In a factory, there are production means that represent significant investments. These equipments constitute fixed costs, typically represented in the accounts as depreciation.
To present the income statement in accordance with accounting standards, and to link sales revenue to the costs incurred to generate it, these fixed costs are allocated per unit of time and per item.
For example, we will calculate an hourly machine rate, which will include several ingredients: energy costs, average maintenance costs, and the annual depreciation of the investment per hour.
These calculations, as we can see, are only used to allocate costs to present the company's accounts in a standard format. This allocation of costs, by the hour and ultimately by item based on the products manufactured on the equipment, does not enable decisions to be made. This is obvious, but most day-to-day decision-makers no longer see it...
What is the cost of a changeover?
Here is an example from a factory in the defense sector. The company's customers were complaining about long lead times. By analyzing the sequence of operations through process mining, it quickly became apparent that these delays were largely due to the fact that batch sizes were large at one stage of machining. Curiously, the production facility in question was not fully utilized, it operated two shifts but was only loaded with slightly more than one. The changeover time, depending on the sequence, was between 30 minutes and an hour.
My first question was therefore: why not reduce the batch size by a factor of two or three? Doing so was compatible with the two-shift opening time and would not have required the use of the night shift team's resources.
The answer?
- "Because a change of series costs €2,000."
- "How do you know that?"
- "That's what it says in SAP."
Argh. With SAP being the reference source for the supposed reality of costs, the external consultant's proposal to reduce batch sizes (and therefore lead times and work in progress) by a factor of 2 fell on deaf ears. I was even told that the company was MRP2 Class A—as if this argument reinforced the veracity of the changeover cost.
What is the real cost of adding additional setups to an unloaded resource?
It is marginal, and in this case, it was much lower than the cost incurred by excessive lead times for the customer, excessive work in progress, quality risks, etc. – all of which were superbly ignored by the ERP system's cost representation.
The illusion of saving fixed costs
Most of the cost represented by the hourly rate of the machine is depreciation. This depreciation is pure accounting math, representing the annual loss in value of the investment we made, for example, two years ago. Two years ago, we had the choice of whether to purchase this equipment. Today, this equipment is there, and on a day-to-day basis we have very little leverage to reduce its cost. It is indeed a fixed cost—making more or fewer changeovers will not influence it.
More surprisingly, in the short term, i.e., within the horizon of our workshop managers' decisions, most of our costs are fixed. You have a set production capacity and increasing that capacity takes time. You have a set number of trained and efficient operators and recruiting and training others takes time.
So, if you ask your production managers to reduce costs, you are demanding something that is largely beyond their control on a day-to-day basis, because the costs they control are essentially fixed.
This is even the case for so-called "direct" labor. Direct labor is supposed to be variable, proportional to the volume to be manufactured—but the reality is that, at least for the coming weeks, you can only marginally adjust the capacity of trained operators to manufacture your products through overtime. These are also fixed costs.
If everything is fixed, how can you be agile?
Therefore, in the short term, most of your organization and capabilities are fixed.
So, to be agile, what you need to focus on is getting the flow moving as quickly as possible by making the right products—the ones your customers want to buy from you.
Once this principle is understood and shared with your teams, the horizon brightens!
The real questions then arise:
- What is the real customer demand?
- What are my real constraints? How can I ensure that they are always working on the right priorities?
- What are the risks we need to protect our flow from? Where should we place buffers, and what type and size should they be?
- How can I make the best possible decisions quickly?
- How can I focus teams on continuous improvement?
These are all questions we can help you answer with Intuiflow...
