Can OEE be Used to Reduce Operating Cost?

OEE or Overall Equipment Effectiveness measures manufacturing performance against perfection. It is regarded as the global benchmark for managing and improving manufacturing efficiency. Any deviation from perfection drives up operating cost. OEE looks at three different losses and multiplies them across to assess total losses. Those losses are:

Availability – This is a measure of downtime (both planned and unplanned)

Throughput – This measures rate loss against the theoretical maximum run rate

Yield – This measures the amount of efficiency lost due to quality issues

Each of these factors has a cost impact. There are measurable financial and other costs associated with having people at work, the lights on, and machines operating. Anytime these things are happening and you aren’t producing at theoretical maximum levels, you are suffering efficiency and financial losses. Most factories are operating at or below 60% OEE but have no idea. Additionally, most factories do not measure productivity, and many who do, use methods that exclude significant losses such as changeover times, start-ups, throughput loss and many others. Again, anytime you have people on the clock and product yet to be made, anything less than the theoretical max output is a loss…for whatever reason – controllable or uncontrollable. At the end of the day, all aspects of running your business are controllable; the only real question is: are you willing to do what it takes to “fix” something that is perceived as “uncontrollable”. I’ve worked with manufacturers who, for years, wrote off “bad raw material” as uncontrollable but have never talked with the supplier about fixing the problem or investigated sourcing with other suppliers. In almost all cases, uncontrollable is synonymous for “we don’t want to deal with it”.

The Logic

For a factory with a direct operating cost of $10M annually and an OEE of 60%, the total efficiency losses are 40%. Therefore 40% of the direct operating costs are also losses, or $4M in this case. At 100% efficiency, the operating cost would be $6M.

World-class execution is 85% OEE, which equates to a direct operating cost of $8.5M in the example above. For the same factory, there is a $2.5M savings opportunity for improving from 60% to 85% OEE. What would you do with an extra $2.5M dollars per year? Expand production? Pay bonuses? Acquire a new business? Buy a small yacht and sail around the world?

Achieving 85% OEE is challenging but attainable for the vast majority of manufacturers. Click the link below to receive a free report on how much savings opportunity you might have based on your direct operating costs and efficiency performance:

My Total Savings Opportunity

If you don’t know your OEE, we can get you up in going on Impruver in less than a month. It will help you track OEE by product, line, shift, team, and even individual. It’s a great tool for highlighting exactly where to focus improvement efforts. For the sake of the tool mentioned in the above link, input 60% as a reference point and see what you get for a savings opportunity if you’re unsure of your current OEE.

 

 

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The 8 Lean Wastes and Their Potentially Disastrous Effects – Overproduction

Manuficient - Overproduction (PEPCON)

Overproduction – the act of making more of something than is immediately required. In this series titled “The 8 Lean Wastes and Their Potentially Disastrous Effects”, we examine a case study for when companies, government organizations, or entire industries have allowed a specific type of waste to escalate to a disastrous effect. In this post, we review the waste of Overproduction to understand what causes it, how to see it, and how to eliminate it. Wikipedia defines overproduction as “excess of supply over demand of products being offered to the market. This leads to lower prices and/or unsold goods along with the possibility of unemployment.”

Jump to:

The 8 Wastes and Their Potentially Disastrous Effects:

Defects | Overproduction | Waiting | Non-utilized Talent & Ideas | Transportation | Inventory | MotionExcessive Processing

Case Study:

In 1988, chemical manufacturing company PEPCON, located in Hersonson, NV experienced a massive explosion of 4,500 metric tons of Ammonium Perchlorate (AP). The facility was producing AP, which is used as an oxidizer in rocket fuel, for the Challenger Space Program. In 1986 the Challenger Program was suspended after the space craft exploded in mid-air only 72 seconds after launch. PEPCON decided to continue production of AP even though there was no longer a demand for it as a way to sustain production capability without inflating costs. The company assumed that they might be able to sell the excess AP to other government programs or to the Challenger Program if it were to ever come back online. They stored the excess product in containers in a parking lot near the production facility. Finally, one of the containers containing the AP ignited and the entire highly-combustive lot went up in smoke. The explosion cause catastrophic damage, destroying the PEPCON factory and other nearby factories and residential property.

The explosion resulted in 2 deaths and and 372 injuries. It also created about $100M in related damages.

Corrective Action:

In response to this incident, the Nevada legislature passed the Chemical Catastrophe Prevention Act in 1991, and later the Chemical Accident Prevention Program.

Interesting Fact:

4,500 metric tons of this product and others were being stored on site at the time of the explosion in aluminum, HDPE, and steel drums. The blast range of the explosion was a 10 mile radius. The actual cause of the fire was never officially determined.

For more details on this case study, check out the Wikipedia article at the following link:

https://en.wikipedia.org/wiki/PEPCON_disaster

 

Overproduction is one of the most dangerous types of lean waste because it enables all other forms of waste to occur. When factories overproduce, they create buffers that allow the manufacturing process to become disjointed from the subsequent elements of the supply chain. This enables process waste to fester in the manufacturing stage because problems in the production process have little to no effect in the company’s ability to satisfy customer demand. This buffer removes the “pain” of poor production execution and the factory loses the discipline required for true operational excellence.

There are management tools that can help to minimize the detrimental effects of overproduction and provide the foundation for increasing operational discipline. OEE is one great example for how to measure productivity so that overproduction can be eliminated and the factory can transition to more of an on-demand operation with minimal finished inventory. Impruver is a fantastic tool for implementing OEE that also drives a grassroots culture of getting better everyday.

 

 

Copyright © Calvin L Williams blog at calvinlwilliams.com [2015]. Unauthorized use and/or duplication of this material without express and written permission from this blog’s author and/or owner is strictly prohibited. Excerpts and links may be used, provided that full and clear credit is given to Calvin L Williams with appropriate and specific direction to the original content.

How to Do a Stress Free Lean Implementation

Manuficient - Top Performers

Lean is said to be the “Machine that Changed the World,” which a fantastic book written by Jim Womack, Dan Jones and Daniel Roos. According to Wikipedia, “Lean manufacturing or lean production, often simply “lean“, is a systematic method for the elimination of waste (“Muda“) within a manufacturing system.” We are now learning that Lean has applicability across far more industries than just manufacturing such as healthcare, finance, education, and many others. However, implementing lean has been a major challenge for business leaders across all sectors, including manufacturing. A study released by McKinsey stated that “70% of Continuous Improvement initiatives fail”. This is a striking statistic considering how popular Lean and other Continuous Improvement initiatives are.

If you go into any of those factories where Lean has failed (and even some where it has succeeded), you’ll quickly find that it generally leaves a bad taste in people’s mouths. Be it because some companies have gutted workforces and administrative jobs under the guise of Lean or that people had to give up things that they held sacred in the name of cutting waste…many people harbor a disdain for Lean. How did an initiative designed to improve product and process quality turn into such a reviled and despised creature?

In conducting and studying many examples of Lean implementations I’ve determined that three key ingredients are needed for success. Those ingredients are:

  1. Technical Expertise. Lean isn’t that hard to learn but somebody needs to know what they’re doing in the beginning at least. This could be an inside or outside person or group. Eventually, everyone needs a strong lean competency and it needs to become a requirement for staying with the company or getting promoted
  2. Commitment. Leaders need to visibly show their commitment and make decision consistent with a Lean culture.
  3. Motivation. If the people at the top or bottom don’t want to do it – it won’t happen. A Lean implementation requires substantial changes in behaviors, the slaughter of sacred cows, and debilitating power struggles. It’s not easy for anybody.

In all reality, the last item trumps the previous two. Let’s face it, people will eventually do what they’re motivated to do as long as management gets the heck out of the way. Do you really need an engineering degree to do 5S or make a few changes to reduce waste and inefficiency? The answer is no. So …the easy way to implement Lean is by pairing the implementation with things people are motivated to do such as:

  • Look good in front of their bosses and peers
  • Get recognized for a job well done
  • Compete and win
  • Have input on the way things are done
  • Prove themselves by getting results
  • Be judged fairly
  • Help others
  • Be a valued contributor to the business
  • Remain gainfully employed
  • …the list goes on and on.

So, to implement Lean, you need to motivate people to eliminate waste and be more efficienct; then give them the tools and support to do what they will be super-motivated to do. To do this, follow these steps:

Step 1Implement OEE. This will tell you and everyone else exactly how much efficiency loss you have, what types of losses you have, and where the biggest opportunities for improvement exist, etc. OEE will serve as your scoreboard for how good everybody actually and undoubtably is. It also puts everyone on the same playing field in terms of measuring productivity. [Week 1 – 8 but continue tracking perpetually]

Step 2Start highlighting success stories for people doing things better. Share Personal Records, Record Breaking Weeks for the team, Best-Practices, Top Performers for the Day or Week, and so on. This will create a culture that feels like winning…and send a message that winning means getting better, which means…increasing efficiencies. All of a sudden, getting better is starting to feel “good” and perhaps even “fun and exciting”. [Week 6 – 15 but continue into perpetuity]

Step 3Provide a continuous stream of tools and techniques for getting better. Teach people root cause analysis, value stream mapping, SMED, kaizen events and anything else they are clamoring to know by this point in the process. You should also consider taking engineers, managers, and key personnel to other factories who have a really good Lean program so they can benchmark ideas. These factories love to show off the great work they’ve done to implement what a vast majority of companies struggle with. [Week 10 on]

That’s it. Pretty easy right? Well there are always varying levels of depth and complexity of tools that can be applied but you can cross those bridges when you get to them. It’s important to follow these three steps in sequence and allow time for each step to take hold in the organization. Most companies try to implement lean by doing step 3 and then step 1 or they just start of with a massive cutting of headcount. Implementing OEE is not as easy as this article makes it sound and neither are the other 2 steps. Fortunately there’s a tool that virtually automates the first 2 (and most difficult) steps called the Factory Operating System (fOS) at www.factoryoperatingsystem.com. This is the best tool out there for implementing Lean or any other Continuous Improvement initiative. In this system, calculating and tracking OEE requires less than a minute per production run to input data and it spits out OEE by line, shift, person, team, product, timeframe, or any other way you want to slice it. It also highlights top performers, record breaking weeks, personal records, and other success stories across your operations chain of command. It’s super-powerful and it’s free, which makes it really great!

Implementing Lean can be a great step toward reducing operating costs, increasing capacity, reducing lead time, improving product quality among many other wonderful things. Don’t make the mistakes most companies make by failing to motivate your people before slamming them with tools, jargon, and complex ideas that will just scare them away. Let the motivation come first, then they will be a) creating their own tools and b) asking you for more tools and techniques to get their systems to operate more efficiently. This way you create a demand for Lean instead of pushing it on people and creating a painful experience for everyone that probably won’t even sustain results. A manufacturing efficiency expert such as those at Manuficient can help you to implement Lean in a non-abrasive way that systematically encourages your people to do better everyday.

fOS Lead Capture2PPM Lead Capture2

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Copyright © Calvin L Williams blog at calvinlwilliams.com [2015]. Unauthorized use and/or duplication of this material without express and written permission from this blog’s author and/or owner is strictly prohibited. Excerpts and links may be used, provided that full and clear credit is given to Calvin L Williams with appropriate and specific direction to the original content.

How to Implement OEE in One Day

Manuficient - Excellence Compass

OEE (or Overall Equipment Effectiveness) is the ultimate tool for measuring and eliminating process waste. Wikipedia defines it as “a hierarchy of metrics developed by Seiichi Nakajima[1] in the 1960s to evaluate how effectively a manufacturing operation is utilized.” OEE combined with rigorous process improvement efforts can drive significant cost savings, reduce stress of daily operations, and increase manufacturing capacity. Simply put, you’re not doing Continuous Improvement or Lean if you’re not using OEE. The metric itself is taken by multiplying Availability (%) x Rate Attainment (%) x Yield Attainment (%).

To implement OEE effectively, you need to track each of these indicators on a continuous basis and perform the OEE calculation for a line, shift, factory, or entire manufacturing network on the interval that you see fit. Here are a few steps to implement OEE:

  1. Capture the % Availability. This is the efficiency lost while the line is not in operation (but the labor force is on the clock). Create a spreadsheet that allows line operators to input the time it takes to start up the line (from clock-in to steady state). Also capture other planned downtimes such as changeovers and shutdown times. Finally, capture each unplanned downtime loss as well.
  2. Capture the % Yield Attainment. This is a measure of the efficiency lost due to producing sub-par quality product. This calculation is done simply by taking the total good units produced divided by the total units produced.
  3. Capture % Rate Attainment. This is essentially the efficiency lost while running less than the maximum possible run rate. To capture this this, develop maximum theoretical run rates for each product on each production line. This should be done by an Industrial Engineer or trained professional. If you don’t have one on staff, you can contract someone to do it or use what I call the maximum empirically demonstrated rate, which is the fastest rate the line has demonstrated in it’s history for the given product. From there, track your total throughput and divide by your theoretical max rate to get your % total losses. Then subtract out % Availability and % Yield Losses. The remaining losses are rate losses.

Then multiply the three indicators across and the result is your OEE, which is a measure of perfection. 100% OEE represents zero efficiency losses. Once you have began tracking these metrics on an ongoing basis, you can aggregate this data to calculate your OEE anytime you want. The more frequently you can report this information, the more actionable the metric is for you. You certainly don’t want to wait weeks or months to find out there is a serious problem; but daily reporting is usually sufficient. Reporting by shift is even better.

With all of that said, the best way I’ve seen to implement OEE is a tool called Impruver at www.impruver.com. It’s the best free tool out there and it calculates and reports OEE for you by product, line, shift, and even team or individual team members. You could simply have your operators enter each production run into the system and the tool does the rest. It takes less than a minute to enter a production run. It even sets your theoretical max rates for you based on your best demonstrated rate. Then it updates the standard automatically when a run is entered that exceeds the previously established rate. In other words, you don’t have to set or update production standards – the tool does it all for you. It’s great!

 

OEE is the benchmark for measuring factory performance and can be used across all industries to highlight areas that can be made more efficient. It’s a metric that can be used to drive substantial cost savings along with targeted process improvements.

Copyright © Calvin L Williams blog at calvinlwilliams.com [2015]. Unauthorized use and/or duplication of this material without express and written permission from this blog’s author and/or owner is strictly prohibited. Excerpts and links may be used, provided that full and clear credit is given to Calvin L Williams with appropriate and specific direction to the original content.

Why Lean Can’t Succeed Without Operational Discipline

Manuficient Consulting - Bullseye

 

Managing people and building the perfect manufacturing system are works of art. There are an unlimited amount ways to effectively get the desired result – being the perfect system and its flawless execution. However, manufacturing itself is an exact science; it is not an art. There exists one-right-way (ORW) of doing every single thing needed to execute the core functions of a factory. There is no need to re-engineer and execute a new process for each individual unit of production. This is immensely inefficient. In the absence of work standards, you are likely doing some version of this. The ORW minimizes cost and safety risk while maximizing service, quality, and morale. The essential job function of a front line supervisor or manager is to a) determine the ORW for all required actions needed for executing operations and b) ensure that everyone is doing it every time. This is why the world needs front line supervisors / managers. The supervisor’s effectiveness can be measured in terms of the number of deviations from the ORW of their direct employees. In other words, the manager’s performance can be primarily measured in terms of operational discipline, or the consistency of actions in which operations are executed. In an ideal state, one would possess the capability to evaluate the exact actions of every person / machine in the production process to ensure strict compliance to standard procedures. Since this is not practical in today’s world, we usually only evaluate compliance to standards after there has been a significant failure; sometimes resulting in some poor soul’s chastising or even worse, public shaming and/or termination. Many companies have turned to (or are turning to) Lean manufacturing to develop the operational discipline needed for operational excellence.

If you break down Lean Manufacturing into it’s two base components, what you are left with is:

1) Industrial Engineering – This is the process of designing and implementing the perfect manufacturing system. It requires understanding the expected outputs of the system and making the changes needed to minimize cost and safety risk while maximizing service, quality, and morale. The key aspect here is making changes to the system. Lean manufacturing applies many IE techniques that happened to be developed in Japan, such as kaizen, poke-a-yoke, 5S and others. Although IE techniques vary in degree of complexity, just about all of them can be taught to a person of average intelligence within a few days or so. The creators of TPS and Lean have done an amazing job of simplifying the discipline of IE for the common factory worker to understand and employ. Significant improvements in manufacturing efficiency can be gained with just a base level competency in IE. The more involved tools and methods are typically highly specialized for a given situation and result in marginal additional improvement. (This excludes the equipment / plant design aspects of IE, which can be highly technical as well).

2) Operational Discipline – This is the systematic and consistent execution of necessary actions. As stated above, this responsibility falls within the core job function of a front-line supervisor / manager. This does not require an Industrial Engineer, Lean expert, consultant, or other specialized technical background. This just requires good managers; being those who are highly disciplined and consistent as well. Managers are typically empowered with all the tools and resources needed to control their employees’ behaviors such as performance reviews (for career advancement), incentive programs including bonuses and pay increases, and others. Many companies launch Lean initiatives believing that Lean will automatically create operational discipline. This is not exactly true. Although Lean can help design and implement systems that help drive operational discipline, Lean itself cannot make the administrators of the Lean system more disciplined. Only effective leadership can ensure or increase discipline. Lean is not a substitute for leadership.

This brings me to the main point of my post. Your Lean initiative cannot succeed without sufficient operational discipline. Lean is a system; but all systems need competent and disciplined administrators. As a manufacturing leader, you don’t need Lean to develop competent and disciplined managers, supervisors, or shop-floor employees. You don’t need a Lean practitioner or Industrial Engineer to establish Standard Operating Procedures and ensure everyone is following those procedures without deviation. These are manufacturing fundamentals that help you get the most out of a Lean expert or IE should you choose to consult / employ them. It’s like saying that your basketball team of 6-year-old’s is struggling because they need more advanced plays. In actuality, they would dominate just by boxing out on rebounds, minimizing turnovers, moving their feet on defense, and making their layups (This was also true for my adult men’s league team so it’s something I’m quite passionate about). With that said, your Lean / IE / Consultant can help to accelerate your CI journey by applying industry best-practices and proven techniques for improving performance. However, if you find that your Lean initiatives aren’t sustaining, then maybe you’re not ready for Lean. You may want to take a step back and figure out how to increase operational discipline.

 

How to Increase Manufacturing Agility in Consumer Packaged Goods

Manuficient Consulting - CPG Agility

Agility is paramount in the CPG industry. This is driven by rapidly changing consumer tastes and preferences, competition – which drives the need for greater differentiation, varying degrees of automation and manual labor forces, constantly changing packaging technology and platforms, and several other factors. Agility is simply defined as the efficiency of change. In other words, how efficiently can you go from your current state to your desired future state? In the CPG industry especially, the future state is a constantly moving target. If your supply chain can’t keep up with the rate of change, then it has no alternative than to become obsolete. This explains the significance of increasing Manufacturing or Operational Agility.

There are several benefits to increasing Manufacturing Agility (this list is not completely exhaustive):

  1. Satisfy a more diverse SKU portfolio with fewer production lines, requiring a smaller manufacturing footprint
  2. Drastically reduce the product development cycle from ideation to commercialization
  3. Scale production capacity to fit fluctuating demand without inflating costs
  4. Significantly reduce the time frame from improvement idea to gainful implementation
  5. Create opportunities to increase asset utilization by picking up orders from competitors and store-branded products

In the CPG industry, the more agile factories or operations win in the long run. Agility helps to keep costs low while making the changes needed to stay competitive. It also brings down the risk of changes significantly since they are less cost prohibitive. There are three main areas where CPG companies need to focus on increasing Agility; people, processes, technology. And there are several approaches to increasing Agility in each of these areas.

PEOPLE

People Agility is referred to as scaling the labor force up or down to meet immediate production needs without inflating costs. This can only effectively be done without compromising critical process knowledge and skill sets. Many CPG companies experience significant peaks and valleys in demand throughout the year. In many cases, manufacturers build inventory or find some way to avoid needing to scale man-power, maintaining a flat workforce with “normal” work hours for each employee. What ends up happening is that they eat labor costs during valleys because productivity slows and people are idle; then they eat labor costs during peaks due to excessive overtime. When you maintain a full workforce when productivity slows, the workforce loses its operational discipline, which is needed for when production demand is high. This creates frustration for both management and the labor force. Its also an expensive way to manage a factory. Below are a few ways to increase the scale-ability of the labor force:

  • Use a fixed crew and fixed production rates but vary production hours based on demand. This would make for inconsistent work hours for employees but help maintain the operational discipline needed for peak volume times. During valleys in demand, production could be scheduled at standard rates; when the crew finishes the work, they could be deployed to other productive work or process improvement projects.
  • Have a fixed full-time crew (based on business case analysis) and use temps to support surges in volume
  • Run with a fixed crew (again, based on business case analysis) and outsource surge volumes to contract manufacturers

PROCESSES

Process Agility refers to the efficiency of changing processes and procedures to meet business needs. In CPG, as well as many other industries, processes need to change constantly to increase competitiveness, reduce costs, increase quality, improve safety, increase moral, improve service levels ,and many other important reasons. Processes in this sense include the specific steps taken by people or technology to get something done. The more Agile a factory or operation, the easier it is to change processes to suit the needs of the business. For a factory that lacks Process Agility, it requires at least 5 years to implement a Continuous Improvement program such as Lean Manufacturing. Contrarily for a factory with great Process Agility, Lean could be implemented and self-sustaining in as few as 2 years. Below are some techniques to be employed to increase Process Agility:

  • Implement systematic management systems that drive operational discipline such as Impruver. Impruver sets standards for the management function and is designed to drive the discipline needed for Continuous Improvement. Click this link for more information on Impruver.com.
  • Develop and execute a world-class training program. This helps to significantly reduce the learning curve for on-boarding new employees and implementing process changes with current employees. Click this link for more details how a world-class training function works.
  • Employ Lean practices such as Standard Work to develop efficient processes and reduce learning curves. Also use tools such as Kaizen and Root Cause Analysis to drive rapid process improvement.

TECHNOLOGY

Technological Agility refers to the ease of changing the technological capabilities used for the efficient making of a product. This could mean changing packaging ability from a canning to a pouch filling; or from vacuum sealing to over-wrap; or from a carton to a sleeve…I think you get the idea. In the CPG industry, formats change frequently. By now, every marketer in CPG has identified the impact that an attractive new packaging format has on product sales. Those same marketers can tell you how frustrating it is when they get push-back from the manufacturing folks that “there’s no way we can do that”. Well the truth is that it can be done – it can always be done. The only factor is what it’s going to cost, which is a function of Technological Agility. A factory with high Tech Agility can run multiple packaging formats on the same production line. On the other hand, a factory with low Tech Agility needs a separate line per format at best; and at worst, simply doesn’t have the capability to efficiently process different formats. Below are a few ways to improve Tech Agility:

  • Use of sensors and servo motors to automatically adjust for changes in package sizes. This also helps for automating product changeovers.
  • Design line layouts that allow processing equipment to be swapped in and out based on production needs. This creates modularity and makes better use of the factory footprint.
  • Outsource smaller runs to contract manufacturers to test market results instead of investing in new equipment
  • Employ 3D printing for late-stage-customization to increase SKU variety without making significant changes in other production areas
  • Engage plant technology and process experts in the product development and design processes. This reduces the time wasted on designs that are not feasible and cannot be manufactured.
  • Leverage data sharing systems so that information from across the supply chain can be used in the product development process. This allows people to understand performance data, capabilities, capacities, costs and other key information across the supply chain.

As new generations usher in new ways of experiencing life, manufacturers in the CPG industry need to have the Agility to keep up with changes without inflating costs. Agility not only enables market leadership, it also removes a significant amount of risk from experimentation – bringing the fun back into the factory. An Agile factory or supply chain creates business opportunities for itself and its customers, who may also need contracted work for store-branded products in new and exciting formats.

Copyright © Calvin L Williams blog at calvinlwilliams.com [2015]. Unauthorized use and/or duplication of this material without express and written permission from this blog’s author and/or owner is strictly prohibited. Excerpts and links may be used, provided that full and clear credit is given to Calvin L Williams with appropriate and specific direction to the original content.

20 Reasons You’re Paying Too Much for Raw Materials – And How to Reduce Costs

Manuficient Consulting - Wasting Money

Raw material is often the single greatest expense for any manufacturing operation. It could range anywhere from 35 – 75% of total cost of goods sold depending on industry and the nature of the supply chain. Unfortunately, many manufacturing companies simply accept this as a “cost of doing business” and are reluctant to explore some of the many opportunities to reduce raw material costs. Some of these opportunities could be captured relatively easily and some require the execution of a longer-term Continuous Improvement strategy.

There are fundamentally three segments of your supply chain where there are opportunities to reduce raw material costs. Those segments are in sourcing, manufacturing, and post-manufacturing. The following are 20 reasons you’re paying too much for raw material:

Sourcing

  • Accepting higher prices instead of taking advantage or supplier market competition. Why not conduct a periodic sourcing analysis to determine the pricing and reliability of competing suppliers? This would give you the information you need to either negotiate prices or source new suppliers.
  • Paying higher prices by ordering smaller quantities from too many suppliers forgoing bulk discounts. The alternative would be to use a smaller number of suppliers to provide more of your materials, resulting in greater purchase volumes and lower prices.
  • Accepting higher prices due to not leveraging payment terms that would be favored by suppliers. Instead, offer to pay suppliers sooner in exchange for lower prices.
  • Accepting higher prices instead of utilizing points of leverage in supplier contracts to negotiate lower prices. The idea would be to assess your relationship with the supplier (including their past performance) to see if there is room for re-negotiating prices.
  • Accepting higher prices due to unwillingness to collaborate with your competitors to get bulk discounts.
  • Utilizing materials that are more expensive than what is needed for the product’s function.
  • Accepting higher prices due to unwillingness to commit to long-term purchasing contracts.
  • Purchasing materials at full rate instead of leveraging bargains. Conversely, monitor your supplier’s business cycles to identify when they would have excess inventory that they would be interested in selling at bargain prices. However, you will, in turn, need to maintain raw inventories and incur any shrinkage, obsolescence, and handling costs. This method is not typically recommended by could be effective in some cases.
  • Purchasing based on your manufacturing schedule instead of supplier’s production schedule. Suppliers are willing to offer discounts if you purchase on their schedule so they don’t need to maintain finished goods inventories. Again, you will, in turn, need to maintain raw inventories and incur any shrinkage, obsolescence, and handling costs. This method is not typically recommended by could be effective in some cases.

Manufacturing

  • High variation in filling or packing processes resulting in high fill targets and over-fill / over-pack. Instead, apply Six Sigma approaches of reducing variation so that overall target weights and over-fill can be reduced.
  • Scheduling using a “push” production model resulting in excess and obsolete inventories. The alternative would be to establish a “pull” production model using kanbans and safety stocks, resulting in controlled inventory levels and less excessive / obsolete materials
  • Scrap and material yield loss created by “leaks” in the system. The approach would be to identify and quantify the impact of leaks. Then implement process changes to close leaks and convert more wasted material into sale-able finished goods.
  • Too many low-consumption raw materials caused by high SKU complexity. Conversely, SKU’s could be rationalized so that smaller orders of raw materials could be reduced.
  • Over-application of material that customers do not find valuable due to over-designing products. Instead, work with customers to better understand the product’s function and remove materials or functions that are not useful to the customer.
  • Over-application of material that customers do not find valuable due to inefficient design. Again, work with customers to better understand the product’s function and explore design options that sufficiently address the need using less material.

Post-Manufacturing

  • Material lost in the supply chain process being scrapped or sent to the landfill instead of being recycled or reclaimed
  • High production costs for suppliers, which can be reduced by providing process improvement or project management services. An approach would be to provide Continuous Improvement services to help reduce the supplier’s operating costs in exchanged for reduced prices. This could be lucrative for suppliers since it helps them increase profit margins with other customers.
  • High supply chain costs for suppliers, which can be reduced by providing warehousing and distribution services. This allows your suppliers easier access to your local markets by utilizing your warehouse and distribution services. Then, you can negotiate lower prices and services fees per activity.
  • Accepting higher prices due to not leveraging buyers to take advantage of bulk discounts. Instead, work with your buyers to have them procure your raw materials. They can often get bulk discounts from your suppliers that you may not have access to. You can also offer your buyers lower prices since this will often result in significantly lower raw material costs on your end.
  • Too much shrinkage, or goods being lost, damaged, or stolen in the supply chain process.

The key to driving substantial improvement in raw materials is to use big data to quantify the opportunity for improvement in each of these areas and develop your plan of attack. The areas that have a combination of high impact, quick results, and low cost of implementation would receive higher priority. The items that do not provide a high short-term impact but contribute to an overall more efficient supply chain would require a more strategic approach to implementation. Most of these items have a place in your Continuous Improvement Strategy and if executed effectively, would set your supply chain up for significant cost reductions in raw material.

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