Cost Accounting: Yours and Your Suppliers’

In my last post I looked at two reasons why companies don’t take a TCO perspective on purchasing. An additional reason is the Cost Accounting system. If you’re only looking at part price when you analyze your cost of materials, you’re only seeing half the picture. There is tremendous opportunity for cost savings when you look beyond part price.

The biggest components of cost of goods sold are materials, labor, operating supplies and overhead. Elements of materials cost include freight, scrap, yield loss, obsolete, inventory adjustments, etc. These are all great places to look for potential savings. In many cases, these kinds of cost savings aren’t even low-hanging fruit; they are fruit that is already lying on the ground.

Your suppliers have these same issues, so if you have a partnership in place, you can suggest that your suppliers reduce their costs and pass the savings on to you. Toyota spends 50% of their manufacturing engineering time at their suppliers, working to reduce costs. Encouraging your suppliers to go lean saves you money.

When I was VP Ops at a manufacturer, we asked our suppliers to share their cost structure with us, which made them nervous at first. However, we promised not to force them to go below the industry average for profit margin. We also guaranteed that anytime they found a way to cut costs and passed the savings on to us, we’d split it with them, in essence rewarding them for finding new ways to reduce costs. Over time, we became their most profitable account, and they became our world-class supplier for parts. No one could provide it cheaper than they could because we worked with them to reduce the costs.

© 2012 – Rick Pay – All Rights Reserved

Agility Requires Speed

The key to successful supply chain management is reliability and predictability of supply: knowing how much you’re going to get and when you’re going to get it. Take as an example a manufacturer who had trouble finding a reliable source for a simple metal flange used by their plants in Mexico. They had to choose between storing a lot of inventory or changing their supply chain. In this case, they began buying the part in the US and shipping it to their facilities in Mexico.

Another issue is agile operations. There’s a difference between agile and lean. The Toyota production system is actually founded on speed: how can we be faster and still produce a high quality product at a lower cost? The right part in the right place at the right time at the lowest possible cost requires speed, so agility is about being fast, flexible, highly responsive. Lean focuses on eliminating waste – it’s related but not the same.

© 2012 – Rick Pay – All Rights Reserved

Are Your Operations Truly Agile and Flexible?

Many Operations organizations seem to plateau after several years of implementing continuous improvement, Lean or Six Sigma. I believe that the next step is to become truly agile and flexible. But what does that mean?

Agility is the ability to think quickly and make quick and well coordinated movements. The key here is quick. I see many organizations take forever to solve problems and develop new innovations. One client I have is struggling to improve shipped on time, with many meetings, excuses and delays. Being agile would suggest that we should see initial significant results in 90 days or less. There is a Japanese term for this – Kaikaku – which means quick, revolutionary change. Agile thinking helps.

Flexibility includes the ability to bend without breaking, susceptibility to modification, and willingness to yield. Two key words there are susceptibility and willingness, because the great measure of flexibility is in your head. Organizations need to be willing to make the necessary changes to get where they want to go. So many companies struggle with change initiatives simply because they aren’t really willing to change, don’t believe they can, or are locked into the old ways of doing things.

To truly move to the next level, organizations need to be agile and flexible.

© 2011 – Rick Pay – All Rights Reserved

Efficiency vs. Innovation

Efficiency is reducing inputs per unit of output. Inputs decrease, output stays flat. Think of cost reduction: we still produce 10 parts, but now it costs us $8 instead of the $10 it used to cost. Efficiency is a one-time, short-run result. Most Lean efforts are focused on efficiency, and I believe this is one of the reasons that Lean usually doesn’t yield long-term results.

Innovation is increasing output while maintaining level input. Your current levels of labor or materials now yield more. A client, a $100 million distributor, is increasing sales by 10 to 20% without spending a nickel more by implementing innovative business processes.

For long-term success, we want innovation, which boosts in sales and improves margins. When innovation starts to happen the results multiply, which means that you get much better traction out of an innovative approach than from pursuing efficiency.

© 2011 – Rick Pay – All Rights Reserved

 

A Picture is Worth…

There are myriad ways of using images to communicate with employees and improve business processes. Pictures and drawings can be extremely useful tools for Continuous Improvement.

The first area where pictures can be useful is process instructions. In this day and age, there are often many languages spoken throughout the operations – one client had 17 languages spoken on the shop floor. A series of pictures showing the progression of work with arrows to indicate details is easy for all team members to understand. This saves translation and helps reduce errors.

Another place to use pictures or drawings is in process analysis. One of my favorite tools is the spaghetti diagram, which traces the flow of materials, paperwork and even people. Tracing the movement often shows that the process goes every which way, resulting in a large scribbled-looking diagram that resembles a bowl of spaghetti. Once management sees this, they grasp the magnitude of the issues.

For one client who was preparing new buildings for equipment that would increase capacity, I used a spaghetti diagram to trace the workflow in a planner mill yard. The diagram showed several choke points that would reduce productivity and require extra people and lift trucks. By flipping over one of the buildings (thankfully before it was built) we eliminated the choke points, increased capacity, redeployed a person, and eliminated a $120,000 lift truck.

This is just one of many stories about using diagrams to save the day. A picture really is worth 1000 words and often a million dollars or more.

© 2011 – Rick Pay – All Rights Reserved

 

Do You Need Kaizen Events to Make Improvements?

Many Lean practitioners seem to take the position that the way you do process improvement is through Kaizen Events. In a Kaizen Event (sometimes known as a Kaizen Blitz) a team of people focus on a given work area or problem, and they develop and implement improvements. While these events can take from a half day to a full week or more, the definition of the event put forth in “The Kaizen Blitz” (AME – 1999) suggests that three days is best. This is not incremental improvement; it suggests significant improvement over a short period of time.

But do you need to wait for a Kaizen Event to make improvements? NO! I was talking to a manufacturing executive the other day that has many small activities going on all at the same time (he won’t even refer to it as Lean) that resulted in about a 7% annual cost reduction/profit improvement on total sales! He believes that continuous improvement by itself empowers people in operations to make many improvements which over time, add up to big numbers. Some of the improvements might take only minutes to identify, plan, do, check and adjust. Others may take hours, days or even weeks depending on the scope. His thought is – don’t limit people to an event to make improvements. Empower them to make them continuously and it becomes part of the culture.

© 2010 – Rick Pay – All Rights Reserved

Is Lean Losing Its Fizz?

It is interesting how things come in threes.  Just this last week, I have spoken to three heads of Operations about their Lean journey, and all three noted that it seemed to be going flat.  In most cases, they had been on the road to Lean for over two years, but due to various circumstances, the improvement from Lean was declining and the enthusiasm on the part of the employees had almost disappeared.  In one case, he rejuvenated the process, but that is another story.

In January there was an article in the Wall Street Journal that suggested that 60% of companies that tried process-improvement initiatives failed to achieve desired results.  Another article about the same time suggested that after five years, 70% of companies polled were no better off than when they started.

A few questions to ask yourself:

  1. Has your organization achieved real gains beyond the initial low hanging fruit of process improvement?
  2. Have those improvements been sustained over the longer term?
  3. Is your organization still enthused about Lean or other process improvement initiatives?

If the answer to any of the above is no, you are probably headed to the same result as the 60% of companies cited above.  It’s time to take action to be sure your improvement initiatives yield the highest result and are sustainable.

To find out more, visit my website and look under the Industry Resources section.

© 2010 – Rick Pay – All Rights Reserved

The First Step in Change Management: Create a Crisis

One of the key weaknesses I see in management today is the ability to successfully manage and implement change.  Change initiatives often are less than successful, or if initially successful, lack sustainability.  One of the key reasons for this is the lack of a clear case for why the change is occurring.  People want to know “why are we doing this?”

To kick off change, it helps to have a rallying cry in order for people to see the need for change.  Such a rallying cry is a crisis.  The HP printer plant in Vancouver, Washington once made a major change on how they designed and shipped product because top management said that if the plant couldn’t become profitable, they would shut it down.  Now that’s a crisis!

If you don’t have a clear crisis, create one.  It could be a market issue, a survival issue, a profitability issue or anything that inspires people to do things differently in order to meet the challenge.  A clear crisis will help initiate and sustain change.

© 2010 – Rick Pay – All Rights Reserved

How Do You Start a Lean Journey? Paint the Lunchroom!

When many companies begin a Lean journey, they wrestle with where to start. Some will begin with training, trying to help employees understand the basics of Lean. Others start with 5S (work place organization) because it is fairly easy to do and demonstrates visible results. Still others will establish new policies such as no lay-offs (due to the Lean process).

I suggest you start by painting the lunchroom! What has this got to do with Lean? Actually, several things – first, it shows you are really serious about changing the environment of the company to one of quality. Second it shows you really care about the environment in which the employees work. How can you expect them to go the extra mile to produce Lean processes and then allow them to eat in a dump? Painting the lunchroom says 1) we want quality, 2) we support you and care about your work place, 3) we are serious about culture change. You could also get new microwave ovens and a refrigerator! If your lunchroom is already in good shape, find something else that will make a statement to the employees.

The first critical step for a Lean Journey is to convince yourself and the employees that things are going to be different; that the culture is going to change. A great way to demonstrate that is to paint the lunchroom!

To See, First You Must Look

I watched Sherlock Holmes recently. I noted that he had an unbelievable ability to see details that helped lead him to the solution of the crimes. That ability to see is vital for process and productivity improvement. Seeing waste is the first step to eliminating it, and believe it or not, that is one of the weakest capabilities I find in many operations environments. People get so focused on the work at hand, that they don’t see the waste that has developed over time. It is like the infamous boiled frog that did not feel the heat coming up because it was so slow. Unfortunately, the waste that develops over time can be so great that it eventually will pull the company down either through poor cost/cash flow management or through service/quality failures.

Take the time to see. Go stand in the middle of the operations, where the action is, and look for the waste. You may not notice immediately, but soon it comes in to focus. You may find low hanging fruit, or so much of it that it might as well be laying on the ground, waiting to simply be picked up.

© 2010 – Rick Pay – All Rights Reserved