MCPD Steps to Begin

 01/03/2019
By Dr. Alin Posteucă
Cost Improvement Targets Deployment: Preliminary Steps

The fundamental tasks of any manager are to continually understand the real situation of the company’s external and internal business environment, to identify the main issues alone, and to come up with solutions and to mobilize his/ her own staff, colleagues, superiors, and all other persons from outside the company to achieve the expected results. Cost improvement is and will remain a core task for any management team.

Current Conditions and Challenge

Managing cost improvement means understanding, planning and gaining control over all the activities needed to have efficient and effective processes, to achieve your goals and meet a cost targets.

Our Approach

Establishing the annual cost improvement targets at a company level requires the deployment of annual cost improvement targets at the level of each process of each product family costs (PFC). Establishing the annual cost improvement targets follows from the formula:

In the MCPD paradigm, the annual external profit is the annual profit gain from sales, and the annual cost improvement goal is the need for internal profit through cost improvement, or more precisely by exploiting the Cost of Losses and Waste (CLW) from the level of operations with the help of the continuous improvement of productivity. Approaching the total offer of CLW company-wide with productivity improvements is the MCPD system stake.

For example, if in the logic of the multi-annual target profit plan an annual profit of 30 million €/$/£/¥ is required in a factory, and the conventional/ traditional profits from sales only provide 25 million €/$/£/¥, then the annual cost improvement goal is 5 million €/$/£/¥.

A. Market-Driven for Annual Cost Improvement Goal

The board of directors and senior managers analyse the historical trend and the main potential future constraints for sales turnover (production number, average price evolution, stock level of finished products, units sold daily, etc.) and market share for target area. From the perspective of cost improvement, average price evolution is the main area of analysis and interest to determine the level of potential target profit and manufacturing cost.

So, market-driven to set the annual level of cost improvement goal involves the detailed analysis of the following items:

  • long-term sales level and company target market share (productivity vision and mission);

  • product structuring within each Product family Cost;

  • capture price evolution and set target selling price (average per seasons and product lifecycle stages).

B. Profit-Driven for Annual Cost Improvement

The board of directors and senior managers analyse the historical trend and the main potential future constraints for the annual manufacturing target profit, annual manufacturing unit target profit, annual manufacturing internal target profit (percentage of manufacturing internal profit from kaizen in annual target profit; number of kaizen projects for cost improvement in all departments – before/ after kaizen; office kaizens; number of people in kaizen; number of kaikaku projects for MCI), annual manufacturing target profit from new products (especially annual cost improvement goal from kaizen for new products), scrap ratio, rework, production capacity, etc. From the cost improvement perspective, annual unit manufacturing target profit, annual manufacturing internal target profit and annual manufacturing target profit from new products are the main areas of analysis and interest in establishing cost improvement targets. In order to establish the realistic profit level for existing and future products throughout their entire life cycle, profit-driven for cost improvement reconciles with cost improvement targets through the catchball process to determine the real possibilities of annual reduction of manufacturing cost for each Product Family Cost (PFC).

So, profit-driven for annual cost improvement involves the detailed analysis of the following items:

  • long-term and annual realistic manufacturing profit expectations;

  • cost system analysis and the needs for MCPD system.

C. Driven by Annual Cost Improvement Targets Deployment

Senior managers, middle managers and MCPD implementation team analyse the historical trend and the main potential future constraints for: (1) total manufacturing cost (initial budget); (2) percentage of annual unit manufacturing cost reduction; (3) manufacturing unit cost (standard), (4) CLW for each process/ work centre for each PFC or product, (5) total costs of losses and waste for all products, (6) CLW from unit manufacturing cost, and (7) CCLW from unit manufacturing cost.

So, driven by annual cost improvement targets deployment involves the detailed analysis of the following items:

  • understanding the manufacturing flow from the perspective of MCPD system;

  • losses and waste and critical losses and waste for each product family cost (PFC);

  • critical cost of losses and waste (CCLW) for each product family cost (PFC);

  • from critical cost of losses and waste (CCLW) to Ideal Cost;

  • Scenario for cost improvement targets for each product family cost (PFC).

Expected impact

D. Driven by Annual Cost Improvement Means Deployment

Senior managers, middle managers and MCPD implementation team analyse the historical trend and the main potential future constraints for: manufacturing lead time (number of workstation, total cycle time, man*hours by product, Overall Equipment Effectiveness – OEE, WIP inventory from set-up, WIP inventory from move, overall line effectiveness – OLE for assembly line, times for material handling, assembly line speed, etc.) and production delivery performance (On-Time In-Full – OTIF, material stocks days, finished products stock days).

So, driven by annual cost improvement means deployment involves the detailed analysis of the following items:

  • Annual Reconciliation to set Cost Improvement Targets: The Basis of the Deployment Mechanism

  • Establishment of Annual Cost Improvement Targets and Means for Each Group Leader.

We remind you that, typically, CLW accounts for 30-40% (sometimes even around 50%) of the total cost of a manufacturing company and we seek to target productivity improvements as close to the ideal cost or zero cost of losses and waste (CLW) as possible for each Product Family Cost (PFC) and for all company.

Remember, the MCPD system warranty is to reduce annual manufacturing costs by minimum 6% for 5 consecutive years.

What Do You Think?

What elements are needed for business leaders to have a great MCPD system to support the Cost Improvement Targets Deployment?

Dr. Alin Posteucă is the founder and CEO of Exegens®, a global consulting firm specialized in cost competitiveness improvement and operational excellence. It helps customers create and implement profitable strategies and cost improvement programs that ensure a unit cost improvement of at least 6% per year for each of the next 5 years by maximizing the efficiency and effectiveness of operations.

He is the author of Manufacturing Cost Policy Deployment (MCPD) concept, published in three books at Productivity Press – Routledge/ CRC, New York (USA). The latest, ”Manufacturing Cost Policy Deployment (MCPD) Profitability Scenarios: Systematic and Systemic Improvement of Manufacturing Costs” (October 2018) is based on its main belief that the annual and multiannual target profit can be achieved irrespective of the sales volumes, increasing or decreasing. He is also the co-author of the book ”Manufacturing Cost Policy Deployment (MCPD) and Methods Design Concept (MDC): The Path to Competitiveness”, published at Productivity Press New York (USA), 2017, as well as the author of the book ”Manufacturing Cost Policy Deployment (MCPD) Transformation: Uncovering Hidden Reserves of Profitability”, published at Productivity Press din New York (USA), February 2018.

Alin Posteucă has more than 20 years of experience in Cost Improvement consulting and training. He has a PhD degree in Industrial Engineering and a PhD degree in Economics.