by Bob Newton | Mar 5, 2015
This is hardly surprising as the vast majority of business leaders in the UK will have been using those same metrics of Profitability, Labour efficiency, and Launch-to-Plan throughout their careers and will thus be very comfortable with them . So why are they challenged by advocates of Lean?
The main reasons for the challenge is that the above metrics do not stand up to any form of logical investigation and will certainly drive non-lean behaviours. I can hear the accountants drawing their swords as I type.
Both Profitability and Labour Efficiency are determined by the Standard Time (ST) allocated to each process step of a product. The accuracy of ST allocation is therefore of the upmost importance to the accuracy of these two traditional KPIs.
Firstly, man-time and machine-time are often inter-mingled and thus labour efficiency calculations are bound to be in error. Secondly, an investigator would want to know how ST is allocated, how often it is reviewed and also carry out an MSA (Measurement Systems Analysis) on it – ask your business when were the STs for one of your current top-selling products last reviewed and updated?
The ST value is then compared with the actual man-hours worked, to arrive at the labour efficiency (not withstanding any machine-time included). The fact that the STs are applied by operation and can include machine time hides opportunities for operators to man multiple machines and thus labour costs are far more likely to be higher than needed even when labour efficiency is deemed to be good!
Also, by the loose (investigate yours) nature of ST allocation, there will be products and/or processes that will have the potential to generate ‘easy’ time (the ST assigned will be higher than it actually is) and production teams will become aware of these and hence will prefer to work on these products and or processes at the expense of others. All this, inevitably leads to building excess WIP, in the case of process preference, and excess Finished Goods in the case of product preference. A true malaise of making something not required now rather than something that is. Thus, the Lean drive of building just what the customer wants, exactly when he needs it will never be achieved.
ST values are also used to carry the overhead burden of the business to facilitate the calculation of profitability of a product. However, it is equally valid to allocate overheads to say floor space. Indeed the most valid allocation would be whatever factor is the constraint on business growth and this is far more likely to be floorspace than people. So, if overheads were allocated to something other than people, then the profitability of individual products would apparently change – so product profitability calculated in this manner is not a fact, it depends upon how overheads are allocated! In terms of an MSA, this instability of the metric would severely undermine it’s usefulness.
The use of profitability as an operational metric also drives the business to believe that inventory is a ‘good thing’, and thus will undermine any attempt to generate the product flow which results from having little or no WIP.
LtP is one of a number of metrics that can be generated by computerised MRP solutions, all of which directly conflict with the Lean methodology of creating a pull system through the production line. The use of LtP actually states that there is a Push-System in place. This will lead to high levels of inventory, poor delivery performance and a myriad of reporting facilitated by bar code scanning, physical counts, and the like – all of which is completely non value adding. The use of this metric can appeal to non-Lean businesses as it purports to keep all direct workers busy – adding value! The point is missed that unless product is flowing through the line into the customer’s hands, then sales will not increase from this ‘busy-ness’ leading to WIP increasing and cash being consumed
The use of this metric will clearly prevent the adoption of either the Lean drive for inventory reduction and line-side visual management systems.
So come on production managers, make a stand for decent metrics.
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