Lean Production System

COMPETITIVE KNOWLEDGE NEWSLETTER 

Let's get to it:

Like the old battery commercial, the squeeze on profits just keeps going and going!

As business volume increased rapidly in the late 1900s, most companies tried to keep up with sales forecasts by throwing their money at capital equipment---thinking that this was the answer to the problems of growing sales backlog and relevant customer complaints regarding late deliveries. Many manufacturers made significant gains in profits solely because their volume of sales far exceeded their profitability break-even point. Most were making huge profits in spite of an absence of a cost reduction strategy. Salesmen were out their "order taking" and "throwing the bears into the factory for skinning." This created chaos on the factory floor. But, as long as the factory could push, shove, expedite and struggle to keep products moving, profits continued to rise in spite of the high-cost manufacturing environment.

During this period of chaos, executive leadership addressed factory constraints as a capacity problem. Consequently, they authorized excessive capital equipment and computer software enhancement expenditures. As it turned out much of the capital equipment and software enhancements arrived too late to do much good. Their introduction into the factory caused added confusion that then made the factory even less efficient. It's clear to many observers that what was needed during the business build-up was a focus on improving existing business processes and manufacturing methodology. New equipment and computer sophistication should come only after the business environment is functioning at a high degree of efficiency and effectiveness. It was simply a case of getting the "cart before the horse."

Fortunately, it's never too late to mount an aggressive program to improve the efficiency and effectiveness of any factory environment. Our lead article, "How to Optimize Manufacturing's Profit Contribution" presents five key elements that provide a foundation for gaining control of the factory floor, improving efficiency and effectiveness and significantly lowering operating costs. Result: factory contributions to profit margin gains are significantly increased.

Such change requires teamwork. Our second article, "Playing Your Position" covers the responsibility and accountability that we have as a team player and the importance of not letting things slip through the cracks.

John C. Maxwell, in an interview with Bottom Line, provides some great advise relative to "Using the Lessons of Failure to Boost Your Success." In his interview, Mr. Maxwell identifies nine critical categories of business failure that if understood can improve your chances of success.

"Price Trends" is next, and finally, we present "What they're saying" with information on the dot-com shakeout, health insurance costs and power outages.

You are welcome to print and share this newsletter with your business associates. We have indexed and archived this and all previous newsletters for your reference. CLICK HERE for index display. 

This newsletter has reached your desk because we share a common objective---to help manufacturing teams avoid "burnout" while achieving their full performance potential. To unsubscribe simply send us an email with "Unsubscribe" as your subject.

Enjoy,

Bill Gaw, President
Business Basics, LLC

Featured Articles in This Month's Edition of CKN:

1. How to Optimize Manufacturing's Profit Contribution

2. Play Your Position

3. Using the Lessons of Failure to Boost Your Success

4. Pricing Trends

5. What They're Saying 

Lean Production System for Winners

1. How To Optimize Manufacturing's Profit Contribution
    by Bill Gaw

I hope that the past year has most CEOs realizing that manufacturers can't outdo their competitors by clever marketing only---"selling the sizzle" while cheating on quality, missing customer commitments and having no focus on improving manufacturing efficiency or effectiveness. To improve or maintain profit margins when the business cycle turns down requires concrete manufacturing action on a practical level---action to change facilities, update processing technologies, adjust work-force practices, and perfect information and management systems.

Optimizing a factory's contribution to profits must be a key strategic objective during the downturn in the business cycle. A focus on improving five elements of manufacturing efficiency and effectiveness can have an immediate, significant, positive impact on the profitability of the overall business. For companies that have had prior programs of cost reductions through a continuous improvement program, it may be time to revisit the target objectives and revitalize efforts to achieve or exceed original performance goals.

Let's review the five critical elements of improving manufacturing performance:

Performance measurement: Financial numbers may tell us we’re winning the war, but it takes performance measurement to show us how to focus our energy and efforts to win each of the battles along the way.

Today, the performance scorecard is a performance measurement system that helps companies pursue their key success factors. The scorecard uses both internal and external benchmarking and employs a relevant cascading method of performance goal setting. Achievements are acknowledged and celebrated on a "real time" basis and not at the traditional annual review.

For a balanced scorecard process to be motivational it must provides timely and accurate data. Simplicity is a key to the validity of measurements and the tractability of problems to their root cause. Data collection design must employ simple and easy to maintain databases to assure data integrity. When people are trained in this process and are permitted to participate in relevant goal setting, performance measurement can motivate teams to higher achievements---including the exceeding of growth and profit expectations.

So what kind of results can you expect when a management team introduces the process of the balanced scorecard? First, people will become motivated and focused on the continuous improvement of their company’s critical success factors. Second, personal and team achievements will become recognized and rewarded--- creating an exciting, winning, work environment. Teamwork will improve and employee retention will rise. Finally, and most important is the company-wide euphoria as "bottom line" results improve and financial pressures no longer create a stressful and defensive work environment. Need help? Good Manufacturing Practices

Reduce waste: There is a negative correlation between waste rates (the percentage of rejects) and productivity and its magnitude is amazing. In a process plant, changes in the waste rate (measured by the ratio of scrap and rework to total cost, expressed as a percentage) leads to dramatic operating improvements. Reducing the percentage of waste by only one-tenth of a percent can lead to a 3% improvement in productivity.

The strength of this relationship is more surprising when we discover that a decision to boost the production throughput rate (which ought to raise productivity because of the large fixed components in labor and capital costs) causes waste ratios to increase. Therefore, in theory, productivity and waste percent should increase together. The fact that they do not indicates the truly powerful impact that waste reduction has on productivity.

A study of companies successful at reducing waste will invariably show that they have developed a culture of gradual, continuous improvement. This culture is the foundation for project implementation success. The Japanese call it kaizen - a management culture of gradual, continuous improvement. We describe it as "a tenacious focus on process improvement". If you doubt the power of gradual, continuous improvement you need to study the careers of Vince Lombardi and Tiger Woods. Their huge success stories are testimonials to kaizen. Vince Lombardi focused his players on the continuous improvement of the execution of basics – that's kaizen! Tiger Woods attributes his success to his relentless quest for a better swing, for higher quality gamesmanship and a daily pursuit of perfection – that's kaizen!

In business the elimination of waste is one of three focuses of kaizen. A check point system and the Five Ws and One H are important elements of the kaizen attack on waste:

The kaizen check point system for waste reduction:

1. Manpower, 2. Technique, 3. Methods, 4. Time, 5. Facilities, 6. Jigs and Fixtures, 7. Materials, 8. Production Volume, 9. Inventory, 10 Place, 11 Way of thinking

The Five Ws and the One H of kaizen:

Who - Who does it? Who is doing it? Who should be doing it? Who else can do it? Who else should do it?

What - What to do? What is being done? What should be done? What else can be done? What else should be done?

Where - Where to do it? Where is it done? Where should it be done? Where else can it be done? Where else should it be done?

When - When to do it? When is it done? When should it be done? What other time can it be done? What other time should it be done?

Why - Why does he do it? Why do it? Why do it there? Why do it then? Why do it that way?

How - How to do it? How is it done? How should it be done? Can this method be used in other areas? Is there any other way to do it?

Need help? Good Manufacturing Practices

Reduce WIP: The positive effect on productivity by cutting work-in-process (WIP) inventories for a given level of output is significant. In some case studies, a reduction of WIP by one-tenth produced a 9% rise in productivity.

There is a huge body of empirical evidence about the benefits of reducing WIP. From studies of both Japanese and American companies, we know that cutting WIP leads to faster, more reliable delivery times, lowers reject rates (faster production cycle times reduce inventory obsolescence and make possible rapid feedback when a process starts to malfunction), and cuts overhead costs. We now know it also drives up productivity.

The trouble is, simply pulling work-in-process inventory out of a factory will not, by itself, lead to such improvements. More likely, it will lead to disaster. WIP is there for a reason, usually for many reasons, it is a symptom, not the disease itself. A long-term program for reducing WIP must attack the reasons for its being there in the first place: Erratic process yields, unreliable equipment, long production changeover and setup times, ever changing production schedules, and suppliers who do not deliver on time. Without a cure for these deeper problems, a factory's cushion of WIP is often all that stand between it and chaos.

Elimination of the stockroom: Material handling and inventory storage are two of manufacturing’s high cost, non-value-added activities. The elimination of the stock room, as it is known today, should be a strategic objective of all manufacturers. Moving materials to their point-of-use is not a new concept, the auto industry has done it from its beginning and all industries have had success with point-of-use, low cost hardware.

Supply chain development is the key, and it’s time to realize that there is much more to increasing supplier contribution to gross profits than simply placing purchase orders with the lowest price bidder. "Strategic Outsourcing" that focuses on getting the right materials to the right place at the right time must replace "beating-up" on suppliers for price reduction alone. 

A manufacturer of electronic component test equipment, in response to its need to increase factory floor space to build a new multi-function tester, decided to convert stockroom space into a production area. It was agreed that none of the new tester parts would enter the remaining stockroom and that all common parts would be relocated to their consuming production areas as "point-of-use" inventory. The key to making this project a success was the development of a powerful supplier support network that provided timely and innovative "point-of-use" logistical support. High communications integrity, scheduling flexibility/responsiveness, superior quality, special materials transportation/storage racks and a positive "continuous improvement" mind set were some of the characteristics of the developed relationship. Today, three years after the start of the project, this manufacturer is a market leader and most of the credit goes to their supplier development team and the powerful supplier support network that it helped develop. 

Business people in pursuit of point-of-use logistics should be advocates of: 1) business integrity, 2) day-to-day supplier cooperation, 3) free exchange of information, 4) responsive decision-making and 5) supplier profit sharing. Supplier development and strategic outsourcing requires a "from the top down" commitment and investment to produce a team of professionals that can make it happen. 

Need help? CLICK HERE 

A commitment to ongoing learning: Without making a commitment to ongoing learning, a factory will gain no more from the above four elements than a one-time boost in performance. To sustain the leverage of plant-level operations, managers must pay close attention to---and actively plan for---learning. 

I am convinced that a factory's learning rate---the rate at which its managers and operators learn to make it run better---is at least of equal importance as its current level of productivity. A factory whose productivity is lower than another's, but whose rate of learning is higher, will eventually surpass the leader. 

Reducing chaos and enhancing learning do not conflict. They make for a powerful combination---and a powerful lever on competitiveness. A factory that manages change poorly, that does not have its processes under control, and is distracted by the noise in its system learns too slowly, if at all, or learns the wrong things. 

In such a factory, new equipment will only create more confusion, not more productivity. Equally troubling, both managers and worker in such a factory will be slow to believe reports that a sister plant---or a competitor's plant---can do things better than they can. If the evidence is overwhelming, they will simply argue, "It can't work here, we're different." Indeed they are--and less productive too. 

Lean Production System for Winners

2. Play Your Position
    by Price Pritchett

Dig up all the details on your assignment. Nail every bit of it down so you will remember it. Then, play your position.

It's tough to achieve a coordinated team effort when people leave their stations…stray into someone else's area…or just get sloppy and let things slip through the cracks.

So get clear on what's expected of you---duties, standards of performance, time frames and deadlines you're supposed to meet. Specifically, what moves are you supposed to make? In what sequence? What territory are you supposed to cover? How should you interface with others on the team?

Teamwork, by definition, implies interdependence. What you do affects others. Some people in the unit depend on you for their success, their effectiveness. What you fail to do can cause them to fail. Chances are if you fall down on the job, you'll pull others down with you. If you're out of position, you may throw the timing off for the entire group. If you're careless about covering your assignment, teammates have to abandon their duties to bail you out.

Sometimes you'll need to cover for teammates, of course, since everyone needs a little help now and then. But don't poke you nose into their business or get in their way. Usually you support your teammates best by playing your position to perfection. 

Lean Production System for Winners

3. Using the Lessons of Failure to Boost Your Success
    from an interview with John C Maxwell, The INJOY Group

People who succeed do so in large part by learning useful lessons from their failures. They don't take their mistakes too seriously. They understand that failing is not a sign of stupidity or incompetence.

Instead, successful people view each failure as an isolated incident. They realize that failure sometimes come from personal weaknesses or blind spots…and that by exploring each mistake and understanding why it happened, they can figure out how not to repeat it. Then they are able to turn their attention back to their goals and begin moving forward again.

For business owners, most failures fall into one of nine key categories. By understanding which categories apply to you, you can improve your chances of success. The nine categories of business failure include:

• Lack of focus. People who lack focus---because they're "too busy" or because their priorities are out of whack---tend to make costly mistakes and waste time and resources.
• Inadequate commitment. If you're genuinely committed to a project, failing at it doesn't mean you'll never succeed. It just means success may take longer and possibly come at a greater cost than you thought.
• Unwillingness to change. Inflexibility is one of the greatest obstacles to achievement, personal growth and success. You don't have to love change to be successful, but because the world won't stay the same, you must accept change and learn to adapt to it constructively.
• Bad fit. Sometimes, a case of mismatched talents, interests, personalities or values can contribute to chronic failure. If your attitude isn't at the root of your failures, consider that you may be "a round peg in a square hole."
• Relying on talent alone. On the road to success, talent offers a good starting point. However, it's not enough to sustain a person through the multiple failures that life brings. You need a strong work ethic, too. Add a strong work ethic to talent and sprinkle with tenacity and you've got a great recipe for success.
• Poor people skills. People won't go along with you if they can't get along with you. If you don't listen to, understand and relate well with others, you'll have ongoing people problems, at work and at home.
• Negative attitude. Your attitude can be either an obstacle or a catalyst to success. It's your choice. If you learn to make the best of your circumstances by finding opportunities in the world around you, you'll be successful.
• Acting on poor information. Successful people filter the information they take in and base important decisions on what they know to be accurate.
• Lack of goals. If you don't know where you're going, you'll obviously never get there. Living life without goals is like taking a driving vacation without using a road map. Goallessness is a major cause of business failure.

Lean Production System for Winners

4. Pricing Trends
    adapted from Bottom Line Business

MIXED OR WEAK

Memory upgrades: Prices of modules with 64 megabytes---enough to double many PC memories---are down to $30. That's nearly one-half the level of one year ago.
Microprocessors: The powerful 1.4 GHz Pentium 4 now averages near $300---down from about $600 one year ago. The new 1.7 GHz version sells for only slightly more ($325).
Nickel: Lackluster consumption could push prices down to $2.82/lb. By the fourth quarter---more than 35% below second quarter 2000 peaks.
Office furniture: A good time to shop for bargains as demand steadily slows.
Workstations: Competition and technological breakthroughs will produce continuing declines---with another 10% drop likely by year-end.

NEW PRODUCTS/NEW PRICES

Computers: Look for new Olivetti and Agenda handhelds that use the Linux operating system. Prices are in the $250 to $300 range.
Printers: A new portable machine from SiPix---churning out 4.125" x 5.75" pages designed for PDAs---is hitting the market. Price: $149.

HEADING HIGHER

Postal Rates: New hikes this month raise the average first-class rate by 1.6%. Included: A $.02 increase for additional ounces on letters and a $.20 to $.25 boost for Express Mail
Rail freight: Rates are moving up. Expect the average bill to jump by 2.5% this year, due to higher operation costs. 

Lean Production System for Winners

5. What They're Saying

• The dot-com shakeout is not a sign that E-commerce is fatally flawed, we hear from Vernon Keenan, an Internet commerce analyst and consultant in San Francisco. In fact, the number of E-merchants will jump from 70,000 in 1999 to more than 400.000 this year. Analysis: The first generation of dot-coms made the deadly mistake of approaching the Internet with grandiose expectations and half-formed business plans. Long-term, E-business depends on using the Web to augment existing products or services. Key: Seeing the Internet as one part of a multichannel sales strategy will help shape realistic expectations about your Web presence.

• Rising health insurance costs could be with us for at least two more years, we hear from Alan Mittermaier, president, Health Metrix Research, a healthcare consulting firm in Columbus, Ohio. HMO premiums have been rising rapidly the past two years, thanks to soaring drug prices and higher reimbursement demanded by doctors. Strategy: Work through your Chamber of Commerce or other small business purchasing groups to build alliances with other companies to gain price breaks. Alternative: Let employees choose between reduced benefits or paying more for their health coverage.

• Now more than ever, you should take power outages, surges and spikes seriously when it comes to your computer equipment, we hear from Eric Grevstad, editor-at-large of Home Office Computing magazine. California's power problems could affect any part of the US. Self-defense: Spend as little as $30 for a surge protector to safeguard your computers. Better: Spend about $100 for an uninterruptible power supply (UPS) that will keep your system running---and its memory preserved---in the event of a power failure. Most computers stores stock both types of protection

Lean Production System for Winners