Waste and inefficiency have grown unchecked for years in the shadow of robust sales. Yet, waste and inefficiency have forced countless companies to take on additional debt, abandon promising new product lines and have even forced some companies to close their doors for good. In today’s economy, identifying and eliminating waste and abuse are central to a company’s strategic goal to help their company grow and prosper.
To start, let’s consider why companies would embark on such a project and then covering the basics steps used in implement a process improvement plan. A few of the reasons why a company may want to start a process improvement project may be because they are:
• Having trouble meeting profitability targets, or experiencing frequent cost overruns on projects
• They may be operating at full capacity and cannot understand why they are repeatedly running late on shipping goods out to customers, or
• They may be losing out on bidding out for new business because they can’t price their products competitively
These problems can often be corrected by moving from batch processing to lean manufacturing. Let’s start off by discussing the differences between batch processing and lean manufacturing.
Batch processing has developed overtime and has become the gold standard of manufacturing efficiency. Because the push in batch manufacturing has been to reduce the per-unit cost, managers have been lead to believe that producing 100 parts when only 5 or 15 are needed is saving the company money. And, that may be true for some companies, but for many it’s not. Companies need to remember that they only save money when efficiencies lead to more completed orders, increased capacity or lowered costs.
Lean manufacturing seeks to streamline end-to-end flow so that processes operate with as few interruptions as possible. Motorola, Kodak and Toyota are large manufacturers that made huge improvements in productivity thanks to lean manufacturing and process improvement initiatives. Lean manufacturing seeks improve profitability by eliminating any process or step that does not contribute to customer value. Because lean processing does not contemplate economies of scale, efficiency of individual processes is often overlooked.
To understand why batch processing has been eclipsed by lean processes it is helpful to understand the history of batch processing.
Batch processing was developed early in the 1900s and was used hand-in-hand with standard costing as businesses attempted to find a way to measure production performance. Business results were measured by actual performance as compared to pre-determined standards for raw material prices, as well as standard usage targets for labor and machine time.
Purchasing managers got rewarded with promotions and raises for driving down the price per unit for materials purchased, so they started ordering in increasingly larger and larger amounts. The downside to rewarding managers for positive price variances is that purchasing in bulk can lead to bloated inventories that might lose value before they’re needed.
Likewise, production managers were incentivized to maximize machine efficiency, by producing as more units, increasing the likelihood that subcomponents will be stockpiled. The overproduction of subcomponents creates bottlenecks because excess subassembly components get stockpiled around the facility, and directly reduce the amount of finished goods shipped out.
Standard costs can also lead a company to quote an artificially high price when bidding out new work, because standard cost gives companies an idea of target profitability. A sales manager may have in his mind that the company should get a 10% profit for each unit sold. However, if the production facility has excess capacity, incremental cost will allow the company to price its product much more competitively.
For these reasons, it is often in the company’s best interests to understand the limitations of standard costing and to utilize process improvement initiatives to help a company reach its full potential. Starting a process improvement project starts with:
A process improvement projects starts with looking at each of the steps in your business from the moment you take an order until the minute you collect payment. Involve the entire workforce in developing cost-saving initiatives by including process improvement benchmarks in formal job evaluations and rewarding enterprising team members with a “Showcasing Success” program that honors a different employee each month.
I have a manufacturing client who had a very enterprising supervisor that saved his company lots of money by using any of his staff’s idle time to perform jobs that would otherwise be done by couriers and waste management companies. It’s these types of improvements that should be rewarded to create a culture of shared success.
As part of a process improvement project, post visual productivity boards throughout the facility that focuses on company-wide results. It will help employees align their activities with overall strategic goals rather than the efficiency of individual functions.
Measures like # of days from order intake to shipment are a great way to improve overall company productivity by breaking down the silo mentality many companies have evolved into as the result of bombarding them with metrics related to their own division’s performance.
Additional metrics can be found by looking at the metrics used by division managers. Understanding why mid-level managers use those metrics might give top management new insights into hidden drivers of the company’s success.
The goal of process improvement is increasing cash flow, profitability and customer satisfaction. It is an ongoing process and depends on the involvement in employees to continuously improve the process.