CASE Texas Eastman Company

om Wilson, company controller, reflected on the changing role of the accounting

T department in Texas Eastman Company’s new operating environment:

Traditionally, accounting was the recorder of history, but perhaps we were not directly relevant for
the operational decisions taken every day by the departmental managers. We see the need to move
accountants physically into manufacturing areas so that they can serve as financial advisors to man-
ufacturing managers. But in order for them to function in this capacity, we need information on a
real-time basis. Operators can see hundreds of observations on their processes every couple of
hours, but we’re issuing cost summaries only every four weeks. We need to break our frame of
vision in order to develop more timely and useful information for operating employees.

Company Background
A visitor is unprepared for a first visit to the Texas Eastman (TEX) chemicals plant in
Longview, Texas. No noxious smells or clouds of smoke hang over the 6,000-acre site, and
one can almost imagine people fishing in the manmade ponds used as a source of cooling
water for the plant (see picture in Exhibit 1). The TEX plant is one of six companies in
the Eastman Chemicals Division of the Eastman Kodak Company. Summary data on the
division appear in Exhibit 2.
The Longview plant, established in 1950, produced about 40 chemical and plastic
products that were sold to other manufacturers for conversion into construction, industrial,
and consumer products. Nearly 9 million pounds of product per day were shipped during
1988. The location in Northeast Texas gave the plant easy access to the East Texas Oil
Field for the primary inputs of ethane and propane. Well-served by water, rail, and pipeline
transportation, the plant consumed weekly the equivalent of 700 railcars of feedstock —
propane and ethane — and 50 railcars of bituminous coal. Employment in 1988 was 2,650
persons. Of these, 1,560 were production workers, and 760 worked in engineering and
managerial positions.
Exhibit 3 shows a simplified diagram of TEX’s chemical processes. Feedstock was
converted in a cracking plant into ethylene and propylene. These olefin products were then
further processed in chemical plants to produce a variety of alcohols, aldehydes, and
specialty chemicals and in polyolefin plants to make various forms of plastics and adhesives.
Computerized models were used to optimize inputs and outputs as a function of current
feedstock costs and the output prices of the plant’s products.

Quality Management Program

The Eastman Chemicals Division made a strong commitment to Total Quality Management
in 1983. Because of the strong dollar in the early 1980s, foreign goods were increasing
their U.S. market penetration, and customers soon discovered that not only were Japanese
and European goods lower in price, they also had higher (more consistent) quality. The

This case was prepared by Robert S. Kaplan as the basis for class discussion rather than to illustrate either effective or ineffec-
tive handling of an administrative situation.
Copyright © 1989 by the President and Fellows of Harvard College. To order copies, call 1-800-545-7685 or write the
Publishing Division, Harvard Business School, Boston, MA 02163. No part of this publication may be reproduced, stored in a re-
trieval system, used in a spreadsheet, or transmitted in any form or by any means — electronic, mechanical, photocopying, recording,
or otherwise — without the permission of Harvard Business School.

From Performance Measurement and Control Systems for Implementing Strategy: Text and Cases, First Edition.
Robert Simons. Copyright © 2000 by Pearson Education, Inc. Published by Pearson Prentice Hall. All rights reserved.
480
 CASE: TEXAS EASTMAN COMPANY

automotive industry, feeling the brunt from foreign imports, began to take action by devel-
oping its own comprehensive quality programs, such as Ford’s Q-1 Program. In addition to
internal efforts, the manufacturers began requiring that their suppliers produce delivered
goods under Statistical Process Control (SPC).
The Eastman Chemicals Division established its Quality Policy in 1984. The division
president articulated the overall Quality Goal, “To be the leader in quality and value of its
products and services,” and backed this goal with a statement of the 11 principles by which
the Quality Goal could be achieved (see Exhibit 4). He hoped to instill an intense focus on
quality throughout the organization.
The Quality Management Program was built on a “Triangle Model” that included
Teamwork, Performance Management, and Statistical Process Control (see Exhibit 5). The
Teamwork leg, with its roots in the Quality of Work Life, Job Enrichment, and Employee
Participation literature, was implemented through Quality Management Teams that permeated
the organization. Every person in the plant, from the president down to the lowest-skilled
employee, served on at least one Quality Management Team. The teams were linked
hierarchically by having members of each Quality Management Team serving on a team at
a higher or a lower level of the organization, so that ideas and programs developed at one
level could be communicated throughout the organization.
The Performance Management leg was built on B. F. Skinner’s behavioral school of
psychology and reinforcement. It stressed the need for establishing Key Result Areas (KRA)
and developing measures for each KRA. The Performance Management process used seven
specific steps:

1. Define the mission in terms of the results the organization is expected to contribute.
2. Identify the key result areas critical to success in achieving the mission. Key result areas could be
financial, safety, or environmental goals, or SPC implementation.
3. Define measures for each key result area that indicate how well the unit is performing its mission.
4. Decide how the measures will be displayed for monitoring to signal significant changes in
measures.
5. Develop control strategies that outline a plan of action when significant changes in processes occur.
6. Develop plans to reinforce progress and achievements for each measure.
7. Implement improvement projects and allocate resources where they have the most impact on the
key result areas.

The implementation of Statistical Process Control (SPC), the third leg of the Quality
Management process, required an even more drastic change in Texas Eastman’s operations.
Prior to installing SPC procedures, operators were continually monitoring the hundreds of
variables, such as temperatures, pressures, humidities, and flow rates, that governed the
performance of each chemical process. As any variable moved away from its nominal mean
value, operators would tweak the process, attempting to bring the variable back to its
standard value. Frequently, this intervention introduced more variation into the final product
than if the operators had just left the process alone.
The first step along the route of complete SPC was to define upper and lower control
limits for each process variable between which operator intervention should not occur (see
Exhibit 6). Because no computer capability existed in 1984 for manufacturing operations,
the SPC charts had to be plotted by hand and analyzed manually. If an observation was
outside the control limit, specific actions were defined to bring the parameter back into
control. Runs tests were performed to detect consistent positive or negative biases even

481
 CASE: TEXAS EASTMAN COMPANY

while each observation remained within the control limits. Taguchi methods were employed
that mathematically modeled operations so that process variation — the distance between the
upper and lower control limits — could be reduced even further. But TEX’s quality initiatives
were limited by the enormous amount of data that had to be collected, analyzed, and stored
manually.

Information Systems
TEX operating personnel had for years been collecting extensive data on operating
processes. Operators were assigned to take readings on 180 routes throughout the plant
every two to four hours. The data collection process yielded between 30,000 and 40,000
observations on the plant’s process parameters (such as temperatures, pressures, flow rates,
and tank levels) every 4 hours. These data were entered on preprinted multicolumn worksheets
that the operators carried on clipboards as they toured their routes. Clerks entered output
data from the worksheets into the daily production report and then sent the process sheets
to a nearby warehouse where they were stored in filing cabinets.
Each day, department managers personally reviewed the data collected from oper-
ations of the day before. This next-day review, however, conflicted with TEX’s current
emphasis on quality. The review would frequently detect unfavorable trends in key operating
parameters much too late, enabling many pounds of product to be produced with varying
product characteristics. Even though only a small fraction of off-spec material might be
produced, the variations in product characteristics could create problems for their customers’
production processes.
When customers complained about variations in product characteristics, or when TEX
people themselves detected unusual variations in products or operations, an engineer would
go to the warehouse, occasionally spending many hours locating the relevant worksheets
for the particular product or operating department. Once the data were located, the engineer
performed an extensive analysis, attempting to learn which parameters might have been
outside normal limits. The search and analysis process was tedious, requiring several days
or even weeks of work, and occasionally, some of the needed process sheets could not be
found in the extensive and often cluttered storage files. Attempts at process improvement
were also limited by the availability of operating data only on the paper worksheets in the
warehouse storage files.
The first step in providing more accessible information for real-time quality analysis
was taken in 1986 with the installation of the Manufacturing & Technical (M&T) System.
A stand-alone computer was acquired for manufacturing in order to accumulate and store
operating data and perform the statistical analysis. Exhibit 7 shows the extent of the data
collection in the plant by major operating division. About 15% of the observations were
updated automatically, about once a minute. The remainder were updated every two to four
hours. Because of the SPC analysis, fewer data points were being collected than in 1984.
By 1988, the M&T System had been significantly supplemented by a more general
and flexible information system embracing both extensive Digital Equipment Corporation
VAX clustered computing and advanced software packages. One package, purchased from
an external vendor, monitored those departments equipped with electronic control systems to
perform automatic SPC analysis, historic graphs of data, and automatic alarm processing.
A second system fed data from daily production reports into the financial control system.
The third, using advanced programming techniques, enabled operators to specify which

482
 CASE: TEXAS EASTMAN COMPANY

SPC tests should be performed on the operating data, and if an out-of-control situation were
detected, generated a recommended course of action to bring the process back into control.
By early 1989, 200 such analytic models had been written. A fourth system provided statis-
tical summaries of operations for individual departments and analysts. The reports included
information on shipments and production, process improvements, control limits, historical
analyses, and incidence and disposition of customer complaints.

Existing Accounting System

TEX prepared fully allocated actual cost reports for its operating departments every four
weeks. Direct manufacturing and delivery costs were 90% of total costs, manufacturing
supervision and clerical costs were 5%, and general factory overhead and support (including
computer expenses) represented the remaining 5% of costs. Almost all costs could be traced
to individual plants and departments on an actual consumption basis.
An Annual Operating Plan (AOP) was prepared in October and November for the
subsequent year. The AOP incorporated all budgets, standards, and plans for the next year.
Sales quantities and prices were provided by the marketing department. Each support group
provided forecasts of prices for materials, supplies, and utilities. The accounting department
then prepared forecasts of departmental and product costs based on this information. The de-
partmental and product cost forecasts became the baseline against which plant performance
was measured.
At the end of each four-week reporting period, the accounting department received
information about actual departmental costs and production quantities. It multiplied produc-
tion quantities by variable standard costs and added AOP fixed cost items to obtain a plan
unit cost for each product and department. Five variances were computed and reported back
to department managers.
1. Usage Variance The effect on Unit Cost of using more or less of an item than planned;
measured as the change in input quantity consumed for a given level of
output, evaluated at standard prices.
2. Price Variance The effect on Unit Cost of a change in the price of an input, based on ac-
tual consumption of each input. Only price variances for labor and for
materials and supplies purchased from outside vendors were included in
the price variance.1
3. Volume Variance The effect on Unit Cost of not operating at the planned capacity utiliza-
tion. The volume variance reconciled differences in unit costs due to
spreading fixed costs over varying volumes.
4. Change-in-Standard The effect of not implementing a planned change in operations or of im-
plementing an unplanned change. It represented the difference between
the current standard and the planned standard. Any capital authorization
with a justification based on cost savings or output increase was always
translated into a change in future standards.
5. Mix Variance The effect, in a multiproduct facility, of producing with an actual product
mix different from the planned mix, or of producing a nonstandard ratio of
formulas for a given product class.

1
No price variance was generated for materials and supplies produced by other Texas Eastman departments, since these vari-
ances were already incorporated in those departments’ cost sheets. These internal price variances, called Prior Department Variances,
however, were shown on the consuming department’s cost sheets so that the department manager could consider alternative
suppliers or materials if the variance was significant.

483
 CASE: TEXAS EASTMAN COMPANY

The sum of the five variances equaled the difference between total departmental costs and
total plan cost. Exhibit 8 shows the format for a sample Departmental Cost Sheet. At the
bottom of the cost sheet, the five variances were split into controllable and non-controllable
components:

Controllable Non-Controllable
Volume Volume
Change-in-Standard Change-in-Standard
Usage Price
Mix

The total volume variance was classified into both controllable and noncontrollable compo-
nents. Reductions in volume due to shortages of input materials or lack of sales demand
were treated as a noncontrollable variance. The manager received a controllable unfavorable
volume variance when the department produced less than demand, and demand was below
capacity. The manager received a controllable favorable volume variance only when demand
was high, and he was able to operate his plant beyond rated capacity.
Controllable change-in-standard variances represented changes in operations under the
control of department managers (such as staff levels and material yield changes). In addition
to the planned changes in standards resulting from capital expenditures, the standard for any
cost element that had experienced a consistently favorable variance during the year would
be changed by at least 50% of the annual mean favorable variance.2 Changes in standards
initiated by the accounting department, such as labor rates, depreciation adjustments, and
changes in accounting methods were considered department noncontrollable.
The Departmental Cost Sheets were typically issued 12 to 15 days after the close of
each four-week reporting period. The accounting department performed analytic studies
of the information before its people walked the reports over to explain the results to each
departmental manager.
Variances for all operating departments were summarized on Division Cost Summaries
for division superintendents and upper management. These summaries included the plant
total cost variance as well as controllable variances for each department and division. Finally,
a report was issued each period for the president, director of administration, and comptroller
that summarized the manufacturing cost of TEX products and gave explanations for sig-
nificant variances from the AOP.
Pat Kinsey, chief accountant, explained the rationale for the plant’s elaborate hierarchy
of cost reports:

The goal of our cost reporting system is to provide to managers on all levels the information they
need to manage their areas of responsibility, from the production manager concerned with the effi-
cient operation of the cost centers under his control to the senior members of management who
must decide which products to produce and how to allocate company resources. Our system works
fine for responsibility accounting and emphasizing controllable variances. But the information is
received too late for analyzing the financial consequences from most operating decisions. Our oper-
ations personnel must rely on their daily review of key indicators (such as production, yields, and
equipment availability) to learn how their operation is performing.

2
The 50% factor reflected a compromise between accounting and operations. Departmental managers were reluctant to incor-
porate 100% of the gain, since they did not want to risk unfavorable variances in subsequent years.

484
 CASE: TEXAS EASTMAN COMPANY

To understand more clearly the problem of delayed and aggregate financial information, you could
think of the department manager as a bowler, throwing a ball at pins every minute. But we don’t let
the bowler see how many pins he has knocked down with each throw. At the end of the month we
close the books, calculate the total number of pins knocked down during the month, compare this
total with a standard, and report the total and the variance back to the bowler. If the total number is
below standard, we ask the bowler for an explanation and encourage him to do better next period.
We’re beginning to understand that we won’t turn out many world-class bowlers with this type of
reporting system.

The Threebee Company

Steve Briley, department manager of Cracking Plant 3B, had recently devised a supple-
mental departmental financial report for his operating department:
The diagram of the cracking process is very simple. We have two inputs of natural gas and energy,
and we produce two main products, ethylene and propylene, plus several by-products, such as
hydrogen and methane gas. But inside the black box that converts feedstock into propylene and
ethylene is an incredibly complex chemical process with thousands of control points, multilevel
refrigerants, and recycling intermediate products.
Operators had little information to help them make decisions about tradeoffs among production out-
put, quality, and cost. For example, we could crack gas at higher temperatures and get more conver-
sion of raw material into main and by-products. But this is costly both in terms of achieving the
higher temperatures and in wear and tear of the equipment. Also, as we push the cracking plant to
maximize the rate of production, it becomes much more difficult to keep quality under control. We
face constant tradeoffs among cost, production output, and quality but have virtually no information
to point us in the right direction in making these tradeoffs.

Briley took an unconventional approach to solving this problem by creating a fictitious

company for his employees and developing a simple financial statement for that company.
The Threebee Company was formed in September 1987, and each employee in Plant 3B was
issued a share of stock (see Exhibit 9). Briley then created an income statement for the
Threebee Company (see Exhibit 10):

In preparing the income statement, the quantities for outputs produced and inputs consumed were
readily available from the daily production report. I needed to supply prices. I estimated the prices
for ethylene and propylene and several by-products (hydrogen, methane, and steam) from nominal
market values for these products. It wasn’t important to get these prices precisely right, as long as
I was in the right ballpark for them. I introduced one wrinkle by recognizing different prices for
in-spec and off-spec material. Threebee would earn the full price for ethylene and propylene only
if the product was within the upper and lower control limits (set initially at 3 sigma). If product was
outside the control limits but still within rated specifications, the product price was set at half the
normal price. This 50% discount was a little arbitrary, but I tried to approximate the discounts that
final producers might face when selling substandard product. No revenues (zero price) would be
earned for material produced outside of specifications.
The basis for the input prices for feedstock and utilities were actual costs, which turned out to be
reasonably close to the plant’s standard costs. But I would occasionally adjust these costs for addi-
tional emphasis. For example, I increased the price of cooling water since the company was starting
a conservation drive, and I wanted to encourage operators to be even more thrifty with cooling
water.
For equipment costs, I computed a mortgage payment for the capital invested in the department
based on a rough estimate of the replacement cost and the company’s cost of capital. This figure
remained constant in each report, of course, but I wanted the operators to be aware of the cost of the
equipment they worked with. I also opened up a loan repayment account to repay any capital ex-
penditures made for product or quality improvements. And I added an additional category, called

485
 CASE: TEXAS EASTMAN COMPANY

Other Costs, as a target for some future cost reduction program. My goal was to start the Threebee
Company off in a zero profit condition, after paying the cost of capital, so that even a zero profit
would reflect a good return on investment.

Briley encountered some initial skepticism from his colleagues about whether workers
would understand or respond to an income statement to evaluate their efforts. He responded:
In my experience, the operators were able and willing to use a new tool, such as this profit state-
ment, as long as they were given sufficient explanation and enough time to grow accustomed to
it. Some operators had never worked with an income statement before, and it took some time to
explain the concept to them. Fortunately, several of the operators had small businesses on the side,
selling crops or raising livestock, and they were familiar with an income statement format. They
helped to explain the concept to the others.
More than the details of the income statement, it was the whole change in culture that took some
time to get used to. In the past, TEX had never shared financial information with operating people.
We just gave the operators specific rules, “do this, don’t do that, watch out for this condition,” but
never told them about the economics of the business they were running.
Once the daily income statement had been designed, data such as actual outputs pro-
duced, their quality and the actual quantities of inputs consumed were obtained from the
daily production record. With these data, Briley personally prepared the Threebee Company
income statement each day:
The operators’ first reaction to the income report was surprise about the cost of raw materials and
energy consumed in the plant each day. They had no idea about the financial scale of operation of
the 3B plant, or how their actions produced large effects on the costs and revenues of the plant. By
varying our feedstock inputs, we can shift the ratio of ethylene to propylene production, but that
change may require more inputs, decrease total production, and influence the amount of by-product
produced. On a cost basis, this may look bad, but if the sales value of the production is greater, the
operators can see that the company is better off even though output is down and costs are up.
As operators made suggestions for improving the format or the calculations, Briley
soon found himself working 12 hours a day to keep abreast of his normal supervisory
responsibilities plus producing the daily Threebee income statement.
When I was away on business, one of the first things the operators wanted me to do when I returned
was calculate the profits for the days I missed. They would be disappointed if results were bad dur-
ing that period because it was too late for them to correct any problems.
Briley’s initial goal had been to double the current operating profit of the plant:
Even though I tried to start from a zero profit condition, our September 87 operations were yielding
a period (four week) profit of about $200K, mostly because the plant was producing more than
standard. I set a goal of achieving a period profit of $400K. If we could hit that figure, I promised to
install a new kitchen in the control room for the operators.
We kept charts, updated daily, of daily profits and cumulative profits for the period (see Exhibit
11). It only took the operators four periods to achieve the $400K rate of profit, and along the way
we broke five new production records for ethylene and propylene. Operators were posting quality
statistics every two hours, and quality measures had improved by 50%. Operators had gotten so
good at having all material within the 3 sigma limits, we agreed to set a more challenging target by
reducing the upper and lower control limits to 2 sigma.

Briley felt satisfied and suspended the program when the higher outputs and quality
enabled the $400K profit goal to be achieved. The operators and supervisors had their new
kitchen, but they told Briley that they missed the daily calculations. They had enjoyed seeing
the daily income statement and the challenge of achieving profit targets. Briley responded:

486
 CASE: TEXAS EASTMAN COMPANY

One of our Threebee Company officers is a computer whiz. He decided to write software so that the
daily report could be prepared automatically, using data the operators entered into the system. Now
when operators come in each day at 7 A.M. to start their shift, they look first at the profit report for
the previous day. When I show up, an operator immediately tells me about yesterday’s profits,
happy when they had had a good day and disappointed when profits had declined.

Operators and supervisors in the 3B plant were using the information from the daily
income statement to make decisions that formerly they were forbidden to make or else they
had taken to Briley for approval. Said Briley:

When the company started the Quality Management Program, we had told the operators not to
tweak flow rates or change operating conditions without prior approval from their supervisor. They
were to hold feed rates and operating conditions constant. Within several periods of operations of
the Threebee Company, operators had learned how to tweak the system to increase profit; they’re
taking actions now that they formerly were not allowed to do. They have also learned to focus on a
few key items and really keep an eye on those. For example, they found that if propylene quality is
good then everything else was working pretty well, so propylene impurities are monitored continu-
ously. They have also narrowed the control limits for many operating parameters to guarantee that
the product is never outside the 100% price limits. In fact, they got so good at this, I had to build in
a new challenge. I established a Top Grade “Gold” quality region and set a 25% price premium for
product falling within the Gold region. My rationale was that the higher quality product could be
sold to new outside customers at this higher price.
The operators were also more willing to take action when I wasn’t around. For example, one night a
hydrogen compressor failed. Normally, repair efforts would have been undertaken on a routine,
nonexpedited basis. But the shift supervisor on duty had just seen the value of hydrogen gas from
the income report. Knowing the value of the lost output of hydrogen gas, he made an immediate
decision to authorize overtime to get the compressor repaired and back on line as soon as possible.

Briley was asked how he used the Period Departmental Cost Reports that he received
from the accounting department:

Some data are only available from the Period Report. For example, I don’t see daily maintenance
records, so we’re using budgeted numbers in the Daily Income Statement. The Period Report shows
me actual maintenance costs and helps me to calibrate and monitor our maintenance activity. The
Period Report also forces us to reconcile between meter readings we take locally and plantwide
meterings. Because of metering discrepancies, we need to absorb a pro-rata allocation of deviations
between local and plantwide meterings.

Gayle English, a production division superintendent, provided additional comments

about the cost reports he received from accounting:

The problem with the period report is that the information comes too late — a cost incurred near the
start of a period will not be reported until six or seven weeks later — and results from all the events
of that period are aggregated together. As a result, production people often pay little attention to the
financial reports since they already know about any chronic problems.
TEX, historically, had shared cost information with departmental managers but was reluctant to dis-
close information on product profitability. Virtually no financial data had been provided to the
operators. With the new report, operators were really surprised about the costs of materials being
consumed in the cracking process. Even the costs of small items like filters or half-filled bags of
material that they might have been throwing away or discarding surprised them. They never appre-
ciated the cost consequences of things they were doing.

Jerry Matthews, an assistant department superintendent, offered his observations on

how the Daily Income Statement changed the roles of the operators:

487
 CASE: TEXAS EASTMAN COMPANY

Initially the work teams were not used to selecting and working on projects. They had to be fed
ideas from department managers. But as they got more comfortable with the reports and with the
freedom they had, they started to take more initiative. Without having good measures, it would have
been difficult to get them interested and involved and to take the ownership for the processes they
were controlling. The financial data on costs and profits turned out to be a lot more meaningful to
them than just trying to control quantities of steam. It helped them set priorities among different
projects. Before, they may have been concentrating on controlling one part of the process that
cost only $200/day. Now they can set priorities to focus where their efforts can have the greatest
impact.
For example, before we established different prices for in-spec and out-of-spec material, it was hard
to mobilize enthusiasm about quality. Occasionally, the cracking department might ship off-spec
material to downstream processing plants. Those plants accepted the material but eventually paid a
higher price for doing so. They had to perform more purges to get rid of impurities from their
chemicals, they might have more rework, and their catalysts would get fouled up sooner. This really
ran up the costs of the processing department, but the costs were attributed to that department, not
to the supplying department that created the problem. Now, by putting a lower price on off-spec
material from the cracking plant, we have everyone’s attention.
The daily financial reports have also become a tool for my decision making. I need to decide
whether to shut down the plant for maintenance for six days or for eight days. The Daily Income
Statement helps me decide whether the additional improvements are worth two more days of
shutdown. I can trade off overtime and higher rates of spending during the maintenance period
in return for getting the plant back on-line one or two days earlier. When demand falls, I can ask
whether it is better to run at a reduced rate or to keep producing at capacity and then shut down for
a few days.

Matthews reflected on the changes brought about by the new systems at TEX:
There’s so much information out there, and we’re still learning how to use it effectively. An opera-
tor always has more demands for his time than he can deliver. Which problems should he solve to
have the greatest impact? Operators can now see the relative priority of raw material costs versus
maintenance costs versus other categories. With the Daily Income Statement, we’ve “empowered”
the operators, making our mission statements about teamwork and ownership real. Doors are open-
ing up; it’s mind boggling. It’s like giving someone a car who formerly only had a horse. There are
new directions and distances we can now consider traveling.

Accounting Department Reactions Jess Greer, a cost analyst in the accounting depart-
ment, wondered about the changing role for the finance function in the new operating envi-
ronment of the TEX plant:

There’s certainly been a lot of interest in Threebee’s Daily Income Statement, and the people seem
very enthusiastic about it. In finance, we have been trying to be responsive. Financial information is
being used for more and more things. We introduced statistical control limits on some of the vari-
ance analysis reports and adjusted standards rapidly to current operating conditions. We’re also do-
ing a lot more analytic work on the numbers to explain deviations between actual and standard. The
finance people are working much more closely with operations, giving them information that seems
to be helping them to manage. But we can clearly do more to improve the delivery of the existing
cost system, to make it more timely, and to switch from paper to electronic presentation.

Tom Wilson, company controller, concurred with the need for the finance function to
go beyond its traditional role:

Continuous improvement requires very rapid, accurate timely feedback. I don’t see how we can
maintain our continuous improvement efforts without some kind of daily operating report. Our
focus of attention has to be to get cost information to the 1st Level Teams, the people on the line
turning the valves that operate the plant.

488
 CASE: TEXAS EASTMAN COMPANY

The senior people in accounting were highly supportive of the Threebee initiative
but wondered about its implications for the overall system of financial reporting at TEX.
They were uncertain about the consequences if every department developed its own financial
summaries. The business people at the top of the organization were used to making decisions
based on the Period Cost Reports, and they expected the financial reports for each department
to tie in to the results for the plant as a whole. They would not want individual department
managers thinking they were doing a terrific job when the plant as a whole was showing
poor performance. Among the questions confronting the senior accounting managers were:

Should there be two systems, the official financial one and one for departmental operations? If each
department develops its own financial system, how should the local departmental reports be recon-
ciled with the upper management reports?

EXHIBIT 1 Texas Eastman’s Chemical Plant

489
 CASE: TEXAS EASTMAN COMPANY

EXHIBIT 2 EASTMAN CHEMICALS DIVISION:

Summary of Operating Results ($000,000)
1988 1987 1986

Sales $3,033 $2,600 $2,378

Operating Earnings 628 388 227
Assets 2,875 2,514 2,266
Capital Spending 475 394 314

EXHIBIT 3 Texas Eastman Company Product Flow Diagram

490
 CASE: TEXAS EASTMAN COMPANY

EXHIBIT 4 Eastman Chemicals Division Quality Policy

491
 CASE: TEXAS EASTMAN COMPANY

EXHIBIT 5 The Quality Management Triangle

EXHIBIT 6 The Control Chart: A Basis for Action

EXHIBIT 7 Data Collection Stats

NO. OF
DIVISION NO. OF ROUTES OBSERVATIONS

Olefin 27 6800
Oxo-Ethylene Products 51 12100
Polyethylene 28 3600
Polypropylene-Eastobond 30 3700
Utilities 20 3100
Supply & Distribution 8 600
TOTALS 164 29900

492
 CASE: TEXAS EASTMAN COMPANY

EXHIBIT 8 Departmental Cost Sheet

Texas Eastman Company
Departmental Cost of Manufacture
Chemical One Mfg. Plant 1
Restricted Information Sheet No. 98
TEX 7112-01 Third Period
Issued 03/31/89
Change in Standard Actual Planned Var.

Period Basis $1,000* $2,000 $3,000*

Year-to-Date Basis 2,000* 2,000 4,000*
Departmental Departmental
Production: Cost This Period Cost This Year
Period 80,000
Var. From Std. Var. From Std.
Year 169,000
Amount Amount Unit Amount Amount Unit

Raw Materials $35,000 $2500 $.0313 $ 82,000 $ 8500* $.0503*

Recoveries
Packing Materials
Net Materials 35,000 2500 .0313 82,000 8500* .0503*
Labor & Benefits 10,000 2000* .0250* 26,000 2700* .0160*
Mfg. Supplies 1,200 500 .0063 1,900 3200 .0190
Maintenance & Repairs 8,800 1200 .0150 29,000 1000 .0060
Plant Utilities 5,000 1200* .0150* 12,000 3700* .0219*
Other Expenses
Laboratory
Plan. & Prod. Records
General Plant
Depr., Ins., & Taxes 3,000 9,000
Miscellaneous 700 700* .0042*
Underground Storage
Work Done For/By Other
Materials Handling
Storage and Shipping
Waste Treatment
Total Conversion Chart 28,000 1500* .0188* 78,600 2900* .0172*
Total Departmental Cost $63,000 $1000 $.0125 $160,000 $11400* $.0675*

Continued next page

493
 CASE: TEXAS EASTMAN COMPANY

Exhibit 8 Continued
Variances

Departmental Usage/ Volume/ Change in

Cost Summary Cost Price Mix Standard AOC

Period — Amt $ 63,000 $ 500* $12,500 $3,000* $ 72,000

— Unit .7875 .0063* .1563 .0375* .9000
Year — Amt 160,600 14,200* 15,345 4000* 157,745
— Unit .9503 .0841* .0908 .0237* .9223
Variance Analysis
Department Controllable Department Non-Controllable

Chg in Prod Chg in Demand Prod

Std Usage Volume Price Std Volume Mix

PD 2,000* 1,000 1,335* 1,500* 1,000* 8,902* 4,933

YTD 3,000* 11,400* 4,750* 2,800* 1,000* 2,228 17,867

EXHIBIT 9 Employee Stock Certificate: 3B Department

494
 CASE: TEXAS EASTMAN COMPANY

EXHIBIT 10 Daily Profit Statement for Threebee Company

SALES $/DY
Steam: ⫹600% 87,938 lb/hr 8,416
⫹160% 11,972 lb/hr 1,068
⫺pyro 24,516 lb/hr 2,368
⫺30% 11,624 lb/hr 1,037
Net 63,770 $6,079
Ethylene: Hi Grade 776,042 lb/day 124,167
Lo Grade 0 lb/day 0 0% out
Waste 0 lb/day 0
Total 776,042 $124,167
Propylene: Hi Grade 358,280 lb/day 68,073
Lo Grade 32,429 lb/day 3,081 8.3% out
Waste 0 lb/day 0
Total 390,708 $71,154
Hydrogen, capacity 7 lines $57,708
Methane, capacity 9 lines $5,058
Heavies (fixed for nov) $1,732
TOTAL SALES $265,898

COSTS

Feedstock: Ethane 227,865 lb 6,471

Propane 1,595,066 lb 108,305
Total 1,822,930 lb $114,776
Maint & Repair (1987 Avg.) $4,168
Utilities:
Electricity 1234 amps $8,359
Cooling Water 4.8 lines $4,109
Natural Gas 3.1 lines $3,442
Other (typical) $607
Total Util $16,517
Other Costs $45,714
Total Cost of Goods Sold $181,175
Loan Repayment 0
Mortgage $54,946
TOTAL COSTS $236,122
GROSS PROFIT $29,776
LESS TAXES @ 35% $10,422
NET PROFIT $19,354/day
(equivalent to $541,923/period profit)

495
 CASE: TEXAS EASTMAN COMPANY

EXHIBIT 11 Daily Profits During Period 4

496