From Zero
to Hero
By
Trevor Cusworth
From Zero
to Hero
By
Trevor Cusworth
One of the main
problems with companies is that their sights are often set too low—using
efficiency measures that don’t reflect their operation’s full
potential.
For example, a
recent analysis of 27 manufacturers showed that on average the companies were
operating at 71% of their maximum efficiency. However, a deeper analysis based on their
assets’ “true capabilities” found that they were actually operating at only 47%
efficiency.
The fact that traditional performance measures were over-reporting efficiency by more than 50% led many of the companies to believe that everything was fine. This, in turn, caused them to overlook some obvious improvement opportunities—such as waste and bottleneck speed—and to focus on minute details that had a minimal impact on the bottom line.
A NEW
APPROACH
“Zero
Loss Analysis "
is a new approach to performance improvement that uses an operation’s potential
as a baseline for assessing performance and identifying improvement
opportunities. Instead of relying on artificial targets, it looks at each
asset’s intrinsic capabilities and detailed operating constraints—the actual
drivers of performance.
This breakthrough
technique has helped manufacturing companies improve performance, boosting their
efficiency and yields by as much as 50%.
The technique can also help companies achieve the greatest return on
their improvement investments.
In many cases, the
insights are shocking. For example, a consumer goods manufacturer was using
downtime to prioritize its process improvement efforts and had assigned teams to
tackle the top two issues, which together were causing 280 minutes of downtime
per week. But the company’s priorities changed dramatically after a Zero Loss
Analysis, which looked at all sources of lost time and translated the impact
into dollars of lost profit (Figure 1).
The Zero Loss Analysis showed that two of the top three downtime problems were far down the list in terms of profit impact, with a combined value of only $70,000 per year. Meanwhile, the biggest improvement opportunity—which was worth about $250,000 per year—wasn’t on the original list of downtime problems because it was caused by a slow-running process bottleneck and was thus invisible to the company’s traditional measurement system.
FAILURE OF TRADITIONAL
APPROACHES
The three most
common approaches used by companies when setting goals and deciding on
performance improvement activities have significant
limitations.
Cost
Accounting and Budgeting
Operating budgets
are typically based on historical performance rather than on an operation’s
intrinsic capabilities and performance potential. Also, budget-related goals are routinely
adjusted downward to make them more achievable. The resulting targets might seem like
hard numbers to give people a tangible goal, but they are actually quite
subjective and usually don’t reflect what is truly possible. People throughout
the organization gradually come to believe that the artificial targets represent
the best performance that can be attained and eventually lose sight of the
operating factors and constraints that drive performance.
In addition, many
companies use data from their cost accounting system to set targets and track
performance. But that cost data doesn’t look at profits or margins. For example,
cost-based performance targets can actually punish managers for increasing
output because it treats the higher costs associated with increased production
volume as a problem without considering the positive impact on
margins.
Moreover, the cost accounting system has no knowledge of
the process bottlenecks and other factors that drive performance. For example,
one of
When a Zero Loss
Analysis showed the true cost to be $750,000 a year, the plant manager was
genuinely shocked. Four weeks later the problem was corrected, and the savings
began trickling down to the bottom line.
We’re not saying you should abandon your operating budget and cost accounting system. We’re suggesting that you recognize their limitations.
Benchmarking
External
benchmarking is another popular, yet flawed, technique for assessing performance
and setting targets. First, the benchmark results are often based on another
company’s performance and largely reflect that business’ unique circumstances
and limitations. Secondly, plant managers and staff tend to be highly skeptical
of external benchmarks. Whether their reasons are valid doesn’t really matter.
If they don’t accept the benchmarks, they won’t take the targets seriously and
won’t feel any pressure to improve.
Manage by
Intuition
Key improvement
decisions are often driven by intuition, rather than hard data. The resulting
targets and focus areas are often little more than an educated
guess.
For example, the
leadership team of a large brewery was asked to guess the company’s top five
improvement opportunities. Their list was then compared with the Zero Loss
Analysis, which showed that only two of their guesses were correct. Their
top-rated improvement opportunity, which they believed was worth about $2.5
million, had an actual value of only $55,000. Their second-rated opportunity,
which they estimated at $1 million, was really only worth $180,000.
Meanwhile,
several of the biggest improvement opportunities weren’t even
listed.
With these
traditional approaches, it is difficult for company leaders to understand the
full magnitude of improvement opportunities—or even to know if all of the
potential problems have been identified. This complicates consensus-building
around the top priorities and slows the improvement
process.
ANALYSIS
PROCESS
Zero Loss Analysis helps companies achieve remarkable performance improvements. It consists of four simple steps (Figure 2).
Gather data.
Collect historical data and other information about the operation, including:
- Production
data
- Raw material
data
- Labor hours
(standard and overtime)
- Run hours
(scheduled and unscheduled)
- Downtime and waste
data
- Product
information
- Costs and production plans
Identify
the bottlenecks.
Analyze
the operational data to identify bottlenecks and performance problems. Conduct a
separate analysis for every SKU or group of closely related
SKUs.
Determine
the actual operating potential.
Calculate
the potential efficiency and maximum yield assuming that bottlenecks are
eliminated, and that the process operates at maximum speed and throughput with
zero waste, downtime and excess crew.
Translate
operational improvements into business benefits.
Conduct a market analysis to determine how the potential operating improvements would affect the company’s bottom line. If increased output can be sold, represent the operational improvements as revenue and profit growth. If the market cannot absorb all of the increased output, represent the operational improvements as labor cost savings, reduced raw material usage, and opportunities for consolidation and rationalization.
ACHIEVING RESULTS
Although a Zero Loss Analysis is both conceptually simple and useful, convincing people to adopt a new approach to measuring and improving performance is tricky. Here are some tips:
Start
with your most efficient plant.
If
you can deliver significant improvements at your most efficient plants, just
think what you can achieve in the other parts of your
operation.
Have
the local staff repeat the analysis.
When your people run the numbers and see the improvement potential for themselves, they are more likely to get on board. That’s essential for sustained performance and improvement.
Dive deeply into one or two areas.
Pick
one or two operating assets and conduct a detailed analysis to show exactly how
theoretical improvements can be converted into real-world value. This makes the case for change much more
compelling.
Analyze
all of your operations.
Analyzing a single plant can deliver valuable insights. But to create a complete picture of your improvement potential, you need to look at your entire operation. This broad perspective can help you understand potential synergies and cross dependencies, and avoid double counting.
GETTING
STARTED
Zero Loss Analysis provides a strong foundation for long-term improvement. Yet a 1–2 week assessment is generally all that is required to identify the level of improvement that is truly possible and to determine the right focus areas. After that, your company will have a clear roadmap for improving its operations and for significantly improving the return on improvement investments.
Trevor
Cusworth, is a Principal Consultant at Step One Consulting,
LLC ,
a firm focused on manufacturing operations improvement in a variety of different
industries. Trevor’s focus is on
helping transform the manufacturing operations of manufacturing clients through
the combination of technology and performance improvement consulting
services.
Contact him at tcusworth@steponeteam.com.
XONITEK
Corporation is a management and technologies consulting firm with a world
wide presence and a reputation for excelling in the optimization of
business synchronization