Welcome to Part 2 of a 5-part series on Lean Design. In Part 1 I made the case that the achievement of “flow” is a major goal in the design of a Perfect Value Stream. In this lesson I’ll cover how flow can be measured, and be used for Kaizen, benchmarking, and product costing. We will then review how a company grew by 500% in a few years, by applying flow methods.
What gets measured gets done, so it makes good sense to have a repeatable and consistent way of measuring the time between the receipt of a customer order and the completion of the order. In the world of manufacturing this is called Manufacturing Cycle Time (MCT) or Manufacturing Critical-Path Time (MCPT). The term Critical Path is important to acknowledge, since what we are measuring is not the total work content time of a product, but rather the elapsed time it takes to get through the system. The more work that can be done at the same time, in feeder lines for example, the shorter MCT will be.
Measuring work flow in non-manufacturing environments can be done in a similar way, and you can call this Administrative Cycle Time (ACT), or simply Total Lead-Time. The time-line on a Value Stream Map will show this time, as long as it is measuring the critical path only, and is called Total Cycle-Time.
There are different ways to measure MCT or ACT, and you will end up with different values depending on the method you choose. Rather than split hairs over which one is best or more accurate, it is more important to be consistent in your measurements from one measurement to another. The important point is less about getting the “right” number, and more about showing a trend of continuous improvement. Here are your main choices:
- Use the Total Cycle-Time from a Value Stream Map of the value stream in question. This is a value that your team should be able to agree on, at least for this one snapshot in time. Using this method also has the advantage that it requires the creation of a VSM for every main value stream, which is useful in uncovering improvement opportunities and prioritizing your improvement resources. As improvements are made in the Value Stream, the map will be updated and progress can be checked.
- In a manufacturing environment, add up the times on the critical path from your product routing file. If you are using ERP/MRP with a shop-floor capability, you will have been required to set up product routings and times, so this information will be available to you. This method will not be as useful for other types of value streams, like administrative processes that do not use formal routings.
- If you have created Process Flow Diagrams (PFDs), as a part of the Mixed Model Line Design method that we teach, then you can add up the work content times on the critical path. Since the PFDs do not include any buffers, the total time will represent work time only, but that’s ok as long as you are using the measurement to track progress over time. The improvement incentive will be to reduce the work content time by eliminating waste and doing more work in parallel.
- Finally, you can record actual elapsed time by attaching a traveler or card to a physical product, and recording the time it takes to be completed. This measurement will be the most true to the actual time that a customer might need to wait, since it will be including off-shift time when the value stream is not working.
While measuring the actual elapsed time is an attractive choice, realize that the time will vary somewhat whenever you measure it. For this reason you should take a sample of actual time measurements, and use the average.
WHAT WILL YOU USE MCT FOR?
We have already mentioned using MCT to track improvements over time. The expectation is that Kaizen efforts will reduce MCT, and you will need to measure it periodically to confirm that this is the case. If, in spite of significant efforts, you don’t see MCT going down, you’ll need to find out why. It might be that the improvements are not on the critical path, or that they do not have a significant impact on the work flow itself. 5S projects fall into this category of improvements. A high level of organization and housekeeping is a very good thing, but it may not impact MCT very much. We discussed the major obstacles to flow in Part 1 of this series, and that is what you should be improving.
For every Kaizen Event, make sure that the MCT metric is being considered. If there is no anticipated improvement in MCT for this event, that represents a red flag. It does not mean that the event is not worth doing, and there may be other important reasons why it is necessary and important. Generally speaking, however, you do want to anticipate a reduction in MCT, and strive to achieve that.
Knowing what your competitors are achieving with MCT will be difficult or impossible to determine. This information is not publicly available, and you would need to know the measurement method used, as I discussed above. In a sense, however, your competitor’s MCT is not relevant, and it is more important to focus on your own process improvement.
USING MCT FOR PRODUCT COSTING
If you really want to light a fire under the focus on MCT improvement, you can consider using MCT as a basis for allocating overhead costs to products. Traditionally companies use direct labor as the basis for overhead allocation: the more direct labor a product has, the more overhead it will “absorb”. The problems with the method are several-fold. Direct labor as a percentage of total product cost has been increasingly going down, so that for some products it may be as low as a few percentage points. During the same time, overhead costs have been going up, so that more cost is being allocated based on less direct labor. This can be problematic: some products may have higher direct labor, but in reality consume a lot less overhead cost. Another problem with using direct labor to allocate overhead costs is that it provides an illusory incentive to reduce costs by reducing labor. What companies find is that as the labor percentage goes down, the overhead percentage goes up, canceling out any so-called cost reductions.
Consider as an alternative using MCT as the basis for overhead allocation. If a product takes longer to get through the system, it will be allocated more overhead cost. The incentive is no longer on labor reduction, but on improving the flow and reducing MCT. At the end of the day all overhead costs will need to be allocated to your products, but the assumption is that a reduction in MCT will actually help to reduce overhead costs more powerfully than simply reducing the labor content. And, reducing labor still remains one of the ways to reduce MCT!
HOW FLOW MAKES A DIFFERENCE
What is the opposite of Flow? One example of non-flow is a job shop environment, where there are no fixed routings per se. Orders in a job shop can move from one resource to another based on the work that needs to be done, and each order could be different. The typical result in a job shop is very long lead-times, which occur when orders are forced to wait for shared resources. In a machine shop, additional time will be needed to change over machines from one part to another, which also forces batching and even longer lead-times. Lead-times in a machine job shop are measured not in days but in weeks.
An aerospace supplier in California, Roberts Tool, embraced flow to compete in an industry notorious for long lead-times. The core strategy was this:
- Find groupings of machined parts to bid on. Aerospace primes will periodically go out for bids on these items.
- Analyze the machining steps from a flow perspective. Do the parts fits within a common routing?
- Design a machine cell that can flow the work from machine to machine with minimal changeover time.
- Find used equipment that will do the job and meet the required tolerances, at a low investment cost.
- Offer to undercut any competitive bid, and quote lead-times that correspond with the flow time. Lead times could be reduced from weeks to days for a set of parts.
Based on this strategy, Roberts Tool was able to grow the company many times over in a few years, and pay off the cost of the equipment in a short amount of time. You can read more about it on their website, www.robertstool.net.
FLOW AS A COMPETITIVE STRATEGY
Adapting flow or MCT reduction as a competitive strategy to improve lead-times, profitability, to eliminate waste and improve quality has been adapted by companies like Toyota, Roberts Tool, and many others. It is hard to imagine an industry that would not benefit from this approach. In the next part of this series, I’ll be sharing the step-by-step process of designing a value stream based on flow principles.