ACHIEVING OPERATIONAL EXCELLENCE & COST REDUCTION THROUGH LEAN

INTRODUCTION

Current industry trend demands manufacturers to keep reducing prices. Change in Demand is
volatile and Time to Market & Time to Volume has become a key determining factor in keeping
ahead of competition. Situation dictates that keeping ahead of competitors is not a prestige but a
necessity for survival in the industry. To be ahead companies need to focus on four key areas which
are SPEED, FLEXIBILITY, PREDICTABILITY & COST EFFECTIVENESS. Lean is a leading-edge
manufacturing methodology which identifies and eliminates Non-Value-Add activities in
manufacturing environment to achieve excellence and improve profitability.

LEAN MANUFACTURING

Lean Manufacturing was first used as a structured way of improving productivity in Toyota known as
the Toyota Production System. Lean aims at improving the amount of value created in operations.

The concept of Waste and improving profitability starts with a focused view on what contributes to
Value as determined by customer. Once Value is understood as whatever the customer is willing to
pay for, then any activity, process or behavior in the shop-floor that does not add value is considered
as Waste. Using this thought process of eliminating Waste has made many companies save millions
of Dollars. Typical gains a company first embarking on Lean could be:

40% Reduction in Inventory

30% improvement in Cycle Time
4-5% improvement in Quality
Reduced Rework rates up to 20% - 30%
30% savings in space

Waste which hinders value is categorized into 7 types:

1. Excess Inventory & Over Production

2. Over Processing
3. Defects and Rework
4. Waiting
5. Transportation
6. Motion
7. Unutilized Human Resource

These Waste are typically caused by certain conditions or philosophies of manufacturing which can
be called as the Seven Deadly Sins

The Deadly Sins, The Seven Waste and how to overcome it is illustrated in Fig 1 below
 Fig 1

WHAT SHOULD WE DO?

Though Lean is a continuous journey of improving we can start by identifying one of the biggest
hindrances to value which is Overproduction and Excess Inventory. Is there too much Inventory in
your manufacturing operations? Here we will consider a way of how to quantify that and possible
methods of addressing too much inventory. In future articles, the know-how of these methods will
be considered
REDUCE INVENTORY
Cost efficient manufacturers who practice concepts such as Lean, JIT and flow optimization use a
figure called a Velocity Ratio to find out if they are having too much inventory. Velocity ratio tries to
estimate how long your production is being delayed due to queuing caused by excess inventory. It is
an excellent quick, easy and reliable estimate to rely on. Table 1 shows how Velocity Ratio can be
calculated and what the figures mean

Table 1

STEP CALCULATE HOW REMARKS

1 Work In Progress (WIP)
2 Daily Going Rate.(DGR)
3 Manufacturing Cycle
Time (MCT)
4 Total Value Added
Process Time (VAT)
5 Velocity Ratio
Add up all the inventory from
first operation until the last
operation
Total customer demand per
day
WIP/DGR
Total theoretical or value
added process time of each of
the process in the shop floor.
MCT/VAT= Velocity Ratio
Includes WIP inside a machine
Calculate only what is needed
by customer.
This is time needed to produce
demand with the current WIP
Calculate only the theoretical
process time at each machine.
Exclude all conversion time,
down time, queue time etc.
Ratio figure of 4 and below
means it is world class. No
excess Inventory.
Ratio of 5 and above means
there is extra inventory and
needs to be reduced

Using these simple calculations, we can tell if there is too much inventory in your system which is
causing costs to be Not Optimized. Then strategies to reduce inventory can be planned

Two proven methodologies which are extremely useful in reducing inventory are:

i. Reduce Inventory batch size at Raw Material purchasing and at shop-floor to speed up the
whole system. Move inventory and WIP in small batches from process to process
ii. Use Inventory Pull System using Kanban. Kanban system is where you establish signals for
correct quantity and time to buy raw material and produce parts. Material is pulled only
when there is a customer pull signal

With this Inventory assessment, you have started to think Lean-To Identify Waste. In the next article,
we will focus on how batch size optimization and Pull System works. Implementing this will lead to
inventory reduction, cost reduction and improved Lead Time.

JR Victor
Email: jrvictor@innovare-sol.com