Process Improvement Consulting Analysis and Summary, ZZZ Co.
Summary of information gathered:
ZZZ is an extrusion facility that sells between 22 million and 30 million pounds a year of extruded type 6 nylon and Polyester. Nylon RM costs are $1.00/# for chip and $3.00/# (Avg) for color. Polyester Chip is $0.75/# and polyester color is $2.50/l#. The operation runs 24/7 on 4 shifts 50 weeks/year. DL is 8 operators/shift. IL is 2 MH, 1 packer, 2 maintenance, and 1 supervisor/shift. Utilities cost $1.2M/year. Maintenance and parts costs $750,000/year. Waste is 7.5% of finished goods per year.
Operators are assigned by machine. Production is run by color batches. (5,000 – 100,000 pounds). Internal inventory is 200,000 of finished goods. Manufacturing SQ FT is 50,000. Warehousing SQ FT is 78,000. Compounding SQ FT is 22,500. Salaried OH is $600K/year.
Sales are $2.00 pound. Net profit margin is 12% (estimated)
Based on the data gathered and research perform PCI recommends a short term project on RM waste. World Class standard on extrusion waste is 6% which yields an entitlement savings of $610,000 to $830,000 a year is waste is reduced to the world class standard.
Short term / Immediate project opportunities:
Raw Material Losses:
The Raw Material losses are the highest loss category for ZZZ. At 7.5% the total losses range from $3 – $4 million based on volume. The industry World Class Standard for extrusion is 6%. The entitlement for improvement is $610,000 to $830,000 by improving waste losses from 7.5% to 6.0%. (These RM losses are actually off quality material due to internal failures or changeovers.)
This project will require a Kaizen team effort including the Plant Manager, Plant Superintendent, 1 Supervisor, 2 Operators. Specialist on call for attendance would be color compounding, maintenance, and shipping. The team would perform Process Mapping and follow the DMAIC process to completion.
Direct Labor costs are $1.05M per year. A traditional Entitlement for this is 5% -10% which would be $50,000 – $100,000 per year. A JSS analysis and would be $5,000 and a controlling measurement system would be about $5,000. Payback on this would be 1-3 months.
Mid to Long term project opportunities:
Parts costs and repairs is $750,000/year. Entitlement savings for M&R is 10%. This would be $75,000/year. Attacking this issue would require a PM system with CMMS. This would require capital expenditure on software, a maintenance planner function, and training for technicians and operators. There is no “easy” way to reduce maintenance costs but a thoughtful long term approach would open up improvements in efficiency for indirect maintenance labor as well as parts costs. Skill enhancement and autonomous maintenance would also enable more long term gains.
It is a fact of life that maintenance labor is always behind. They always have more to do than they have time to do it. The best solution to improve this is a commitment to preventive maintenance tasks that take away from repair activities short term but reduce repair tasks in the long term. Note: Saving money by shorting parts purchases is a bad long term plan. Designing maintenance activities are the “right” rate will minimize long term costs while keeping equipment in optimum running condition.
Finished Inventory runs about $400,000 a month. This generates about 10% or $40,000/year in taxes and tied up capital investment. LEAN calculations estimate true OH costs of inventory at 30% or $120,000/year. The additional $80,000 is caused by warehousing space costs, handling, wastage and other effects. Since current warehousing is internal to the existing facility, reducing inventory would not save on rental fees. Another OH costs associated with inventory would also be hard to quantify with hard KPI’s.
A Kanban/Pull system could reduce inventory to about $180,000 based on the current pull rate of established customers. Service level, JIT principles and a Kanban pull system can be designed to hit this target. This would require a monthly recalculation of pull rates from the customer by shipping personnel and the establishment of reorder points. (This could also slightly increase the waste percentage on changeovers. By targeting “large” lots (20K+) for the Kanbans this loss would be minimized). There is also the consideration of lot mergeability. This would be a seperate project but the marketing advantage of merge ability could be significant.
ISO 9000 is a very comprehensive system of certification used to penetrate and participate in certain markets. While we do NOT recommend pursuing a certification, we do recommend adoption of certain aspects of the ISO 9000 standard. Simple work instructions and quality tracking will address one of the key TPM/LEAN precepts in that “all work is highly standardized and repeatable so that process variation is eliminated”. Standard Work is a key concept and goal. We also recommend the Labor project and using the resulting JSS for SOP development.
Long Term Process Improvement initiatives:
Based on the current overhead and sales of $44M – $60M year and an estimated net profitability of @ $3M/year I would recommend the hire of a Process Improvement professional to work and/or develop a plant Process Improvement plan. At a salary range of $65K +/- $5K you could hire a Process Improvement Engineer to work on projects full time. A general rule of thumb is that a Process Improvement Engineer should save 5 to 10 times their salary per year. Developing a realistic stage by stage improvement plan would take a higher level salary position or outside consulting analysis. Overall Lean Manufacturing expectations would be a 3.5% – 7% reduction in costs per year. Capital costs would also be incurred in setting up measurement systems and/or modifying computer databases.
PIC recommends a project be chartered on reducing plant OQ waste through the establishment of a Kaizen team consisting of management and operators with staff support as needed. There is sufficient volume and losses in other categories to support other individual projects and/or the philosophical adoption of a LEAN Six Sigma Process Improvement initiative.