The short answer is "yes", there is a financial benefit to the pursuit of Operational Excellence. The goal of this post is to provide some ideas from which you can conduct further research to promote Operational Excellence within your company.
For the purpose of this post, I am going to focus on the opportunities that reducing or eliminating the 7 wastes associated with lean (over-processing, material movement, people movement, waiting, yield loss, inventory and over-production) could provide.
Let's take them one by one.
This activity is commonly referred to as "rework" or possibly "retrofit". Over-processing requires additional labor and in some cases materials that are not included on the Bill of Materials (BOM) or Routing. The BOM and Routing are important documents in the manufacturing cost calculation, which is in turn important for the product pricing calculation. Over-processing simply erodes your product profit margin (unless your customer foots the bill).
Most industries do not require documentation of over processing (industries such as medical device production require documentation). As a result, over processing activities going unmeasured and unnoticed resulting in a "hidden factory" within your factory. To be honest, most of the medical device partners with which I have worked record the over processing information as part of the device history record, but do not utilize the data to pursue Operational improvements.
To measure the financial impact, sum the hours consumed by rework and multiply by your shop labor rate. This is your cost for activities performed for which the customer is not paying!
Even if the customer foots the bill, your hidden factory consumes your plant capacity that can affect on-time delivery, and/or drive up overtime costs. You may spot this waste through consistent failure to meet internal production schedules (as long as the production schedules are achievable). Other adverse impacts from over-processing may include reduced inventory accuracy (production work order closure must account for material consumption not on the BOM or a rework work order must be created) and yield loss (additional processing and handling risks product damage).
Material movement is quite simply the transfer of materials from supplier to customer, both internal and external. A few examples of this waste are shipments of product from suppliers to your location, movement of work in progress (WIP) between processes and shipments of products to customers.
Most often the focus of efforts to reduce material movement are internal to your manufacturing plant primarily because it is completely within your control. There are industries that seek to maintain close geographic proximity between key supplier and customer. A great example is the automotive industry that requires suppliers of complex purchased assemblies, such as dashboards and seats, to be within a certain distance due to the coordination required to ensure product is shipped in the proper sequence for seamless (and usually automated) intergration into the assembly line.
This waste can be spotted by analyzing WIP inventory and transport characteristics.
The financial impact of material movement is usually not direct, but stems from an impediment to achieving one piece flow. Many material movements require labor to execute, but labor reduction is not usually the goal for reducing material movement waste.
One point of advice, evaluate automated material movement equipment very carefully. Automating material movement may be simply automating waste. Mechanical conveyance systems can themselves become a form of waste if their maintenance is expensive, availability is poor, lacks flexibility, causes damage to components, etc. Understand why you are employing equipment for material movement to ensure such equipment is properly specified and used.
The title of this section describes this waste perfectly. With that said, the important factor is to understand why people are moving.
Certainly, there are unavoidable and important reasons that people will move. I encourage you to focus on the reasons people move that are not important or are symptoms of another problem. Some examples include; searching for tools/inventory, poorly laid out work cells and delivering/handing off data.
Spotting this waste is easy when you go the gemba (place where work is done) and observe. Be careful of the Hawthorne effect (or observer effect) as people may change their work patterns while you are "watching". This is particularly challenging in an company that has not adopted the Operational Excellence mindset or where employees do not trust leadership/management.
Labor financial impacts of the people movement waste can be calculated in a similar manner as described for the over-processing waste.
At first glance, waiting appears to be straightforward. It becomes more complicated when you consider that waiting can affect people, processes or sequenced/interconnected equipment.
There are many reasons why waiting occurs: disruption at a previous process, materials/tools/personnel are not available, cycletimes of neighbor processes are poorly matched, lack of or slow decision making, etc.
Waiting is usually easy to spot when observing processes or equipment. In some cases, waiting is built into the program when certain conditions are met (or not met). Waiting can be difficult to spot when observing people for similar reasons as people moving unnecessarily (remember the Hawthorne effect). People will make themselves busy to avoid appearing "lazy" in front of executive or middle management, which affects your observations if you are not familiar with the value stream.
What makes waiting "interesting" is that it can become institutionalized, almost to the point of acceptance. It may even be built into production plans and schedules, artificially reducing your plant capacity.
Waiting can impact the ability to meet the internal production schedule, on time delivery and/or drive up overtime costs when production falls behind. Calculate your labor losses in the same manner as previous labor losses.
Reducing yield loss (aka scrap) is pretty much universally accepted as a good thing to do. As a result, the method to capture the financial impact of yield loss is well known and publicized.
Yield loss is commonly associated with non-conforming production parts, but should also include other sources such as slag, runner waste, edge trim from converting operations, material affected by changeovers, etc.
Similar to the waiting waste, yield loss commonly becomes institutionalized. Companies may budget for a certain amount of yield loss in their planning and scheduling and only react if actual yield loss exceeds budget. Budget the yield loss to high and you may have increased overtime and missed deliveries as you "oversell" the plant. Budget the yield loss to low and you artificially cap your plant capacity and your top line revenue if you have an S&OP process in place to prevent overselling your plant.
What makes this a challenging waste to address is the comfort that many people feel from having large stores of inventory. It is an all too common practice to utilize inventory to shield customers from operational problems, much like Linus with his blanket.
There are many different operational metrics for inventory such as, inventory turns, inventory as a % of sales and days on hand. Faster inventory turns, lower inventory as a % of sales and fewer days on hand coincide with shorter lead times resulting in improved cash flow from Operations. More important than the cash flow is that I have never met a customer that does not want a shorter lead time enabling them in turn to carry less inventory.
Ironically, inventory (and accounts receivable) may be popular with Executive Leadership and Finance as it can be used as collateral to secure a loan should an influx of cash be required. Inventory appears on a balance sheet as an asset, which is easily audited and evaluated by a lender. Loans requiring inventory collateral happen more frequently in smaller or less "healthy" companies due to the loan repayment risk the lender assumes.
The financial benefits of reducing inventory is lower inventory carrying costs and improved cash flow. Wouldn't it be great if you could improve cash flow enough to secure a smaller loan or better yet...avoid securing a loan altogether to meet financial obligations!
Also, think about how much time you spend preparing for, executing and closing physical inventories and cycle counts. While an accurate inventory is important, inventory management activities are all waste. You know the drill at this point, multiply the hours spent performing inventory counting by a labor rate to quantify the labor waste.
Inventory itself is a waste, but is really an effect of the worst waste...
Over production is considered by many to be the worst waste because it causes and/or covers up many of the other wastes. The decision to over produce is made for many reasons, but most important is to recognize that it is a decision. The financial impacts of over production have already been discussed in the other sections.
The decision to stop over production is significant in that it also signals a true desire to pursue Operational Excellence. There is no longer a desire to cover up waste and inefficiency, but rather expose and correct it.
There are real financial gains to be reaped as described for the various wastes throughout the posts for companies that are not satisfied with their financial performance or have an aim to grow.
Stay tuned for the next blog post that will discuss why many (if not most) Operational Excellence efforts fail.
As always, KBM Consulting, LLC wants to help you transform you Operation into a source of competitive advantage and encourage you to take the first step by reaching out to us for more information.