Cost reduction without secrets: a success story
Voice of Headquarter
At AA Company, the volume and number of orders fluctuate widely and are often unpredictable. In order to cover the fluctuation of the orders received, in some periods the working time and the work during the holidays (overtime) were increased, and in other periods the production capacities were much surplus. At the same time, the level of unit costs has risen far beyond expectations and continues to have an increasing trend. In response, the CEO called for planned production to be completed during normal business hours to reduce overtime costs and further, he called for all ways to reduce costs without investment and without affecting quality and deliveries, in order to meet the annual and multi-annual Return on Investment (ROI) target and the profitability target.
About AA Company AA: (1) type of industry: manufacturing and assembly; (2) production regime: repeated batch of equipment (equipment, transfer lines, semi-automated assembly lines) and manual activity (processing, inspection, assembly, etc.), (3) number of employees: 850.
Voice of Company
For countermeasures, the top management from AA Company considers the introduction of Manufacturing Cost Policy Deployment (MCPD) and Method Design Concept (MDC) to generate the expected profit by eliminating and preventing constraints and losses that prevent the continuous reduction of production costs, more precisely to:
- continuously know the feasible potential for total cost reduction and for each cost center;
- continuously increase production capacity without investment;
- meet the target of annual and multiannual production volume;
- carry out production during normal working hours;
- obtain the reduction of target unit costs at annual and multiannual level;
- reduce the cycle time of operations (equipment and manual labor), of set-up time and of transfer time;
- improve the quality level;
- continuously reduce WIP level and lead time;
- know and continuously plan the most effective and efficient improvements possible;
- meet the annual/ multiannual target profit regardless of the sales trend (increasing/ decreasing).
Voice of Managers
The top managers commented on the current conditions in the company as follows:
A shift has 8 hours (or 8 hours * 60 min. = 480 min.). There is a 30-minute lunch break, leaving 7.5 working hours. On average, about 10 minutes are used for meetings at the beginning and at the end of the program, short guards, cleaning, inspection and more. Therefore, the average time of a shift (actual loading time) is 440 min. (480 min. - 30 min. - 10 min.).
Taking into account that the standard cycle time per product unit, synchronized with the upstream process time of the equipment, is 0.6 min./part, the theoretical production is 733 units/ shift/ equipment (or 440 min./ 0.6 minutes). However, in reality, the average production is only 390 units/ shift/ equipment during the normal operating time.
That means just over half the amount of theoretical production. Even if it is impossible to produce the theoretically calculated quantity, the target production plan (no overtime or work during the holidays) could still be met if 550 units/ shift/ equipment were produced (this means about 75% of the amount of theoretical output). Taking into account the forecasts of customer demand for our products and the lifespan of plastic injection equipment, it would be good that the 550 units can be made in a maximum of 12 months. At the same time, the capacity of the assembly lines has significant variations and this is our next bottleneck - after the “Z1“ process. Moreover, our calculations require an annual cost reduction of at least 6% for the coming years to be truly competitive and to achieve annual profit plans. Only in this way can the Return on Investment (ROI) target be met. Therefore, I am considering the introduction of the MCPD and the MDC to meet these pressing needs. "
Generating annual and multiannual profit and meeting the Return on Investment (ROI) target by:
- continuous sizing of feasible cost reduction potential;
- increasing the production volume from 390 units to 550 units on bottleneck equipment (“Z1”) in the next 12 months and improving the “A1” line;
- reducing unit costs by at least 6% per year;
- multiplying MCPD and MDC to other areas of the company – the other semi-automatic assembly lines.
Basic preliminary analyses
- analysis of the current production flow and managerial objectives;
- analysis of how KPIs are measured and collected (including for losses & waste);
- analysis of the current way of measuring productivity in the production area;
- analysis of measuring productivity at managerial levels (from shop floor to top management and vice versa);
- analysis of how much productivity improvement depends on top management for the next 5-10 years;
- analysis of how much of the productivity improvement targets depends on top management for the next 1-5 years;
- analysis of the current cost and budgetary system;
- analysis of maintenance, quality and industrial engineering systems;
- analysis of how to plan, carry out and the results of improvements;
- preliminary study of potential cost reduction.
Introduction in MCPD and MDC
- Short report on the potential for cost reduction (based on previous analyzes);
- Decision to join MCPD and MDC;
- Establishing the MCPD/MDC team;
- Benchmark discussions;
- Consulting budget preparation;
- Exegens contracting;
- Establishing extensive project teams;
- Master plan development;
- MCPD & MDC training;
- Detailed examination of the production system.
Study of the potential for cost reduction
Starting from the voice of the managers and from their own measurements, the following were found:
Annual cost reduction potential in transformation costs structures (€ 35,928,000):
- average cost of losses for a “Z1” process shift: € 11,643 (of which: (1) cost of losses for operation variance: € 2,100 and (2) cost of losses for efficiency variance: € 9,543);
- average cost of losses for 24 hours (3 shifts of the “Z1” process): € 34,930€;
- average cost of losses for 30 days of the “Z1” process: € 1,047,900;
- cost of losses for 12 months of the “Z1” process: € 12,574,800 (or 35% of annual transformation costs; including cost of losses for human work).
Annual cost reduction potential in material & system costs structures (€ 89,820,000):
- cost of losses and waste related to Material & Utilities Efficiency: € 4,950,000 (Material Yeld; Auxiliary Consumables; Die, Jig and Tool; Obsolete Spare Parts; Energy & Other Utilities);
- cost of losses and waste related to Inventory Consumption Efficiency: € 7,100,000 (WIP from Set-up Waste; WIP from Transfer Waste; Near to Line Inventory Waste; Raw Material Inventory Waste; Components Inventory Waste; Packaging Inventory Waste; Finished Products Inventory Waste);
- cost of losses and waste related to System Consumption Efficiency and Effectiveness: € 3,143,000;
- cost of losses and waste for 12 months related to material & system costs: € 15,193,000 (or 16.9% of the total material & system costs).
Total cost of losses and waste identified for the last 12 months: € 12,574,800 + € 15,193,000 = € 37,767,800 (or 30% of the total costs were identified and located to be reduced).
Macro KAIZENshiro for Takt Profit
- potential and feasible annual macro KAIZENshiro (possible cost reduction target): € 15,500,000 (out of a total of € 37,767,800);
- macro KAIZENshiro planned for annual cost reduction: € 7,500,000 (to meet both the 6% cost reduction per year and the increase in production volume from 390 to 550 units/ shift/ equipment);
- accurate determination of areas for improvement to contribute to the fulfillment of the planned annual macro KAIZENshiro;
- establishing the resource plan needed to meet the planned annual macro KAIZENshiro (especially the participation of people in improvements was planned).
Takt Profit was established as follows:
Takt Profit= contribution profit per unit (€) / net processing production per unit in bottleneck operation (minutes) = 135€/1,30 minutes/unit (every 1.30 minutes of net processing production per unit in bottleneck operation must generate a contribution profit per unit of 135€
Improvements to reduce costs
Improvements made by MCPD (kaizen) to achieve annual KAIZENshiro of € 7,500,000 (process “Z1” but also the semi-automatic assembly line “A1”):
- reduction and standardization of scheduled downtime (reduction by 15%);
- reduction/ elimination of breakdown for “Z1” (reduction by 18%);
- scrap reduction for “Z1” (reduction by 35%);
- reduction of auxiliary consumables (reduction by 24%);
- reduction of energy consumption (reduction by 12%);
- packaging inventory reduction (reduction by 47%);
- reduction of internal distribution time (reduction by 32%).
Improvements made by MDC to achieve annual KAIZENshiro of € 7,500,000 (“Z1” & ”A1”):
- elimination of speed losses variance for “Z1” (0.1 min .; from 0.7 min. to 0.6 min.);
- reduction of cycle time for “Z1” (from 0.6 min. to 0.5 min.) and for line “A1” (reduction of cycle time by 35% which had an impact on the reduction of labor costs of 21%);
- reduction of set-up time for “Z1” (from an average set-up of 35 min./ shift/ equipment to one of 9.5 min./ shift/ equipment) and for the line “A1” (reduction of set-up time by 52%).
Results and project extension
- The successful development and implementation of the solutions identified by the 10 improvement projects above led to the full fulfillment of the macro KAIZENshiro of € 7,500,000, without investments, in the 12 months of the initial project. The “Z1” process was no longer considered a bottleneck. Instead, the “A1” semi-automatic assembly line became bottkeneck and was improved. MDC was applied to the “A1” line in order to increase production capacity through innovative redesign and implementation of new working methods with superior performance (a cycle time lower on average by 35%). The MDC activities started from the study of the potential improvement of the productivity of people and equipment/ lines (MDC feasibility audit) and from the establishment of the micro KAIZENshiro (respectively Basic Functions – BF and Auxiliary Functions from cycle time);
- It was decided to extend the project for the full implementation of the Manufacturing Cost Policy Deployment (MCPD) and Method Design Concept (MDC) systems for continuous measurement and improvement of productivity by reducing/ eliminating the cost of losses and waste;
- Through MCPD and MDC it was made possible to achieve all the objectives set by the company’s voice.
- The planning of macro KAIZENshiro has been extended for the next 3 years to continuously support the need to meet target profitability and ROI by continuously reducing costs based on increased productivity.
- The project expanded to group level, including by implementing the profitable production planning system called Speed-Based Target Profit (SBTP) to continuously meet the TAKT PROFIT target.
Do you want to know the potential for a feasible reduction in your company’s costs (equipment and/ or assembly lines) without paying anything for it and without us coming to your company? Then let’s set up a phone or Skype/ Zoom discussion to discuss in detail how we can help you find out how much your company’s costs can be reduced without investment and how.
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