Continuous Improvement or Continuous Cost Reduction
By Jack Reardon
Continuous improvement, or continuous cost reduction, means improving efficiency and productivity. If you improve efficiency and productivity, you decrease costs, increase capacity, and improve the overall output, reducing complaints and returns. It’s all about being better, faster, and cheaper. If you make better products and services, you make things faster by reducing waste and we end up with a cheaper process. In global markets, if you want to increase market share there are limited ways you can make this happen:
- Create something for which no market exists and you own the market. But, as soon as you create this new market, like the smartphone, everyone else is jumping in to take that market away from you. They will steal your market by undercutting the price.
- Steal market share; if you are in an existing market and you want to grow, you must steal it from others. In order to steal market share, your product or service must be better, faster, or cheaper.
Better, faster, and cheaper: Continuous improvement is used to achieve all three of these strategies. Business is survival of the efficient and continuous improvement is not just a nice thing to do, but a must. The business that is happy with their performance and doesn’t improve everything is doomed. Everything is changing and if the business does not keep up, they will fall behind. I see this over and over; businesses that were once very successful and productive going out of business because they did not reinvest, did not improve the way they did things, and cost themselves right out of business.
Continuous improvement is not a quality program instituted because you have complaints and returns and in-house defects; it is how we can improve everything we do. From order entry to shipping, how can we cut costs and increase speed? Why does it take so long to do anything? Every step in the process needs to be mapped and analyzed to determine how we can do this job better, faster, and cheaper. The reason it is called continuous is that we can never be satisfied with the performance. Very few things in this world are perfect or without error, so the goal is to constantly seek perfection. Another reason performance metrics are so important is that they track, monitor, and improve whatever the process is and make it better and better. Is 98% good enough? How about 99%? What about 99.9997% or six sigma?
In today’s world, margins are getting smaller, competition is getting harder, and customers are more demanding; therefore, as a business we cannot become stagnant. We need to develop new products, new ways of manufacturing those products, and new methods of providing services and once developed continue to improve and cut costs. This is not easy! However, if we are running around fighting fires all day long, we will never have time to accomplish all these other things. If we can stop fighting fires, we free up resources to address improvements.
How does one free up resources? It takes time but my approach is to fix the current processes to a five or six sigma level: no complaints, no returns, very little defects, and plenty of time to work on the future. When I was able to get my manufacturing performing at a six sigma level, we had plenty of time to focus on developing robust new products that flowed right into manufacturing with very few problems or actions required, and very little manufacturing issues. Performance is the goal; anything less than six sigma is unacceptable. Planning, planning, planning is the key to making things happen. If you can take a 30-day lead time down to a couple of days, you just achieved your goals faster. If you can do this with a good high-quality product, you have achieved better results, and because you did it faster you achieved it more cheaply and have therefore maximized profit.
With the amount of man-hours we spend planning, we really suck at it. Why does it take 30 days to build a product that has 188 seconds of actual work involved? If I need 100 of these parts, why can’t I build these in 18,800 seconds? This should have a lead time of two days! What’s the problem? There are many excuses why it takes 30 days, but they are just excuses. These parts spend most of the time sitting around waiting.
Waiting to be received
Waiting to be inspected
Waiting to be transferred to inventory
Waiting for a machine
Waiting to be inspected
Waiting for rework or scrap replacement
Waiting for final inspection
Waiting to be packaged
Waiting for shipping
If we could eliminate all this waiting, we could be much more efficient. It is not easy to address all this waiting; it takes some major strategy shifts. We need to look at how we do things and redesign the process to make it more efficient and productive, thereby reducing costs. I had a two-day turnaround time and my customers would actually pay more for quicker delivery. It took a couple of years to figure out how to do this and it took some investment in inventory, but it paid off very well. Our biggest improvement was taking our set-up time from four hours to four minutes, freeing up huge amounts of capacity. Set-up time is the biggest waste of time in manufacturing and it is also one of the easiest to fix, so why don’t they do it? They don’t have time! We’re too busy!
The management team that accepts excuses is not going to improve anything. At best, you can maintain the status quo, not continuous improvement. The only method of cost reduction is getting rid of people, which does not solve the problem. People are not the issue; it is how we are using those people that is causing the problem. We tend to blame people for mistakes and inefficiencies, but it is the process that is causing the problems. Redesign the process and problems will go away! The basic problem is typically the way we do things and not who is doing these things. We have worked in service organizations with 20 to 30-day turnaround times and a huge backlog by redesigning the process from scratch and ending up with two days and no backlog. Error rates from 62% to 2%, customer satisfaction in the toilet to very happy, just by mapping out the process, addressing the flow, training the employees, totally redesigning the process, and ending up with half the resources. Now this process is better, faster, and cheaper. It is also freeing up time to work on continuous improvement of that process by allowing the employees to track and monitor their own performance.
Start at the beginning and work your way through, process by process, project by project, until you end up with all the processes working on making their process better and better and establish internal customer/supplier relationships throughout the company. One of my frustrations is a lack of communication between processes; errors or defects are passed from one process to another and nothing is done to address these issues. “Not my job” is what I’ll hear. You are a customer and you have the right to receive high-quality products or services from the previous process. As an internal supplier, I should meet on a regular basis with my internal customer and receive feedback on how I am performing. Do I supply you with good product? Is my product on time? Let’s look at the cost of both of our processes and see if there is anything we can do to improve efficiency. Let’s work together to make a better product, faster and cheaper. Just think how fast we could improve if we were able to create this type of environment!
If I receive a bad product or service from the previous process, I should give it back and have them fix it. If I do this, they will have to find out why it is happening and address the problem. This is what continuous improvement is all about; continuing to improve everything we do, taking the time to address problems and satisfying my customers! It is hard work, it takes time and effort, but the payoff can be huge. How many businesses has Wal-Mart put out of business? They created a fast, efficient, and cheap process that others were unable to compete with. If you do these things, you will put the competition out of business because they will be unable to keep up with your improvements. This strategy is called Lean Six Sigma and it works. Wal-Mart may not be the best, but they are very Lean in how they buy, transfer, and sell products. They can undersell anyone and still make money; this is what these strategies are all about.
If I were in the healthcare business and I could process claims in half the time and half the cost, I could undercut everyone else and steal all their business. Healthcare is mostly based on price and people tend to go for price rather than service. What would happen if I could sell you a package just as good as the others, but at half the cost? People would jump ship to my healthcare package. With the same benefits, same coverage, and better service, I could steal at least half of your business. Before I do this, I have to figure out how to cut my costs in half or more and still make the same margins. This can be done; it’s not that hard!
I am in business for one reason: to make money! The trick is to maximize sales, maximize profits, and maximize growth, while decreasing costs and improving quality and delivery.