Achieve Target Price and Earn Profits Too!

January 25, 2012 by 2 Comments

Whether launching a new product or expanding capabilities to accommodate our clients growing needs, meeting the target price is a significant barrier to earning new revenue streams and potential profits. Sometimes we take on new business opportunities as a way to gain market share, deepen relationships or to gain an advantage over the competition. While these strategies for new business serve their purposes well, it remains essential not only to meet the target price, but also to be profitable at the target price.

Fortunately, approaching target price challenges from both a design improvement and process improvement perspective allows us to open ourselves to a path toward meeting our objectives. A design and process improvement course can make taking risks less emotional and bring us into the realm of rational decision making. What if a design and process improvement method was consistently employed, and the data collected from these efforts demonstrated that a 10%, 15% or even 30% gain in profitability is likely.

One step in achieving a data driven decision-making model is to create processes that deliver reliable data needed to incorporate into an existing decision making and forecasting model. A process that generates and delivers this kind of information is presented below. It is an iterative process that synergizes with a well known Six Sigma concept, Define, Measure, Analyze, Improve, Control (DMAIC).

Step One: Define Base Process

  • Define base process
  • Create value stream map
  • Delineate sub-processes and assign cycle times to each
  • Identify and document opportunities for improvement
  • Present per product price and improvement opportunities

Step Two: Perform Project, Provide performance Feedback and Improvement Opportunities

  • Actual cycle times
  • Yield reporting
  • Constraint analysis
  • Feasibility study
    • Incorporate actual data to engineer design for manufacturability model
    • Material & equipment suitability
    • Yield and process time optimization

Step Three: Adopt New Process

  • Define new process
  • Create new value stream map
  • Delineate sub-processes and assign cycle times to each
  • Identify and document opportunities for improvement
  • Present per product price and improvement opportunities

Step Four: Perform New Process, Provide performance Feedback and Improvement Opportunities

  • Actual cycle times
  • Yield reporting
  • Constraint analysis
  • Feasibility study
    • Incorporate actual data to engineer design for manufacturability model
    • Material & equipment suitability
    • Yield and process time optimization

This iterative process continues to deepen, creating an improvement perspective and can continue until all potential waste is removed, or can be finished when a desired target price and profit is met.  The data gathered from the process can then be integrated into our decision-making models.

While the decision-making model currently in use may not be well structured and documented, we are making decisions and are therefore using some sort of model. Enhancing our awareness regarding how we go about making decisions and adding a rational perspective to our new business strategies can support our efforts to increase revenues and profits.

Click Here to download a case study supporting this model.

Click Here to begin a conversation on how ASAP can help meet your target price initiatives.

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Productivity Affects Sales – How?

December 15, 2011 by 2 Comments

Meeting sales goals is one of our highest priorities, and productivity is a determining factor in whether or not we meet those goals. The degree to which our manufacturing processes are productive affects our capacity to generate revenue. Since our organizations exist to serve the demands of our customers, measuring productivity and understanding the degree to which productivity affects sales performance is worth exploring.

One of the difficulties in measuring productivity is that often our manufacturing environments have high-speed, automated equipment to produce our core processes, and secondary process are semi-automated requiring a labor component. While it may be a fairly simple equation to determine cycle times of our equipment-based primary processes, methods to determine cycle times in secondary processes requires a different approach, especially if customization is a requirement.

Although it may be difficult to measure, monitor and improve productivity, it is an important component to capacity and ultimately sales. This model demonstrates how productivity affects our ability to generate sales revenues.

Productivity 100% 50% 60% 70%
Budgeted Hours (at capacity) 2,000 2,000 2,000 2,000
Actual Hours 2,000 4,000 3,333 2,857
Lost Capacity (hr) 0 2,000 1,333 857
Lost Revenue ($50/hr) $0 $100,000 $66,650 $42,850

Looking at this model in terms of meeting sales goals shows how important it is to know what capacity issues may sprout up if productivity levels are less than expected. If I am planning to achieve a 15% increase in sales, do I have the capacity to meet the goals? Are the capacity issues due to productivity or a lack of available resources?

Theses are ideas and questions are integral components in planning for successful organizational growth and meeting customer expectations.

Generating sales opportunities, closing sales, increasing demand and developing long-lasting client relationships is only half of the equation. The other half is actualizing these efforts through our manufacturing environments. Productivity has a big impact on whether or not we fully leverage our sales efforts.

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The Painful Truth about the Temporary Labor Industry’s Business Model

December 5, 2011 by 3 Comments

Most of us use temporary labor agencies.  It seems like a pretty easy solution to managing variable demand.  And it is.  I just make a call and ask for laborers. An agency could have an office right in my building.  I just walk down the hall, or have them attend my production meeting, send an internal email or phone call.

Except that often, when I ask for 8 folks, I get 5. I ask for people with specific skills and 3 of the 5 actually possess the skill.  The other 2 folks, not the 3 as asked for, are coming soon and those people don’t have the skill set either.  Not only is the skill set absent, but the temps don’t really want to be here anyway.  Several of the people selected are not interested in productivity or quality and we hear about it in a very loud fashion.

These are just some of the frustrations we experience when contracting with temporary agencies, and we can’t really blame the people because the painful truth is that the industry itself benefits when their staff is unproductive.

I know this sounds harsh, but consider this: if my customer is expecting a turn time/delivery in 5 days, I need to plan and staff my project for this expectation.  If I plan the project as if it will run at 100% of productivity, then I need 5 people and I staff my project with temporary labor.  After the project gets started, I notice that productivity is at 60%.  Now I need 2 more laborers, or do I?  Since the 5 people I have are producing at 60%, what output can I expect from the additional 2 laborers and how will this affect my commitment to my customer?

This is a complex mathematical question.  First, I have to calculate lost time/productivity from Monday and if the crew continues at 60%, I have another calculation to make.  I figure I actually need 9.167 people working for the next 4 days.  Consequently, a project that should have taken 5 people 5 days, or 200 production hours to complete, now becomes a 333.33-hour, stress-filled project.  Not to mention the extra management costs working to avert disaster.

Whew, I avoided disaster with my customer and that feels great, but now I have a responsibility to my company to be profitable.  Let’s look at how this project performed:

Project

Budget

Actual
Hours

200

333.33
Revenue  ($30)

$6,000

$6,000
Labor Cost  ($15)

$3,000

$5,000
Gross Profit

$3,000

$1,000

This model demonstrates the actual labor cost due to an unproductive crew.  My company just lost $2,000 of gross profit.  In fact, I gave it to the temporary agency because instead of researching other alternatives, improving my process and or asking folks to be productive, I continued to add unproductive labor costs to the project.

Additionally, the temporary labor industry does not help me  improve my processes; offer fixed per project costs, or guarantee quality and yet the agency gains $2,000 in revenue.  The logical conclusion, painful as it may be, is that the temporary labor industry benefits from providing unproductive labor hours.

I’m thinking there is a better way to manage my variable demand and that now is the time to check into alternatives, especially before my next project is due.

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How Does Productivity Affect Profitability?

October 26, 2011 by 4 Comments

We all know there are several factors that affect profitability.  One of my favorite considerations is productivity.  Increasing productivity levels can dramatically increase profitability.  Typically, profitability is evaluated from a financial statement prospective, and labor is measured as a percentage of sales.  Often, the natural inclination is to decrease labor costs through lay-offs and work force reductions.

However, rather than reducing our work force, productivity provides a platform to increase the output of our current work force and thereby increasing profitability.   A key starting point to uncovering the potential profits hidden within productivity is asking questions such as; “How productive is our work force?” and, “How do our current productivity levels affect our profitability?”

Often, there is difficulty in determining a method to answer these questions due to the complexity of our manufacturing operations, ERP systems and reporting systems.  Simplifying the process with productivity models helps to gain insights on the potential Return On Investment involved with the pursuit of increasing work force productivity.

The productivity model below illustrates the effect of productivity on profits.  The first table explains the basic assumptions behind the model.

Assumptions
Process Time (sec) 250
Product Sales Price $5.63
Project Quantity 10,000
Project Runs Per Month 5
Labor Cost / hour $25.00

Next, this model illustrates the effect of productivity on the profitability of one manufacturing process, produced five times within one reporting period.

Profitability

Productivity

50%

60%

70%

80%

100%
Revenue

 $281,250.00

 $281,250.00

 $281,250.00

 $281,250.00

 $281,250.00
Labor Cost

 $173,611.11

 $144,675.93

 $124,007.94

 $108,506.94

 $86,805.56
Manufacturing
Cost (50%)

 $140,625.00

 $140,625.00

 $140,625.00

 $140,625.00

 $140,625.00
Gross Profit

 $(32,986.11)

 $(4,050.93)

 $16,617.06

 $32,118.06

 $53,819.44

This model demonstrates how powerful productivity is, as a factor in profitability. While developing processes to track productivity outside financial reporting mechanisms, can be cumbersome and complicated, there is opportunity for a substantial ROI on these efforts.  We can begin to reap these additional profits by following this five-step process.

  1. Define processes and sub processes
  2. Perform time studies and line balance
  3. Implement consistent training methods and train supervisors and line employees to the process
  4. Set productivity goals
  5. Monitor output and measure against goals

Practicing these steps is a great place to start unlocking the hidden profitability opportunities within our manufacturing processes!

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Bulk Pack For Huge Savings in Display Fulfillment & Kitting Costs

July 18, 2011 by 5 Comments

Display fulfillment and kitting projects often require products packaged in their primary package, to be placed into an assembled display.  Likewise, kitting projects require packaged products to be combined and placed into a shipper carton.  Both processes require removing product from a container, typically a master carton.

Surprisingly, the quantity of product packed into this container/master carton has a big impact on the cost of fulfillment and kitting projects.  Consider that opening a master carton, removing product and breaking down the carton for recycling takes about 36 seconds.

While at first glance 36 seconds seems inconsequential, this is where the carton quantity has an impact.  Since it takes 36 seconds to open, remove and discard a master carton, these seconds become fixed.  Whether we are removing 3, 12 or 25 parts from a carton, it still takes at least 36 seconds to perform the product removal process.

Working with the assumption that 36 seconds is a fixed process time, the method to determine the product cost is to distribute process time evenly over the carton quantity. For example, if the carton quantity is 3, then divide 36 seconds by 3 parts equaling 12 seconds per product.

Carton Quantity

3

12

25

50
Removal Process Time Per Product (sec)

12

3

1.44

.72

Next, multiply the seconds per product times a fully burdened labor rate.  For example, 12 seconds times a $30/hr equals $.099 per product.  Therefore, the cost for simply removing one part/product from its secondary packaging is about $.10 per part.

Carton Quantity

3

12

25

50
Removal Process Time Per Product (sec)

12

3

1.44

.72
Cost per Product – $30/Hr Labor Rate   ($) $.10 $.025 $.012 $.006

Now, if the a finished display requires 50 parts per display, then the cost per display for simply removing the product from its carton is $5.  This chart below illustrates the impact carton quantities have on display fulfillment costs.

Carton Quantity

3

12

25

50
Removal Process Time Per Product (sec)

12

3

1.44

.72
Cost per Product – $30/Hr Labor Rate   ($)

$.10

$.025

$.012

$.006
Cost per Display – 50 Parts/Display ($)

$5

$1.25

$.60

$.30

To determine the cost per display project, multiply the order quantity 500 times the cost per display.  For example, 500 times $5 equals $2,500. The chart below illustrates the removal cost based on order quantity and the potential saving of bulk packing product for display projects.

Carton Quantity

3

25
Cost per Display – 50 pieces per Display

$5.00

$0.60
Cost per display order – 500

$2,500

$300
Cost Saving For 25 Carton Quantity

$2,200

  

Furthermore, bulk packing products that are going into display projects, reduces the amount of cartons needed, which reduces secondary packaging costs while reducing waste and garbage removal costs.  The chart below demonstrates the opportunity for material and waste reduction.

Carton Quantity

3

25
Product needed to fulfill display 50*500

25,000

25,000
Cartons per pack-out quantity

8,334

1,000
Material Saving For 25 Carton Quantity

7,334

  

Obviously, there are additional steps to a fulfillment process than simply opening, removing and discarding the secondary packaging of a product.  However, a simple change in secondary packaging quantities has the potential for huge labor, and material cost savings.

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Why Not Minimize Labor Expenses and Maximize Sales Revenue Today?

April 13, 2011 by 6 Comments

A great way to minimize labor expenses and maximize sales revenues is to improve our processes.  Strategies such as, Business Process Improvement (BPI) and Total Quality Management (TQM), encourage organizations to change,  to communicate and to involve the whole organization in meeting the business objectives set in strategic planning sessions.

Supporting the strategic goals are the methodologies used to create change and improve processes.  However, even when a direction is set, and balanced scorecards and key performance indicators are established, it can be difficult to know where to start.  What processes need improvement, and where can we get our best return, are questions we might ask.

For those of us acquainted with Lean Principles, the answer might be to use Kaizen, for continual process improvement. Yet, for others it might start with processes that continue to produce poor quality.  Poor quality frequently indicates variability in our processes and where there is variability; often there is excess labor expense. Where this is the situation, perhaps a Six Sigma approach is employed.

Regardless of the strategies, methodologies or process used for improvement efforts, the implications of Return On Investment show how important it is do the work.

For example: If my fully burden labor rate is $30 per hour and I improve a labor process by 20 seconds, and the process produces 20,000 parts per month, I save $3,333.33 per month and $ 40,000.00 per year!

Process Time Saved Monthly Quantity Monthly Labor Expense Savings
20 Seconds 20,000 $3,333.33
Process Time Saved Annual Quantity Annual Labor Expense Savings
20 Seconds 240,000 $40,000

Taking this concept one step further is to consider that the opportunity described in the table above is only one process.  We all operate more than one process in our businesses.  What if we were able to save 20 seconds on 2, 3 and 4 other processes?

Process improvement is an investment and it can be difficult to develop initiatives, communicate, implement and maintain our efforts.  However, the benefits of our efforts surely out weigh the alternative.

We want to hear from you! What has your experience been with process improvements?


Click here to download your free Return On Process Improvement tool to start understanding how small process improvements can produce large savings throughout the life of your product. Get the information needed to start making process improvements today!

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Do Lean Manufacturing Principles Apply to New Product Launches?

February 24, 2011 by Leave a Comment

Yes, yes and yes, lean manufacturing principles do apply to new product launches. In our journey to launch new products, how many times have we faced one or more of the seven wastes identified in Lean Manufacturing such as:

  • Transportation
  • Inventory
  • Motion
  • Waiting
  • Overproduction
  • Over Processing
  • Defects

An obvious waste to discuss in a new product launch situation is overproduction. A typical definition of overproduction is to produce products in excess of customer demand.

Often in a new product launch, orders for the new product are created from an anticipatory perspective with the use of forecasts instead of live customer orders. Using anticipated demand systems and structures increases the opportunity for over production because forecasting demand is frequently ambiguous. We can engage in rigorous research efforts and still have errors in our calculations, add into the equation volitile demand, inflexible manufacturing systems and supply chains, and it becomes clear why overproduction regularly occurs in new product launches.

Interestingly, both the goals of a new product launch and the goals of a lean factory are striking similar. For example, in a new product launch, the desired outcome is to get our products to market as quickly, efficiently and cost effectively as possible. Like wise, the goal of Lean is to reduce cycle times, eliminate waste and reduce total costs.

Incorporating lean strategies in new product launches has many benefits including:

  • Reduced total costs by eliminating over production
  • Accelerated time-to-market by reducing lead times
  • Meeting emerging customer needs by reducing process cycle times

The launch is a crucial stage in the product development process. Applying Lean principles to this stage can create tremendous opportunities to maximize returns on our new product development efforts.

What have your experiences been with lean launch strategies and methods?

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Process Improvement: it is not WHAT we do, it is HOW we do it

February 11, 2011 by Leave a Comment

“A Corporation is a living organism; it has to continue to shed its skin. Methods have to change. Focus has to change. Values have to change. The sum total of those changes is transformation.”
- Andrew Grove, Intel Corporation

You know how it feels, being in the flow: completing tasks, checking items off the list, solving problems, producing our products and engaging in productive behaviors. Activities are moving fast and we believe, in this moment, there is no room and no reason for process improvements.

Except that nagging feeling –the one that emerges with stunning regularity. The inclination, that, completing these tasks again, checking this item off the list again, producing these products in the same tired ways and solving these same old problems again, may be a great waste of effort.

It is in this moment of dissonance, a great opportunity exists: to shift our focus from what we do, to how we do it. This pause, this small opening, gives rise to an occasion to ask bold, new questions:

  • Are the activities we perform adding value to our product? Or, are employees performing unnecessary tasks because of inadequate training, tradition, or inefficient work cell layout?
  • Is our throughput maximized and downtime minimized? Or, do our materials meet bottlenecks in processing that create limits on our ability to fulfill orders?
  • Can we find ways to improve quality so we do not need to spend excess time looking for and fixing defects? Are processes understood and reproducible to minimize the occurrence of defects?
  • Is our supply chain optimized to reduce costs? Is the movement of our product necessary or minimized to create the best cost to value received by the client?

While it may seem impossible to break out from the flow and find the time and courage to ask difficult questions, we need to ask difficult questions to develop competitive business processes and implement the correct changes to transform ourselves, our colleagues, and our businesses into 21st century success stories.

 

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Meeting Critical New Product Launch Dates

November 10, 2010 by Leave a Comment

Bringing a new product to market is a storied journey with many roadblocks along the path from ideation to product launch. As the launch date approaches, more and more resources are invested. Meeting critical launch dates becomes increasingly important in achieving revenue and return on investment objectives.

There are many important factors to consider when planning for critical launch dates. One of those factors includes lead times. Lead times are especially significant when working within complex distribution channels and supply chains.

Lead times are a confusing and difficult issue because the definition of lead time tends to vary from supplier to supplier. The variation in definition stems from whether or not process times and transit times are included within the definition. Within the context of supply chain management, lead time is measured from the point of order initiation to the receipt of the product. However, some suppliers may only include process time.

When planning to achieve critical launch dates it is important to understand important components within lead times including, process time, transit time, receipt time and set up time.

  • Process time is referred to the total time it takes to complete an order.
  • Transit time is the amount of time a product spends traveling from supplier to customer.
  • Receipt time is the amount of time it takes to inspect and enter the product into inventory.
  • Set up time is the amount of time needed to prepare the product for the next process.

Incorporating these elements into the planning process helps us to ask better questions regarding timing, and deepens our understanding of how to enhance planning strategies for product launches.

Lead times play a critical role in meeting launch dates. Understanding the intricacies and interdependencies of each component encompassed within lead times is helpful in bringing products to market in a timely fashion, and meeting ROI objectives.

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Great Product Packaging

August 27, 2010 by Leave a Comment

We know it when we see it.  It triggers a curious feeling, an impulse to pick it up, to touch it, and to bring it home with us.  No, it is not a puppy!  It is a great product -packaged with great care – in great packaging materials.  Often, in the buyer’s eyes, the package the product is in, is synonymous with the product. People associate the quality of the product and the experience using the product with the packaging (marketing) the product is in. With packaging playing such an important factor in a product’s image and ultimately sales, here are five elements of packaging that helps to create a connection with the buyer.

Materials
Material choice is an important factor in package quality. Material quality ought to reflect the value of the product being sold.  Material choice may include the gauge of shrink wrap; paper weight of a retail box, the mil thickness of a poly bag  or the flute size best suited for graphics reproduction and stacking strength.  Materials selected needs to endure the distribution channel and the retail environment while accurately reflecting brand attributes.

Product Protection Systems
Packaging needs to protect the product from elements within its manufacturing environment and distribution channel.  A product that is well protected may have many layers in its packaging system, such as a primary package that is sealed, a secondary package to reduce movement and a tertiary package.  A retail package’s tertiary packaging may be the retail box placed on the shelf for purchase. An OEM package’s tertiary packaging may be the distribution box that is stored at the distribution location.  Finally, how the product is unitized, its pallet pattern and pallet protection all contribute to how well the product is protected.

For More Information

Check out this video to learn more
about how to prevent product damage within the supply chain.

Click Here to learn more about how
ASAP can help you with your
damaged product issues.

Processes
Packaging processes need to be complimentary to the product’s manufacturing processes, sequenced correctly and given as much attention as the creation of the product itself.  Packaging processes requiring employees to double and triple handle product are inefficient.  Inefficient process can lead to quality problems, such as missing components.

Ease of use
Ease of use factors for the end user include the ease of opening the package, the layout of the product and its accessories and handling for distributors.

Branding
From a brand prospective, packaging needs to communicate both emotional and rational information about the product.  Colors, font choice, images and logo placement on the package creates an emotional response to the product. Text and other content inform the user of product features and benefits.

As consumers, buyers and end users, we have difficulty differentiating the product from its package.  We tend to believe the image communicated in the packaging is the product we are buying.  With this knowledge, It is important to develop great packaging to promote and protect our great products, make connections with our target market, increase sales and help consumers feel good about their purchase decisions.


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