Strategic Cost Reduction

Today, the world in which we compete is far different from what we've previously experienced. Competition is stronger than ever; customers have more choices and are demanding products and services that are delivered as fast as possible (speed), with no errors (high quality), and at the lowest possible price (low cost). It's easy to see why profit margins are shrinking across our industry. To thrive and effectively compete we must develop a strategy in which we continue adding value to our products and services while, aggressively seeking ways to eliminate waste.

Lean Six Sigma (LSS) incorporates Lean's focus - process speed, and Six Sigma's focus - process quality. Together they take aim at eliminating or minimizing waste. A company must constantly lower its cost (Total Cost of Ownership or TCO) to remain competitive. By eliminating waste we will increase our ability to meet our customer's requirements, while maximizing the firms' profits.

Lean Overview

What exactly does lean mean? In 1990, James Womack, Daniel Roos and Daniel Jones coined the term "lean production" in their book The Machine that Changed the World. This book primarily focused on the automotive industry, refers to Lean Production as a manufacturing paradigm based on fundamental goal of the Toyota Production System (TPS) – continuously minimizing waste. Dr. Womack and Professor Jones followed that groundbreaking work in 1996 with Lean Thinking. Where they demonstrate how lean concepts can be applied to practically any business or industry.

Goals of the Lean Enterprise

1. Define value from the customer's perspective.
2. Reduce Total Cost
   Create the most value while consuming the fewest resources.
3. Eliminate Waste
   Identify which process steps create value and which are only waste (Muda).
   

Muda – The Japanese word meaning "waste" which, when applied to management of the workplace, refers to a wide range of non-value adding activities.

Types of Waste
Waste is any activity that takes up time, resources or space but does not add value to a product or service. The seven types of waste are:
Over-Production
Production of service outputs or products beyond what is needed for immediate use.
Waiting
Also known as queuing - refers to the periods of inactivity in a downstream process that occurs because an upstream activity does not deliver on time.
Transportation
Unnecessary movement of materials, products or information.
Over-Processing
Trying to add more value to a product/ service than what your customer is willing to pay for.
Inventory
Refers to the amount of materials or work-in-process within the system.
Motion
Movement of people that does not add value to the product/ service.
Defects
Are products or aspects of our service that do not conform to specification or to our customers' expectations, thus causing customer dissatisfaction?

Evolution of Six Sigma

The expression Six Sigma was first used in the context of quality improvement by Motorola engineers in the mid 1980's. Initially within Motorola Six Sigma was purely a quality metric that was used to reduce defects in the production of electronic components. Six Sigma was then simply a statistical term that specifically referred to a performance target of 3.4 defects per million operations or 'opportunities' (DPMO). During the mid to late 1980's Motorola quickly realized that they could extend Six Sigma principles beyond manufacturing - to reduce variation and defects in all aspects of organizational performance.

Six Sigma as a Performance Goal
Before Six Sigma most companies believed that 99% was good enough.
Is it? As you can see in table 1.a, 99% is equivalent to a sigma level of four or five. The process will have 6,210 – 233 errors per million opportunities. Studies have shown that the typical process operates at approximately 3 sigma (σ).
Key Concepts of Six Sigma
As you can see, Six Sigma started as metric and has evolved into business philosophy. The philosophy uses data and statistical tools to systematically improve processes and sustain process improvements.

The methodology is a project-focused approach consisting of five phases; Define, Measure, Analyze, Improve, and Control (DMAIC). Projects are selected and Defined from business, operational, and customer needs, based on their linkage to executive strategies. In the Measure phase, tools are applied to validate the measurement system and characterize the process. In the Analyze and Improve phases, sources of variation are identified, a statistical relationship between the process input and output variables is established, and the process performance is optimized. The Control phase applies traditional and statistical tools to sustain the process improvements. Emphasis is places on controlling the key process inputs to consistently achieve key process outputs.

Conclusion
Lean and Six Sigma were originally designed for the factory floor. They have often been regarded as rival initiatives. To sustain our leadership role in our industry, we must utilize tools from both philosophies. Lean Six Sigma will enable firms to provide a cost savings and delight our customers by rapidly accelerating and improving our performance, processes, products, and services.

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Miss leading truths about Economics of Scale

Economies of scale are the cost advantages that a firm obtains due to expansion. Economies of scale refers to the decreased per unit cost as output increases. The initial investment of capital is spread over an increasing number of units of output, and therefore, the marginal cost of producing a good or service decreases as production increases.

When applied on the factory floor, this tends to increase cost throughout the plant. In Economics, you are taught that “an increase in a firm’s scale of production leads to lower cost per unit”. This maybe correct, when you are looking at total output of the firm. Total output quantity divided by total cost equals average cost. This works, when looking at the firm as a whole. When this concept is miss-applied, firms try to apply this thinking to individual production areas. This kind of thinking raises cost throughout production. I have watch individual production lines run as hard as possible, for machine efficiency while building mounds of inventory (or cash) waiting in stock piles! Remember, economics of scale is only valid if the firm’s total out is increased. Many American organizations are working to achieve the benefits of economics of scale, while countering forces of diseconomies of scale are holding the firm back. The most often cited example of diseconomy of scale is bureaucratic inefficiency. As size increases beyond a certain point, operations tend to become more difficult to manage.

As this continues, production cost rises and inefficiencies expand throughout organizations – making the firm less competitive in the open market place. The firm will have choices, become lean or outsource/ offshore their production! Lean is a tougher journey and is better for local communities. American manufacturers’ will continue face this competitive pressure, the firm must make tough decisions.

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