Process Improvement Consulting Thoughts

Process Improvement Consulting Thoughts

Process Improvement Consulting

Process Improvement Consulting (PIC) is focused on providing business strategies and knowledge to reduce costs and improve profitability through application of LEAN, Six Sigma, and traditional Industrial Engineering Techniques.

Lean Six Sigma is a method that uses collaborative team efforts to reduce waste and improve statistical performance. Lean techniques focus on removing the 8 types of waste and Six Sigma is the statistical and systematic method to define and measure the targeted improvements.  PIC focuses on the “Price – Cost = Profit” calculation to identify areas of costs that have the greatest savings potentials to the client.

Short Term/Low hanging Fruit Improvements.

The three areas of cost that historically show the most dramatic opportunities for cost reduction are Raw Material, Labor, and Supply Chain costs.

Raw Material:

Raw Material (RM) costs are usually the largest single cost of any manufacturing enterprise.  These costs generally range from 20% to 50% of the final conversion price.  The losses related to RM also have the greatest entitlement of improvement at 100% of the waste stream.  For Example, if a manufacturer uses 5 million dollars a year in RM and has a waste lost of 10%, the loss is $500,000/year.  Theoretically this could be zero and the potential increase in margin could be $500,000/year.

Labor costs:

Labor costs are usually the second largest costs in manufacturing.  Depending upon the amount of improvement already designed into the manufacturing process, Lean tools have an entitlement effect of between 5%-30% of the labor costs.  This is due to the fact that you have to use labor to make things.  Even with robotics some labor is necessary. Generally a 5%-10% improvement can be targeted in successive years of continuous improvement projects.

Supply Chain:

Logistics normally evolves rather than beginning with a design.  When evolution occurs the original systems become unwieldy and lead to inefficiency.  Reviewing the Supply Chain often uncovers simple modifications that can reduce inventory (rents/taxes), capital investment (RM and FG), On-time-in-full-Customer deliveries (OTIFC), andproduction rate optimization. (While Purchasing is normally a function of Supply Chain PIC does not analyze or make project proposals on this function). Supply chain improvements are normally 5%-30% of the Raw Material inventory value.

Controllable Variable:

Parts and repair costs are usually the fourth largest cost improvement opportunities in the short term.  Entitlement of targeted improvement are usually 10%-20% of previous year costs.

Mid to Long Term improvements:

Some Process Improvements take a longer period of time to effect change.  Some of these areas are Inventories, Supply Chain logistics, Overhead and Indirect Labor absorption through increased throughput (if the market is available), Process Improvement Culture development, ISO 9000, and Capital Project analysis and improvement.

These projects normally focus on Culture and the development of a process improvement mindset, first at the ownership level, then management and operator levels.  The Toyota Production System (the basis of lean theory and development) focuses on systematic improvement and the collaboration of the entire production chain to catalyze and implement change.  Kaizen is the technical term of this type of improvement.

Targeted possible improvements depend upon the type of system analyzed.  Usually a good indicator of opportunity is either budgeted losses or overhead % costs to industry standards.

Why Cost improvements have a larger impact on net profitability than sales:

Price cost reduction effects are usually a multiple of sales effects due to net profit margins.  If a company has a 20% net profit margin then operational costs are 80% of revenue.  A $1,000 reduction in operating costs goes directly to the bottom line. $1,000 more in sales will only result in a $200 increase to profitability.  This means that the lower the net margin the greater the impact on cost reduction has on profitability.  At 20% margin the ration is 5:1.  At 10% the ration is 10:1.

PIC recommends a long term focus change towards continuous improvement at all levels of personnel.  While we provide targeted low  hanging fruit projects we also provide planning, analysis, and training for organizations that want to pursue this transformation.

Reach out to us to schedule a discover call.

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