Organizational Opportunities from the Frontline Story 18: Challenging the Cost Savings Decision Making | Operational Excellence Quick Hits

In today’s session, we’re gonna continue on the series on organizational opportunities, stories and lessons learned from the front lines. So today’s story comes to us from a manufacturing company that was a make to order environment, they were dealing with some material waste issues, along with some process control issues that was affecting product quality.

To reduce the material waste, a company implemented some new policies to reduce the waste. So what was the result for the company. So let’s talk a little bit more in detail about this situation. So when we look at Waste Reduction, a lot of people think that waste reduction this year, so we put an initiative in place to reduce waste, that’s going to translate into improved company performance and reducing waste for the company. So in this case, a little bit more about the details of the story, there was this process where they had to do some calibration.

So in order to do some calibration, they had to take some material and run some material and then take that material to determine the calibration of the device that they’re using by weighing the material that was produced over a certain period of time that was coming from the process. So they would run a small sample, measure the time, measure the weight of the material and determine if that was still within acceptable limits, because there was a time element that they needed to use this material in their process. And so what they would do is they would run calibrations multiple times throughout the day, to check the weight of the material that was coming out from the process. And if it wasn’t coming out to an acceptable range, they would adjust the process of the material output or time was consistent because the temperature would change the temperature would affect the viscosity of the material. So they had to kind of slowly adjust the gun to make sure that the material per time was consistent that was coming out of the process.

So because this calibration was wasting materials, they put a policy in place. Oh, it’s like we’re wasting too much material doing these calibrations. So we’re going to stop doing the calibrations. So if we stopped doing the calibrations, that we’re going to save all that material that was being used to do the calibrations. So what was the effect of that decision. So when I was out on the shop floor working with the people, what I found was that, throughout the shift as the gun became less and less calibrated, they would have either too much material or not enough material that was needed for the process and for the product. So of course, if it was too much material, that would be a problem because it would be out of spec. But if it was too little material that also had to be out of spec.

So what they would have to do is they’d have to take and they’d have to run some extra material into a little ziploc bag and it would use that bag to fill in voids in the product where the material didn’t fully fill the product. So as I was watching this, they were spending so much time and effort and actually waste way up filling these small Ziploc bags. The net result was that they’re using more material than if they just would have calibrated the process at various times throughout the shift to make sure that the gun was it within calibration. So this is a situation where leadership comes out, they make a decision to change the process, thinking that it’s going to save some money. And then the end result is it costs more money.

So when we look at cost savings impact from waste reduction, if we look at the different types of measuring waste reduction we have, waste can be determined by the amount of material saved, or it can be the amount of labor saved, or the amount of operating costs saved such as like landfill if we need to take this product, it’s wasted materials wasted to the landfill, we are going to reduce landfill costs and all these associated cost with that scrap or rework. And in this case, they were thinking that they’re gonna save material and they’re gonna save labor by not calibrating the gun at periodic intervals throughout the shift.

When we take these initiatives in isolation, typically they don’t translate into business outcomes. When we look at Waste Reduction, of course, if we use that as a primary means to improve company performance, we look at the eight ways it’s like well we can reduce unplanned waiting, we can reduce overproduction, we can reduce excess inventory, we can reduce defects or rework. We can reduce extra motion we can reduce extra processing, extra chairs rotation and then under utilized people. A lot of times companies are looking at the is eight wastes and figuring out how we can reduce those. But the question is are those waste reductions turning into overall improvements for the organization. So therefore, if we look at measuring waste reduction impact, only waste reduction efforts that affect the overall performance are improvements.

Improvements should meet one of the following criteria that improves the flow rate of the entire system, which means it increases sales to the entire system, or increases throughput of the system, and also reduces the lead time. When we look at operating expense, it needs to reduce the cost of the system. So that means the cost on the income statement for that category is reduced from period one to period two, if it doesn’t reduce, then it’s not an overall reduction in operating expense. And then it also improves the first test quality system. So the total first pass yield increases or reduces the total inventory investment for the organization. So, we’re looking at these criteria for measuring the impact of waste reduction efforts, not in isolation. So, when we’re looking at at improvement efforts, when implementing changes, the change that only needs to improve the performance of the organization. But more importantly, it needs to prevent any potential negative consequences of the change. So in this case, they made a change saying, Hey, we’re going to reduce our calibrations because we’re wasting too much material and the time associated to do that. And what happens is, we ended up taking more time and wasting more material because of the over usage of the material and under usage of the material, and then the rework to address those issues. So in the long run, they’re actually worse off than they would be if they just calibrated the equipment on a periodic basis or even calibrated more often. So that we could actually get the equipment dialed in even more precise for the temperature range that it was operating. So therefore every improvement is a change. But not every change is an improvement. So this is an important concept to understand. We want to identify those changes that are going to improve the system performance of the organizational performance.

So if I look at organizations, and all the changes that they make, very few of them are actually translating to improve business performance. So if we could focus everybody’s efforts on those changes that are improved business outcomes, man, we can get huge leverage. So 90% of the initiatives aren’t making an impact. If we could take those resources and we can focus on critical few that are going to make an impact, then we have huge leverage.

So that’s our session for today. Again, thanks for joining us, connect with me on LinkedIn. Visit our website, go to our YouTube channel where we have lots of videos and performance improvement and what it takes to become a high performing organization.