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.

Filed under Uncategorized Tagged with , , , , , , , , , ,

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.

Filed under Uncategorized Tagged with , , , , , , , , ,

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!

Filed under Uncategorized Tagged with , , , ,

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.

 

Filed under Uncategorized Tagged with , , , , , ,

Damaged Product? Modifying Your Pallet Pattern May Be The Solution

January 28, 2011 by 5 Comments

We all have experienced frustrating situations where our product has been damaged while traversing the supply chain. Often our first instinct is to look at the package design for a solution.  While that may help, the solution may lie in simply reconfiguring your pallet pattern.

We have produced a new video that explores how pallet patterns can be modified to eliminate product damage.

To view in a higher resolution, Click Here to watch on YouTube.

Filed under Uncategorized Tagged with , , , , , , , , , , , ,

Translating Hourly Labor into Product Costs For Process Improvements

January 13, 2011 by Leave a Comment

There are a variety of costing systems and methods. Some of which include: standard costing, activity-based costing (ABC), theory of constraints and target cost management. With so many differing approaches, and disagreements regarding how methods should be applied, it is easy to understand how product costing is reprioritized, finding its way to the bottom of our task list.

However, with increasing competitive pressures, product costing is vital to our long-term success. With product costing playing such an important role in the health of our organizations, it is necessary to find techniques for costing that help us understand and make improvements to our processes and cost structures.

Creating simplistic spreadsheets is an easy method for developing basic product costing systems, enabling us to isolate and evaluate costing variables. Perhaps the most difficult and most important variable to incorporate into product costing is hourly labor costs.

There are several contributing factors leading to difficulties in translating hourly labor costs into a product costing format. First, we pay direct labor on an hourly basis; therefore, a typical labor cost is expressed as an hourly cost, not as a per unit cost. Next, it is necessary to track the actual time a laborer works on specific products. This can be difficult, as changing manufacturing schedules require workers to move from one task to another. Finally, product output needs to be measured and matched with the labor hours and hourly labor costs contributed to making the product.

Fortunately, once data collection points are established, entering data into a spreadsheet is the easy part of the process. The exciting part is watching these data sets become real information for process improvements, leading to reduced labor costs.

Click here to download your free basic product costing tool to start understanding your hourly labor costs in relationship to specific products/processes.  Get the information needed to start making incremental process improvements today!

Filed under Uncategorized Tagged with , , , , , , ,

Create A Conduit For Cost Savings Within The Supply Chain

December 16, 2010 by Leave a Comment

Information sharing within the supply chain is a great strategy for cost savings. Often, organizations working with one another have redundant systems creating double entries of the same information, duplicate paper work and double handling of the product.

The reproduction of tasks costs both entities money, increasing costs to produce a product. Additionally, the opportunity for errors amplifies at each step in a process where duplication is present.

Information sharing can be as simple as referencing order information, such as purchase order numbers, in the subject line of an email or referencing design specifications by including drawings and or specification numbers, in proposals and estimates. Sharing and referencing information helps reduce the amount of administrative time taken to locate and refresh memories regarding the details of a project or product.

While these simple steps may make our jobs easier, the real opportunity for cost savings is in integrating information technology systems. Allowing business partners within the supply chain, to complete work directly within Enterprise Resource Planning (ERP) systems has many advantages.

One set of advantages is in the quality of the information. Work performed directly in ERP systems has the following benefits:

  • Relevant information is delivered to the appropriate people. Layers of people within an organization are accessing information contained within an ERP; each with particular tasks or decisions to make based on information obtained from the system. Often it is difficult to understand who needs which components of various information. Less time is consumed figuring out who needs what and ensures relevant information is shared with appropriate departments and personnel.
  • Timely work directly performed in an ERP means that real-time information is in the system. Time sensitive information necessary for processing proper accounting functions is available. Timely information also reduces wait time for professionals to keep projects moving forward and focus on their primary work load functions.
  • Accuracy increases as dual data entry points decrease, by limiting the number of times the same information is entered.

Integrating information systems with business partners increases the quality and efficiency of information, leading to cost savings by reducing additional steps in business processes.

 

Filed under Uncategorized Tagged with , , , ,

Avoid The Returns Bin, Package Your Product On Purpose

June 30, 2010 by Leave a Comment

“Don’t judge a book by its cover, but you’re clients are judging your product by its package.”

You know how it is, you are at the store, ready to make a purchase, but the package looks beat up, torn apart and wrinkled. The instant assumption is that the product inside is cheap or poor quality.  As consumers we make these assumptions all day long!  Whether we are buying cereal, electronics or a vehicle, the  appearance of the package dictates our choices.

When making purchasing decisions, we buy on both rational and emotional factors.  Rationally, we believe the functional attributes of the product will meet our expectations.  However, if the outer package does not appeal to our emotional needs of safety and trust, we simply move to the next available alternative.  Even if it is a generic substitute.

The consequences of these subconscious assumptions about the quality of the product has a real impact on brand loyalty and sales.  Often the products whose packaging is damaged or just doesn’t look and feel right, is placed directly into the discount bin or even worse, returned directly to the distributor and manufacturer.

To avoid the discount bin, three critical components to consider in your packaging system include: design, material and process.

Design
A package design needs to address both the rational and emotional needs of the end user, while supporting the attributes of the product.  The package structure speaks to the rational and the graphics, images and colors address the emotional aspect.


Materials
Choices of materials need to support the design structure, branding appeal and price.

Process
The packaging process created needs to consider the how material and product are assembled to create a package that is aligned with both functional product needs and appeals to the buyer’s emotional needs.  Additionally, the process need to be articulated with written work instructions, estimated time at each step and organized in the most efficient sequence.

The packaging system is a system, which means that each component affects the other.  It is possible to have the best design, use the best materials, but if the process is flawed it can destroy the efforts of the whole system resulting in costly returns.

A packaging system that accounts for each component of the system and incorporates both the rational and emotional needs of the end-user creates an intentional, purposeful package and the pay-off is brand loyalty.

ASAP is excited to roll out our new Process Improvement Consultation offer. Click here to learn more.

Filed under Uncategorized Tagged with , , , ,

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. . .

——
Click here for a Case Study.

Click here for a Free Process Improvement Assessment.

Filed under Uncategorized Tagged with , , , , , ,

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.

 

Filed under Uncategorized Tagged with , , , , , ,

Follow

Get every new post delivered to your Inbox.