My columns have traditionally discussed the choices that EPIC has made in its Lean manufacturing strategy implementation. What hasn’t been covered is the basic groundwork analysis every company should go through when considering whether Lean is a good fit.
Lean manufacturing always involves tradeoffs. Therefore, management teams beginning a Lean implementation truly need to understand what they want it to help them achieve. The focus should always be on the financial aspects of Lean manufacturing and continuous improvement. And, most important, on evaluating the right financial metrics.
For example, one of the biggest myths associated with Lean is the assumption that a successful implementation requires a reduction in labor overhead. Excess resources will become apparent during progression; however, personnel reduction is not the proper place to begin a Lean initiative. This just isn’t financially or operationally necessary in all instances, and really sets a negative precedent. Employee buy-in and commitment to change will suffer as a result. The reality is that in most cases, the key focus should be on more efficiently using resources. In the case of employees, that may be through cross-training and tactical redeployment in production operations based on demand trends.
Questions to ask include:
What current constraints am I trying to eliminate?
What costs are driving this decision?
What is my company’s business model?
What is the typical production lot size?
What’s typical processing cycle time per
What’s the typical BoM cost for a unit?
How quickly does production convert to cash (meaning, is there a finished goods kanban or ship to customer output)?
How quickly are customers typically paying
Answering these questions helps establish the correct goals for a robust Lean strategy. For example, reduced lot size strategy is more of an inventory turn improvement than a process efficiency improvement. It’s typically better from a process efficiency and quality standpoint to run larger size lots, to minimize changeover activity, but you do get reductions in custom part inventory turns by reducing lot sizes.
I would recommend reduced lot sizes for an organization only if it makes financial sense. There should be no other reason to do so. The downside of smaller lot sizes can be increased variability in the process and increased workload in terms of process changeover activities. Ultimately, these variables could hurt quality or customer satisfaction. To implement a reduced lot size system, these variables must become constants in your process, which becomes a resource investment, so the paybacks must be present and readily displayed.
EPIC’s reasons for adopting Lean went far beyond operational improvement or even a desire to improve inventory turns. The key driver for implementation occurred years ago when we had a single facility. The factory was out of available floor space and production increases were driving the need to consider facility expansion. The combination of WIP reduction and a more efficient factory layout resulted in a reduction in floor space, requirement of about 30%. However, had floor space and a growth strategy not been an issue, the payback on Lean implementation could have been much longer.
Before beginning any Lean strategy, I highly recommend the engineering management team involved seek a basic financial management book, with good sections on return on investment analysis, payback strategy, net present value (NPV) calculation and analyzing the time value of money. These are not easy reads, as most are in textbook format, but I’ve found that the most successful Lean implementation strategies have a strong financial backing.
My next column will build on this topic by focusing on the Cost of Quality and the hidden costs that a good Lean manufacturing can eliminate in more detail.
Ryan Wooten is engineering manager at EPIC Technologies (epictech.com); firstname.lastname@example.org.