The Cost of Getting it Wrong

On a dark night in October 1707, Great Britain suffered its worst single day loss of naval ships.  Great Britain lost nearly an entire fleet of ships, four warships and two thousand lives were lost.  For such a proud nation of seafarers, this tragic loss was distinctly embarrassing.  What caused this disaster was not a superior naval force, in fact there was no pitched battle at sea……….what caused this disaster was the admiral, Clowdisley Shovell, simply miscalculated his position in the Atlantic and his flagship smashed into the rocks of the Scilly Isles off the southwest cost of England.  The rest of the fleet, following behind the flagship went aground and piled into the rocks, one after another.

This disaster was not caused by the admiral’s ignorance, but rather by his inability to measure something that he already knew to be critically important – in this case longitude.  The concept of latitude and longitude had been around for a very long time, but by 1700 there still wasn’t an accurate way to measure longitude and the admiral was forced to rely on crude measurements. He miscalculated and disaster ensued.

Obviously having sound measuring systems in place is critical for ships, planes and trains, but also very important for organizations, who need to know if their initiatives and activities are achieving what is expected.  Organizations need to know how far they are traveling from their desired path and what is it costing them to stray, their PONC, their Price Of  Non-Conformance.  Once you know where you are relative to where you need/want to be and what it is costing you to be in non-conformance, only then can you determine your priorities, set the appropriate initiatives to correct and monitor the improvement process.  You can’t truly fix, what you can’t measure.

For today’s businesses it is an absolute imperative to be managed based on data and measurements.  So the first step to being managed by the numbers is to determine where your organization is at today by establishing what is critically important to your organization in achieving a sustainable competitive advantage with customers and relative to the competition.  Some of these measures might include, delivery time, speed to market, quality and error standards, order accuracy and the all important product/service price.  These measures which are governed by the external customer and competitive environment will provide the basis for driving the improvement process in the organization, and will lead to internal measures, such as cycle time, changeover time, inventory turns, batch size and takt time, which impact the external measures.  Customers may care about on-time delivery, but have no interest in your internal processes which impact delivery time, but you better.

These external and internal measures must become an integral part of the overall business strategy in order to achieve the improvements, create sustainable competitive advantage and ensure a continuous long-term improvement process.  Consistent and constant  communication of these benchmark measures and progress in improving them is vitally important across the entire organization in order to focus and direct resources and efforts.

Let me give you an example of developing a comprehensive snapshot and measures for current activities from a manufacturer in the auto parts industry.  On time delivery is simply not negotiable in the automotive parts supply world.  Either you are on time and meeting customer requirements or you are not in business.  This particular manufacturer was always on time and had a reputation for outstanding customer delivery and service.  But as we analyzed the delivery situation it also came to the forefront that each and every order was expedited for an incremental cost of $400,000.  This manufacturer’s PONC, Price of Non-Conformance, in regards to delivery inefficiency was a staggering $400,000 annually on revenue of $25 million.

This “waste” reflected inefficiencies in the manufacturing processes and related to a number of issues including change over time, process flow and material handling.  In order to overcome these manufacturing inefficiencies each order had to be expedited.  Interestingly enough the expediting of orders was not viewed by the manufacturer as waste, because quite simply, “that’s the way we’ve always done it”.  To address the situation, the manufacturer had to become more responsive and shave days off the manufacturing process.

For the sake of simplicity let us focus in on the issue of change over.  Although the change over of the manufacturing dies was a relatively simple process, taking only a matter of minutes, the locating and delivery of the dies and the required tools to the appropriate machinery literally took hours. By applying SMED and 5S approach to storing of the dies and tools, the company not only dramatically saved time, but also saved $135,000 annually in the change over process and downtime of machinery.  A new benchmark was established for change over and is now monitored for compliance.

Similar improvement processes were applied to plant layout, process flow and material handling and not only did these improvements further reduce manufacturing time and reduce costs, but also identified savings in floor space, inventory, damaged materials, and people motion totaling $1.2 million.

Before jumping in to any improvement process and applying any of the lean methodology tools, such as 5-S, SMED, Error Proofing, Kaizan, Kanban, TQM or Six-Sigma take that step back an undertake an assessment of your organization.  Where is it today and where do you want to take it.  By doing so you will have the critical measures and the underpinnings of a navigation plan to avoid running aground and piling into the rocks.