Organizational Opportunities from the Frontline Story 23: Improving Organizational Productivity | Operational Excellence Quick Hits

In today’s session, we’re going to continue the series on organizational opportunities, stories, and lessons learned from the frontlines. Today’s story is about a manufacturing company aiming to improve its organizational productivity. The company operated in a make-to-order and make-to-stock environment and wanted to enhance its on-time delivery performance, reduce lead time, and decrease finished goods inventory.

Upon analyzing the orders in the system, it was discovered that a significant portion of them were stuck in the first third of the production process. This raised the need to understand the reasons behind this issue and how to improve the company’s performance. One factor contributing to the bottleneck was the company’s attempt to minimize direct labor costs, which led to creating an artificial bottleneck early in the process. This mindset resulted in most orders being stuck in the initial stages.

Costs in organizations can be classified into fixed costs, variable costs, and mixed costs. Fixed costs remain constant within the relevant range, while variable costs change proportionally with the output. Additionally, costs can exhibit step cost behavior or linear cost behavior. Step costs remain fixed for a specific period and then increase or decrease as the activity level changes, while linear costs vary in proportion to the activity level.

Direct labor costs are considered fixed costs that function as a step function within the relevant range. This means that labor costs remain unchanged unless there are changes in hiring or layoffs. Reducing time on a process reduces the labor content for the work completed but doesn’t impact the overall labor or operating costs of the organization. Attempts to reduce labor costs at the job level can create artificial bottlenecks and hinder overall output.

To improve overall company performance, a mind shift is necessary. Reducing process time should focus on reducing constraint operation time, strengthening the weakest link in the chain, or freeing up non-constraint operations to transfer capacity to areas that improve total output. Utilizing protected capacity to offload constrained resources and create stability can enhance organizational performance. Overutilizing protected capacity leads to waste and decreased performance.

In the mentioned case, the company began by reducing work-in-process and focusing on flow. However, a steady increase in late orders and backlogs occurred when they tried to run more orders through a process without direct labor hours. By analyzing the situation and offloading work to other machines in a different process step, they achieved a significant reduction in late orders and improved flow. Daily decisions were made to allocate resources flexibly and use protected capacity effectively, leading to reduced lead time, increased profitability, and improved on-time deliveries. The replenishment cycle for stock parts also became shorter, resulting in reduced inventory.

That wraps up our session for today. Feel free to connect with me on LinkedIn, visit our website, or explore our YouTube channel, which offers abundant information on the mind shift necessary to create a high-performing organization.