Article series on How to Reduce Manufacturing Costs – Part 2
Last month we shared the ways our most successful clients have stayed successful – by reducing manufacturing costs. We touched briefly on Lean Manufacturing, but wanted to cover it in more detail this month, as it can have astounding results.
Adopting lean manufacturing principles can reduce manufacturing costs by increasing labor productivity, cutting production throughput times, reducing inventories, and cutting errors and scrap by as much as half. So, what is “Lean”? It is a simple and effective way of conducting business processes. It characterizes all activities as either value-added or non-value-added with the focus on eliminating non-value-added activities (wastes).
Waste is defined as any activity that does not add value from the customer’s perspective. According to research conducted by the Lean Enterprise Research Centre (LERC), 60% of production activities in a typical manufacturing operation are waste — they add no value at all for the customer. The good news is that just about every company has an opportunity to cut manufacturing costs using lean manufacturing techniques and other best practices. This article from Entepreneur.com shows how small changes can produce big results in labor reduction, raw materials, and, even in the call center.
Just think about reducing your production time or cost by even half of that — what would that do to your bottom line? Cost saved drops directly to the bottom line. For example, assuming that your product costs are split evenly between raw material, labor and overhead, a 30% reduction in labor means that your product cost decreased by 10% (.3 X 33.33). That might be a 10% increase (or more) in your EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization). What do you think your controller will say to a 10% improvement in bottom line because you are doing things more efficiently?
What would it do to your ability to produce finished goods? If labor is your bottle-neck — and, in today’s tight marketplace, hiring qualified employees is always a challenge — a 30% reduction in labor means that you can produce one-third more finished goods. Or, you can apply that labor to another product that is in tight supply. No matter what your scenario, Lean has benefits for labor, management and customers.
A great place to start implementing lean production is by understanding the forms of waste (waiting, transportation, inventory, motion, over-production, over-processing, defects, and wasting talent) and how to eliminate them. Check this list of Lean Terms and Definitions to get a fast primer on Lean. These terms describe the “tools” Lean uses to eliminate waste, improve your manufacturing operations, and thereby reduce manufacturing costs. Two of my favorites from The Toyota Way are “Genchi Genbutsu” (Go and See for yourself) and “Plan, Do, Check, Act” (PDCA a four-step management method for continuous improvement). Don’t let the Japanese terms scare you, they are short-hand from concepts. The link above gives very brief, manageable definitions to help you get a framework to learn.
Of course, one of our goals is to make sure that we have a good understanding of how an ERP / MRP system can fit into a lean manufacturing organization. We can mirror your lean processes in software systems, to support reducing waste and manufacturing costs in the process. We always want our clients to be better at what they do, and if BASM as your partner can help you do it better, more profitably; it’s a win for everyone and we’ve done our job.
Download our article on Lean Manufacturing Insights which covers the principles of using lean production to reduce manufacturing costs. It provides more detail on the forms of waste and information on several of the lean tools.