Lessen your Cost, do not create more, the Key to Success
In business, ideas for new products and production techniques tend to emerge during times of crisis when the old products and methods have become unprofitable and create more cost. This is the case with “lean production,” a method of planning for demand by reducing waste, developed in Japan by the Toyota Motor Corporation in the 1950s. At that time, Toyota was a relatively inefficient producer of cars. Like many other Japanese companies, Toyota was struggling to overcome the shortages created by an economy that had been devastated by war.
Looking for ideas, Toyota sent a young engineer, Eiji Toyoda, to the US to visit Ford’s Rouge plant in Detroit, MI. Toyoda spent three months studying the mass-production technique pioneered by Ford at the Rouge. On his return, Eiji reported that he was impressed by the scale of production that Ford achieved— the Rouge was so big that it required its own railroad, hospital, and several fire stations. However, he also believed that the factory was riddled with Muda—the Japanese term for wasted effort, materials, and time. Toyoda and his colleagues set about developing a new production system that sought to replicate the output and economies of scale achieved by Ford, but in a less wasteful manner.
Different types of Waste
Shigeo Shingo, a Japanese industrial engineer who worked with Toyota in the 1970s, identified
Seven types of waste, or Muda. The first type is overproduction. Traditional manufacturers have a tendency to mass produce in advance of sales. These companies try to forecast what they think demand will be for their product, then they make the goods that they expect to sell. The main problem with this system of manufacturing, however, is that it relies on accurate forecasting of demand. If the forecast does not accurately match demand, the company could be left with mountains of unsold stock.
The second example of muda is inventory waste. In addition to stockpiles of unsold finished goods,
Many mass producers keep stocks of raw materials and work-in-progress to reduce the risk of production being halted. Stocks of raw materials are held in case a supplier fails to make a delivery, or to protect against the possibility that some of the raw materials might be defective and unusable. Stocks of work-in-progress, or semi-completed products, are held just in case a machine on the production line breaks down. These can then be inserted into the process to ensure that production continues. However, holding stocks of raw. Holding goods in stock is a cost for a company since warehouse space and employees need to be paid for. In addition, cash tied up in stock could be in the bank instead, earning interest. Materials and work-in-progress is considered wasteful because of the associated space and staff costs.
What is movement Cost in Business?
The third type of Muda that Shingo identified is movement. In some factories, workstations are badly designed, and employees spend time doing things that do not add value to the product, such as looking for tools, walking from one part of the factory to another, or bending to pick up parts. This type of waste increases cycle time—the time taken to produce a unit of output. Longer cycle times lead to lower productivity, which in turn drives up unit labor costs.
Time spent Cost
The fourth muda is time spent waiting. Delays may occur when machines on a production line are poorly coordinated, resulting in bottlenecks. Time might also be wasted resetting machinery to produce a different part. The fifth muda is transportation. Time and money spent moving work-in-progress from one factory to another will drive up costs, and this is unlikely to add value to the product, so it is wasteful. The sixth example of muda is over processing. Consumers will only pay for the product featurism that they value. Producing complex, over engineered products is wasteful because it creates additional costs without any extra revenue.
Production of defective items
The final Muda is the production of defective items. Substandard products signify a waste of time and resources and mean that further inspection processes are required and the products must be reworked. In addition to the seven types of Muda, Toyota identifies two other potential problems: mura and muri. Mura is an uneven flow in a process, leading to unbalanced working practices. Muri is the overburdening of people or equipment. Lean strategy using these insights, production engineer Taiichi Ohno developed the Toyota Production System (TPS). This lean production method counters waste in the production process by producing more using less. It enables a manufacturer to increase output without having to pay for extra labor, raw materials, or capital.
Alternatively, a business can use lean production techniques to make a better-quality product that will sell for a higher price. Lean producers try to eliminate overproduction and waste stock by using the just-in-time (JIT) system, in which production only happens in response to customer order. Companies that use just-in-time never produce output for the stock, and if there are no orders from buyers, production stops. Thus, production is pulled through by the consumer, rather than being pushed through by the manufacturer. The same principle is extended to raw materials and bought-in components. Lean producers run with minimal buffer stocks, relying instead on daily, or even hourly, deliveries from suppliers. However, the absence of a stock of raw materials means that a faulty shipment of components could bring an entire factory to a halt. So to make just-in-time work, lean producers require reliable suppliers that produce zero defects.
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