Organizational Opportunities from the Frontline Story 14: Lowest Total Cost | Operational Excellence Quick Hits

In today’s session, we’re going to continue on the series on Organizational Opportunities, Stories, and Lessons Learned from the Frontlines. So today’s story comes to us from a manufacturing company. They’re engineered to order, and the company was dealing with a lot of production pressures to try to meet customer demand. And when I went out in production and started watching what was happening, there was a lot of activity, and people were busy, but not many employees were productive. And so what was contributing to this issue of employees not being productive, it was really management. And then how did we deal with this? In today’s session, we’re going to talk about cheapest price versus lowest total cost.

So what they had was a minimizing cost mindset. So a little bit more to the story that purchasing was going out trying to minimize cost. So they had these razor blades that they would buy for this tool, and the tool would jam up throughout the shift causing minor stoppages in the production process. And it was basically creating an hour worth of loss productivity per day from this jamming. And this is the picture of the razor blade after one run, immediately after being replaced with new razor blades. So you can see how poor these razor blades were. And of course that was causing the jams and the minor stoppages. And that productivity was lost through multiple stoppages throughout the day. So that minimizing cost mindset was really causing production and all types of issues. And so, I want to talk about this minimizing cost mindset and how we overcome that.

And I call it jumping over $100 bills to pick up pennies. So we’re trying to minimize cost at the expense of productivity. So let’s talk about productivity. So what are the measures of productivity, is being able to convert inputs into useful outputs. So I put useful because I see a lot of outputs being generated, but they’re not useful by either the next step in the process or downstream processes or the customer. And when I ask people why they’re doing that, I get to answer, “Well, that’s the way we’ve always done it.” Okay. So we really need to understand who is our customer. And it starts with the customer or the next step in the processes, that’s your customer. Everything starts with the customer. And their inputs define the outputs of the upstream process. So in this case, our customers define the outputs of the process.

Those outputs define how the process should be functioning. And how the process is functioning defines the inputs to that process. And it goes back through the process by looking at the customer and going backwards on the necessary and sufficient inputs. And so necessary means that it’s needed to achieve the outcome. And sufficient means it needs to be correct. So I see a lot of times, they have the necessary things in place, but they’re not sufficient.

So we need both necessary and sufficient for the process to be executed properly, to meet the useful outputs that are the inputs for the next step in the process. What are process inputs? So inputs are the resources invested to accomplish the task. So of course, we have the desired output. We have the process. And then, typically, we have materials. We have instructions. We have drawings. We have skilled labor. We have tooling. We have equipment. And we have programs potentially.

And so I could have the best process in the world. And if one of these inputs is not sufficient, I can’t achieve the outputs I’m looking for. So in this case, the tooling that they’re using wasn’t sufficient because purchasing was trying to minimize cost. And so that was causing the process all types of downtime and not achieving the output that they need for a company.

So this company was about 10 million in sales. And so if you look at that over a month, at one hour a day times 20 working days, it’s 20 hours of downtime because of this tooling issue, which is like two and a half days of production were lost because of this mindset of trying to minimize cost. So if we could overcome that mindset and eliminate that and eliminate that downtime, there’s two and a half days of productivity that could be improved just by that simple change.

So what is busywork? So busywork is an activity that has undertaken to pass time and stay busy, but in and of itself has no actual value. We call it non-value added for the customer or the next step in the process. So in this case, everyone was busy. They’re doing all sorts of activities, but not a lot of those activities were being converted into useful outputs for the next step in the process. So. of course, non-value added or anything that we do that doesn’t convert the product or service one step closer to what the customer’s demanding. It doesn’t change the market form or function. It’s not necessary. It’s activities that the external customers not willing to pay for. And these should be eliminated, simplified, reduced, or integrated. So what it contributes to lost productivity? So this is the list that I made over years and years of experience.

One, lack of sufficient problem-solving skills. So if you’re not good at problem-solving, what happens is we put more non-value added steps in place, and that reduces productivity. Reactive decision making, so we’re reacting to this current situation and making decisions based on that and trying to get the best outcome for the cards that were dealt.

Nd of course, it’s not very proactive. So of course, a lot of times the wrong decisions are being made. So that’s driving constant daily interruptions. And then, the next one is incapable and unstable processes. So poorly written work instructions or procedures, lack of effective training and bad multitasking. So when we’re multitasking, that kills productivity and quality. Ineffective and too many meetings, creating data and reports that are not utilized, and then the one we’re talking about today, minimizing cost at the expense of throughput.

So what is hidden capacity? So hidden capacity is capacity that’s not easily identified by someone with an untrained eye, but it is in simplest terms, can be defined as busywork that doesn’t convert what the person’s doing in a useful output. So of course, every time the gun would jam, he’d have to open up the gun, clean it out, put it back together, and start using the tool again. And so in this case, he was busy, but all that downtime and that minor stoppages wasn’t productive.

So we need the lowest total cost mindset. So what does that mean? Rarely does the cheapest purchase price translate into lowest total cost. So in this case, the cheapest purchase price was killing productivity in production. So the lowest total cost is determined by considering all factors, the throughput operating expense and investment, and looks at the effect on throughput relative to the changes in operating expense and changes in investment.

In this case, if I were to pay more for the razor blades that can last longer, the outcome is more throughput because they could be more productive by eliminating those minor stoppages. So that’s what we want to consider when we’re looking at total cost, not cheapest purchase price. So therefore, the goal is to increase throughput at a faster rate and operating expense, or create a positive return on investment on any decision. So that’s our session for today. Again, connect with me on LinkedIn. Visit our website. Go to our YouTube channel where we have all types of concepts on mind shift and mindset that’s necessary to become a high-performing organization.