1

5-3-01First in Glass

Process Optimization with a Process-Centric

Improvement Approach

ARIS Users ConferenceMay 3, 2001

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5-3-01

Who is Pilkington North America?

• PNA is a private company

• Owned 100% by Pilkington UK

• North American glass company

• Over 150 locations

• Three SBU’s– AGR - Auto glass aftermarket– BP - Building products – OE - Auto glass to the OEM

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5-3-01

PNA SBU’sBP (30%)

– 4 large float plants – Customers - O/E, Windows and M&F

OE (45%)– 7 Fab/modular plants– Customers - AGR, Big 3 and NNAMS

AGR (25%)– Large Depot/100 Wholesale sites– Customers - AGR retailers

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PNA Business Organization

• Part of largest glass organization in the world

• Pilkington invented float glass process

• Pilkington leader in product innovation

• PNA has largest float tanks in N.A.

• PNA designs/manufactures most complex auto glass

• PNA OE business is low cost producer

• PNA AGR has leading market share

• PNA AGR has industry’s largest distribution facility

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5-3-01

Step 1:

Describe the Problem

Team Charter

Team Champion/Sponsor: Gerry Gray

Team Members: Randy Berg (TL), Annette Apel, Grant Blair, Jeff Bowman,Luann Brodbeck, Kerry Cowen, Jim Ehle,Todd Huffman, Heidi Smithey, PhilTaggart, Rick Tippett, Sandi Yari,

Problem Statement: Current cost structure for financial overhead costs is too high for PNA to remaincompetitive in the long term (approx. 30% total reduction necessary).

Customers: Shareholders (represented by PNA Operations Review Committee).

Team Objectives: Reduce total cost of PNA financial activities (for example, Corp. Finance from

$5,453M in FY00 Budget by $1,000M to $4,453M in FY01 and by $1,500M to$3,953M in FY02).

Determine optimal areas where financial activities should reside. Create value improvement by utilizing a “zero base” approach to business activities. Deliver a tangible implementation plan by 12/1/99.

Metrics: Total cost of financial activities; Headcount.

Input Boundary: Financial transactional processes.

Output Boundary: Financial reporting and analysis.

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First Step Team Activities• Data collected on work activities from 49

Corporate Finance employees in 8 departments and over 100 employees in the business units for 21 financial sub-processes (totaling 61 detailed activities)

• Team prioritized which finance sub-process areas needed to be mapped using XY Matrix and confirmed by data collection - total of nearly 50 process maps completed

XY Matrix - Team Tribal Knowledge

XY MatrixProject: VFM Finance

Date: 10/5/99

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Output Ranking 38 19 11 8 8 8 8 Rank % Rank

Finance Processes (X's)Association Table

1 Accounts Receivable 7 10 376 8.46%

2 Cash Application 8 10 414 9.31%

3 Accounts Payable (trade and freight) 7 10 376 8.46%

4 Travel Expense Report 1 1 49 1.10%

5 Payroll 10 8 468 10.52%

6 Benefits 10 1 391 8.79%

7 Manage General Ledger 1 1 49 1.10%

8 Perform Closing and Financial Reporting 10 9 479 10.77%

9 Plan and Manage Taxes 6 1 239 5.37%

10 Manage Financial Risk 2 2 98 2.20%

11 Manage Corporate Risk 1 1 49 1.10%

12 Perform Internal and External Audits 7 4 310 6.97%

13 Perform Asset Planning/Accounting 2 2 98 2.20%

14 Perform Project Accounting 2 2 98 2.20%

15 Cost Analysis 4 4 196 4.41%

16 Manage Liquidity 1 1 49 1.10%

17 Manage Employee Pension Plans and Benefits 3 3 147 3.31%

18 Manage Capital Structure 1 1 49 1.10%

19 Manage Financial and Accounting Policies 1 1 49 1.10%

20 Manage Credit/Customer Risk 8 10 414 9.31%

21 Manage Insurance 1 1 49 1.10%

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View Results

Delete

Instructions

DEMO

Team Participation - Mapping PlanBPC

ResponsibleProcesses To Be Mapped Process

OwnerTask

LeaderStatus of Maps and Timeframe

(as of 10/7/99)

Rick Payroll Processing – Consolidated and Plants Bowman,Ehle,Cowen,

Taggart

Bowmanwork with

SBUs

High Level & Most Detail CompleteExpect this to meet Team needs

Heidi Manage Credit/Customer Risk – Credit LimitsEstablished, Allowance for Doubtful Accounts,Payment Negotiations & Collections, Notes,Credit References, D & B Reports.

Bowman/Tuttle

Bowman None Done – High Level Complete by10/22/99

Heidi Cash Application – Apply Cash, Adjust Cash,Reconcile deductions, Bill backs, ROCA’s, CDAProcessing.

Bowman/Tuttle/Tisdale

Huffman None Done – High Level Complete by10/22/99

Heidi Accounts Receivable – EOM Receivable Reptg,Customer Acct Maintenance, GL Bank Errors,NSF Chec ks, SAP A/R , OE Manual Invoices.

Bowman/Tuttle/Tisdale

Blair None Done – High Level Complete by10/22/99

Luann Accounts Payable – Invoice Entry, PaymentDistribution, Maintain vendor accts, Prepare1099’s, Recurring Payments, Plant PME’s, EOMJV’s and recons, EDI 810 and File Invoices,security administrator.

Bowman/Tuttle/Tisdale

Brodbeck 90% High Level and Detail Level Complete,add EDI Invoices and Maintenance ofPASS system vendors and securityadministrator – Complete by 10/15/99.

Luann Perform Closing & Financial Reporting – AGR Bowman/Tuttle/Apel

Cowen 50% Complete – High & Detail LevelComplete by 10/22/99

Luann Perform Closing & Financial Reporting – BP Bowman/Tuttle/Apel

Taggart None Complete – Documentation Available– High Level Complete by 10/22/99

Luann Perform Closing & Financial Reporting – OE Bowman/Tuttle/Apel

Ehle/Yari None Complete – Documentation Available– High Level Complete by 10/22/99

Luann Perform Closing & Financial Reporting –Consolidated

Bowman/Tuttle/Apel

Berg 50% Complete – Complete by 10/22/99

Key Activities:1. BPC/Process Owner and Task Leader meet to discuss processes to map and set

up mapping meetings with appropriate process personnel.2. BPC’s map “AS IS” processes and review for accuracy with Process Owners.3. BPC/Process Owner and Task Leader meet to discuss potential changes to

processes and BPC’s map “TO BE” processes.System (IT) and Operational Procedure changes are identified and implemented.

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Step 2:

Analyze Current Results

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Total Corporate Finance Costs (Gross)

5,453

4,4533,953

6,033

6,8087,440

4,000

0

800

1,600

2,400

3,200

4,000

4,800

5,600

6,400

7,200

8,000

FY97Actual

FY98Actual

FY99Actual

FY00Budget

FY01Target

FY02Target

$ (0

00

)

Actual Target Best in Class Benchmark

Primary Metric

Two-year target provided to Finance team

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Benchmarking Best Practices

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0.36%

0.51%

0.86%

1.15%1.21%

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0.40%

0.60%

0.80%

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1.40%

1.60%

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Comparison to Benchmarks

Benchmarking is based on a study of more than 500 companies by the AICPA and The Hackett Group - levels shown are first quartile for each category

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Comparison to Benchmarks

Benchmarking Best Practices

Benchmarking is based on a study of more than 500 companies by the AICPA and The Hackett Group - levels shown are first quartile for each category

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Step 3:

Prioritize Key Problem Areas

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Two Level Pareto AnalysisFY00 Budget - Grand Total Finance Costs by Source

of Costs

592 551 480 371 172

12491547

2236

4678

58%

82%

39%

71%

0600

120018002400300036004200480054006000

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0%10%20%30%40%50%60%70%80%90%100%

Total Cost Cumulative %

FY00 Budget - Total Corporate Finance Costs by Sub-process

398

327

238 229190 167 162 162

113

5515 10 8 4 1 0 0

485508

780825

64%

71%76%

81%

34%

56%

18%

45%

85%

0

100

200

300

400

500

600

700

800

900

1000

Finance Sub-processes

($00

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10%

20%

30%

40%

50%

60%

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90%

100%

Total Cost Cumulative %

85% of Corporate Finance cost is represented by 9 sub-processes.

Benefits bar not addressed by VFM Finance because it is outsourced and covered by contractual obligation.(Team worked on burgundy bars)

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Step 4:

Perform Root Cause Analysis

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5-3-01

Root Cause by Process Modeling

• 50 Level 3 and 4 process maps completed• 40-50 people involved• Documented how the work is done - both “as is”

and “to be” process maps • Sub-processes assigned costs and prioritized for

improvement:– Simplify - eliminate non-value added

– Standardize - reduce variation

– Consolidate - improve efficiency

– Automate - reduce manual effort

– Outsource - use specialized expertise

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Simplify and Consolidate

Three different processes for each SBU simplified and consolidated into one

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18Distributeemployee

documents

AGR -- MondayClinton -- Friday

Lathrop -- ThursdayLaurinburg -- Thursday

Niles -- FridayOttawa -- Friday

Rossford -- Wednesday (next week)Salaried -- varies

Shelbyville -- FridaySherman -- ThursdayVersailles -- Thursday

Employee paymentdocuments delivered

PlantManagement

OPPORTUNITY: Deliver Electronically

direct depositnotification

employeepaycheck

XOR operator

Standardize and Automate

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Step 5:

Identify Activities & Countermeasures

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• Eliminated NVA work and positions; reassigned some work and positions to SBUs

• Standardized and consolidated payroll processing

• Implemented Receipt Initiated Voucher (RIV) for AGR glass purchases

• Decentralized processing of customer credits

• Automated Accounting processes

• Outsourced pension management

• Lengthened account reconciliation cycles

Activities and Countermeasures

Implementation Plan as of 2/25/00What Who When Status

1) Implement logistics for transfer of finance activities and related costs to SBUs:(a) AGR – 7.70 FTEs ($638M in overhead cost savings to Corporate Finance)(b) BP – 3.85 FTEs ($230M in overhead cost savings to Corporate Finance)(c) OE – 3.20 FTEs ($205M in overhead cost savings to Corporate Finance)

Cowen/BowmanTaggart/Bowman

Ehle/Bowman

3/31/003/31/003/31/00

Ongoing through3/31/00

2) Restructure Corporate Finance to absorb remaining and additional work from 11.05FTEs eliminated while 14.75 FTEs are transferred to SBUs ($526M in overhead costsavings to Corporate Finance)

Bowman 2/29/00 Ongoing

3) Renegotiate tax and external audit contracts with PWC ($340M in cost savings toCorporate Finance)

Bowman 3/31/00Completed as of

2/10/004) Implement modification to accounting closing schedule Bowman 3/31/00

5) Eliminate need for manual jv for workers compensation incurred losses by automatingthe function

Bowman 3/31/00On hold – feasibility

determination(Tippett / Dangelo)

6) Implement outsourcing of defined benefit pension management to one vendor Bowman 3/31/00 Decision by 3/31/00

7) Implement outsourcing of the Risk Management function to Aon Bowman 1/31/00Completed as of

2/10/008) Implement project to interface AGR COPS with PASS for AGR Wholesale and

Distribution glass purchases and make use of Receipt Initiated Voucher (RIV) –Project 4981AGR: AGR Wholesale portion AGR Distribution portion PPV upload to GL and Laser printing P. O.s

Cowen/Bowman2/29/003/31/004/30/00

On track for targetNeed info. from Dist.

9) Implement direct entry of credits into systems by SBU personnel – Project 255FIN Bowman/SBUs 2/29/00 On track for target10) Create two reports for credits entered (AGR Sales and OE Sales) and automate OE

credit numbering system – Project 255FINSmithey 2/29/00

80% chance ofcompletion on target

11) Consolidate and standardize all payrolls for processing and check printing purposes Bowman 6/30/0012) Eliminate LNA Bowman 6/30/00 In process

13) Identify ST changes necessary to move Rossford from OE to BP Taggart/Ehle 1/15/00Completed as of

2/10/0014) Implement ST changes necessary to move Rossford from OE to BP (Project 308) Taggart/Ehle 3/31/00 On track for target15) Develop data warehouse to meet OE reporting requirements – Project 4980OE Ehle 3/31/00 On track for target16) Clean up MSA by transferring retained earnings and develop separate legal entity

balance sheets and P & Ls to replace Eztrieve reports – Projects 258 and 257Bowman 3/31/00

17) Automate AGR rebates and BP bonus calculations – Projects 259 and 260 Cowen/Taggart 3/31/00 Terminate BP piece18) Find and implement replacement for Compro system (if necessary) – Project 261 Bowman 12/31/00 On hold due to date19) Implement changes to GL security required by Internal Audit – Project 4962FIN Bowman 3/31/00 On track for target

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Step 6:

Evaluate Results

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Primary Metric - Results

Total Corporate Finance Costs (Gross)

5,453

4,4533,953

4,000

7,4406,808

6,033

5,130

3,587

0

800

1,600

2,400

3,200

4,000

4,800

5,600

6,400

7,200

8,000

FY97Actual

FY98Actual

FY99Actual

FY00 FY01 FY02Target

$ (0

00

)

Actual Budget Target Best in Class Benchmark

FY01 Budget set 19% below target

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Countermeasures Linked to Results

FY01 (6 mo.)FY00 FY01 Planned YTD Actual

Budget Budget Reduction AnnualizedPeople costs 2,674 1,442 1,232 1,490Non-people costs 2,779 2,145 634 1,846

Total 5,453 3,587 1,866 3,336Reduction % 34% 39%

Positions 46.0 22.5 23.5 24.0Reduction % 51% 48%

Corp. Finance Summary Cost Reduction ($000)

Headcount reduction less than planned due to accelerated timing of Payroll centralization project (headcount addition scheduled in FY02) and A/P issues

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Customer Satisfaction Results

• Running rate actual cost reduction in Corporate Finance is $2,117M from FY00 Budget to FY01 Actual to-date.

• This is 112% better than customer expectations of $1,000M in first year and 41% better than $1,500M during first two years!

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Summary of Results

• Goals were achieved by attacking NVA activities and processes - to realize significant cost reductions with minimal risk to the organization.

• Cost reduction for first year is estimated at 124% of customer expectations for two years and is on target to reach or exceed the estimate!

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Step 7:

Standardize Improvements

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Standardize Improvements• Standardize payroll practices:

– Standardized timing of payrolls– Checks now print centrally in one format– Standardized policy for special payrolls and

checks– Checks / direct deposit notifications mailed

• Standardize A/P processing (RIV)

• Standardize credit memo processing and automate OE credit numbering system

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Step 8:

Recognize Successes

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Primary Metric - Post Project

Total Corporate Finance Costs - FY01

299598

8971,196

1,4951,793

2,0922,391

2,6902,989

3,2883,587

1,6681,369

1,081820

5102690

400

800

1,200

1,600

2,000

2,400

2,800

3,200

3,600

4,000

$ (0

00

)

Actual Cumulative Budget Cumulative

Actual is 7% below FY01 Budget to-date

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The Proof is in the Results

Two-sample T for FY00-Actual vs FY01-Actual

N Mean StDev SE MeanFY00-Act 11 455.9 46.5 14FY01-Act 6 277.8 25.5 10

Difference = mu FY00-Actual - mu FY01-ActualEstimate for difference: 178.195% CI for difference: (134.0, 222.1)T-Test of difference = 0 (vs not =): T-Value = 8.61 P-Value = 0.000 DF = 15

FY00-Actual FY01-Actual

250

350

450

550

Boxplots of FY00-Actual and FY01-Actual

(means are indicated by solid circles)

P-value of 0 indicates there is a 0% chance that the difference between the two samples occurred by random chance. The difference between the two samples is statistically significant - our countermeasures have proven effective in reducing Corporate finance costs.

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The Results Continue

• Three people in A/P accepted offers for early retirement resulting in $120,000 savings per year.

• $140,000 per year cash discounts recovered.

• Upon completion of improvements yet to be completed, expect to recover an additional $110,000 per year.

• With the centralization of purchasing, savings of $300,000 per year have been realized with the reduction of five people.

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Intangible Result Also Achieved

• Auto reconciliation of A/P resulting in time savings at the end of the month.

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Questions