In this week’s blog, I am continuing with the series of great leaders and thinkers' thoughts on different aspects of manufacturing. As most businesses are in all probability well into their respective budgets for 2020, the time is ideal to talk about costs.
Taiichi Ohno, the Father of the Toyota Production System
This blog will be the first of a number of quotes from Taiichi Ohno, who, incidentally, was born in Dalian China, one of my favorite cities, and started off with Toyota as a shop floor supervisor before moving up the ranks. I think a lot of readers are well aware of this and have taken this route through manufacturing.
Taiichi Ohno (大野耐一 Ōno Taiichi, February 29, 1912 – May 28, 1990) was a Japanese industrial engineer and businessman. He is considered to be the father of the Toyota Production System, which inspired Lean Manufacturing in the U.S. He devised the seven wastes (or muda in Japanese) as part of this system. He wrote several books about the system, including Toyota Production System: Beyond Large-Scale Production.
Source – Wikipedia at: https://en.wikipedia.org/wiki/Taiichi_Ohno
One of the quotes that he made that will be discussed in this Blog is:
Source – "Quotes by the Father of the Toyota Production System", Supplychaintoday.com
In my book, The Plant Manager, I make it very clear from the start that the main measures of cost drivers are your KPIs beginning with the design inputs on productivity, usages, and waste. This is followed by other items required for operations, energy, lubrication, etc.
In the Finance chapter of my book, I take the reader through how finance in manufacturing hangs together, and where the responsibilities for the various inputs are and why. These are two important items that need to be fully understood by all holding positions in plant management.
This is the base of what Taiiach Ohno is saying. Costs are there. They are a necessary evil as you have to pay your way. That being said, the message is not to just sit back and calculate them. That’s easy. Work them down or minimize these costs. Added to this, try and eliminate all unnecessary costs. I have examples of this in my book as well where opportunities were found to totally eliminate operating costs.
Costs do not exist to be calculated. Costs exist to be reduced.
Let’s start off with the a summary of the process for budgeting in management as covered in the book.
Firstly, you will need a sales plan tied back to a production plan where it is asked: “Can this plan be met? Are any changes needed in the operations that will require additional operating hours, people, or equipment?”
I did make a point of the above, especially additional resources that are missed for various reasons. Don’t drop this ball.
One point I made is that all manufacturing budgets are to be in “costs per unit.”, ie. “USD/kg” for example. This makes the justifications for any additional costs required easier, and this justification will continue to be used throughout the budgeting process.
The easy part of the budget to calculate are the variable cost inputs. These are “the number of units x usage x cost.” The more you make, the more material is required, and the more costs go up. This is where the production cash flow is derived from – the big number justified above.
The challenge now comes in reducing these costs. As explained in my book, there are two parts to this. The first, the usage variances that fall squarely on the shoulders of the operational management and staff and are usually expressed as a KPI in a units/output measurement. The other is the cost of the materials or price paid that in all probability sits with supply chain/procurement who need to negotiate these. Often in bigger companies, the CEO/MD and non-executive directors are part of these negotiations as they have such a high impact on profitability.
Back to the plant, during the course of the year with the productivity improvement teams in place, there must have been opportunities found to improve KPIs. These now have to be declared and turned into cost savings.
Where improvements are minimal, stretch targets will have to be given to users to get the leverage required so that the CFO can achieve the margins or profit expected by the board and shareholders. Don’t forget again that this is from where dividends are derived and the calculation of their return on investment (ROI).
The business, as an entity, is up against rising costs due to international economics, inflation, material cost, and, more recently, trade wars and tariff increases. These costs cannot all be passed onto the consumer; therefore savings must be found internally. Yes, your KPIs must be improved. Below, is an extract from the book on the definition of a KPI:
“KPIs – Key Performance Indicators that, in the case of a plant, cover a very broad spectrum, as discussed. Never lose sight of these and water them down; they all need to be in place and measured, although only the ones with greater leverage are reported on to the higher levels. The old-age adage should not be forgotten to ‘Look after the pennies and the pounds will look after themselves.’ " Source – The Plant Manager
This is where the plant teams have to get their heads down and really work hard within their respective teams, interrogating each and every input to see where and how it can be reduced or sometimes eliminated.
I covered the balancing of the budgets in which there are fixed costs in a fair amount of detail with respect how they should be structured and follow a two-to-three-year plan in line with modern maintenance methods used today and also suggested how to optimize these. You will find this in my book under “asset care” which, after people, will be the biggest fixed-costs input.
On people, the example I use in the book is restructuring. This is not an annual event but done more so every four to six years. One interesting point on this is that for support services, I have noted that more and more work is being outsourced in small pieces via agencies, and even more so to freelancers that are online. This is an interesting opportunity that needs to be looked into by the HR practitioners. If going this way, please read the 6-week Rule as a guideline in the chapter “Consultants and Contractors,”
In closing, there will always be costs, and there is no getting away from them; and, there is the reduction in costs that is an ongoing challenge and will never stop for both plant, procurement management, and all the respective staff.
As Taiichi Ohno says again:
“Costs exist to be reduced.”
Taiichi's two approaches to drawing up budgets
To all those drawing up budgets and doing budgeting planning, it’s always a long haul, and once done, sets the tone for the following year. So as not to leave those high and dry after reading this blog when working with the teams, I have cut-and-pasted the two major approaches from Taiichi Ohno to build into your various work sessions when drawing up different budgets.
The thoughts that do not apply must go into the operational systems for future budget improvements.
First approach the 'Seven Wastes' model
“Ohno was also instrumental in developing the way organisations identify waste, with his ‘Seven Wastes’ model which have become core in many academic approaches."
These wastes are:
Delay, waiting or time spent in a queue with no value being added
Producing more than you need
Over processing or undertaking non-value added activity
Transportation
Unnecessary movement or motion
Inventory
Defects in the Product.”
Source – Wikipedia: https://en.wikipedia.org/wiki/Taiichi_Ohno#cite_note-Dumas_2013-6
Second approach: the 'Ten Precepts' model
“Ohno is also known for his "Ten Precepts" to think and act to win:
You are a cost. First reduce waste.
First say, ‘I can do it.’ And try before everything.
The workplace is a teacher. You can find answers only in the workplace.
Do anything immediately. Starting something right now is the only way to win.
Once you start something, persevere with it. Do not give up until you finish it.
Explain difficult things in an easy-to-understand manner. Repeat things that are easy to understand.
Waste is hidden. Do not hide it. Make problems visible.
Valueless motions are equal to shortening one's life.
Re-improve what was improved for further improvement.
Wisdom is given equally to everybody. The point is whether one can exercise it.”
Source – Wikipedia: https://en.wikipedia.org/wiki/Taiichi_Ohno#cite_note-Dumas_2013-7
Good luck to all those busy drawing up budgets, and who had the time to read this blog.
Until next week…
EJ
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