As a follow-up to my last column, 'Must Have' Metrics for Continuous Improvement, the next must-have metrics are first pass yield (FPY) and rolled throughput yield (RTY).
While most companies I visit measure FPY, almost none measures RTY, and therefore they miss exposing huge opportunities to improve flow, quality and financial performance. Why? Because most companies report only by process, which grossly understates the true impact on how material flows through the plant from start to finish. The only metric that tells the whole truth is (RTY). That said, both have a purpose. FPY is equipment specific while RTY reports the cumulative effect of all processes on key deliverables.
Let's say there are six operations involved with the product, and each operation reports its FPY at 95%. RTY, on the other hand, calculates the accumulating impact of the fallout at each operation. In this example, RTY is actually .95 x .95 six times resulting in RTY of 74%. Fully 21% of the opportunities for improvement are being hidden. The opportunities are enormous not to mention how much positive spillover effects will result in improved delivery performance, quality, constraint utilization and financial performance.
The 74% number in this calculation simply means that only 74% of the material you start in process actually reaches the shipping room without flow interruption. While many won't be moved to urgently act on a 5% opportunity, who can stand by and not react to a 26% opportunity with high urgency? Immediately we want to do a deeper dive on the data and dedicate scarce resources to improve, and fully engage salaried and hourly people to help as a team. In other words, full court press!
The quality department typically has the individual numbers to do the calculations, but the missed opportunities aren't being recognized and no one is asking for the data. As we said at the beginning of this series, the first step in problem solving is recognizing there is a problem. The second step is knowing how to size it. The RTY metric will put it on the table. Collect the data. Pareto-ize it. Act on it to achieve improvements of the processes using the lean tools many of you already know. Results will show massive improvement in customer complaints, returns, allowances, rework costs, remakes, etc., in year No. 1 and for years to come.
Oh yes, and these changes will also result in new, free capacity (no capital investment required) to support sales growth and improved operating margin. GMs, VPs of OPS/Mfg/Quality, Plant Managers......where are you?
The Power of OEE
Original equipment effectiveness (OEE) is also a powerful metric used to improve the effective use of resources by machine The gist of it is that by multiplying FPY x Utilization (hours of operations vs. the scheduled hours) x Performance (e.g. machine speeds, rates), you get an overall number for that work center. Most companies I see don't report or use OEE well. Some, however, measure the three components of OEE but never translate that into the opportunities to improve. It's another way to expose large opportunities, particularly in the area of maintenance and the maximization of constraint throughput.
(Once again, since we started this series you should know these things by now: 1) What data you need; 2)what data you already have; 3) what data you need to go get; 4) how to report it so it's actionable; and 5) you should have a start on using more powerful data to drive improvements.)
Critical Inventory Measures
Next up as a critical set of measurements is inventory. Inventory of all kinds is usually the greatest consumer of cash in a manufacturing business. (Major capital projects from time to time would be the other main cash use.) Inventory turns measure the velocity with which raw material (RM), work-in-process (WIP) and finished goods (FG) move through the processes. A simplistic example is if you always have one month of inventory on hand, it would turn 12 times per year. World class companies talk about inventory "spins" in their businesses where end-to-end supply chains include both suppliers and customers to participate in engineering continuous flow throughout the value chain. Their turn numbers are more in the range of 50 to 100 spins per year. Most factories I visit have RM and WIP turns in mid to upper single digits and FG turns of three to four turns. Of course, FG inventory is inventory in its highest cost state -- huge use of cash!
Inventory Equals Cash
Lean is all about flow. Any interruption to the flow is our enemy and represents opportunity for improvement. That's why understanding inventory metrics can lead us to major issues.
For example, if you have downtime on a constrained work center is it due to poor quality or late deliveries of raw materials? Or is there WIP stuck upstream that has choked off support of the constraint? Do a gemba walk around your operation. If you see excesses either in the shop or on the RM and FG inventory records, ask why it's there. As you walk the floor and see inventory backing up in the process, engage the supervisor and find out why the materials aren't flowing.
Create a bigger awareness that inventory equals cash. In the wire and cable industry I worked to have everyone instinctively see dollar bills (cash!) all over the floor instead of inventory. Some improvement fanatics put various sized reels near the break area with signs on each of them communicating how many hundreds of dollars were wrapped around each reel. When everyone instinctively begins to see dollars of cash lying on the floor, instead of "just inventory," you're getting somewhere!
I urge you to sit with your accounting people and understand the calculations of inventory turns and then set bold targets for reductions over a period of time, e.g. 50% reduction in three years. They should also issue a recap of dollars by each inventory type for standard products and be able to summarize FG dollars by items, i.e., A, B and C. For custom-built products you should report by part number, customer name and dollars.
The plant metrics:
- RM, WIP and FG turns
- Inventory dollars for RM, WIP, FG
- Another option some use: Number of days of inventory for each inventory category. Of course reducing the number of days will move the inventory turns number higher.
Here's a tough one. If you are still scheduling batch and queue operations, e.g., with weekly time buckets, you'll have to change. This process always creates too much inventory. Instead, launch a project to redesign the flow into value streams/cells and reengineer the soft infrastructure necessary to match, i.e., ERP scheduling modules including bills of material, routers, etc. In other words, use your formal system to change the parameters for schedule planning only with the objective to ultimately do all schedule execution visually on the shop floor.
This must be carefully planned and ideally done with a manageable group of products so you can phase in this radical change to how you think, work and behave. It's a big job so expect to make the transition over a period of time. It's typical that a complete revamp could take two to three years. Make certain you have senior-level understanding and support for the journey you need to begin. It's a major undertaking so avoid scope creep and identify the number of people who must be available to accomplish this feat. (Think new ERP system project to get a feel of how serious this commitment is.)
As for the execution piece, the beauty of a well-designed "footprint," with kanbans calculated based on line-balanced flow, is that it's easy to visually manage a much-reduced inventory level and deliver more products on time. It's very difficult to optimize the consumption of inventory dollars until this is done.
The first step is usually painful because you have to "drain the swamp" of excess inventories in order to begin creating flow. Use pilot projects to accomplish this gradually to avoid major disruption to the operations. And don't forget to tell your suppliers so they can also slow down replenishments as your schedule dictates.
As you get your footing, you should initiate a supplier strategy, led by your chief of sourcing, that requires key suppliers to start working on producing smaller lots sizes (shoot for 75% reduction in set up times), reducing lead times, improving delivery performance, etc. The same things you expect of your own operations you should expect from your suppliers. The best ones will deliver on your expectations and gain market share. Why? Because you'll work with them as strategic partners for the long term, learn from each other and improve your operations together.
For those that don't respond positively, you'll either terminate your relationship with them or, best case, significantly reduce their level of business. Whether you invite your suppliers in for a presentation of your plans and expectations or whether you communicate via letter, be sure that suppliers are fully aware of your new expectations and that there is a new level of accountability for their improvement. Finally, if you have existing suppliers who are already on the journey to excellence, ask for their help and learn from them. And draft a different communication for that list (likely a much shorter one) thanking them for their leadership and improved performance.
A final note: Many plants I visit have consigned supplier inventory on the shop floor or in the warehouse because the suppliers' lead times are beyond the factories' cycle times. Just because it's the suppliers' cash being tied up, it's taking up your space that could be more productively used, your labor to handle it, move it, etc. It's a common supplier crutch and completely misses the point. There is still excess cash in the pipeline, and somewhere in their pricing you're still footing the bill. Suppliers need to do the same hard work you are doing in your business so elevate your expectations.
On the other hand, some factories use consigned inventories as a crutch based on their poor scheduling processes, poor FPY requiring remakes, etc. Both you and your suppliers need to be doing the same things to reduce the cash being consumed on inventories, especially raw and finished goods. All that said, be patient and work together. The last outcome we want is to have our customer service negatively affected by these changes and the growing pains that accompany them.
"The most dangerous kind of waste is the waste we do not recognize."--Shigeo Shingo
"There is nothing so useless as doing efficiently that which should not be done at all."--Peter F. Drucker