Posts filed under ‘Dan Trojacek’

Lean Six Sigma Logistics: Inventories and the Cost of Production

Image from ShutterstockFrom a simplistic point of view, a firm must optimize costs in order to achieve maximum profitability. Therefore, focusing on controlling and lowering costs is instrumental to a firm’s long-term profitability. In the automotive industry, for example, competitive pressures have put downward pressure on retail prices, which means that profit margins can be increased only through decreased costs. Additionally, those companies that can maintain competitive pressures on their competitors will in fact see increased sales, which will result in more efficiency through the realization of economies of scale in terms of overhead cost spreading. In essence, companies that gain competitive cost advantage will continue to maintain competitive advantage overall. However, inventory control, and it financial impact, can be challenging for many firms, as it affects the components of both explicit and implicit costs.

 Explicit costs are defined as historical costs or actual costs that are tangible and allocated on a firm’s financial statement. With respect to inventory, these costs can be seen in items such as storage of inventory, transportation, and material handling costs, including all the personnel, warehouse, and PP&E costs. Other explicit costs associated with holding inventory include those costs due to scrap and rework (which are proportional to WIP), shrinkage, obsolescence, taxes, insurance, and damages to inventory. Even though firms recognize that explicit costs exist with inventory, many companies rationalize that these costs are necessary evils and say they should simply be considered a cost of doing business. Even though reducing these explicit costs can appear to be daunting, doing so can truly separate the top performers in a competitive industry.

Implicit costs are those costs that do not involve actual payment by a company, but represent lost opportunity that results from allocating money in one area, thus ultimately abandoning other potential projects. The opportunity cost of such decisions is the return that the abandoned projects may have generated on the invested capital. There are many schools of thought on how to calculate the cost of lost opportunity; however, most financial managers will agree that the financial losses fall somewhere between the actual cost of capital and a firm’s required risk-adjusted rate of return on its equity (the weighted average cost of capital) for that industry.

Explicit cost, then, are not reflective of the whole story relative to inventory. Implicit costs of holding inventory tell the true story of how inventory can have significant financial implications for the firm.

Regardless of how a firm calculates the opportunity cost of holding inventory, there is no question that the cost does exist and must be taken into consideration when making strategic decisions.

How does your firm calculate the Cost of Production?

Stay tuned for my next segment on Lean Six Sigma Logistics…

Dan Trojacek, LSSMBB, CMQ-OE

Vice President | Director | Manufacturing | Operations | P&L | Supply Chain | Quality | Compliance | Lean | Consultant

June 30, 2018 at 1:46 pm Leave a comment

Lean Six Sigma Inventory Practices

shutterstock_524020273The advantages underlying a Lean environment involve optimizing the supply chain while reducing costs and becoming more flexible to meet the customer’s needs. But we must remember that a transition to a Lean environment affects all functional areas within a company, including all major logistics functions. However, not all functional areas or logistics functions may realize cost reductions individually, as Lean relies on the premise of optimizing an entire process and not simply micro-managing a particular department.

This need to look across the business unit as a whole unit is the number one adjustment for companies when going to a Lean logistics strategy. Simply stated, most companies today still have functional barriers that do not allow them to properly optimize costs across intra-company departments. To do this, and to understand the benefits of implementing a Lean system within the context of logistics functions specifically, one must understand the activity and cost drivers behind specific logistics activities.

Once this information is available, an analysis can be performed summarizing the individual cost drivers so it can be compared with the optimal cost that would result if the activity drivers were integrated with a Lean network.

After basic logistics fundamentals are taken into consideration, we must then look at inbound logistics systems relative to Lean logistics principles. These include many of the parameters such as:

  • Delivery frequency per supplier to the plant,
  • Lot size per part number,
  • Returnable packaging,
  • Leveled flow of each part number into the plant,
  • Pipeline visibility and contingency planning,
  • Logistics measurement systems and continuous improvements

From a Lean manufacturer’s point of view, inbound logistics cost drivers are seen in the following areas:

  • Inventory control
  • Demand forecasting
  • Cost of expediting, shortages, etc.
  • Obsolescence
  • Quality
  • Warehousing and storage
  • Transportation
  • Packaging
  • Order processing
  • Material handling

In order to have a world-class inbound logistics system, a company must take these Lean logistics principles and build its logistics networks using the Lean principles as the foundation of the network.

Does your company use Lean Logistics in the development of a World-Class organization?

March 3, 2018 at 1:43 pm Leave a comment

The Lean Enterprise: What is it and Why is it essential to business survival in the new millennium?

What is this thing called Lean? Is it different from JIT, TQM, re engineering or World Class? Why do we need to change the way we are working, we are profitable? Are these questions that have crossed your mind? Many have wrestled with these and other similar concerns over the last couple years. The first thing we need to do is understand what Lean is all about.

Lean has its origins in the teaching and writings of TQM and JIT, which espouse the idea of “delighting the customer through a continuous stream of value adding activities.” Specifically, it is an extension of the phrase “world class” as define by Dr. Richard Schonberger as “… adhering to the highest standards of business performance as measured by the customer.

Lean Structured Problem Solving ProcessIn other words, Value is always defined from the customer’s perspective. Understanding your customer’s needs is a prerequisite for driving Lean principles and methodologies.

A commonly held definition of Lean Enterprise is, “a group of individuals, functions, and sometimes legally separate but operationally synchronized organizations.” The “value stream” defines the Lean Enterprise. The objectives of the Lean Enterprise are to: ​correctly identify and specify “value to the ultimate customer / consumer” in all its products and services.

Analyze and focus the value stream so that it does everything from product development and production to sales and service in a way that activities that do not create value are removed and actions that do create value proceed in a continuous flow as pulled by the customer.

From the time a customer need is recognized until it is satisfied, the process and all its elements must add value for the “value stream” to be meaningful. The basic components of this Lean system are waste elimination, continuous flow, and customer pull.

As defined by John Krafcik, in his book, The Machine that Changed the World “Lean production is “lean” because it uses less of everything compared with mass production: half the human effort in the factory, half the factory space, half the investment in tools, half the engineering hours to develop a new product in half the time. Also, it requires far less than half of the needed inventory on site. The expected results are fewer defects, while producing a greater and ever growing variety of products.”

Lean applies to any organizational type and can be applied to all areas within the business. Essentially, Lean is a three-pronged approach incorporating A Quality Belief, Waste Elimination and Employee Involvement supported by a Structured Management System. Lean Enterprise activity value diagram basically, we’ve taken simple processes and complicated them resulting in longer lead-times, reduced flexibility, increased inventories and the inability to    meet customer demands. The lean objective is a continuous rapid flow of “Value-Adding Activities.”

The first principle of Lean is to satisfy the needs of the customer by performing only those activities that add value in the eyes of the customer. Put yourself in your customer’s shoes, peer into your organization and look around. You will find many activities occurring which add no value and often times prevent you from meeting customer demands. Identifying both value added and non-value added activities provide you with a visual map of your processes.

The second principle is to define the “Value Stream”. The goal is to identify material and information flows currently required to deliver a product or service. This activity will highlight     bottlenecks, handoffs, lead-time and where inventory. The result is a pictorial of your current processes from start to finish and all parts in-between. The key is to focus on the 65-95% of non-value added actions occurring.

The third principle of lean is to eliminate waste. Waste in the value stream is any activity, which the customer is not willing to pay for since it adds no value to the product or service and often times, is consuming resources. Waste exists in all parts of the business – front office to the factory. This effort results in redefining the current value stream to one of value adding activities and what we call “Sustaining” (SNVA) activities. Sustaining steps are defined as, non-value-added activities performed for one of two reasons, required to by law or regulation or because it contributes to business effectiveness. This provides an outward focus and responsiveness to ever-changing customer needs as opposed to traditional redesigns which are outward focused as they relate to your inward focused needs.

The lean transformation is directed by guiding tenets such as:

Positive, clear communications
Ensure “no-blame” culture
Work through cross-functional teams
Staff involvement at every stage
Process maps on display for comments
Remove non-value added steps, hand-offs, rework loops
Agree design principles with all
Fix the root cause not the symptom
Ensure solution supports departmental interfaces
Incorporate Continuous Improvement

The Lean change effort defines the tools and principles that determine how all aspects of a business operate from sales through distribution. As a result, the right environment for all the competitive elements of quality, design, production, procurement, service and delivery are addressed consistently. Typically, we see benefits to the business like space saving of 50-80%, inventory reductions of up to 90%, reduction of lead-time by 50-75% and quality improvements of up to 300%. In order to be successful, we must follow a rigid-disciplined process. Depending on “low-hanging fruit” opportunities, savings can be realized in several months and have an immediate impact to the bottom line. However, one must be committed for the long run as some change efforts can take as long as 2 years (especially those centered around changing corporate culture).

“Value Stream Mapping” is from the book Learning to See, by James Womak.

Lean Transformations 

The transformation starts with (1) identifying the need for change, (2) communicating that need for change, (3) defining the “value stream” current and future, (4) identifying those changes which address the need for change and solve the situation at hand (5) developing change plans (6) measuring the results and (7) going back to 1 and starting over.

While there is no fail-safe method for a successful transformation, following a regimented approach is the best advice. When programs do fail, many of the reasons can be traced to a few common themes. Some of these pitfalls of implementing lean are:

Not involving the people whom will actually do the work
Not educating the ENTIRE work force
Not having backing and continuous commitment from top management
Not understanding why you need to change
Not having a process owner of the change effort
Not have a clearly identified need and reason for change
Believing that “Your industry is too different to use these techniques”

Lean is intolerant of failure, failure of suppliers, processes, people to perform, machines to operate and most important, uninspired leadership. As you streamline the value chain, disruptions to your process will immediately halt your ability to meet customer demands. While this is not desirous, it does allow us to focus in on the issues and solve them, as these islands of lead-time no longer hide them. The goal is to develop a sustained and uninterrupted flow of value to the customer by effectively converting raw materials (or knowledge) to finished goods (or services) across the entire supply chain.

We believe that Lean Principles can be applied to any environment (high/low volume, high/low mix, job shops, continuous flow and traditional batch facilities) even regulated environments like Pharmaceuticals, Biotech’s and Medical Devices. Every system or process contains waste. Every firm (from manufacturing to distribution to service-related) contains activities that add no value to the customer. The tools and techniques used will depend on specific situations and needs. Lean is a holistic approach to reduce waste in the value stream of any process. Like any other paradigm, Lean requires constant attention and commitment, every day of every week of every month of every year. It is a never-ending effort. Toyota went lean over thirty years ago and is still at it.

VIP is an operations improvement consulting firm specializing in the delivery of value through implementation of Lean Manufacturing and Supply Chain Management tools and techniques in a variety of industries from discrete parts to continuous flow, from distribution to assembly, from aerospace to pharmaceuticals. We have enjoyed equal success deploying these tools and techniques in non-traditional settings like offices, regulated environments and retail settings.

This article written by Patrick Lucansky, Robert Burke and Lee Ducharme and was originally published in the January Issue of PharmaChem Magazine.

Patrick A. Lucansky is President of Value Innovation Partners, Ltd, a Certified Management Consultant through the IMC, teaches operations/ lean courses at the BA/MBA levels

Remember, techniques get you there, principles keep you there.


December 8, 2017 at 3:41 pm Leave a comment

Why Does Lean Need Six Sigma?

As robust as Lean is for dealing with lead time and non-value added costs, there are several critical problems that generally are not addressed in the seminal books on Lean.  Six Sigma provides robust solutions to these problems, which explains why Lean needs Six Sigma.Lean needs Six Sigma

First, Lean does not explicitly prescribe the culture and infrastructure needed to achieve and sustain results. Most Lean resources are mute on the infrastructure needed to successfully implement Lean initiatives and achieve and sustain Lean speed. It is true that many companies that have implemented Lean have been driven to develop an infrastructure similar to that of Six Sigma, but they did it as hoc, rather than use the prescriptive structure contained in Six Sigma. Companies that only apply Lean are sometimes unable to deploy it across the whole organization and sustain results because they lack the well-defined Six Sigma cultural infrastructure to generate senior management engagement, formalize training, secure dedicated resources, and so on. Thus the progress of Lean has been dependent on individual initiative. Many successful Lean implementations regress when a new manager takes over.  Six Sigma is less susceptible (though not immune to) this problem: it asserts that there is only one set of stakeholders whose interests alone must be served. Every book on Six Sigma discusses, in detail, how to sustain infrastructure; virtually no book on Lean even addresses the issue.

Second, Customer Critical-to-Quality needs are not front and center. In requiring the identification of what is “value-added” in a process, Lean does incorporate some element of customer focus, but it is introspective in its approach. The person creating the value stream map makes the decision as to whether an activity is value-add or not. In contrast, Six Sigma prescribes numerous places in improvement methods where the voices of the customers and suppliers must be included. It uses Customer Critical-to-Quality as a key metric and requires a means of capturing the VOC in the Define phase of DMAIC. Simply put, the customer is not front and center in Lean, yet is ever-present in Six Sigma. Most descriptions of Lean methodologies dive into the Improve phase (in DMAIC terminology), going right to solutions and jumping over Define and Measure. Without a prescribed Define step to understand how big the problem is, and a Measure phase to quantify the size versus the resources, people often have bitten off more Lean than they can chew, or lost themselves in a frenzy of Lean improvement events.

Third, Lean does not recognize the impact of variation. Lean does not possess the tools to reduce variation and bring a process under statistical control. Six Sigma views elimination of variation as key and provides a whole arsenal for attacking variation (from statistical process control to design of experiments). For example, allowing an acceptable defect rate of 2% to move to a 10% defect rate can increase lead times and WIP substantially. In other words, the speed and cost gains of Lean can be erased instantly by an increase in variation. An increase in defects is not the only source of variation that increases lead times and WIP. Variation in the demand for an offering and variation in the time it takes to perform an activity that creates that offering both have a major impact on process lead time, which Lean does not directly address. Variation has little effect on processes operating at low capacity. But most service organizations function at or near full-capacity, and that is when variation has a major impact on how long the work (or a customer) has to wait ‘in queue.” Customer-facing service processes often experience a lot of variation in demand because there is no control over when customers will contact us. The lesson? The larger the variation in input, the more excess capacity is needed. If there is either low variation or demand can be controlled in some way (which is more likely achieved with an internal process), then one can operate at a higher capacity without risking excessive delays.

In conclusion, anything that reduces productivity rates will result in long lead times, as people tend to remain “locked on” on type of task longer than is required to meet immediate customer demand. Lead times can be dramatically reduced by using Lean tools to allow task transitions with minimal impact on productivity. One of the primary sources of the learning curve is the complexity of the tasks performed. The larger the number of different tasks, the less often they will be repeated, and the steeper the learning curve. Thus, complexity reduction prevents, while Lean Six Sigma cures, the learning curve problem.

Contents of this article taken from the book “Lean Six Sigma for Service” by Michael L. George.

April 30, 2017 at 10:42 am Leave a comment

Strategic Leadership –What’s Your Style?

Strategic Leadership is the ability of influencing others to voluntarily make decisions that enhance the prospects for the organization’s long-term success while maintaining long-term financial stability.

Continue Reading March 19, 2017 at 6:59 pm Leave a comment

How to Achieve Operational Excellence

Part 1 of 2: Understanding Operational Excellence

Operational Excellence is the foundation of business growth, profitability and competitive advantage. An organization can only begin to forge new growth strategies and business models after it has developed a mature capacity for managing its current business operations effectively and efficiently in the course of meeting the needs of its customers/stakeholders as no one can grow a profitable business on an unsecured foundation.

Based on the criteria of the Malcolm Baldrige National Quality Award, Operational Excellence must be demonstrated by results, not just by words. About half of the 1,000 points associated with the Baldrige award are results focused. In order to maximize the degree to which these 450 points are attained, an organization must show sustained improvement over time, in all areas of importance, against ‘best in class’ organizations.

Operational Excellence is therefore demonstrated by results that reflect sustained improvement over time, improvement in all areas of importance (both performance areas and segments within each area), and performance at a level that is at, or superior to, ‘best in class’ organizations. Common areas of importance for a cost center are safety, quality, people, and cost. Profit centers add the revenue generation performance, processes, and information and technology areas to this mix. Common segments within each performance area include employee groups, facilities, departments, and external customer types. Organizations today are seeking to be operationally excellent for three key reasons: costs, customers, and competitors. They are continuously seeking the best ways to achieve operational excellence (lower costs, improve flexibility and speed to market, quality and reliability, and customer/stakeholder satisfaction and value. By effectively analyzing and managing operations, organizations can produce the right products with the right features at the right cost.

Part 2 of 2: Achieving Operational Excellence, to be continued…

Question: Does your organization have Operational Excellence initiatives in place? 

March 19, 2017 at 6:06 pm Leave a comment

Leveraging Lean Manufacturing with Six Sigma to Improve Business Performance

Separately, Lean and Six Sigma have changed the face of the manufacturing business. Six Sigma, the business management strategy that allows operations managers to improve quality by identifying and removing errors, uses a set of quality management methods. Lean manufacturing, the production practice focused on removing waste, also helps you increase operational efficiency in your business. Both six sigma and lean manufacturing encourage continuous improvement in terms of producing better products, processes or services. In manufacturing, this can include decreased product development cycles, fewer product defects, increased productivity and better utilization to improve  business performance.

Ensure your employees acquire skills and knowledge regarding six sigma and lean manufacturing strategies. Numerous resources are available for this, including online courses. Make sure your program gets sponsorship from your organization’s executive leadership before beginning any implementation; without acceptance and understanding from the company’s leaders, the program cannot function effectively.

Establish roles, such as champions, black belts and green belts to work in a six sigma framework (organizational structure). The define, measure, analyze, improve and control phase method focuses on problem solving. Champions typically define the project scope. Black belt personnel usually act as project leaders. Green belt staff act as team members and work to enable process improvements.

Focus on producing high quality products and establishing metrics based reliable and verifiable statistics. Reducing product defects and eliminating practices that cause waste combine to improve bottom line results.

Incorporate feedback from customers regarding quality and needs. Understand the total product usage as well as variations. Review customer requirements to identify improvement opportunities.

Use process mapping and flow charting techniques to analyze how work flows and better understand conditions and process interactions. Conduct root cause analysis to investigate defect incidents. Determine why problems or accidents occur and then institute permanent corrective action.

Minimize costs by reducing the lead time (the amount of time between the beginning of work and the end) of any process. Lower the number of things in process. Use this strategy in procurement, product development or manufacturing. Eliminating the non-value-added costs reduces your overall expenses and improves business performance. Reducing setup times can significantly improve business performance.

Use lean strategies and tools to increase the speed and efficiency of your business operations. Use six sigma strategies to reduce defects and improve quality. By using both strategies you can produce products more quickly, be more responsive to customer needs and feedback, reduce product defects and operate more efficiently and cost effectively.

Lean Six Sigma is the most dynamic program for streamlining the performance of both your production department and your back office, and providing you with the cost reduction and quality improvements you need to stay one step ahead of your competitors.

In 2017, with the promises of the new Presidential administration to bring manufacturing jobs back to the USA, are you ready to hit the ground running to produce your best quality product as efficiently as possible thereby keeping your competitive edge?

 This article contains excerpts of an article written by Tara Duggan and originally appeared in the Houston Chronicle (Chron).

January 9, 2017 at 3:20 pm Leave a comment

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