The assembly cell was installed and running in our Mexican factory. We had used the Production Preparation Process (3P) to design this Improved Junction Box assembly area and were happy to see our hard work and ideas in practice. We had a compact U-shaped cell with right-sized equipment and low-cost automation. Machines had no changeover or were designed for single-second-exchange-of workstation (SSEWS) to allow mixed production and level flow. Operator’s stations were ergonomically designed and had quality, error-proofing, and safety built-in. Operators, material handlers, and supervisors were following standard work. Cross training and improvement activities were happening as planned. Then the plant manager informed me that this was the least profitable area in his plant.
We had designed this cell to minimize waste. Both capital expense (CapEx) and operational costs were minimized while building in flexibility and scalability for future volume changes and variation in day to day or weekly demand. I had to understand the metrics and measures used by the plant manager and the accounting department. The profit and loss (P&L) statement should show this was a real money-maker for the company.
In the process design we tried to find the balance between CapEx and headcount. Everything could be automated, but not everything should be automated. We were able to eliminate almost $800,000 from equipment costs by removing automated powered conveyors and integrated machinery and add a couple operators. Over the five year life of the program the reduction in capital, combined with the cost of capital, justified more than twice the operators we had added. The lower CapEx meant we were able to quote a lower price and win the business. All the capital saved was not a concern for the plant manager, all he was accountable for was operational costs, and more headcount meant more costs.
Headcount was an expense, but the area should still be very profitable because of the other improvements. The machines were designed for robustness, simplicity, and maintainability. They needed a minimum of spare parts (MRO), maintenance support, and utilities. The products required electro-static discharge (ESD) protection including carbon sub-floors, temperature control, humidity control, and dust filtration. By designing a cell that minimized space, the operational costs of $1400 per square meter per month should be minimized. Using less space avoided additional lease or construction that would have been needed in the future for new business or warehouse activities. All the cost reductions and cost avoidance should more than offset the cost of the additional operators.
Allocation of overhead by product line was assigned based on headcount. The utilities, maintenance, shop supplies and repair parts (often referred to as Maintenance, Repair, and Overhead or MRO), and other items were all charged against the area regardless of actual usage. The natural gas furnace had one operator, and my assembly area had ten operators. The allocation, or the area’s share of this overhead, was ten times that of the oven area, even though our process did not consume any natural gas except space heating. The assembly line that was highly automated, consumed tremendous amounts of electricity, had five employees, and occupied 1,000 m2, was allocated half the electricity costs compared to my area with its many simple, or even manual, machines in 100 m2. The allocation model assumed that if the area had one tenth of the operators in the factory, than it had consumed one tenth of the MRO crib, and one tenth of the hours of the maintenance and quality departments, and every other source of overhead cost.
This assembly area was making the rest of the factory look good, even if the current accounting methods made that area look below average. We won the business because Lean allowed us to quote the most competitive price, the low inventories improved cash flow, and the area was absorbing two to four times more of the overhead costs than it consumed. The assembly area was making the other areas look better than they were. The allocation model should be revised, and value stream accounting should be implemented to accurately see the profits generated from the area, but Lean, built into the process from the very beginning, was delivering profits every day to the factory, and to the company.
Robert H. Simonis is the Senior Consultant for Manufacturing and Operations at KCE Consulting LLC. Robert has over twenty years of leadership experience including ten years factory management and ten years of global responsibilities in automotive, electronics, machining, and complex assembly operations and is recognized as a Lean enterprise expert.