One of the prevailing messages that Bruce Nelson and I tried to
elucidate in Epiphanized is how
damaging the effects of cost world thinking can be for companies. In this
posting I’m going to focus on one of the most common performance metrics, manpower efficiency and demonstrate why
using it can lead your company down the wrong path to profitability. I hope you will see that monitoring this
metric and trying to drive it higher will not only hamper your company’s
profits, but it will actually take you in exactly the wrong direction. Let’s first look at the calculation for
manpower efficiency.
Efficiency has been
defined as a ratio of an employee's actual time to perform a function compared
to some theoretical standard time needed to complete it. For example, suppose
an employee actually produces 80 parts in one hour. Suppose now that the standard for this job is
100 products in an hour (as measured by a time study). Based upon this employee’s output, this
employee is calculated to be 80 percent efficient. Theoretically this employee has the capacity,
if he or she is producing to standard, to produce 20 more parts per hour.
So what would happen if
you were trying to achieve maximum operator efficiency within the following
simple 4-Step process (Figure 1)?
Figure 1
For
each step in this process, the processing times and the corresponding
capacities are listed. So assuming you
wanted each step in the process to operate at hypothetically, 100 %
efficiency. What would this process look
like after running at full pace for one hour (Figure 2)?
Figure 2
Here is what this process, running at 100% efficiency would look
like after running for one hour. Since
Step 1 can produce a part every 5 minutes (i.e. 12 Parts/Hour) while Step 2 can
only produce 6 parts per hour, a WIP of 6 parts stacks up in front of Step 2.
Likewise, because Step 2 runs twice as fast as Step 3, 3 units
of WIP would be stacked in front of Step 3.
Steps 1, 2 and 3 are running at 100% efficiency, which is what we
wanted, but how about Step 4? Does Step
4 even have an opportunity to run at 100% efficiency? Step 4 received all three parts from Step 3,
processed them in 30 minutes, and then was forced to sit idle because it had no
parts to process during that hour. So
Step 4’s efficiency was 50%. What would
happen to this process after 10 hours of operation?
Figure 3
Figure 3 gives us a look at this process if we were attempting to run each step at 100% efficiency for 10 hours. There would be 60 units of WIP stacked in front of Step 2, 30 units of WIP stacked in front of Step 3 and Step 4 would have finished all 30 units it had to work on to ship to the customer. The overall efficiency for this process is 87.5%, but think about how much cash this WIP is tying up? Does it make any sense at all to use manpower efficiency on each individual process step rather just at the system constraint? In TOC this is known as local optimization. The key to improving the throughput of this simple process is to focus improvements only on Step 3. Unless Step 3’s capacity is improved, the capacity of the entire process will remain at 3 Parts/Hour.
At least three negative consequences result from using manpower
efficiency in each individual step of this process:
1. Excessive WIP build-up throughout the process tying up excessive
amounts of cash.
2. Individual cycle times for each individual part becomes extended
3. On-time delivery deteriorates.
The efficiency model, like the one presented in the above
figures, is typically measured and implemented at the wrong system location and
usually has distressing effects on companies’ financial results. The end
results are typically the opposite of what is expected to happen by companies
using this metric. If companies would
measure efficiency only at the constraint and attempt to maximize it there,
improved throughput would be the effect.
As I’ve written about
before, it’s important to appreciate that the principal focus of Cost
Accounting is per part or per unit cost
reductions. And because these perceived cost reductions are viewed favorably
by many companies, it is the reason why there is so much emphasis on operator efficiency?
Cost cutting or cost reductions is/are simply not the key to
profitability. There have been many
highly efficient companies that have simply
gone out of business. Have you ever heard of a company that has saved
themselves into wealth and prosperity? Think about it, any perceived savings
that the sock maker (Focus and Leverage Part 154) thought he was getting were
quickly eroded by buying more raw materials and typing up all of his cash. In
fact, it ended up costing the sock maker much more money than he realized and
not saving him anything!
Many companies will categorically state that the primary goal
of their company is to make money and yet they spend the principal
portion of their time trying to come up with ways to save money. The difference between the two approaches
is blatant. The tactics you employ to make money are so immensely
different than the approach you would use to save money. Quite simply, you make
money by increasing throughput! These
two concepts are divergent in their thinking with each taking you in a completely
different course with drastically different outcomes.
In my next posting, we’ll continue to explore some of the
problems associated with traditional cost world thinking and discuss ways to
overcome them.
Bob Sproull
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