Eliminating waste, or muda, from processes is a core concept of lean. Most of us know the seven types of waste (see below), yet the trick is “learning to see” these wastes that often are ubiquitous parts of our operations. Below is a list of common symptoms for each waste. If you see the symptom, you may have an opportunity to eliminate the underlying waste.

• Defects - Plant “hospitals”, rework loops, customer returns and complaints, cost overruns for raw materials or labor, 100% inspection (in plant or at the customer).

• Overproduction - Often called the “mother of all muda” since it can cause or increase the incidence of the other six wastes. Look for excess inventory, AS/RS systems, large batch size, inability to meet customer demand, long or complex setups, low awareness of takt time (customer demand rate), poor quality, inflexibility, disjointed operations within a process.

• Transportation - Fork lifts, carts, AR/RS systems, AGV systems, consumption of envelopes, boxes, shipping labels, long lead times, aisles, conveyors.

• Waiting - Bins, queuing areas, waiting areas, chairs, in/out boxes, large batch sizes, long lead times, pallets, boxes, envelopes, stuff in the aisles.

• Inventory - Look for reasons that people would build inventory as a quick fix to a problem: parts shortages, mura, defects, long lead times, labor standards, idle time, lack of clear build signal.

• Motion - Safety issues like repetitive strain injuries, falls, long or inconsistent cycle times, misplaced tools, cranes, lifts and other material handling equipment

• Overprocessing - Conformance issues with tolerances, fit, finish. Long cycle times, worker performance issues, scrap rates, standard material specifications

This is a recounting of a conversation I had with a plant manager about the financial impact of missing shipment of his product for that month (which since it was December, was also be a miss for the fiscal year). The lesson is an old one: be sure to do a marginal (incremental) analysis when assessing the impact of a change in revenue, cost, or profit, and be aware of how you handle allocated fixed costs.

Me: So you may miss shipment for 5 units this month? How will that impact the company financially?

Plant Manager: Well, cost accounting shows that the profit for this product is $50,000, so this may be a $250,000 hit to the company.

Me: I’m afraid the impact will be larger than that. $50,000 is the average profit per unit (writing on my tablet):

Profit = Revenue – Variable Costs – Allocated Fixed Costs

But, what’s the financial impact if you don’t ship a unit?

∆Profit = ∆Revenue - ∆VC - ∆FC

∆FC = 0 (these are fixed costs, and don’t vary with volume), so

∆Profit = ∆Revenue - ∆VC

So the impact to profit of not shipping a product is its incremental revenue less its incremental variable cost. You said that revenue per unit is $1,300,000 and its variable cost is $1,070,000, so the impact to profit of missing shipment will be $230,000 per unit.

PM: That’s over $1 million in lost profit for 5 units!

Me: Sorry to be the bearer of bad news, but remember that ∆Revenue - ∆VC is sometimes called “profit contribution” which is a significantly larger number than the “profit” that cost accounting attributes to a product.

And the impact to cash flow (what really gets some companies in a bind) may be even greater. For example, what if much of the raw materials for this product are already purchased and sitting in inventory?

The impact to Cash Flow (∆CF) would be:

∆CF = ∆Revenue - ∆VC + (inventory already purchased for that item)

PM: I get the idea, but I’m not even going to calculate that number. But I do have a heightened sense of the financial impact of not being able to ship a customer order.

Henry Ford embarrassed himself later in life and left his company with a dark legacy surrounding his public and published anti-Semitism. He’s certainly no role model, but his genius for manufacturing is legendary, and he is easy, even fun, to read when he focuses on business. He had a gift for envisioning simple solutions to unsolved engineering and business issues.

As an example, here are excerpts from Ford’s My Life and Work (available from Amazon and B&N) that I categorized by current topics that challenge us still today:

Continuous improvement

Hardly a week passes without some improvement being made somewhere in machine or process…The factory keeps no record of experiments. The foremen and the superintendents remember what has been done.

Not a single operation is ever considered as being done in the best or cheapest way.

Try new processes

The saving on one style of bolt alone amounted to half a million dollars a year.

Engaging Everyone in Continuous Improvement

We get some of our best results from letting fools rush in where angels fear to tread.

None of our men are “experts.” The moment one gets into the “expert” state of mind a great number of things become impossible.

Target costing

We have never considered any costs as fixed. Our policy is to reduce the price, extend the operations, and improve the article. You will notice that the reduction of price comes first.

Driven by our strong economy, many of our manufacturing clients have plans to increase production capacity. I sometimes share with them this strategy that Richard Schonberger describes in World Class Manufacturing:

Increase capacity in increments. If your sales forecast calls for increasing capacity by 100 widgets, start by adding a line that can handle 25. Then add separate lines as needed to handle growth.

This approach:

• Lowers the risk of hiring too many people and over investing in capital equipment if the sales forecast is wrong.
• Creates several parallel lines instead of one line. This improves flexibility, reduces the impact of a line going down, and simplifies new product introductions.

Our client continues describing how staying close to operations helped with their problem solving (see part 1 and part 2):