Full disclosure

Jonathan Tilley argues that to win the battle for increased productivity, accountants must give production engineers full access to all facts and figures.

The drive to increase UK productivity to the levels of its European and US competitors has become the Holy Grail of British manufacturing with lean production widely regarded as the best means of succeeding in this quest.

For many manufacturers the opportunity to make a lean transformation in their production system comes when they introduce a new product. But why do so many companies fail to take advantage and chose instead to add to the cholesterol of their existing production layout? Can the blame be laid at the door of production engineers, or are the real culprits to be found elsewhere in the organisation?

Lean thinking essentially strives to meet customer requirements by constantly attacking the three enemies: waste, variability and inflexibility. Waste is any activity that adds cost but no value. Variability is any deviation from standard in a process or its inputs, such as materials, people or equipment. Inflexibility is the cost of meeting customer requirements – quantity, specification and time, for example.The business benefits of lean production cannot be ignored, and indeed are increasingly well documented.

So why are companies missing out on opportunities to lean production systems when they are installing a new line for a new product, or especially when they move to a new manufacturing facility on a greenfield site?

Research carried out by McKinsey & Company’s Production Systems Design Centre shows that on average a senior production engineer has six opportunities in his or her career to design and install a new product line. But, only in less than half of cases can these production systems be regarded as successful in terms of its eventual productivity and cost.

Indeed, in one automotive component manufacturer over a 10 year period every new product line which was installed was deemed to have failed.

In the vast majority of the so-called failed lines, production engineers had not even attempted to introduce a new production system, let alone one designed along lean principles. Instead they had added to the cholesterol of a typical factory layout that grows organically, where the pressure to keep up output to meet customer demand outweighs the ability to plan and install a new, more efficient production system that takes account of total cost.

This is not just the case in smaller manufacturing companies which typically expand in piecemeal fashion driven by an entrepreneurial owner manager, but until relatively recently it was also the situation in an engine plant of one of the world’s large automotive manufacturers. Convoluted and extended production lines had grown organically as new products and product variations were added, without anyone considering the improvements that could be made from a re-design of the whole production system.

In addition to time, and ensuring continuation of production, the research showed that the other major barrier to introducing a new production system is cost. Production engineers are trained to think in terms of capital cost when designing a production line and, despite the acknowledged under-investment in UK manufacturing businesses, are under great pressure to keep cost to a minimum. This means that the optimum, lean production system solution is often not introduced.

For example, to avoid expensive carriers a production engineer may choose to make the production line take the shortest, most direct route. However, for many lines this may not be the best solution, as is the case in a car assembly facility.

In what appears at first glance to be a counter intuitive product flow, car bodies enter the assembly area in the centre, which means that the semi-assembled car body has to be transferred by carrier from line to line via longer transfer conveyors. However, this design means that engines and other heavy and large parts do not have to be transported within the facility at all, being delivered to the outside of the assembly area, saving time and money in the production process. The smaller and mostly hidden parts are in the middle of the layout as they are easier to transport. The overall aim is an optimised process sequence and process design for production efficiency, with the simple, slick logistics and with flexibility considered for new model introduction and product variation.

Unfortunately, the amount of capital to be invested in a new production line or facility is often the only measure on which a decision to proceed, or not, is made. The decision is taken despite the fact that the cost of much of the capital that is not model-specific will be amortised over a period of 20 to 30 years.

The major savings that can be made from a lean production system are increased productivity and reduced running costs and over time these can far outweigh any additional capital expenditure.

In a typical manufacturing company around two thirds of the cost of capital can be tied up in the manufacturing process. However, up to 55% of the wages bill is also directly attributable to manufacturing, which means that capital costs are often only a small proportion of the total cost of production.

Leaning a production system does not necessarily require a large amount of capital investment. A building products manufacturer changed the layout of a production system for a capital investment of £5,000. The change took place over three days, without interrupting on-going production and resulted in an increase in productivity of 25% and a reduction in lead time of 70%.

The key, therefore, to analysing the potential effectiveness of a new production system is not its capital cost, but should, in the first instance, be its total running cost. This is where most production engineers start to struggle as such figures can often be hard to come by, whether by design or accident, from the company’s accounting function.

In some companies, however, production engineers enjoy full access to figures, which in other organisations would be regarded as the sole preserve of the financial director. Toyota, acknowledged as one of the world pioneers and leaders in lean manufacturing, is understood to base its decisions on the total cost of production – capital plus running costs and at they same time remaining true to the principles of T.P.S. (Toyota Production System).

The ultimate aim of lean manufacture – producing goods of high quality, in the shortest leadtime, at lowest cost, while continuously improving sustainability – is to increase the value delivered to the customer.

One aspect of lean production that is still little understood and with which both production engineers and accountants need to get to grips, is how the additional value added by lean manufacture can both be measured and realised by its practitioners.

Unlike an analysis of running costs, potential added value equation is very difficult to quantify. Cost plus is the basis of most pricing decisions. It is branded consumer goods companies, especially those at the luxury end of the market that have developed and realised a value proposition by building a brand against which they can demand and obtain premium prices from their customers, though not generally by using lean production.

The challenge for other manufacturers is to see how they can emulate luxury goods manufacturers and realise the hidden value, which they will generate through lean production processes. Once this additional value is taken into account in the decision making process as to whether to introduce a lean production system for a new product, there will be no argument – lean will win every time.

Sidebar: Treat them lean

One business-to-business manufacturer that has used lean manufacturing to add value to its business is Pittsburgh-based aluminium producer Alcoa.

Before it started using lean manufacturing, its products were regarded as commodities and its profitability was reduced by its dependence on the world spot price of aluminium.

The company focused on gaining productivity improvements in all activities across the supply chain, from raw materials to the end consumer, encompassing the integrated use of management tools, production process controls, quality systems, technology and human resources development.

At the same time it took a systematic operations approach with specific tools, processes, and actions applied to eliminate waste, improving customer responsiveness and reducing inventory levels.

As result, profits grew faster than sales while capital expenditure as a proportion of sales declined and in 2000 Alcoa achieved a return on capital employed in the year of 14.4%, against a ROCE of 10.4% from the best of its competitors.

In addition, the company saw a payback of $1 billion costs savings with an additional $1 billion savings targeted for 2003. This, in turn, has allowed Alcoa to break out of a cycle where its net income was linked to the spot price of aluminium.

On the web