Learning to See

By John Darlington

Alains cartoon in front of the reader should explain more quickly than I could do in words the problems of representing the real world. Why is it that different ages and different generations have represented the visible world in such different ways? Will the paintings we accept as true to life look as unconvincing to future generations as Egyptian paintings look to us? Is everything concerned with observation entirely subjective or are there objective standards? If there are, if the methods taught in the life class today result in more faithful imitations of nature than the conventions adopted by the Egyptians, why did the Egyptians fail to adopt them?
As with art so with business. Lean manufacturing insists on seeing the benefits associated with implementation in terms of cost reductions. The removal of waste is seen as synonymous with the removal of cost. We believe that this is erroneous. Because it is wrong it leads to clashes between accountants and Lean experts who cannot reconcile results to the numbers claimed to have been saved. And worse still it may lead companies who are embarking on the path of Lean Enterprise to have unrealistic targets and expectations about the value to their business of the program. In misunderstanding itself it will in time of difficulty prescribe for itself the wrong remedies. Even worse as senior executives are under such pressure these days to produce results, an ill conceived cost reduction plan could result in their demise and the abandonment of the companys efforts to go Lean altogether.
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Learning to See

The following examples are all taken from real life situations. Try to value the improvement based upon the cost information given or think about the additional information you would need to do justice to the improvement.

Picture this:
The assembly end of the plant has been running a series of short kaizen events for the last month. The team of 8 employees has just made an excellent presentation. As a result of all their waste removal work and subject to spending approximately 3000 on relayout and 2000 on tooling the line can maintain the output but with only 6 members. The 2 employees are going to form the basis of an internal improvement team to try to replicate the success in other parts of the plant. If we assume a fully fringed cost of 17,000 per annum for an operator and tooling having a life of 2 years how much money has be saved?

Picture this:
The purchasing manager of your company has an inflationary assumption of 2% built in to the budget for next year. Three items under your consideration are symptomatic of the issues you face to value his claimed cost reductions. Part A cost 5 per unit today. Next year the supplier wants to charge 5.1. The purchasing manager thinks that if the internal Lean Team where to work on the suppliers premises and lean out the product routing of A then the inflationary increase can be avoided. Presuming everything goes to plan and the supplier agrees that the inflationary increase is no longer appropriate how much money has been saved per unit? Part B costs 4.5 per unit today. This was a new part introduction last year when volumes where at the development stage of 500 per annum. The volumes expected this year are 20000 per annum and the price is due to change to 4 per unit. With the same inflationary assumptions applying how much has been saved? Part C costs 6.8 per unit today. Next year a new supplier in the Far East is going to supply the part for 5.8. The expected volume is 6000 and the supplier is even willing to put down consignment inventory to secure supply. How do you value the cost reduction?

Picture this:
The company is disturbed about the pernicious effect on costs of the continuing poor Overall Equipment Effectiveness (OEE) numbers. One of the major cost reduction programs for the year ahead is to increase the OEE from 50% to 70% uptime. A major training initiative is underway to spread the word to operators about waste removal and the distinction between value adding and non-value adding activities. You are responsible for the Availability section and chose Figure 1 as a real life plant situation to illustrate your points. Machine A makes parts 1 and 2 and feeds assembly that needs both parts to complete a product for sale. The demand for the week ahead is 3000 finished assemblies and there are 6000 minutes available to assembly and Machine A. The Finance department assist you with the information that the 2 hour set up for Machine A to change from part 1 to part 2 or the other way around costs 500 each time.

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Learning to See

Machine A is certainly a good target for OEE improvement. Historically it rarely reaches more than 60%. Assembly operations incur no particularly long changeovers but their productive hours compared to occupied hours are woeful and overtime here is amongst the highest in the company at 28%! This costs 80,000 per annum in premium. Figure 1

Demand 3000 per week

Machine A Cycle time 30 seconds Set-up time 2 hours

Machine A Cycle time 30 seconds

Part-1

6000 minutes per week

Picture this:
Your target audience for the next cost reduction activity is a maintenance crew and the operators and team leaders of a major machining line that supplies the customer direct with no assembly required. Figure 2 illustrates very well you believe the current real life situation for major machining LINE 1. The triangle represents the raw material stage. The circular nodes are the 6 operations performed on the part and the final oval shape represents the customer order. The X on one of the circular nodes represents the slowest operation in the line. Although it is the slowest it is still just able to reach TAKT time. TAKT time is 1 every 6 minutes today. Later in the year the TAKT time must reach 1 every 5 minutes. There is no time to lose and certainly not to machine downtime which is illustrated on operation 2, 3 and 5.

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Learning to See

Figure 2

LINE 1

Machine Downtime

10%

2%

5%

The calculation of the cost of downtime on this line is judged to be 50 per minute. The line works two 8-hour shifts 5 days per week. You want to conclude your session with the assembled audience with a target cost reduction to give real substance to the brainstorming session that identified root causes through the 5 Whys. How would you focus and value the cost reduction?

Picture this:
A lot of lean activity development work has gone into one particular machine line in the plant in which you work. Consequently there is good availability of data on which to make decisions. The line has been formed into a natural work team and the following data is also relevant. TAKT time is 1 every 10 minutes. The sell price is 40 and the raw material cost is 10, with labour and overhead charges to the line are 15/hour and 30/hour respectively. The hourly cost rates for the machines are indicated in Figure 3 and the incidence of scrap as a % is 10% for the first operation 5% for the third and 2% for the fifth. As per Figure 1 the triangular shape represents raw material, circular nodes for operations and oval for the customer order. Figure 3 Labour rate 15/hour and Overhead 30/hour based upon cycle times

Pieces/hr

30

20

10

30

20

Cost/s hr

1.5

2.2

4.5

1.5

2.2

Scrap

10%

5%

2%
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Learning to See

There is only one line but Figure 3 reflects the fact that the rates of production for the 5 operations has been mirrored in the cost of production by the application of the cell labour and overhead rates. Thus at 30 pieces per hour for operation 1 with labour and overhead rates of 15/hour and 30/hour works out to a cost of 1.5 per piece. It is important for you to focus on the most effective place to initiate a Six-Sigma program and to be able to predict the resulting cost reduction. How might you achieve this?

Picture this:
A workshop team has just completed a red tag exercise and sent back to raw material stores 350 pieces of work in progress (WIP). Further they have defined standard WIP and a buffer area which means they have high hopes of resisting the excess pieces returning in the future. The raw material cost is 20 per piece and fully absorbed standard labour and overhead is 30 combined. The finance department value WIP at this stage of the production process at 75% of the full standard cost of labour and overhead. How do you view the cost reduction achieved by the team?

Picture this:
A Kaizen team is about to make a presentation to a senior group of executives and come to you for some help. In the course of their attempts to reduce the manufacturing lead-time they have looked at the workbenches in their assembly area and decided that they are not all required. Taking them out has reduced the space required by 40%! Your inquiries reveal that the factory pays 10,000 per month in rent and rates and that assembly previously took up 20% of the floor space. How can you make the executives see clearly the cost reduction?

Conclusion
Do you like me feel uneasy at labelling the above activities as cost reductions? It is too easy, too bland and in many instances doesnt add up. There has to be a better way. Regarding the specific questions posed above here are some observations. It is quite clear that some of the activities are excellent examples of operational improvement. Some are more associated with cost avoidance than cost reduction. Cost avoidance is often best exploited by business growth where the resources released from wasteful activity are re employed on more value adding work in the eyes of the customer. And if there is to be a significant role for the accountant in a Lean Enterprise perhaps it lies in this appreciation. In many instances accountants are only involved on the very periphery of lean activities and their ham fisted attempts to value them as cost reductions cause misdirection and understatement. Properly focussed lean programmes build the potential for something better. Very many times the best way to exploit this is to grow the business. And who better to bridge the gap between increasing operational bench strength and commercial opportunity than the Lean Accountant

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Learning to See

To do this successfully the accountant has to have a thorough understanding of lean process and policy improvements. Some have already commenced on the lean journey as witnessed by the accountants actively studying for Lean qualifications. They are aware that the trick to seeing the real value of the above efforts requires a deeper insight than to simply distinguish between cost reduction and cost avoidance work. Costing information and unit costing in particular can obscure where the real improvement needs to be made. Understanding the impediments to FLOW is crucial. Take for example the problem posed by Figure 3. As TAKT time is 1 every 6 minutes all the costings calculated with reference to the potential of the various work centres are irrelevant. As the constraint process is the 3rd operation this is critical to an understanding of the flow of the line. It is not the cost that is most relevant if there is a problem for the constraint operation; the very THROUGHPUT of the business is jeopardised. In the light of that where would you start the improvement activity for scrap reduction first? And where would a more traditional company commence it? If you as the accountant see the errors in the cost reduction mirage are you absolutely sure that your operations management are similarly endowed with 20/20 vision. It might be interesting to give them the Learning to See quiz just to be sure. In a Lean world obsessed, quite rightly, with establishing standards of best practice and then improving on them it is important we devote time to making sure we all have the correct vision of the benefits of all these efforts. Originality is easily exaggerated, especially by authors contemplating their own work. There are few observations in this short article that have not occurred to other accountants or disturbed lean practitioners who had to value improvement activity. I hope that elaborating on ideas to which evidence has previously been brought is seen to be useful.

Acknowledgements
E.H Gombrich Art and Illusion John Bicheno The Lean Toolbox Eli Goldratt The Goal James P. Womack and Daniel T. Jones Lean Thinking John Kenneth Galbraith The Affluent Society Reid and Bracewell John Darlington is a member of IOM and a Chartered Management Accountant. He has worked for AlliedSignal Turbochargers both as Financial Controller and as Plant Manager and most recently as Group Kaizen Director of United Engineering Forgings. He also teaches part time at the Lean Enterprise Research Centre at Cardiff Business School.

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