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Key role of EMPLOYEES in Business Process Improvement

There are four major roles within a business management system: Business Leader, Process Owner, Operational Manager, and Process Operator. The responsibilities of each of these roles are unique, but work together as a system. Some employees in an organization may perform as many as all four of these roles over the course of a day, week, month, or year. Now let’s have a look at each role in detail.

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1.     Business leaders

Business leaders have responsibility for creating the business plans (including strategic plans created during the strategic planning process) and associated resourcing plans necessary to cause the organization to be successful.

Senior leaders (corporate) have the duty of defining the customer and business objectives which an organization needs to achieve in order to be successful. This process includes overseeing the development of the organization’s mission, vision (goal), and values.

Lower leader-levels (business unit and functional) get the task of translating senior leaders’ business objectives into business objectives that make sense for their level and that support the accomplishment of the senior leaders’ business objectives.

The responsibilities of the business leaders follow the PDCA (plan, do, check, and act) cycle.

Plan: The business leaders create and own the business performance objectives of the organization. Senior leaders need to first understand the requirements of their customers, stockholders, workforce, suppliers, and communities. They need to understand their competition. They need to understand the environmental, economic, technological, social, legal, and political environments that they do business within. Senior leaders need to consider all of these elements as they design a Business model and business Strategy map that will meet the customer and business requirements. Business Leaders then translate these requirements and business environment issues into business performance objectives. Business Leaders then create business plans and associated resourcing plans that will cause the organization to achieve these business objectives. The Business Leaders establish business performance metrics to measure the business’s capability to meet these business objectives. Many organizations create a Balanced scorecard to organize and communicate business performance metrics.

Do: The business leaders are responsible for communicating to the organization their business plans. As the organization conducts business, the Business Leaders are responsible to build bridges and remove barriers that will allow the business performance objectives to be met. The business performance metric data is produced and collected as business is performed by the organization.

Check: The business leaders periodically analyze the business performance data and use it to visualize the business’s capability to meet business objectives over time (performance trends), compare actual performance against performance targets, and identify performance issues.

Act: The business leaders are responsible to create improvement actions to address the performance issues that are identified during their analysis of the business performance data. These improvement actions are created to ensure the organization is able to achieve their business plans.

 2.     Process owner

The process owner is the person who is responsible for designing the processes necessary to achieve the objectives of the business plans that are created by the Business Leaders. The process owner is responsible for the creation, update and approval of documents (procedures, work instructions/protocols) to support the process. Many process owners are supported by a process improvement team. The process owner uses this team as a mechanism to help create a high performance process. The process owner is the only person who has authority to make changes in the process and manages the entire process improvement cycle to ensure performance effectiveness. This person is the contact person for all information related to the process.

The responsibilities of the process owner follow the PDCA (plan, do, check, and act) cycle.

Plan: The process owners create and own the process performance objectives of the organization. The process owner first needs to understand the external and internal customer requirements for the process. This person uses the business plans as a source to help understand the long term and short term customer and business requirements. This person then translates these requirements into process performance objectives and establishes product (includes service) specifications. This person establishes process performance metrics to measure the process’s capability to meet the product specifications and overall process objectives. The set of metrics that are to be reviewed by operational managers and process operators are called key performance indicators (KPIs). The process owner then designs process steps to describe work that when performed will have the capability to produce products that meets the customer and business requirements.

Do: The process owner is responsible to communicate to the operational managers the details of the processes that the operational managers are responsible to execute. As the operational managers and process operators perform the processes, the process owner is responsible to build bridges and remove barriers that will allow the process performance objectives to be met. The process performance metric data is produced and collected as the process is performed by process operators. The process owner is continually involved with the operational managers and process operators as they use kaizen to continually improve the process as they are performing the work.

Check: The Process Owner periodically analyzes the process performance data and uses it to visualize the process’s capability to operate within control limits over time (performance trends), compare actual performance against performance targets, and identify performance issues.

Act: The Process Owner is responsible for creating improvement actions that address performance issues that are identified during their analysis of the process performance data. Improvement actions may include the initiation of Lean projects to reduce waste from the process or include the initiation of Six Sigma projects to reduce variation in the process. Improvement actions may include the use of problem solving tools that would include risk assessment and root cause analysis. Risk assessment is used to identify and reduce, eliminate, or mitigate risk within the process. This is the proactive approach to avoid problems being created from the process. Root-cause analysis is the reactive way to respond to problems that occur from the process. Root-cause analysis is used to identify the causes of problems within the process and identify and implement improvement actions that will ensure these problems do not occur again.

3.     Operational manager

The operational Manager is responsible to bring the resources and processes together to achieve the objectives of the business plans that are created by the business leaders.

The responsibilities of the operational manager follow the PDCA (plan, do, check, and act) cycle.

Plan: The operational managers – in collaboration with each Process Operator, create Process Operator performance objectives for the employees they supervise. The Operational Manager needs to understand the performance requirements of the process. They match employees (Process Operators) with the competency and skill requirements of the process to be performed. They ensure that the Process Operators have the budget, facilities, and technology available to them that is necessary to achieve the performance objectives of the processes.

Do: The operational manager is responsible to teach process operators how to perform the processes (work). Process Operator instruction usually consists of classroom and on-the-job training. The Operational Manager oversees the work and ensures Process Operators receive ongoing informal feedback as to their performance. As the Process Operators perform the processes, the Operational Managers are responsible to build bridges and remove barriers that will allow the process and Process Operator performance objectives to be met. Process and Process Operator performance metric data is produced and collected as the process is performed. The Operational Manager ensures that Process Operators are using Kaizen to continually improve the process as they are performing the work.

Check: The operational manager periodically analyzes the key performance indicators (KPIs) during the production cycle to evaluate the work group’s ability to achieve the process and process operator performance objectives. This data is used to visualize the process and process operator capability to meet business plan objectives over time (performance trends), compare actual performance against performance targets, and identify performance issues. They review this performance data and sort out process operator performance issues from process performance issues. Many organizations use a war room concept to post performance data. Within the war room, the operational manager conducts periodic review and analysis of this performance data.

Act: The operational manager is responsible to create improvement actions to address the performance issues that are identified during their analysis of the process and Process Operator performance data. They address Process Operator performance with ongoing feedback to the Process Operator and/or by using an employee performance management review process. They communicate process performance issues to the Process Operator(s) and the Process Owner.

4.     Process operator

The process operator is responsible to learn and perform the processes (work) necessary to achieve the objectives of the business plans that are created by Business Leaders.

The responsibilities of the process operator follow the PDCA (plan, do, check, and act) cycle.

Plan: The process operators – in collaboration with their Operational Manager, create and own their performance objectives. Process Operators are responsible to understand the performance objectives of the process they are to perform and the specifications of the product they are to produce.

Do: Process operators are responsible to learn the processes (work) that they are to perform. They ensure the processes are performed to meet the process performance objectives and produce product that meets specification. As the Process Operators perform the processes, they are responsible to communicate to their Operational Manager (supervisor) the bridges that need to be built and the barriers that need to be removed to allow the process and Process Operator performance objectives to be met. Process and Process Operator performance metric data is produced and collected as the process is performed.

Check: The process operator periodically reviews the Key performance indicators (KPI’s). The Process Operator makes adjustments to their work based on their actual performance compared to KPI targets. The Process Operator is responsible for identifying and reporting any performance issues and stopping production if necessary.

Act: Process operators practice kaizen to continually challenge the process and communicate improvement suggestions to their operational manager (supervisor).

Key considerations

Processes need to align to business goals. An organization’s strategic goals should provide the key direction for any Business Process Improvement exercise. This alignment can be brought about by integrating programs like Balanced Scorecard to the BPI initiative. E.g. when deploying Kaizen, Six Sigma, identification of projects can be done on the basis of how they fit into the Balanced Scorecard agenda of the organization.

Customer focus Fast-changing customer needs underscore the importance of aligning business processes to achieve higher customer satisfaction. It is imperative in any BPI exercise that the “Voice of Customer” be known, and factored in, when reviewing or redesigning any process.

Importance of benchmarks BPI tools place a lot of emphasis on “measurable results”. Accordingly, benchmarks assume an important role in any BPI initiative. Depending on the lifecycle of the process in question, benchmarks may be internal (within the organization), external (from other competing / noncompeting organizations) or dictated by the senior management of the organization as an aspirational target.

Establish process owners for any process to be controllable, it is essential that there be clarity on who is the process owner, and what constitutes success/failure of the process. These success/failure levels also help establish “control limits” for the process, and provide a healthy check on whether or not a process is meeting the desired customer objectives.

 Source: Wikipedia

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YOKOTEN

The 8 step of TBS (Toyota Business practice)

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Meaning

Means   “Across  Every where”

Yokoten is a Japanese word that roughly translates to “best practice sharing”.

Yokoten, the term Toyota adopted to capture the idea of horizontal transfer of information and knowledge across an organization.

Yokoten encourages sharing of data across the organization’

It is one of the winning behaviors of Toyota, namely copying and improving on kaizen idea that works. Toyota  calls this yokoten since it’s more precise than “copy” or “horizontal deployment” or “sideways expansion”.

It’s not a vertical (top-down) requirement to copy as Intel might deploy it in their “copy exactly” model. It’s not a “best practices” or benchmarking approach per se. Yokoten is horizontal, or more peer-to-peer, with the expectation that people will go & see it for themselves (this is called genchi gembutsu) and learn how another area did kaizen. In yokoten at Toyota there is an expectation that copying a good idea will be followed by some added kaizen to that idea.

How yokoten is done at Toyota?

Rather than waiting for the kaizen information to go up the chain of command where it can be sent back down to another area to copy or learn from, Toyota people are encouraged to go see for themselves, and return to their own area to add their own wisdom and ideas to the knowledge they gained.

The role of the senior managers is to make people aware of the existence of these good kaizen examples so that they can go see for themselves, gain the knowledge and improve upon it further

Simply telling subordinates to copy it may be kaizen of a sort but it would not serve the second important aspect of the Toyota Production System, the respect for and development of people.

Toyota has learned, it is not enough to copy (adopt) the result of good kaizen, we must also copy  (adopt) the thinking that resulted in the good kaizen

Toyota Business Practice

Within the 8 step practical problem solving process known as TBP (Toyota Business Practice) the yokoten activity happens in step 8.

  1. Clarify the problem
  2. Break down the problem
  3. Set a target
  4. Analyze the root cause
  5. Develop countermeasures
  6. See countermeasures through
  7. Evaluate both results and process
  8. Standardize successes, learn from failures

Within the PDCA cycle yokoten happens in the Act (A) stage

How can we adopt it?

We can do “yokoten of yokoten” by studying Toyota and how they do it. They began 60 years ago when their managers and engineers traveled to the USA to learn from leading American manufacturers. At Toyota today the expectation is that kaizen is not complete until yokoten is confirmed and the learning is shared with others. Yokoten is part of the culture. It may not be too strong to say that it is a job requirement. Kaizen must result in a standard, and yokoten means standards must be copied (studied, adapted & improved) by others. However it is not enough to copy (adopt) good kaizen as it is, one must adapt and improve the learning for one’s own process

Basic requirement of Yokoten

There is another Japanese phrase which is often associated with building a yokoten culture. It is kaze toushi ( 風通し ) and literally means “ventilation” or “wind blowing through” but refers to the openness or ease of communication within an organization. When this ventilation or information flow is poor, yokoten does not happen.

Why Yokoten?

Yokoten is a essential part of long-term success in a lean culture, but can also have a big impact on short-term results. Yokoten is a success multiplier. Perform a good kaizen, and then copy (adopt) the results, learn from it & adopt it wherever applicable, and you immediately duplicate or multiply the impact.

The same is true of lean. There is no guarantee that it will continue on its own into the future. We need to exploit Yokoten to assure that we continue to be lean into the future.

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By

Mr.Mukesh Khare – KAIZEN Institute India


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Operational Excellence in Pharma Manufacturing……

Lean, Fit and Ready to take on the Global Generic

By Mr.Jayanth Murthy

Opportunity – It is often said that the rate at which innovations and improvements happen in the world of personal computers, if the same rate were to be applied to the auto industry we would have cars costing a few thousand rupees, giving 200 KM to a litre of petrol and emitting 99% less obnoxious gases!

The question is, why this spirit of continual innovation and improvements not seen in other industries? Be it automotive, steel or in this case the Pharma Industry. If one sits back and calmly recollects the formulation manufacturing paradigms and concepts existing say two/ three decades ago and compare it with today, one may not find any drastic changes, in most pharma companies. The drugs have tremendously improved, the drug delivery has improved, but the paradigms and process of manufacturing has hardly kept up. It probably takes 30‐40 days (or more) in terms of TPT ‐ Through Put Time for a batch to come out from start to finish, today it remains the same in many cases.

At this point I would like to highlight that a lot of revolutions through innovations have happened as regards Pharma machinery and equipments per say, again I am not referring to how to compress faster or better or how to granulate faster or better, I am talking of Through Put Time – the total time for a batch to move through all the process. The focus is on the entire value chain from dispensing of raw material all the way upto finished goods being packed.

At this stage, let me introduce 3 terms and concepts: 

  • TPT ‐ Time from Start to Finish. It is the sum total of both value adding and wasteful activities/ time.
  • VAA ‐ Value Adding Activities. Anything that converts (Physical or Chemical conversion) Raw Material towards Finished Goods. It is what the customer is willing to pay for.
  • NVA ‐ Non Value Adding Activities – also called Waste or Muda. These are activities that consume costs and add no value to any one – activities like waiting, rework, change‐over, cleaning, rework, staging, inspection, etc.  As mentioned before, with improvements of machinery we have seen VAA / cycle time reduction and quality improvements. But the NVA have reined. NVA’s take 90% more of the TPT!

Which means, improving VAA is hardly the point, one need to cut the NVA’s, if TPT has to be cut drastically! Here lies the crux in terms of challenge for Indian Pharma sector.

Crashing the TPT by half or even 75 to 90% is not possible, unless the paradigm of the senior management changes. This happens if a clear understanding of concepts like TPT, VAA and NVA are understood. Sadly, in many formulation units improvement has anything to do with TPT reduction or process improvements is met with resistance. The regulatory requirements are used as a ‘shield’ to prevent ideas on improvements. This may sound too generic a statement, but one has to understand the 80‐20 principle. Probably only 20% of the top formulation units in the country actively pursue TPT reduction across the value chain in an integrated fashion. The rest of the 80%, which form the majority of Indian industry are blissfully unaware of the potential that Lean or Kaizen offers across the value stream!

The challenge today is not about driving a few improvements at a few places through few people. The real challenge is how do you attack the TPT in formulation say by 50%, say in 5 months? That sounds exciting and challenging! Reducing TPT has immediate magical effect on the inventory across the pipeline. As the Through Put Time reduces, the inventory reduces, and this would mean less working capital, faster deliveries and greater flexibility. As India grows and grabs the huge global generic market one has to remember that labor cost advantage is going southwards. It is more of an efficiency and productivity game today. And this game can’t be understood and played unless one understands it from end to end value chain perspective and applies the concept of TPT, Waste and Value Add optimization across.

There are eight types of waste one can encounter in a business. Going into the formulation units here are a few one needs to watch out for and attack. These wastes have been defined which helps in identifying and attacking them without beating around the bush.

Below are the critical wastes in a typical formulation business…;

Transportation:

Movement related to material can be termed as waste/ Muda of Transportation. Traditional formulation unit have very restrictive and complex layouts where rooms are built within rooms with one door leading to another door! All this is done, keeping in mind the hygiene requirements.

This results in a lot of material handling and transportation, where people often seen pushing material on trolleys or often conveyors are used. Manual or automated transportation should be looked as waste and one should strive to minimize the same. This doesn’t happen unless the importance of flow management, pull manufacturing and internal logistics are understood and implemented. In fact, once the layout has been designed to address flow issue, various other issues are sorted out as a by‐product! But a change in basics manufacturing layout needs a huge shift in paradigm and management has to take courageous leaps of faith in Lean to do this. Upto 50% reduction in this type of waste is quite easily possible! W impacts costs almost immediately.

Waiting:

Any kind of waiting in the operations is classified as Waste/ Muda of Waiting. For example, material or machine waiting for Quality Approvals, approvals waiting for results which in turn are waiting for observations. Material waiting for machines, machines waiting for materials, people waiting for approvals, material waiting for change over etc. Easily 1‐20% of times goes in some form of waiting! Causing inventory blockage, waste of capacity, delays etc. It is because of this reason that layouts have to be designed without ‘staging’ room, which is made to ‘manage’ material that is waiting!

Reprocessing:

Although, it is considered as taboo, many plants engage in this activity. It deteriorates quality, creates delay and consumes resources. Of course in formulation, in many a times, no rework or reprocessing is possible and one is left with only the option of scrapping the lot which is a costly affair. Why?‐Why? analysis is the starting point of rework analysis. Rework also applies to rework of change over, maintenance jobs, reports, analysis, anything that is not done ‘first time right’.

Overproduction:

Defined as producing more or faster than the requirement of the immediate next process or customer. For instance, dispensing before all material required for the lot is available or before granulation is ready. This may continue through granulation, drying, blending, compression, coating till packing. Overproduction is huge disease which can be attributed to poor line balancing, when capacities are not matched or equipments run on differential speeds. It results in buildup of huge work in process (WIP) inventory. Inventory is money and lead to other headaches !

Inventory:

Finally, inventories parked across the value steam, starting from raw materials, WIP and finished goods, is a killer! Inventory comprises 50 – 60% of the total costs in a manufacturing unit. Excess (shortage is also a danger, not discussed here) of incoming inventory including the packing material results in blockage of money, space and risk of obsolescence. WIP is a resultant of poor flow and overproduction and no use of systems like Kanban. Inventory occupies space, requires additional handling and management, has to be accounted for, labeled etc, all of which again consumes resources and time.

Finished goods inventory, especially relating to domestic markets is a big issue which needs to be managed through waste elimination across the distribution chain. Certain practice, like having centralized warehouses , month end syndrome and the bull whip effect are other common phenomenon in the Indian Pharma sales and distribution space. This results in direct losses , including discounts on near to expiry goods.

Kaizen / Lean is ready and here… are you says Mr.Jayanth Murthy (Director – KAIZEN Institute India/Africa/Middle East)

 


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Making The Shift To A Lean Enterprise

The plant may be a disciple of lean manufacturing but the rest of the organization might operate in functional silos.

We’ve all experienced or heard stories about an organization that has a “slam dunk” opportunity for a double-digit profit from a new business win. The company submits its quote confident it has the right plant — an award-winning, quality-focused, lean manufacturing operation — relevant design experience, past success working with the specified materials, and existing inventories of the required packaging and containers. Within a few weeks the contract is awarded and the company is celebrating the new business win.

With two years until launch, there is no way this organization could stumble on the project… or could it?

Fast Forward To Launch…

The company president is having daily crisis management meetings reviewing the problems associated with the new business with a team formed for the sole purpose of fixing the following:

  1. Remove containment activity in the next 60 days.
  2. Reduce premium transportation in the next 30 days.
  3. Revisit the internal cost estimate.
  4. Examine process controls.
  5. Comprehend the engineering change requests in the next 60 days.
  6. Examine the material issues causing the product to fail in the field.
  7. Reduce overtime in the plant by 20% in the next 60 days.
  8. Attain the productivity rates advertised in the project.
  9. Revisit the flexible agreement language at the plant.
  10. Revisit the organization’s ability to respond to problem requests from the field.

How could a plant recognized for high quality and lean awareness have failed so miserably?

The quick answer is that while the plant may be a disciple of lean manufacturing, the rest of the organization operates in functional silos.

Failure To Launch

After reviewing the problems more closely, here are specific reasons why the launch was doomed to fail:

  • Component designs were not compatible with new equipment. The engineering staffs did not provide a capable process and assumed the operations team would determine a solution.
  • Production samples were built on weekends at low volumes on tools very similar to, but not the same as the new routed production tools, which were late.
  • Quality checks on the early pilot material were passed with marginal justification.
  • The new designs were not subject to stringent run at rates.

So, while the plant was well-suited to deliver a quality product, this launch fell victim to an organizational culture that didn’t embrace lean initiatives.

To avoid situations like this, organizations must create a lean enterprise.

Get Your Lean On

Lean initiatives such as standard work and quality at the source are as important to the company’s engineers and accountants as they are to the assemblers in the plant. Just in time delivery is determined by more than a card system in the plant. Everyone in the organization has a role to play.

To create lean energy around their core value streams, organizations need to embrace a cultural shift to become a lean enterprise.

To start, each department head needs to:

  1. Teach the team lean initiatives. “Learn by doing.”
  2. Create a value stream map to identify the activities in each department and highlight the opportunities for continuous improvement.
  3. Recognize the value of the current state and create a future state map.
  4. Examine whether the department supports the value stream or if it is a functional silo that has little to do with the internal or external customer.
  5. Focus on metrics related only to value stream opportunities. Other metrics are irrelevant.
  6. Recognize team members that understand the value of the organization’s shift to a lean enterprise.
  7. Have access to a lean enterprise expert, or sensei, throughout the process.

The lean enterprise, like lean manufacturing, doesn’t occur overnight and it can be a difficult process. What’s important is to remember that customers will not be satisfied in the long-term until the organization recognizes and pursues one system that leads to excellence.

The Value Of Lean

It’s been said that the value of an organization is in how it handles the launch of a new product. A lean enterprise helps ensure success for that critical product launch.

The lean enterprise embraces a common language and culture based on customers and people. There is no room for the status quo. Organizations cannot allow themselves to be dominated by the functional silos of the past.

The lean enterprises — those that recognize the value of a standard work approach to every task within their companies — are the organizations that best comprehend today’s dynamic business climate and are best positioned for success.

Your goal should not merely be a lean plant floor. That’s only part of the solution. Every department in your organization needs to embrace lean principles.

When that happens, you’ll have a lean enterprise….

By Dave Wolgast and Guy Morgan, managing directors, BBK 

Source: http://www.industryweek.com 


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If Your Company Does Product Cost Reductions, It’s Already Too Late

Refocusing product cost management efforts from cost reduction to cost avoidance is less comfortable but far more profitable – May 16, 2013 Eric Arno Hiller, President, Hiller Associates

  • Product cost is the largest expense for manufacturing and the key to profit.
  • Companies today focus on reducing cost after start of production, rather than meeting their product cost targets initially at launch.
  • A pure cost avoidance strategy is far more profitable than a pure cost reduction strategy.
  • Product cost management teaches us that the most profitable strategy is a combined strategy of both avoidance and reduction, with the majority of resources focused on avoidance.
  • The combined strategy requires culture change and process design, before hiring people or buying software. It is challenging, but the added profit gains are worth the effort.

Product cost, which is roughly equivalent to cost of goods sold on the income statement, is the biggest expense for manufacturing companies, typically 70% to 90% of revenue. You can see COGS as a percent of sales for a random sample of companies in the table below.

Given the magnitude of product cost, one would think that manufacturing companies would have the process of controlling product cost down to a fine art. Sadly, this is not true, and meeting cost targets at start of production in most companies is black art with the predictability of the stock market.

In this article, we will talk about two different strategies that companies use to control product cost. Let’s call them “cost reduction” and “cost avoidance.”

Cost Reduction vs. Cost Avoidance

Figure 1 shows a graph of product cost over time in the product life cycle. In the cost reduction strategy, the company goes through product development putting little or no effort into controlling product cost. Cost increases as parts are designed and added to the bill of material. The product is almost assured to exceed its product cost targets at the start of production. After start of production, the cost reduction efforts begin in earnest through a variety of techniques, such as lean, value analysis/value engineering, purchasing demanding year over year cost reductions, etc.

Two Different Strategies for Product Cost Management

Figure 1:

A cost avoidance strategy is exactly the opposite of cost reduction. In cost avoidance, a large amount of effort is spent as early as possible in product development to meet the product’s cost target at launch. However, post launch, little effort is spent on year-over-year savings.

On the graph, we have shown the extremes of the cost reduction vs. cost avoidance strategies. Most companies are doing something in between. However, on which strategy do you think most companies focus? It’s pretty obvious from the graph, correct? Most companies obviously are going to focus on cost avoidance, correct? Right?

Why people reduce cost instead of avoiding it

The sad truth is that most companies focus the majority of the resources they use for product cost control after launch, not before. Why is this? Many who have worked in product development have heard management and others disparage cost avoidance as “not real.” Cost reductions can easily be measured; cost avoidance cannot. For example, I was paying $10 and now I am paying $8. That’s tangible and real. But, if I say, I am paying $7 now, but had I not been careful in my design, sourcing, and manufacturing decisions, I likely would have paid $10, management considers that ephemeral.

This attitude of most management is detrimental to the company’s profit. Can you imagine living your personal lives like this? Let’s say you need to get cable TV service. Would you search around carefully and find the TV channel package you wanted for $60/month? Or, would you do the following: First, do minimal shopping around and take a package for $100/month. Then, a year later, you investigate to find the “low hanging fruit” of a new deal for $90/month. Another year later, you beat on your cable supplier to reduce the price to $80/month. Next year, the “easy wins” are gone, so you really work hard to find a deal for $70/month.

We don’t shop this way in our personal lives, but most companies manage cost in this way. They do it because accountants can measure reductions. Reductions are real. People get rewarded and promoted for reductions.

Why focusing solely on cost reductions doesn’t work

Looking at Figure 2, we can split the difference between the cost reduction line and the cost avoidance line into two parts. The first is the triangular region. Even if, after years of cost reduction efforts, we were able reduce cost to the point at which the cost avoidance line starts at launch, we have still failed. In has taken years to reduce cost, and that triangular region has a name: lost profit.

Maximizing Profit with Product Cost Management

Figure 2:

It is actually worse than this in reality. We will NEVER get down to the same price as the cost avoidance line. We know from the legendary DARPA study from the 1960s that the vast majority of product cost is “locked in” very early in product development. Products are systems, and it’s very hard to extract cost fully without changing the whole system. Furthermore, the cost of making the change is much higher, post launch. Per a 2010 Aberdeen’s study[i], engineering changes made after release to manufacturing cost 75% more than those made before release. These trapped costs that we cannot get out are shown in the rectangular region on Figure 2.

What’s the solution? Do both and flip the focus

So far in the article, we have been talking about a 100% cost reduction strategy vs. a 100% cost avoidance strategy. The field of product cost management would teach us to focus on what practically works and generates maximum profit. In this case, the solution is to do the following two things.

  1. Do BOTH cost avoidance and cost reduction– As shown by the orange line on the graph, the most profit can be made if you meet or come close to your product cost target at start of production and then focus some effort on reduction after launch. Realize that this means that management needs to expect LESS reduction each year in production (e.g. 1% to 2% a year, not 3% to 5% a year).
  2. Flip the focus of the majority of product cost management resources before production begins– Today 70% to 90% of product cost management resources are focused on reduction. Management needs to flip the focus so the majority of effort is on avoidance.

These improvements require cultural changes in how people are incentivized and motivated. Management needs to cast the vision, educate, and walk the walk. This also requires that companies have a solid process for product cost management. Most do not. A common pit that most companies fall into when attempting this transition is to focus first on hiring more resources or buying software tools, rather than first designing a process and starting cultural change. The right people are critical, and tools can greatly enable the process. However, if the cultural and process elements are not in place FIRST, the company will waste a lot of time and money in failed attempts at product cost management and re-starts to the effort.

These are not easy changes to make, but they are worth the effort.

Consider the table at the beginning of the article again. If your company has 80% cost of goods sold and 5% net margin, then reducing COGS to 79% means a 20% increase to profit! What do you think, managers and executives? Is 20% increase in profit worth the effort? We can ponder that question in another article.

In the meantime, the next time someone disparages cost “avoidance,” show them this article and tell them, “You call it ‘cost avoidance’; I call it maximizing profit.”

Source: http://www.industryweek.com

Change is Mandatory!!!

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Change is Mandatory!!!

Question is Can we CHANGE faster then others?

If you don’t know WHERE YOU ARE/YOUR CURRENT STATE and you don’t know WHERE YOU WANT TO GO, your chances of getting to a place that meets your expectations/goals are minimal.

If you are planning a Kaizen/Lean manufacturing initiative or you are not pleased with the results of your Kaizen/Lean initiative its time to re-look at what has been done and CHANGE!

Kaizen is based on making little changes on a regular basis–always improving productivity, safety and effectiveness, and reducing waste. Kaizen Reduces Waste in areas such as inventory, waiting times, transportation, worker motion, employee’s skills, over production, excess quality and in processes. Kaizen Improves space utilization, product quality, use of capital, communications, production capacity and employee retention. Kaizen Provides immediate results. Instead of focusing on large, capital intensive improvements, Kaizen focuses on creative investments that continually solve large numbers of small problems.

Bad business ignores the sign of disaster.
Good business spots the sign of disaster and deals with them.

To conclude I would like to say that CHANGE IS THE NEED FOR AN HOUR, but this change is not easy. To implement these changes is not easy and to shed light on how Kaizen helps companies excel I have chosen this topic.