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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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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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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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!

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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.

 

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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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