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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Reducing Variations In Assembly And Packaging Processes – A 3-Step Guide

January 9, 2012 by 4 Comments

Assembly and packaging processes, sometimes referred to as secondary processes, can be difficult to define, measure, analyze and control. Labor-intensive, secondary processes performed by us humans seem to present the most challenges. The unpredictable nature of human performance can be overwhelming, making it seem impossible to feel confident about the accuracy and consistency of our processing methods.

Uncertainty feels risky and is frustrating to deal with. Blaming the people performing the process seems like an appropriate behavior, however, I have found it is more productive to take a curious approach and understand what drives this unpredictability.

So the then the question becomes how. What course of action can be taken to understand what causes variation and unpredictable outcomes? Broadly speaking, we need to look at the system inputs, such as, process, people and tools. The first input to become curious about is the process. Some questions to consider include:

  • Is the process defined?
  • Are process tasks defined?
  • Are tasks and sub-process measurable in terms of quality and quantity?

Once the process is defined and measurable, move to a review of the tools needed to perform the tasks and sub-processes. Some questions to consider about tools include:

  • Are the tools widely available
  • What training is available for tool use
  • How are tools calibrated and maintained to ensure consistent performance.

Finally, we can review what specific skill sets are needed to use the tools and perform processes. Some questions to ask about skill sets include:

  • What types of motor skills are needed, fine, gross or a combination of both?
  • Are hand strength and dexterity needed?
  • Are detailed math skills needed for measuring and counting?

After negotiating this adventure in curiosity, we can start inserting humans into a well designed, measurable process where variations can be analyzed and controlled.

While this 3-step guide may seem time consuming, the benefit of doing this work is an ability to create fantastic training programs to further our goal to offer great products to our customers.

Speaking of great training programs, check out this sample video, highlighting ASAP’s performance training video production capabilities.  We have also included the corresponding Shrink Wrap Quality Training Test.

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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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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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5 Step Process To Removing Complexities In Manufacturing Processes

April 27, 2011 by 4 Comments

A good place to begin removing complexities in our manufacturing operations is in our secondary processes.  Often there is a clear delineation between a primary manufacturing process and a secondary process.  For example, an organization that produces plastic widgets may identify its primary manufacturing process as injection molding, the conversion of plastic into a widget.  Processes such as separating, assembly, packaging and finishing are considered its secondary processes.

Since primary or core processes tend to be the processes best understood within our organizations, it seems logical that gaining a better understanding of what is happening after core processing, creates an opportunity to reduce complexity.

When it comes to removing complexities, there are no quick fixes.  The concept behind this 5-step process is to gain a better understanding of how we currently produce our products.  Working through this process, we find a natural inclination to simplify.

    1. Create “as is” process maps – Document the whole route the product travels from it’s core/primary process to the next, or secondary processes, following the product through to its finished, shippable state.
    2. Define processes – Document processing specifications at each secondary process defined in the process map.
    3. Measure cycle times – Measure each process to understand process time requirements for each process articulated in the process map.
    4. Evaluate Sequencing – Evaluate each process and determine its fit within the larger system based on cycle time, finishing order and value creation.
    5. Simplify – Remove non-value added processes by reducing extra processing steps, product travel times and redundancies.

It can be difficult to peel back the many processing layers involved in our manufacturing operations.  However, once the manufacturing journey our products travel are stripped down to minimum processing requirements, we can begin to rebuild our processes with a new clarity.  This new clarity provides a shift in perspective, creating an opportunity for an intentional, re-focused effort to align our manufacturing processes with strategic business objectives.

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Packaging & Product Developement, Earlier Is Better

July 8, 2010 by Leave a Comment

“Waiting for the launch stage to consider packaging is too late”

Your package is the client’s/end user’s first concrete interaction with your product. It is the moment where the cumulative messaging and marketing efforts are judged. It is the first opportunity to create trust.  Is the package in alignment with your prior messaging; does it communicate the virtues extolled in the advertising campaign?

With such an opportunity to earn trust and create a connection with the end user, it makes sense to think about packaging early in the product development process.  While this consideration may not be necessary in the ideation or scoping stages, there is room for package design and development in the business case and development stages.

According to Robert G. Cooper’s book Winning At New Products, the summary of activities within business case stage are:

  • User needs and wants study
  • Competitive analysis
  • Market analysis
  • Detailed technical assessment
  • Concept testing
  • Financial/business analysis
  • Plans of action

Package development, design and process definition has implications in concept testing and financial/business analysis activities taking place within the business case analysis.

Understanding how the package will look and feel and how the end user will interact with the package enables a more robust concept testing opportunity with end users.  The package design is demonstrated as a complete product prototype.

Once the package design is known, the packaging process is developed.  The packaging process has an effect on the financial/business analysis activity.  For example, if the package requires ultrasonic sealing or blister pack, the organization needs to conduct research to understand whether or not the process fits within core competencies and the investment costs of packaging equipment.  This information, along with the processing costs, is incorporated into the business analysis for a more accurate manufacturing cost model.

Integrating packaging strategies earlier in the product development process has advantages from both branding/marketing and cost perspectives, allowing you to build a more accurate business case for your product.

 

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Productivity: 99 Years of Scientific Management – Every Second Counts

June 16, 2010 by Leave a Comment

Where to Begin?

Productivity – In macroeconomics productivity is measured by our nation’s Gross Domestic Product, and in microeconomics, productivity is measured by the output of production.  Calculating marginal cost and marginal revenue in an effort to maximize profits is probably the last thing on your mind when you walk into your production environment. Most likely workforce productivity, the amount of goods produced in a given amount of time, is near the top of your priorities. So we ask where to begin?

Stopwatches have been in use in manufacturing since Fredrick Taylor introduced his concept of scientific management.  Yet since that time, stopwatches have been the catalyst for labor disputes and management theory debates. Over the past century, names in the ranks of Deming and Ducker and movements from TQM and Six Sigma, owe their roots to the concept of scientifically managing manufacturing processes.  So on the eve of the centennial anniversary of Taylor’s publication, The Principles of Scientific Management (1911), we pay tribute to his thought leadership and explore how every second counts.

A Recap of Taylor’s 4 Principles

Here is a quick recap (with a new century’s bend) on Taylor’s four duties of scientific management, found in chapter 2 (pages 36, 37) of his publication.

  1. Develop a science for each element of work, which replaces the old rule-of-thumb method (heuristic).
  2. Select, train, and develop each person based on scientific study rather than leaving each person to train themselves.
  3. Collaborate with workers to scientifically develop work methods and to ensure the work being done follows the scientifically developed methods.
  4. Likewise, divide work most equally between managers and workers, so that managers plan work using scientific principles for the work they perform and the work planned for the workers.

In a previous blog, we discussed how to define and measure productivity in a three step process.  The next step is understanding how every second leads through to the income statement.  Just like you, we think time is money.

Productivity & Income Statements

For business owners, managers, and executives everywhere, the Income Statement or Profit and Loss Statement (P&L) is where the productivity of manufacturing processes are realized. Of course, controlling overhead is part of the overall picture, and the principles of the stopwatch can be applied to these necessary functions too.

Let’s get into the thick of it.  For our example, we’ll use a manufacturing process to make widget Z.  After defining the process and working with a workgroup to find the most efficient processing methods, data shows that it takes 6 minutes (360 seconds) to manufacture widget Z.  To simplify things we won’t factor in break times etc.

If we don’t use Taylor’s second rule when demand increases, and we don’t select, train and develop a person based on the scientific study, our second person, Worker B, produces widget Z in 6 minutes and 20 seconds (380 seconds).  That’s a 5.6% increase in time, meaning that person would produce approximately  ½ a part less an hour, 1.1 whole part less every 2 hours, 4.2 parts less over an entire day, and 1094.7 parts less in an entire year. (If you are running the numbers with us, those decimal points really added up in the long-run.)

Using this data, let’s compare the annual revenue generated by Worker A who is 100% productive based on our scientific method and Worker B who is 95% productive based on our scientific method. Let’s assume the market rate of $40 for widget Z.

Worker A Worker B
Annual Production $20,800 $19,705
Annual Revenue $832,000 $788,211

The difference in revenue produced by Worker B, from Worker A, is $43,789. Throughout this example the economic principle cēterīs paribus, Latin for all other things being equal or held constant, is employed.  We will set the wage of Worker A and Worker B at $25/hr., and just for fun (but it isn’t necessary) let’s assume there is $20 of materials in every unit produced.

Annual Wage $52,000 $52,000
Cost of Materials $416,000 $394,105
Cost of Goods Sold $468,000 $446,105
Gross Profit $364,000 $342,105

At the end of the year Worker A passes along $21,894 more to the bottom line than Worker B. Those 20 extra seconds add up to real dollars; even 5 extra seconds of processing time would add up to be a loss of opportunity equaling $5,698 annually.  This makes us wonder – what if scientific management wasn’t used in the first place. . .

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Good Enough? How Productive Is Your Organization?

April 22, 2010 by 1 Comment

In the next few blog posts, I will explore the impact productivity has on the many facets of an organization. Productivity impacts the release of new products and new product development, strategic planning, pricing strategies, operations and administrative functions.

Businesses, at their core, deliver services and products through complex systems and processes; each of these deliverables takes time to produce. Productivity is the measure of the efficiency of how the output is produced.

Creating a productivity measurement is a three-step process:
1. Process Definition
2. Standardization Study
3. Performance Study

Process definition requires the understanding of why the process exists, who performs the process, the process inputs and outputs, process sequencing, and the delineation of where a process starts and ends. Once these factors are known and documented, the process is measured in terms of time.

Through measuring defined processes in terms of time, we can create processing time trials. During processing time trials, the process is measured from start to finish by taking several samples. In turn, this data is calculated into a baseline of average processing time also known as a standard.

Once a standard processing time is known, we measure real world processing outputs and compare them to the standard processing time, thereby creating productivity measurements. For example, if the standard processing time to create an invoice is 2 minutes and then we measure output over a 1-hour period resulting in 25 units produced, the output productivity over the sample hour is a productivity rate of 83%.

It is important to note that the initial process definition & standardization captures variables that replicate the production environment.

The process of creating productivity measurements is a powerful business tool. Defining all business processes creates a better understanding of how a business performs. Process analysis enables process improvement efforts and tells us how efficiently we are performing specific processes.

Armed with this information, we can begin to answer questions such as:

  • What are our organizations points of strength?
  • How long will it take to build this new product and is this process time accounted for in the business case analysis?
  • How does our processing efficiency affect the Profit & Loss Statement?
  • How much does it cost to process an invoice?Where are the constraints in my manufacturing processes and how much do these constraints cost?

The ability to find the answers these multi-disciplined questions is essential to staying competitive in today’s business environment.

Stay tuned for my next blog articles where I explore how productivity measurements are used as a guide in answering these important questions.

 

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