Gear in 1982. In 1995, Aero Gear expanded into gearbox assembly but the company continued to be primarily a manufacturer of precision gears and gear shafts. Examples of the parts Aero Gear produces are pictured in Exhibit 1. Exhibit 1 Sample Products IMA EDUCATIONAL CASE JOURNAL VOL. 1, NO. 3, ART. 1 SEPTEMBER 2008 1 ISSN 1940-204X IMA EDUCATIONAL CASE JOURNAL VOL. 1, NO. 3, ART. 1 SEPTEMBER 2008 2 Competitive pressure on Aero Gear rose during the 1990s. Aero Gear’s customers were engaged in fierce competition for market share in the commercial aerospace sector. They, in turn pressed for cost reductions from their suppliers. In addition, foreign commercial and defense aerospace customers increasingly insisted on local sourcing of significant amounts of work as a precondition for accepting bids from aircraft and engine manufacturers. Diverting subcontract work away from their U. S. suppliers helped satisfy these demands. The fact that Aero Gear was located in a high wage state added to the competitive pressure. In response Doug Rose spearheaded the development of the Aerospace Components Manufacturers organization in 2000. Aero Gear and other local aerospace suppliers joined together to improve overall efficiency and to work cooperatively to attract business beyond the capabilities of any one member company. The ACM members decided that adopting and implementing lean business practices would be the foundation of their efforts to jointly improve...
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