45 Seconds = $25,000 in Savings

May 1, 2012 by Leave a comment

Really? 45 seconds.  I can’t even brush my teeth in 45 seconds, boil an egg or sing the ABC’s.  But I can save $25,000 – how?

We all know time is equal to money.  Workforces are paid based on the amount of time spent working, and therefore a monetary value is placed on time.  A strategy then to save money in this difficult economy, is to save time and that is exactly what process improvement does – saves time and consequently, saves money.

The depth of savings is of course, dependent on how time is valued.  In the model below, we illustrate how saving 45 seconds in process time equates to saving money.

Seconds Saved

Fully Burdened Labor Rate

Project Run 5 times/year

45

$20

$2,500.00

$12,500.00

45

$25

$3,125.00

$15,625.00

45

$30

$3,750.00

$18,750.00

45

$35

$4,375.00

$21,875.00

45

$40

$5,000.00

$25,000.00

The beautiful thing about making process improvements is that the savings are not a one-time event, but rather an ongoing return on investment earned each time the process repeats.

For More Information

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about how small process modifications can make large improvements to profitability.

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ASAP can help you increase your process efficiencies.

Imagine the opportunities – what would happen if I could save 45 seconds on, 2, 3 ,4 different processes?  How could this affect my capacity to grow my client base?  How could this affect my ability to invest in new products? How could this affect my ability earn that promotion? How does this affect whatever it is, that is important to me?

45 seconds. It’s less than the time it takes to brush my teeth!

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Performance Problem Solving 101: Moving Beyond The Pointy Finger

March 27, 2012 by 1 Comment

Performance evaluation can be a messy topic. Often it is difficult to understand why performance output does not match expectations.  Part of the complexity is separating out personality conflicts and learning to focus on the situation.  However, focusing on the situation requires us to unravel or peel back the layers to uncover the inputs to performance.  Three important inputs include:

  • Process – the work instructions to perform functions
  • Tools – the equipment, machinery, jigs, computers, etc used to enhance performance
  • People – those who perform processes/functions

Taking time to focus on each of these inputs provides insight into how they effect performance and measures the degree to which each is aligned and leveraged for optimal performance.

The next step is how to evaluate each input.  A great way to begin an evaluation process is to gain an understanding of the current state by asking questions about each input.  Beginning with process, process questions might sound like this:

  • Is the process written
  • Does the process support the desired outcome
  • Are there redundancies
  • What quality level is the process capable of producing
  • Are tasks combined to reduce motion and waste
  • What are the cycle times

Once the process is defined and validated for quality and productivity performance goals, we can evaluate the tools.  Tool evaluation questions might sound like:

  • Do the existing tools support quality goals – what tools could be incorporated
  • Do the tools proper enhance productivity and decrease cycle times
  • Are the tools easily accessible
  • Are the tools well cared for and maintained
  • Do the tools allow for self correcting behaviors

Now that the process and tools questions are resolved, we can move to an evaluation of the people engaged in the process.  People questions might sound like:

  • What physical skills are necessary
  • What intellectual/emotional skills are necessary
  • What problem solving skills are necessary
  • What leadership attributes are needed
  • What training is necessary

After exploring,  problem solving each component can begin.  Knowing how to measure each input helps to untangle and align each for the best possible outcome – And it could lead to a happier work force too!

What have been your challenges in performance evaluation?

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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 5 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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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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Core Competencies and Productivity: Are They Related?

May 27, 2010 by Leave a comment

When someone asks, “what are your business’ core competencies?”, what is your typical answer? This question of core competencies seems intangible and esoteric, making it difficult to find a good answer. Often the key to unlocking core competencies is to gain an understanding of your organization’s strengths.

When considering points of strengths, productivity is one measure to uncover which business processes we perform efficiently. Productivity is a measure of how efficiently we perform business processes. Efficient business processes and systems are organizational strengths.

Recognizing efficient systems and processes gives us a baseline to evaluate strengths. Understanding strengths helps bring core competencies to a tangible level because strengths are identified as concrete process outputs.

When process measurements, such as productivity, are in place, confidence increases in understanding what organizations are good at producing. With an increased confidence level, determining core competencies seems less overwhelming and more tangible to actual products and services.

Business process efficiency is not the only factor to consider when identifying a core competency. However, establishing process measurements and evaluating which systems and processes are efficient, is a good first start in understanding points of strength. After determining an internal diagnostic, our attention can be turned to the external environments of market place, end users and competitors to complete the process of determining core competencies.

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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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