Cost Reduction or Productivity Increase

Different sides of the same coin or two separate activities? Pretty much the same to me, some may call it one thing, some another.

Classically, productivity is defined as Output divided by Input.

-or- A second definition is, productivity is the same as profit, selling price minus all costs

-or- Toyota sees Profit = (Price – Cost) x Volume, assuming that the manufacturer cannot dictate the sales price.

Different mathematics, similar theory:
To improve productivity or gain profit, raise output and / or lower input.

Now that we have the theory out of the way, these actions will stress inexpensive and quick ways to raise output and / or lower input in your organization, whatever your line of business.

1. Generally
it is wise to act to raise profits or output, to ease bottlenecks, to refine operations that have lost their sharp focus over time or start effective new ones. Operations are most profitable when they have the least waste, and that is the heart of the Toyota Production System.
In November 2009 the Bureau of Labor Statistics announced that US non-farm productivity surged at a 9.5 percent annual rate. So, many companies are successfully taking the steps to adapt. While the BLS calculation is based on man hours, in actual practice productivity, output divided by input, includes all costs and output.
A. Raise Output
Maximize capacity and equipment capability, manage constraints
Match throughput to customer demand
Cut cycle times for quick response to market conditions

B. Lower input, not only direct but administrative and indirect
Minimize facility capital and operating costs
Optimize manufacturing and processes
Simplify logistics, shipping, warehousing
Define the process for high quality production
Establish standard costs and measure against them
Adapt inventory to continuous manufacturing practices
Match overhead to throughput
Balance inventory levels to output
Get the most out of material purchases

2. What first?
Apply the Pareto Principle

Vilfredo Pareto, a 19th century, Neo-Classical economist mathematically described the unequal distribution of wealth that he observed in the world around him. His observation, known as Pareto’s principle, has been profitably extended into other fields of inquiry: in business Pareto’s principle tells us that a few of the inventory items will constitute most of the value; a few processes will give most of the trouble; a few line items will generate most of the cost; a few constraints will control the entire pace of operations; a few misdirected efforts will create the most issues.

Expressed most simply, productivity focuses on those few items that influence the largest result. You may know Pareto as the 80/20 rule, or ABC.
Show me the money.

3. Specific ideas.

A. Management practice
1. Product pruning
A thousand years ago when I was with ITT in the Harold Geneen days, there was a practice called product pruning. Each company was required to decide annually which if any products should be eliminated, based on cost versus income. That is not as simple as it sounds because it requires an accurate knowledge of real costs and net sales prices. Many times since then I have seen individual products crying out for pruning but still in the catalogue.

2. Overhead allocation method, absorption
Is your overhead allocation and absorption correct? If not you can’t make a sound decision about product pruning, or product profitability, or equipment justification, or department profitability. It takes some work to sort out costs and apply them correctly, but if not you will have information that is meaningless at best, and harmful at worst. Correct decisions can only be supported by correct information.

3. Lean manufacturing, a common term for the Toyota Production System, is well applied only when it is corporation wide, encompassing admin and executives as well as the production floor. What is your manufacturing cost? If you cut that by a quarter, how much do you save? Compare that to an significant improvement in the rest of the budget. Go back and look at Pareto again.

4. Just In Time inventory control principles and MRP are mutually exclusive. You can’t enjoy the benefits of both at the same time.

5. Economic Order Quantity is a proven benefit to operations cost. An excellent article by Dave Piasecki about it’s uses and misuse within modern inventory control systems is at http://www.inventoryops.com/economic_order_quantity.htm.


B. Operations
1. Constraints management is perhaps the most important tool to use on the shop floor, and it usually is pretty inexpensive to correct problems quickly. Identify production constraints, manage them, and staff all other tasks according to the constrained output level. Then in order, raise the constraints. Please see my article on the subject.

2. Check the company’s basic outlook for production. Is equipment dedicated to one product or flexible to process many products? Does your present arrangement match you present product mix and objectives?

3. My experience tells me that the work pace of people is pretty good while equipment is running and material available. The loss of productivity comes at changeover, down time, and when material is not available. Pay special attention to changeovers; question carefully why they occur in the first place, then study changes and speed them up.

4. Is your materials management policy to start a product down the line even if not all components are on hand? You can prove it to yourself that is wrong, or you can take my word for it. It is costing you money, in changeovers, idle delay, bigger inventory, rework.



Thanks for the time, I hope the article was useful. JPR welcomes the opportunity to discuss your particular application.

Jack Greene, Jackson Productivity Research Inc.

What's Next?

You have searched the web to understand how the principals of productivity and cost reduction can benefit your organization, but maybe don't know quite how to proceed. I'll be glad to share what I know about the subject, and will welcome your call or email. Tell me as much as you'd like, confidentially, about your organization's situation and objectives, timetable and budget, and I'll describe some practical actions to accomplish your scope. You will have a better understanding of the options.

 

There's no cost or obligation to contact Jack Greene at 626-375-2468  
jack@jacksonproductivity.com