Getting Lean to Maximize Factory Resources

January 1, 2011

Part 1 – Small Quantities More Often

In this article, Part 1 of 2 parts, we will show you how to use Lean methods to produce bottom line results with a carefully selected single change.

In manufacturing, batch size affects everything including: manufacturing lead time, cash flow, plant floor space needs, inventory costs, amount of working capital and capital investment. By focusing [see article called: Maximizing Plant Management Success] on reducing batch size and balancing flow (aka Getting Lean), a company can improve productivity, improve cash flow, reduce plant floor space, and free up cash that is tied up in WIP and FG inventory [see article called: Maximizing Cash]. Getting lean is all about improving flow. Large batches impede flow. Small batches promote flow because they move quickly through the process.

Let’s examine a factory that makes a small high value – high mix consumer product where each unit has a wholesale value of $50. Annual revenue is $17 million. There are 100 workers in a 12,000 sq. ft. plant (very crowded). Since the operation is entirely Make-to-Stock (MTS), about 10% of the factory space is consumed by a stock room that holds $5 million of inventory in about 1,000 SKU’s. There are 6 assembly lines, each with 12 operations from start to finish and most operations take only a minute or two to complete. The current batch size is 100. Why? Two weeks of stock for one SKU is 100 units, and it takes almost 2 weeks to make a batch. Cafeteria trays are used to transport 100 units at a time from one assembly station to another. If we assume a balanced flow where each operation takes 2 minutes to perform, each assembly requires only 24 minutes of Value Added time (VA), while the remaining 3600 minutes in the process are Non-value Added time NVA.

First: We will make a single change. Instead of using cafeteria trays (100 assemblies), we will implement small carriers (10 assemblies). To make the change stick, we must: 1) take away all the cafeteria trays, 2) provide sufficient carriers, 3) re-arrange the lines to remove the space required for the cafeteria trays, 4) provide space only for a very limited FIFO queue to hold 2 carriers at the input of each workstation, and 5) use Kanban cards to regulate flow.

Now, let’s look at our savings opportunities as a result of this single change. First, just the reduction in WIP has the potential to liberate almost $0.5 million of working capital. Second, with smaller production lines, we can free up space on the factory floor, which we can use for a new assembly line for a new product. Our new production lines are now 28% shorter than the previous lines. Saving 28% on 6 production lines is almost enough space for 2 new lines. That’s pretty good for one change, right? Well, in a Lean factory, the concept of continuous improvement means that we are not done yet, so we must seek additional savings.

In Part 2, we will examine how we can build upon batch size reduction by adding another single change that will yield even more financial benefit.

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