The Goal: A Process of Ongoing Improvement, page 30
"What’s the matter?’’ I ask him.
"What about setup time?’’ he says. "You can batch sizes in half, you double the number of setups. What about direct labor? We got to save on setups to keep down costs.’’
"Okay, I knew this would come up,’’ I tell them. "Now look, it’s time we think about this carefully. Jonah told me last night that there was a corresponding rule to the one about an hour lost at a bottleneck. You remember that? An hour lost at a bottleneck is an hour lost for the entire system.’’
"Yeah, I remember,’’ Bob says.
I say, "The rule he gave me last night is that an hour saved at a non-bottleneck is a mirage.’’
"A mirage!’’ he says. "What do you mean, an hour saved at a non-bottleneck is a mirage? An hour saved is an hour saved!’’
"No, it isn’t,’’ I tell him. "Since we began withholding materials from the floor until the bottlenecks are ready for them, the non-bottlenecks now have idle time. It’s perfectly okay to have more setups on non-bottlenecks, because all we’re doing is cutting into time the machines would spend being idle. Saving setups at a non-bottleneck doesn’t make the system one bit more productive. The time and money saved is an illusion. Even if we double the number of setups, it won’t consume all the idle time.’’
"Okay, okay,’’ says Bob. "I guess I can see what you mean.’’
"Now Jonah said, first of all, to cut the batch sizes in half. Then he suggested I go immediately to marketing and convince them to conduct a new campaign which will promise customers earlier deliveries.’’
"Can we do it?’’ asks Lou.
I tell them, "Already, our lead times have condensed considerably over what they were before thanks to the priority system and making the bottlenecks more productive. We have reduced lead time of about three to four months down to two months or even less. If we cut our batch sizes in half, how fast do you think we can respond?’’
There is an eternity of hemming and hawing while this is debated.
Finally, Bob admits, "Okay, if we cut batch sizes in half, then that means it ought to take half the time it does now. So instead of six to eight weeks, it should take about four weeks . . . maybe even three weeks in a lot of cases.’’
"Suppose I go to marketing and tell them to promise customers deliveries in three weeks?’’ I say.
"Whoa! Hold on!’’ says Bob.
"Yeah, give us a break!’’ says Stacey.
"All right, four weeks then,’’ I say. "That’s reasonable, isn’t it?’’
"Sounds reasonable to me,’’ says Ralph.
"Well... okay,’’ says Stacey.
"I think we should risk it,’’ says Lou.
"So are you willing to commit to this with us?’’ I ask Bob.
Bob sits back and says, "Well...I’m all for bigger bonuses. What the hell. Let’s try it.’’
Friday morning finds the Mazda and me again hustling up the Interstate toward headquarters. I hit town just as the sun hits the glass of the UniCo building and reflects a blinding glare. Kind of pretty actually. For a moment, it takes my mind off my nerves. I’ve got a meeting scheduled with Johnny Jons in his office. When I called, he was quite willing to see me, but sounded less than enthusiastic about what I said I’d like to talk about. I feel there’s a lot riding on my ability to convince him to go along with what we want to do. So I’ve found myself biting a fingernail or two during the trip.
Jons doesn’t really have a desk in his office. He has a sheet of glass on chrome legs. I guess that’s so that everyone can get a good look at his Gucci loafers and silk socks—which he exposes as he leans back in this chair, interweaves his fingers and puts them behind his head.
He says, "So... how is everything going?’’
"Everything is going very well right now,’’ I say. "In fact, that’s why I wanted to talk to you.’’
Jons immediately dons an impassive face.
"All right, listen,’’ I tell him, "I’m going to lay my cards out for you. I’m not exaggerating when I say everything is going well. It is. We’ve worked off our backlog of overdue orders, as you know. At the beginning of last week, the plant began producing strictly to meet projected due dates.’’
Jons nods and says, "Yes, I’ve noticed my phone hasn’t been ringing lately with complaints from customers missing their orders.’’
"My point,’’ I tell him, "is that we’ve really turned the plant around. Here, look at this.’’
From my breifcase, I take the latest list of customer orders. Among other things, it shows the due dates promised, along with the dates when Ralph expected shipment, and the dates the products were actually shipped.
"You see,’’ I tell Jons as he studies the list on the glass top of his table, "we can predict to within twenty-four hours one way or the other when an order will leave the plant.’’
"Yes, I’ve seen something like this floating around,’’ says Jons. "These are the dates?’’
"Of course.’’
"This is impressive,’’ says Jons.
"As you can see by comparing a few recently shipped orders with ones of a month or so before, our production lead times have condensed dramatically. Four months’ lead time is no longer a holy number with us. From the day you sign the contract with the customer to the day we ship, the current average is about two months. Now, tell me, do you think that could help us in the marketplace?’’
"Sure it could,’’ says Jons.
"Then how about four weeks?’’
"What? Al, don’t be ridiculous,’’ says Jons. "Four weeks!’’
"We can do it.’’
"Come on!’’ he says. "Last winter, when demand for every damn thing we make was way down, we were promising delivery in four months, and it was taking six! Now you’re telling me you can go from contract to finished product in four weeks?’’
"I wouldn’t be here talking to you if we couldn’t,’’ I tell him, hoping desperately that we’re right.
Jons snorts, unconvinced.
"Johnny, the truth is I need more business,’’ I tell him. "With our overdues gone, and our current backlog declining, I’ve got to get more work into my plant. Now we both know the business is out there; it’s just that the competition is getting more of it than we are.’’
Jons looks at me through narrowed eyes. "You can really turn around an order of 200 Model 12’s or 300 DBD-50’s in four weeks?’’
"Try me,’’ I tell him. "Get me five orders—hell, get me ten orders—and I’ll prove it to you.’’
"And what happens to our credibility if you can’t come through?’’ he asks.
Flustered, I look down through the glass table.
"Johnny,’’ I say, "I’ll make a bet with you. If I don’t deliver in four weeks, I’ll buy you a brand new pair of Guccis.’’
He laughs, shakes his head and finally says, "Okay, you’re on. I’ll pass the word to the salespeople that on all your products, we’re offering terms of factory shipment in six weeks.’’
I start to protest. Jons holds up a hand.
"I know you’re confident,’’ he says. "And if you ship any new orders in less than five weeks, I’ll buy you a new pair of shoes.’’
29
A full moon is shining through the bedroom window and into my eyes. The night is still. I look at the clock beside me, which says it’s 4:20 A.M. Next to me in bed, Julie is sleeping.
Resting on my elbow, I look down at Julie. With her dark hair spilled out on the white pillow, she looks nice sleeping in the moonlight. I watch her for a while. I wonder what her dreams are like.
When I woke up, I was having a nightmare. It was about the plant. I was running up and down the aisles and Bill Peach was chasing me in his crimson Mercedes. Every time he was about to run me over, I’d duck between a couple of machines or hop on a passing forklift. He was yelling at me from the window about my bottom line not being good enough. Finally he trapped me in the shipping department. I had my back against stacks of cardboard cartons, and the Mercedes was racing toward me at a hundred miles an hour. I tried to shield my eyes from the blinding headlights. Just as Peach was about to get me, I woke up and discovered that the headlights were moonbeams on my face.
Now I’m too much awake, and too aware of the problem I was trying to forget this past evening with Julie for me to fall back to sleep. Not wanting to awaken Julie with my restlessness, I slip out of bed.
The house is all ours tonight. We started out this evening with nothing particular to do, when we remembered we had a whole house in Bearington with nobody in it to bother us. So we bought a bottle of wine, some cheese and a loaf of bread, came here and got comfortable.
From the living room window where I stand in the dark looking out, it seems as though the whole world is asleep except me. I’m angry with myself at not being able to sleep. But I can’t let go of what’s on my mind.
Yesterday we had a staff meeting. There was some good news —and some bad news. Actually, there was a lot of good news. High among the headlines were the new contracts marketing has been winning for us. We’ve picked up about half-a-dozen new orders since I talked to Johnny. More good news was the fact that efficiencies have gone up, not down, as a result of what we’ve been doing in the plant. After we began withholding the release of materials and timing the releases according to the completed processing of heat-treat and the NCX-10, efficiencies dipped somewhat. But that was because we were consuming excess inventories. When the excess inventories were exhausted—which happened quickly as a result of the increase in throughput—efficiencies came back up again.
Then, two weeks ago, we implemented the new smaller batch sizes. When we cut batch sizes in half for non-bottlenecks, efficiencies stayed solid, and now it seems as though we’re keeping the work force even more occupied than before.
That’s because a really terrific thing has happened. Before we reduced batch sizes, it wasn’t uncommon for a work center to be forced idle because it didn’t have anything to process—even though we were wading through excess inventory. It was usually because the idle work center had to wait for the one preceding it to finish a large batch of some item. Unless told otherwise by an expeditor, the materials handlers would wait until an entire batch was completed before moving it. In fact, that’s still the case. But now that the batches are smaller, the parts are ready to be moved to the next work station sooner than they were before.
What we had been doing many times was turning a nonbottleneck into a temporary bottleneck. This was forcing other work centers downstream from it to be idle, which reflected poorly on efficiencies. Now, even though we’ve recognized that non-bottlenecks have to be idle periodically, there is actually less idle time than before. Since we cut batch sizes, work is flowing through the plant more smoothly than ever. And it’s weird, but the idle time we do have is less noticeable. It’s spread out in shorter segments. Instead of people hanging around with nothing to do for a couple of hours, now they’ll have maybe a few tento twenty-minute waits through the day for the same volume of work. From everybody’s standpoint, that’s much better.
Still more good news is that inventories are at their lowest ever in the plant. It’s almost shocking to walk out into the plant now. Those stacks and piles of parts and sub-assemblies have shrunk to half their former size. It’s as if a fleet of trucks had come and hauled everything away. Which is, in fact, about what happened. We’ve shipped the excess inventory as finished product. Of course, the notable part of the story is that we haven’t filled the plant back up again by dumping new work-in-process on the floor. The only work-in-process out there now is for current demand.
But then there’s the bad news. Which is what I’m thinking about when I hear footsteps on the carpet behind me in the dark.
"Al?’’
"Yeah.’’
"How come you’re out here in the dark?’’
"Can’t sleep.’’
"What’s wrong?’’
"Nothing.’’
"Then why don’t you come back to bed?’’
"I’m just thinking about some things.’’
It’s quiet for a second. For a moment, I think she’s gone away. Then I feel her beside me.
"Is it the plant?’’ she asks.
"Yeah.’’
"But I thought everything was getting better,’’ she says. "What’s wrong?’’
"It has to do with our cost measurement,’’ I tell her.
She sits down beside me.
"Why don’t you tell me about it,’’ she says.
"Sure you want to hear about it?’’ I ask.
"Yes, I do.’’
So I tell her: the cost of parts looks as though it’s gone up because of the additional setups necessitated by the smaller batch sizes.
"Oh,’’ she says. "I guess that’s bad, right?’’
"Politically speaking, yes,’’ I tell her. "Financially speaking, it doesn’t make a damn bit of difference.’’
"How come?’’ she asks.
"Well...do you know why it looks like the cost has gone up?’’ I ask her.
"No, not at all,’’ she says.
I get up to switch on a lamp and find a piece of paper and pencil.
I tell her, "Okay, I’ll give you an example. Suppose we have a batch of l00 parts. The time to set up the machine is 2 hours, or 120 minutes. And the process time per part is 5 minutes. So we’ve invested per part 5 minutes plus 2 hours of set-up divided by 100. It comes to 1.2 minutes of set-up per part. According to the accountants, the cost of the part is based upon direct labor of 6.2 minutes.
"Now if we cut the batch in half, we still have the same amount of set-up time. But it’s spread over 50 parts instead of 100. So now we’ve got 5 minutes of process time, plus 2.4 minutes of set-up for a grand total of 7.4 minutes of direct labor. And the calculations are all based on the cost of direct labor.’’ Then I explain the way costs are calculated. First, there is the raw material cost. Then there is the cost of direct labor. And finally there is "burden,’’ which essentially works out to be cost of the direct labor multiplied by a factor, in our case, of about three. So on paper, if the direct labor goes up, the burden also goes up. "So with more set-ups, the cost of making parts goes up,’’ says Julie.
"It looks that way,’’ I tell her, "but in fact it hasn’t really done anything to our actual expenses. We haven’t added more people to the payroll. We haven’t added any additional cost by doing more set-ups. In fact, the cost of parts has gone down since we began the smaller batch sizes.’’
"Down? How come?’’
"Because we’ve reduced inventory and increased the amount of money we’re bringing in through sales,’’ I explain. "So the same burden, the same direct labor cost is now spread over more product. By making and selling more product for the same cost, our operating expense has gone down, not up.’’
"How could the measurement be wrong?’’ she asks. I say, "The measurement assumes that all of the workers in the plant are always going to be fully occupied, and therefore, in order to do more set-ups, you have to hire more people. That isn’t true.’’
"What are you going to do?’’ she asks me.
I look up at the window. The sun is now over the roof of my neighbor’s house. I reach over for her hand.
"What am I going to do? I’m going to take you out to breakfast.’’
When I get to the office, Lou walks in.
"More bad news for me?’’ I joke.
He says, "Look...I think I can help you out on this cost of products thing.’’
"Yeah? Like how?’’
"I can change the base we’re using for determining the cost of parts. Instead of using the cost factor of the past twelve months, which is what I’m supposed to be doing, we can use the past two months. That will help us, because for the past two months, we’ve had big increases in throughput.’’
"Yeah,’’ I say, sensing the possibilities. "Yeah, that might work. And actually the past two months are a lot more representative of what’s really going on here than what happened last year.’’
Lou leans from side to side. He says, "We-l-l-l, yes, that’s true. But according to accounting policy, it’s not valid.’’
"Okay, but we have a good excuse,’’ I say. "The plant is different now. We’re really a hell of a lot better than we were.’’
"What about setup time?’’ he says. "You can batch sizes in half, you double the number of setups. What about direct labor? We got to save on setups to keep down costs.’’
"Okay, I knew this would come up,’’ I tell them. "Now look, it’s time we think about this carefully. Jonah told me last night that there was a corresponding rule to the one about an hour lost at a bottleneck. You remember that? An hour lost at a bottleneck is an hour lost for the entire system.’’
"Yeah, I remember,’’ Bob says.
I say, "The rule he gave me last night is that an hour saved at a non-bottleneck is a mirage.’’
"A mirage!’’ he says. "What do you mean, an hour saved at a non-bottleneck is a mirage? An hour saved is an hour saved!’’
"No, it isn’t,’’ I tell him. "Since we began withholding materials from the floor until the bottlenecks are ready for them, the non-bottlenecks now have idle time. It’s perfectly okay to have more setups on non-bottlenecks, because all we’re doing is cutting into time the machines would spend being idle. Saving setups at a non-bottleneck doesn’t make the system one bit more productive. The time and money saved is an illusion. Even if we double the number of setups, it won’t consume all the idle time.’’
"Okay, okay,’’ says Bob. "I guess I can see what you mean.’’
"Now Jonah said, first of all, to cut the batch sizes in half. Then he suggested I go immediately to marketing and convince them to conduct a new campaign which will promise customers earlier deliveries.’’
"Can we do it?’’ asks Lou.
I tell them, "Already, our lead times have condensed considerably over what they were before thanks to the priority system and making the bottlenecks more productive. We have reduced lead time of about three to four months down to two months or even less. If we cut our batch sizes in half, how fast do you think we can respond?’’
There is an eternity of hemming and hawing while this is debated.
Finally, Bob admits, "Okay, if we cut batch sizes in half, then that means it ought to take half the time it does now. So instead of six to eight weeks, it should take about four weeks . . . maybe even three weeks in a lot of cases.’’
"Suppose I go to marketing and tell them to promise customers deliveries in three weeks?’’ I say.
"Whoa! Hold on!’’ says Bob.
"Yeah, give us a break!’’ says Stacey.
"All right, four weeks then,’’ I say. "That’s reasonable, isn’t it?’’
"Sounds reasonable to me,’’ says Ralph.
"Well... okay,’’ says Stacey.
"I think we should risk it,’’ says Lou.
"So are you willing to commit to this with us?’’ I ask Bob.
Bob sits back and says, "Well...I’m all for bigger bonuses. What the hell. Let’s try it.’’
Friday morning finds the Mazda and me again hustling up the Interstate toward headquarters. I hit town just as the sun hits the glass of the UniCo building and reflects a blinding glare. Kind of pretty actually. For a moment, it takes my mind off my nerves. I’ve got a meeting scheduled with Johnny Jons in his office. When I called, he was quite willing to see me, but sounded less than enthusiastic about what I said I’d like to talk about. I feel there’s a lot riding on my ability to convince him to go along with what we want to do. So I’ve found myself biting a fingernail or two during the trip.
Jons doesn’t really have a desk in his office. He has a sheet of glass on chrome legs. I guess that’s so that everyone can get a good look at his Gucci loafers and silk socks—which he exposes as he leans back in this chair, interweaves his fingers and puts them behind his head.
He says, "So... how is everything going?’’
"Everything is going very well right now,’’ I say. "In fact, that’s why I wanted to talk to you.’’
Jons immediately dons an impassive face.
"All right, listen,’’ I tell him, "I’m going to lay my cards out for you. I’m not exaggerating when I say everything is going well. It is. We’ve worked off our backlog of overdue orders, as you know. At the beginning of last week, the plant began producing strictly to meet projected due dates.’’
Jons nods and says, "Yes, I’ve noticed my phone hasn’t been ringing lately with complaints from customers missing their orders.’’
"My point,’’ I tell him, "is that we’ve really turned the plant around. Here, look at this.’’
From my breifcase, I take the latest list of customer orders. Among other things, it shows the due dates promised, along with the dates when Ralph expected shipment, and the dates the products were actually shipped.
"You see,’’ I tell Jons as he studies the list on the glass top of his table, "we can predict to within twenty-four hours one way or the other when an order will leave the plant.’’
"Yes, I’ve seen something like this floating around,’’ says Jons. "These are the dates?’’
"Of course.’’
"This is impressive,’’ says Jons.
"As you can see by comparing a few recently shipped orders with ones of a month or so before, our production lead times have condensed dramatically. Four months’ lead time is no longer a holy number with us. From the day you sign the contract with the customer to the day we ship, the current average is about two months. Now, tell me, do you think that could help us in the marketplace?’’
"Sure it could,’’ says Jons.
"Then how about four weeks?’’
"What? Al, don’t be ridiculous,’’ says Jons. "Four weeks!’’
"We can do it.’’
"Come on!’’ he says. "Last winter, when demand for every damn thing we make was way down, we were promising delivery in four months, and it was taking six! Now you’re telling me you can go from contract to finished product in four weeks?’’
"I wouldn’t be here talking to you if we couldn’t,’’ I tell him, hoping desperately that we’re right.
Jons snorts, unconvinced.
"Johnny, the truth is I need more business,’’ I tell him. "With our overdues gone, and our current backlog declining, I’ve got to get more work into my plant. Now we both know the business is out there; it’s just that the competition is getting more of it than we are.’’
Jons looks at me through narrowed eyes. "You can really turn around an order of 200 Model 12’s or 300 DBD-50’s in four weeks?’’
"Try me,’’ I tell him. "Get me five orders—hell, get me ten orders—and I’ll prove it to you.’’
"And what happens to our credibility if you can’t come through?’’ he asks.
Flustered, I look down through the glass table.
"Johnny,’’ I say, "I’ll make a bet with you. If I don’t deliver in four weeks, I’ll buy you a brand new pair of Guccis.’’
He laughs, shakes his head and finally says, "Okay, you’re on. I’ll pass the word to the salespeople that on all your products, we’re offering terms of factory shipment in six weeks.’’
I start to protest. Jons holds up a hand.
"I know you’re confident,’’ he says. "And if you ship any new orders in less than five weeks, I’ll buy you a new pair of shoes.’’
29
A full moon is shining through the bedroom window and into my eyes. The night is still. I look at the clock beside me, which says it’s 4:20 A.M. Next to me in bed, Julie is sleeping.
Resting on my elbow, I look down at Julie. With her dark hair spilled out on the white pillow, she looks nice sleeping in the moonlight. I watch her for a while. I wonder what her dreams are like.
When I woke up, I was having a nightmare. It was about the plant. I was running up and down the aisles and Bill Peach was chasing me in his crimson Mercedes. Every time he was about to run me over, I’d duck between a couple of machines or hop on a passing forklift. He was yelling at me from the window about my bottom line not being good enough. Finally he trapped me in the shipping department. I had my back against stacks of cardboard cartons, and the Mercedes was racing toward me at a hundred miles an hour. I tried to shield my eyes from the blinding headlights. Just as Peach was about to get me, I woke up and discovered that the headlights were moonbeams on my face.
Now I’m too much awake, and too aware of the problem I was trying to forget this past evening with Julie for me to fall back to sleep. Not wanting to awaken Julie with my restlessness, I slip out of bed.
The house is all ours tonight. We started out this evening with nothing particular to do, when we remembered we had a whole house in Bearington with nobody in it to bother us. So we bought a bottle of wine, some cheese and a loaf of bread, came here and got comfortable.
From the living room window where I stand in the dark looking out, it seems as though the whole world is asleep except me. I’m angry with myself at not being able to sleep. But I can’t let go of what’s on my mind.
Yesterday we had a staff meeting. There was some good news —and some bad news. Actually, there was a lot of good news. High among the headlines were the new contracts marketing has been winning for us. We’ve picked up about half-a-dozen new orders since I talked to Johnny. More good news was the fact that efficiencies have gone up, not down, as a result of what we’ve been doing in the plant. After we began withholding the release of materials and timing the releases according to the completed processing of heat-treat and the NCX-10, efficiencies dipped somewhat. But that was because we were consuming excess inventories. When the excess inventories were exhausted—which happened quickly as a result of the increase in throughput—efficiencies came back up again.
Then, two weeks ago, we implemented the new smaller batch sizes. When we cut batch sizes in half for non-bottlenecks, efficiencies stayed solid, and now it seems as though we’re keeping the work force even more occupied than before.
That’s because a really terrific thing has happened. Before we reduced batch sizes, it wasn’t uncommon for a work center to be forced idle because it didn’t have anything to process—even though we were wading through excess inventory. It was usually because the idle work center had to wait for the one preceding it to finish a large batch of some item. Unless told otherwise by an expeditor, the materials handlers would wait until an entire batch was completed before moving it. In fact, that’s still the case. But now that the batches are smaller, the parts are ready to be moved to the next work station sooner than they were before.
What we had been doing many times was turning a nonbottleneck into a temporary bottleneck. This was forcing other work centers downstream from it to be idle, which reflected poorly on efficiencies. Now, even though we’ve recognized that non-bottlenecks have to be idle periodically, there is actually less idle time than before. Since we cut batch sizes, work is flowing through the plant more smoothly than ever. And it’s weird, but the idle time we do have is less noticeable. It’s spread out in shorter segments. Instead of people hanging around with nothing to do for a couple of hours, now they’ll have maybe a few tento twenty-minute waits through the day for the same volume of work. From everybody’s standpoint, that’s much better.
Still more good news is that inventories are at their lowest ever in the plant. It’s almost shocking to walk out into the plant now. Those stacks and piles of parts and sub-assemblies have shrunk to half their former size. It’s as if a fleet of trucks had come and hauled everything away. Which is, in fact, about what happened. We’ve shipped the excess inventory as finished product. Of course, the notable part of the story is that we haven’t filled the plant back up again by dumping new work-in-process on the floor. The only work-in-process out there now is for current demand.
But then there’s the bad news. Which is what I’m thinking about when I hear footsteps on the carpet behind me in the dark.
"Al?’’
"Yeah.’’
"How come you’re out here in the dark?’’
"Can’t sleep.’’
"What’s wrong?’’
"Nothing.’’
"Then why don’t you come back to bed?’’
"I’m just thinking about some things.’’
It’s quiet for a second. For a moment, I think she’s gone away. Then I feel her beside me.
"Is it the plant?’’ she asks.
"Yeah.’’
"But I thought everything was getting better,’’ she says. "What’s wrong?’’
"It has to do with our cost measurement,’’ I tell her.
She sits down beside me.
"Why don’t you tell me about it,’’ she says.
"Sure you want to hear about it?’’ I ask.
"Yes, I do.’’
So I tell her: the cost of parts looks as though it’s gone up because of the additional setups necessitated by the smaller batch sizes.
"Oh,’’ she says. "I guess that’s bad, right?’’
"Politically speaking, yes,’’ I tell her. "Financially speaking, it doesn’t make a damn bit of difference.’’
"How come?’’ she asks.
"Well...do you know why it looks like the cost has gone up?’’ I ask her.
"No, not at all,’’ she says.
I get up to switch on a lamp and find a piece of paper and pencil.
I tell her, "Okay, I’ll give you an example. Suppose we have a batch of l00 parts. The time to set up the machine is 2 hours, or 120 minutes. And the process time per part is 5 minutes. So we’ve invested per part 5 minutes plus 2 hours of set-up divided by 100. It comes to 1.2 minutes of set-up per part. According to the accountants, the cost of the part is based upon direct labor of 6.2 minutes.
"Now if we cut the batch in half, we still have the same amount of set-up time. But it’s spread over 50 parts instead of 100. So now we’ve got 5 minutes of process time, plus 2.4 minutes of set-up for a grand total of 7.4 minutes of direct labor. And the calculations are all based on the cost of direct labor.’’ Then I explain the way costs are calculated. First, there is the raw material cost. Then there is the cost of direct labor. And finally there is "burden,’’ which essentially works out to be cost of the direct labor multiplied by a factor, in our case, of about three. So on paper, if the direct labor goes up, the burden also goes up. "So with more set-ups, the cost of making parts goes up,’’ says Julie.
"It looks that way,’’ I tell her, "but in fact it hasn’t really done anything to our actual expenses. We haven’t added more people to the payroll. We haven’t added any additional cost by doing more set-ups. In fact, the cost of parts has gone down since we began the smaller batch sizes.’’
"Down? How come?’’
"Because we’ve reduced inventory and increased the amount of money we’re bringing in through sales,’’ I explain. "So the same burden, the same direct labor cost is now spread over more product. By making and selling more product for the same cost, our operating expense has gone down, not up.’’
"How could the measurement be wrong?’’ she asks. I say, "The measurement assumes that all of the workers in the plant are always going to be fully occupied, and therefore, in order to do more set-ups, you have to hire more people. That isn’t true.’’
"What are you going to do?’’ she asks me.
I look up at the window. The sun is now over the roof of my neighbor’s house. I reach over for her hand.
"What am I going to do? I’m going to take you out to breakfast.’’
When I get to the office, Lou walks in.
"More bad news for me?’’ I joke.
He says, "Look...I think I can help you out on this cost of products thing.’’
"Yeah? Like how?’’
"I can change the base we’re using for determining the cost of parts. Instead of using the cost factor of the past twelve months, which is what I’m supposed to be doing, we can use the past two months. That will help us, because for the past two months, we’ve had big increases in throughput.’’
"Yeah,’’ I say, sensing the possibilities. "Yeah, that might work. And actually the past two months are a lot more representative of what’s really going on here than what happened last year.’’
Lou leans from side to side. He says, "We-l-l-l, yes, that’s true. But according to accounting policy, it’s not valid.’’
"Okay, but we have a good excuse,’’ I say. "The plant is different now. We’re really a hell of a lot better than we were.’’
