Performance measurement system and transfer price model for cast wheels

Abstract

The primary objective of this dissertation is to arrive at the Performance Measurement system for the Wheel Shop of the railroad cast wheel manufacturing unit called the Rail Wheel Factory (RWF), Bangalore. RWF is under the administrative control of the Ministry of Railways, India. The paper details the manufacturing process in the Wheel shop and the existing scheme of performance cost measurement of wheel production. The apportion of labor, material overhead and depreciation to the unit wheel manufacturing cost, is ahistorical allocation of costs to the finished product on an average cost-plus basis. This is demonstrated as inadequate to uncover the inefficiencies in the production process at this plant. The research hypothesis is that the cost plus model of performance measurement fails to evaluate the contribution of various manufacturing costs towards the unit total cost of the wheel in a process-based plant. The hypothesis is validated by analysis of the cost sheets of production performance for cast wheels of BOXN wagons, which form the bulk of the production of the Wheel shop of the RWF. The inadequacy of the cost plus model is highlighted through regression analysis of the independent variables affecting unit total cost of wheel production. The output indicates the maximum significance of material and administrative overhead costs towards unit total manufacturing costs without specifying the precise activities in wheel production that contributes to the higher manufacturing cost. Detailed review of contemporary literature on Performance measurement including Activity based costing and perspectives on the Balanced Scorecard for manufacturing plants is used to postulate the framework of an alternative model of performance measurement for wheel production. The increase in costs is captured by mapping activities involved in production process focused on the activity cost driver in each sub shop of the Wheel shop. This is based on the Quality Policy to produce low Cost quality cast wheels. The research elicited the views of the stakeholders of the plant on the efficacy of cost competitive measures in the production processes at the plant, both from the field and at the administrative office of Ministry of Railways head quartered at New-Delhi, India. This led to evolution of a transfer price mechanism to track the cost of the product in the intermediate to final stages of manufacture. The inefficiencies in manufacturing process as the product is passed from then upstream to downstream shops are effectively highlighted in this model. The internal transfer price model is an opportunity for the RWF management to introduce a robust performance based incentive bonus scheme for the Wheel shop employees. This is based on two-part (fixed or variable rate) mechanism, based on higher premium for process improvements in respective sub shops rather than single incentive piece rate per finished good wheel as at present. The performance measurement and revised incentive bonus scheme should be very effective in the Wheel shop as research findings corroborate the high levels of employee motivation and learning potential in this shop. The evaluation of the stakeholders' responses to the questionnaires and interviews confirm the need to adopt a proactive strategy in vendor and cost management issues. Respondents believe long-term vendor relationships will contribute to value creation in supply management. The importance of performance measurement of the process cycle needs wider dissemination in the organization. Significant percentage (57 pct.) of the stakeholders are satisfied with the internal business processes of the Wheel shop but could not confirm the plant's performance status in comparison to similar plants. This is the challenge to the plant management to reaffirm that performance measures for wheel production at RWF are in conformance to international benchmarks as such specialized plants are few worldwide. The collaboration route with reputed credible manufacturer of similar cast wheels or Joint venture with a global railroad equipment manufacturer is suggested as a method to penetrate the competitive international export market of rail road consumables. Control over wheel manufacturing costs through activity based cost measurement and internal transfer price mechanism with a tie up to a reputed international collaborator will enable the translation of the plant mission, to be a world class producer and exporter of cast railroad wheels. The paper has suggested the adoption of Balanced Scorecard for Wheel shop with regard to Internal Business processes and Learning and growth Perspectives to further improvements in manufacturing processes and enhance employee satisfaction to make cost competitive cast wheel product. The research findings of high employee productivity and propensity for growth indicate that even in the existing structure, the introduction of the Performance measurement system and transfer price model for Wheel shop, Rail Wheel Factory, India, will be effective to reward employees, control costs and improve the quality of the product. The paper recommends that restructuring of the Rail Wheel Factory, as an autonomous Corporate entity or Public Limited Corporation listed on the stock exchanges, with introduction of employee stock options, is the best method to fully maximize the effectiveness of the activity based performance measurement system.