Keeping Your Eye on the Ball

I toured a client’s manufacturing facility last week. I had not seen it since about six months ago.  Part of the facility looked neat, organized and seemed to have very good flow. There was a bit more inventory around than in the past, but not enough to worry about, I thought.

Then we moved into the other part of their operation. It was messy, dirty, and inventory was piled wherever there was space. The total output was about the same as six months ago, yet overtime had become excessive and on-time shipments had decreased.

Six months before, this area had been neat, clean, efficient and effective. Now it was a mess. What happened? Could it be that they got comfortable and took their eye off the ball? I’ll find out, as they’ve retained me to discover what went wrong.

The second law of thermodynamics says that if systems aren’t improving, they will decline toward chaos.  One of the clear requirements of any process improvement program is continuation. It is called continuous improvement for a reason. If you take your eye off the ball, conditions will deteriorate. It’s a basic law of nature.

© 2011 – Rick Pay – All Rights Reserved

Your Capacity Is Larger than You Think

Many Operations executives spend a great deal of time trying to figure out what the capacity of their operations is. I suggest it is always much more than you think. I found this out through an experience at my prior company.

I was VP, Operations, and one day the VP, Sales came into my office and told me that our biggest competitor was experiencing a major product failure. If we could almost double our output for 120 days, we could scoop up a number of major accounts, shutting our competitor out of a key segment of the market. His question was, “Can we do it?” I said “of course,” and then when he left, I thought, wow, how are we going to do that?

We named this challenge “Project 45.” We had to go from 25,000 units per month to 45,000 units for three months, then ramp back down to 25,000. We thought that our capacity was in the neighborhood of 25,000 units. We did three key things that helped achieve our target.

  • First, we went to the employees and explained what we needed to do. I had gone to the CEO and CFO and got them to agree that we would pay a bonus to the employees of a percentage of the added gross profit above 25,000 units. We would also need a lot of overtime and would have employees from other parts of the company help on the production lines.
  • Second, we created a measurement system much like the United Way thermometer to track our progress and make it visible to everyone.
  • Third, we went to our key suppliers and explained what we needed and the great opportunity for them if they could quickly ramp up while maintaining quality and on time delivery.

The project was a resounding success. We actually had suppliers work Thanksgiving Day for us. We hit 64,000 units the last month and we won a number of major accounts, effectively crippling our completion. While we knew that 64,000 units was not our true capacity (it was a one-time flex), we knew our capacity was much higher than 25,000 and the employees believed in their ability to produce beyond expectations.

The best part was when the project ended just before Christmas, I got to put on a Santa Claus hat and pass out bonus checks to the employees equal to a month’s pay. It made for a very Merry Christmas for all of us!

© 2011 – Rick Pay – All Rights Reserved

Is Labor a Fixed or Variable Cost?

If you talk to your local cost accountant, they will tell you that labor costs (along with materials and supplies) are recorded as variable costs.  In reality, they should be treated as fixed costs.  Why is that?  Because, in the short run, it is not easy to turn this asset into costs that can vary with revenue which is the definition of a variable cost.  It is very difficult to lay off people in a low revenue month and then rehire them in a high revenue month.  If you try to do that, hiring costs, training costs and cost of quality all increase usually to the degree that they more than offset keeping the people through the downturn.

Many companies will try to furlough people or send them home early in an attempt to turn this fixed cost into a variable cost.  While this works in the short run, people will get tired of the lower income and unpredictable work schedule and eventually will look for a new job.  This again raises the cost of hiring, training, etc.

The only true variable labor cost is the use of temps and overtime.  If your company is in a volatile market, it is best to plan for a level of temps and overtime to create a variable environment.

© 2010 – Rick Pay – All Rights Reserved