Fwd: How to really cut costs - myth vs. reality

---------- Forwarded message ----------
From: Jose Mora <joseimora@gmail.com>
Date: Thu, Feb 26, 2009 at 6:45 AM
Subject: How to really cut costs - myth vs. reality
To:

Dear Friends of Atzari,

We've all been there.  We're working on our project, making strides, and along comes the assertive "business guy" that tells you its time to cut costs.  He has the right gravitas, the right presence, and the right body language, all to intimidate you into taking precisely the wrong actions to what your business really needs.  We also know him as the "old school" guy.

This so-called business-guy is coming at you from a cost-accounting viewpoint.  He measures costs in terms of local efficiencies, absorption, and other jargon that seem to make him a true business believer.  

The problem?  

What he is proposing will be the exact opposite of what will cut operating expenses for the enterprise.

Myth: Larger lot sizes will improve efficiencies, reduce the cost per unit, therefore the overall cost.

Reality: You can't measure what you can't see, and you can't cut costs if you have masked the inefficiencies.  Larger lots create excess work in process, hide inefficiencies, and defeat the quality feedback system.  In fact, they end up resulting in much larger operating expenses (the true measure of cost).  Throughput Accounting can mathematically prove the fallacy of unit-based cost accounting.  The only unit that counts is the enterprise, not a unit of product.

Myth: Across the board cuts are the fairest and surest way to reduce costs

Reality:  Cutting costs at the constraint and choking the constraint will reduce the overall throughput of the system and hurt business.  It is far better to invest in protecting your constraint while cutting expenses dedicated to non-constraints.  Protecting the constraint also means having a buffer before and after the constraint.  Unless you know what these are, you really can't just cut across the board and know if you're helping or hurting your business.

Myth: By inspecting early and often, we eliminate defective product while its unit costs are still cheap.

Reality: Units have no value to a customer until they are usable finished units.   you cannot inspect quality in, you must build it in.  Having a reliable lean process, with small lot sizes, the units will travel quickly to their finished stage, at which time defects and corrective action can be put in place.  Frequent inspections, on the other hand, actually slow the process and may also interfere with the quality feedback loop.

Myth: You must first eliminate the "rocks" before lowering the water level.

Reality: Many so-called "rocks" are mirages of light distorted by excess inventory.  Until you reduce lot sizes and WIP inventory, you won't see your real inefficiencies.

Myth: Let's lean each area individually and later connect them.

Reality: Efficiencies at a non-constraint are a mirage.  Unless you view the entire process and identify the constraint, you may actually end up hurting the process.

So, how do you really cut costs:

(1) First and foremost, you need to reduce your lot size.    I don't know your product, so I don't know what is a good lot size.  As a rule of thumb, you should be able to complete an entire lot in a few hours or at least within a day.   If it takes longer, you may have lot sizes that are too large.  There are exceptions, but we know how to deal with those.  

(2) Once you have lowered your lot size, the true constraint(s) in your process will become obvious.  Apply TOC to protect the constraint.  Everything else that is not a constraint or a buffer to protect the constraint is fair game for cutting operating expenses - or eliminating altogether.

(3) Do not be afraid of "lowering the water level."  If you approach it carefully and truly engage the problem, the answers will reveal themselves.  There is always a way to "remove the rocks" or at least minimize their effect.

Controversial?  Yes, but if there is a time to shed cost-sapping myths, that time is now.

Did I step on some toes?  Probably.  But unless we want to see our jobs exported, or eliminated, we must begin to challenge these myths and become truly lean.  The biggest obstacle to a lean transformation is not found in our production floor, but in the way we think and in the myths we continue to embrace.

Lean isn't a luxury, it is a necessity.  We either believe in it or we don't.  If we REALLY want to cut costs, its time to stop the posturing and really get to the heart of the matter.

Thanks and regards,


Jose I. Mora, Principal Consultant
Atzari Consulting, L.L.C.
Mobile: (917) 566-0965 (business)
Mobile: (786) 351-2484 (personal)
Office: (973) 206-9473
Fax: (866) 223-5813 (business)
Fax: (866) 476-0426 (personal)
www.atzari.com
jmora@atzari.com, joseimora@gmail.com