Identifying and reducing waste, essential to improving manufacturing performance, can be achieved through a methodical scrutiny of cost factors. Improvement is increased when the activities of departments and functions — and even third parties — are integrated to gain long-term efficiencies.
For a payoff in cost savings and efficiencies, initiate an improvement program. Begin your scrutiny with one significant cost factor, which you can think of as an internal value lever to be activated. The cost of goods sold (COGS) value lever includes components typically totaling 45-65% of operating cost. They include material and procurement; asset utilization; direct labor; property, plant and equipment; and warehousing and delivery. Pulling the COGS lever can increase net income as much as 15%. COGS components are interrelated; examine each for the way it individually contributes to cost as well as how it affects the other components.
Common value levers to assess in COGS are material, property and equipment, direct labor, and warehouse and logistics.
Material and procurement, and asset utilization
Investigation into the quality of raw materials and their usability is key to avoiding not only excessive inbound cost but also inefficiencies throughout processing. It follows that it’s essential to analyze the preventive equipment maintenance and the failure control modes from the time a raw material enters equipment until it exits as a finished product or work in progress.
Labor is a highly controllable expense, with direct labor costs dependent on material and equipment predictability, as well as training, pay and salaries, work environment, personal protective gear, etc.
Formal training is essential. Expecting new hires or transfers to learn by observation can lead to the expenses of downtime, absenteeism, turnover and product quality issues.
Property, plant and equipment; warehousing and delivery/distribution
Observation is the way to get a realistic picture of material handling and movement costs. Walk around the facility to understand extra steps and/or backtracking. Follow the entire material flow to determine if fast-, medium- and slow-moving items are positioned correctly for efficiency in getting them to the manufacturing floor or the next step in the process. Watch for opportunities in labor reduction and reassignment.
Make use of statistical process controls to assess the upper and lower control limits of heat, pressure and the number of repetitions of equipment parts. Through a validation protocol, you’ll learn if equipment is delivering product within a statistical parameter. The control limits will tell you if scrap is being produced so that you can make adjustments. It will also pay off to implement an overall equipment effectiveness methodology to measure the availability, performance and quality of your products.
In addition, take into account overhead, e.g., in utilities — efficient use at low-cost times of the day and cost negotiations with providers.
Integrate activities for long-term efficiencies
In concert with the tactical approach — pulling value levers — focus strategically on LEAN methods to drive improvements. A collective process of people working together on solutions, LEAN catalogs costs associated with work processes to identify waste and inefficiencies across the organization. It supports end-to-end business planning for every functional area. Through LEAN, capture and maintain a holistic view to ensure that improvements are sustained daily, weekly and monthly.
Case study: Efficiencies and quality through harmony
A manufacturing company described the manufacturing issue — slow commercialization of products due to order, fulfillment and delivery management.
The consultants watched a work order move through facilities. Beyond strictly manufacturing floor issues, the consultants identified causes and effects — the lack of a company calendar; no sales and operations planning past the forecast, which meant no information feed for demand, inventory and supply planning; and no communication of the inventory plan to the sourcing organization for materials management and negotiations with suppliers. A critical component was the sales function’s inability to plan events and predict customers’ use. There wasn’t more than the past year’s forecast to make correlations among weekly or monthly product demands, so that customer service couldn’t provide customers with proper lead times. Overlaying everything were inconsistencies in master data.
There were over 20 interdependencies. It would have been easy to fix the manufacturing issues, but without attention to other areas, it wouldn’t be a full solution.
The client agreed and was provided with a holistic solution that enables greater manufacturing efficiency and customer service quality.
An internally integrated approach creates collaboration in increasing efficiencies and driving down costs. In taking this approach, lay down functional foundations, eliminate silos and institute continuous workflows and data sharing. The integration should encompass the entire business and include strategic planning, the company calendar, master scheduling, financial analysis, sales and operations, demand, inventory, supply and capacity, as well as manufacturing-specific procurement, production and distribution.
As part of the integration, maximize value levers, asking questions such as these:
- Does our planning effort drive our procurement activities?
- Do our procurement activities allow our plant to operate as efficiently as possible?
- Do our manufacturing assets allow us to meet our product quality standards and distribute on time?
You’ll find that making changes in the sales or customer forecast, for example, flows all the way through the organization. Changing a piece of equipment that will reduce downtime can be planned for so that inventory remains stable while seasonal and steady labor, materials and equipment are available for production, with sufficient lead time to get the product to distribution sites for timely delivery.
Having taken a holistic approach internally, advance to the next level — external integration. An externally integrated approach brings suppliers, other third parties and customers into the planning process. For example, being informed about supplier and customer seasonal needs will enable you to avoid an interruption of material flow into your facility and product flow from it. You can accomplish this by creating and adhering to a master production schedule to guide accurate planning of labor and costs. Third parties will know when to expect finished goods for allocation and delivery to customers. You’ll build better relationships by being more predictable, and boost savings and efficiencies by being more strategic in deploying working capital.
An integrated approach is important in the case of a contract manufacturer providing work in process or finished goods. The planning process should be seamless, with regular calls to discuss priorities and the production schedule just as you do with your own manufacturing group.
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