Lean Workforce in Hospitals

I’ve been a big fan of Mark Graban’s for years, but only just had the opportunity to work with him. About 2 weeks ago we delivered a webinar focused on Lean in hospitals. If you haven’t heard of Mark, he’s a highly respected Lean expert and author of Lean Hospitals among other books on the subject.

Mark provided several examples of how Lean techniques can be used to improve operations and steps ensure that a hospital’s staff is respected and supported.

If you haven’t had a chance to hear Mark speak about Lean, this is a great opportunity. He shares specific examples and outlines a process that everyone can use to improve outcomes.

Becker’s Hospital Review hosted it and you can see it here

Additionally Mark will be holding full seminars soon. If you are looking to learn more about Lean in a healthcare environment I would suggest looking into one of these:

Building Successful Lean Teams

Boston, March 31, 2015

https://www.universe.com/events/building-successful-lean-teams-boston-tickets-boston-0TL5Q

Kaizen: On-Site Experience, Franciscan St. Francis

Indianapolis, April 22,23

https://www.universe.com/events/kaizen-on-site-experience-franciscan-st-francis-tickets-indianapolis-CLZ8F

Government employees are making good labor decisions, they just don’t see the whole picture

I was pleasantly surprised during my time at the Governing Leadership conference in Maryland held last week.

First was the energy and diligence expended by the elected and appointed officials in attendance to continue to work through the challenges they face. It was a refreshing change from the articles frequently found in the media about less than stellar government performance.

Secondly, I was impressed by the prevalence of Lean methodology in place within different areas of government. As I told the attendees during my panel discussion on performance budgeting; the good news is that organizations in the private sector have been through this transformation and survived. Examples of how to use Lean are readily available, it continues to get easier to implement Lean as the number of successes grow and are publicized.

What struck me during the day was the complexity of planning and operations. While there are several examples, the one that hit home for me was the impact many small decisions  have on a government’s finances. For example, a simple choice between who works an overtime shift and who doesn’t can have a decades long financial implication that far outweighs any wage difference or even premium pay difference. But this cost implication is hidden from the decision makers and is often never connected.

It becomes easy to see how governments can get a poor reputation for managing its finances over the years because of what in hindsight look like obviously poor financial decisions.

When labor makes up to 90% of a municipal government’s labor budget (their stat not mine). It would seem like there would be more visibility and control over the decision-making process. The challenge for governments is that an hour worked today is impacted by benefit rules that take into account many years previously worked and then generates many years of commitment ahead. The supervisor making the daily decision has no visibility to this and therefore cannot take it into account.

If we could provide the information that shows the real cost of an hour of labor, supervisors would be enabled to make better decisions and I would bet that government would see immediate benefits from improved use of tax dollars without having to resort to tax increases or layoffs.

Consider these easily measurable areas of influence on the cost of an incremental hour :

  1. First is the cost of the wage paid. This is the easiest to measure and is often what is used in labor reporting and decision-making.
  2. Will this have an impact on benefit costs? (If the employee is classified as part-time, will they now be eligible for benefits under the Affordable Care Act? Do they generate any additional vacation, comp time or paid sick/personal time?)
  3. Are they now eligible for overtime? It could be 1.5 or higher based on negotiated contracts
  4. Will this hour impact their pension? Depending on pension rules, this incremental hour of work could increase their pension. Depending on the contract, it’s not just the last couple of years of a person’s wages that are used, but, for example, the highest average pay during a continuous 60 month span, whenever that occurs in a person’s career. This incremental hour of time could have an impact on government cost that lasts for 20 or more years!
  5. Is this work occurring due to a State or Federal grant? Has the amount from the grant already been used up? If so the department is now responsible for paying the overage must now find those funds from another area of the budget.

 

Every day the result of these calculations change for each individual, they can even change from one hour to the next!

It’s no wonder that supervisors can unwittingly rack up expensive labor bills at the end of the week when they are doing their best to apply resources to the work at hand. Even worse the may never realize what they have done because some of these costs never show up in their daily or monthly cost reports.

What’s the answer? This same problem is faced by supply chain managers all over the world. The cost of a good is impacted by many different factors during its life from raw material to delivered good. Rather than looking at the cost to manufacture the good (Raw Material + Production Labor + overhead) which often produces an incorrect cost, manufacturers look at the large drivers of cost across the entire supply chain and calculate a “Cost to Serve”. The cost to serve is a very useful calculation when making decisions (e.g. We could get cheaper labor in Vietnam but the lead time, shipping and warehousing costs go up too much.)

This same principle can be applied to an hour of labor. With benefit costs and regulatory compliance becoming a significant part of total wages, it’s time to provide the total labor cost to supervisors so that they can make better decisions about how they use labor or who is assigned the next shift.

The best part of this opportunity is that unlike manufacturing Cost to Serve where data collection costs are high but calculation requirements are low, the total cost of the next hour of government labor is already available, it’s a matter of aggregating that cost into a one simple dollar figure on a daily basis so that a supervisor understands the impact their decisions are having on their organization.

If your organization is having trouble containing its labor costs then it’s time to understand what the next hour of labor is really costing your organization. You have the data, you have the rules, it simply a matter of sharing them with the people who are deciding how much to spend in the next hour.

Is it worth the effort? Considering the 2103 PEW Trusts report found that 39 of 40 of the cities it analyzed do not have fully funded pensions and the amounts are measured in 10’s of millions and even billions, I would say this is an area worth looking into.

pensiongap

Turning the soft term “employee engagement” into hard operational results

Last week I was in London where I participated in Works Management’s “The Great Productivity Debate” which was hosted by WM editor Max Gosney.

Max began the event with some statistics from the Office of National Statistics that rated the UK as having low productivity compared to other European nations as well as the US.

When the participants were asked the cause of this low productivity in the UK, the conversation quickly centered around employee engagement. Participants had automated what they could, outsourced where possible and were now focused on the local workforce.

How the different companies engaged their workforce varied as much as their own manufacturing processes. But there were many similarities. There were two common threads of discussion for those companies that were successful. First is management spent time listening and acting on their employees’ suggestions every day. In their facilities it wasn’t a shock or a signal of bad news when a senior manager walked the floor. The second was that employees were rewarded for participation. The value of the reward seemed to matter less than the act itself and varied in terms of peer recognition, time-off or monetary rewards.

It was fortunate that the next day I was able to visit a client, Vaillant, a manufacturer of environment control systems. A company that has thrived not only through a long-term recession but also a significant downturn in its own market (housing). Their approach to employee engagement was the definition of the items we discussed at the event day before.

I could spend several pages on the unique methods Vaillant has employed to improve productivity and quality and increase on-time delivery, but for now, I’ll focus on how it is engaging its people.

Vaillant has developed its own Vaillant Perfection System (VPS) improvement methodology. A methodology of thirteen principles that is loosely based on the Toyota Production System.

The first two principals are enjoy your work and understand your value. Vaillant understands that if you don’t enjoy what you do, you won’t do your best. It also wants its employees to understand that they are a valuable part of the company and that if they aren’t working when they should be, the rest of the company suffers. These relatively soft principals yield hard results. Turnover is 0.6% and unplanned absenteeism is down 31% to 2.8% since beginning the program.

Vaillant sets an improvement goal each year in terms of performance and expects its people to provide the ideas to achieve that goal. They have set up a lifecycle system of ideas that shows progression from suggestion through implementation so it’s clear to all where they are to achieving that goal at any point in time. Creating a company specific methodology and setting a goal is easy. The more interesting part I saw during my visit was how the company supported employees in achieving the goal. I’ll highlight a couple of examples here.

In terms of educating employees on the principles, which borrow heavily from Lean principles, they close the loop in a way I have never seen before. At the end of the class, participants go on a Photo Safari of their own department. To graduate the class, each employee must take a photograph of a principal of VPS in action and then a photograph of something that isn’t supported by one of the principles.

Vaillant also has an interesting method of justifying projects. Vaillant found that the traditional method of financial ROI can become very department centric. For them, that traditional ROI method led to reducing cost or increasing value one department only to have the opposite effect in another as costs were pushed around the plant. Instead, Vaillant looks to see if the idea supports one of the principles in its VPS methodology. If it does, they apply the iceberg principal (the financial costs are just the visible tip of the iceberg) and look more broadly at how the entire system is affected. As an example it recently justified LED lighting. At first blush, LED’s couldn’t compare to fluorescents in traditional life versus purchase and operating cost comparisons. But when it looked at the cost of change-out in terms of maintenance labor and increased safety risks associated with maneuvering on high ladders around unforgiving production equipment, Vaillant realized that LED’s do make sense and made the change.

In terms of rewarding employees, Vaillant does a number of things to demonstrate their appreciation of employees. The one that stuck out for me was how it handles doctor visits. Because its turnover is very low and its workforce is aging, Vaillant’s employees are faced with an increasing number of medical issues. To reduce the impact on their wages due to more time spent out of work due to medical appointments, Vaillant implemented the following policy: For a general medical appointment, the employee must set the appointment up on their own time since there are options to make that happen. But when the employee must see a specialist or have surgery which is most often only available during working hours, Vaillant doesn’t want to impact employee’s pay for something out of their control. Vaillant’s policy pays up to four hours for time out of work on those occasions. Of course Vaillant expects something in return. It offer this flexibility expecting that the union will be flexible in accepting changes as Vaillant’s workforce needs change. The union finds this is a beneficial compromise.

After my week in the UK and spending a significant time discussing employee engagement with a number of companies, it is clear that those who are successful have evolved from occasional bursts of engagement activity and suggestion boxes into a significant commitment from both HR and Operations into treating their employees like expert consultants. Tangible activities include setting up measurable goals (both group and individual), providing the investments in tools and training, committing management’s time to the effort and finally rewarding when appropriate.

Competitive Manufacturing in the UK

I was in the UK last week and had an opportunity to participate in a production tour of a local manufacturer. This company produces consumer goods for yard care and is a great example of a manufacturer that sees the extremes of variability in their business. Imagine if your company received five percent of its revenues in 1 day. And 20% of its revenues in one month. Now try and keep your large retail customers happy as they demand delivery of stock within 2-3 days of placing an order. Let’s make it a little more interesting. The product is fairly mature and technically fairly simple in nature. As a result, the majority of your competition manufactures their product in China. Let’s finish it up with a highly variable demand driver: the weather. Too dry and water conservation goes into place making it illegal to use their products. Too wet and no one needs their products. With predictions of climate change increasing the extremes in weather, no one expects any of this to get better.

I visited this company about 4 years ago and it was impressive to see the changes the operations team has made since that time. Starting from the warehouse, a new warehouse management system is constantly re-allocating product within the racks to flow raw materials towards production and finished fast-turn goods toward packing & shipping . At the same time pickers are regularly re-allocating stock within the warehouse to maximize use of space.  The company has reduced packing error rate by implementing a packing process that is “part” centric rather than customer order centric. What this means is that they bring a pallet of product to the packing area and pack the quantity required by each customer in a separate carton. They then pull the next pallet of product. Their third party logistics partner then consolidates the boxes by customer order and delivers the completed orders. The company’s order accuracy rate is so high that some of their customers have eliminated incoming inspection, providing a cost advantage.

On the production floor the team has increased use of production cells to eliminate WIP as they found some components were getting damaged as they were moved from operation to operation. To reduce labor and reduce cycle time, they have built quality into the product through the use of built-in quality inspection by operators to reduce quality inspectors and extra steps from the production lines.

To manage the large swings of temporary employees, management has isolated product operations that can be trained in as little as a couple of hours. This allows employees become productive as quickly as possible. They also reduce the seasonal swings of premium pay and shorter, unpaid weeks with their full time workforce by using banked hours. In this case employees work longer hours during the busy periods (winter and spring) and enjoy 3 day work weeks during the summer. The employees’ time is accrued and then paid later in the year during their time off, so weekly pay isn’t affected. The company transitioned away from piece rate to hourly pay so that employees receive the same size paycheck in both seasons which helps employees manage their cash flow at home.

They have also implemented a Kronos workforce management system that allows them to see labor usage and WIP movement throughout the plant. Previously they only had knowledge of materials when released to the floor and when they were entered into finished goods inventory. This visibility into what was happening on the shop floor has allowed for changes to labor standards which resulted in the lowering of standard costs on their two largest product lines. The information also provided the insight to re-design some processes. As a result, in the four years since I visited, their labor effectivity as measured by OEE on assembly lines has improved by 18%.

They have also made the factory more visual. Not like you would expect with lots of LCD screens spewing production information; those are purposely kept at a minimum. But rather lots of signs and color coding to help the many temporary employees find their way around the factory so they can stay productive.

The production cycle time is now so short and the factory so small relative to production volume that if they stop loading the trucks during busy season, production will have to stop within three hours because there is no room to put anything.

As though this wasn’t enough, this company has also gone green. From putting 50 tons of production waste into a landfill annually, they have gone to a virtually zero landfill footprint through re-using, re-cycling and finding markets for waste materials.

As though this wasn’t enough, their Director of Operations is looking to visit other manufacturers. He feels that while he has kept his head down and focused on the improvements, after a while they begin to focus on smaller and smaller gains. He feels that by seeing other company’s operations, he’ll be able to look at his operations again in a whole new light.

You’ve been commoditized, now what?

Commoditization of a product is a natural evolution of the market and is not the worst case scenario. If you are responsible for a commodity product, that means there is still a viable market for what you build. This is a much better proposition than being obsolesced.

Your main problem is that while you have been working to build brand awareness, optimize distribution channels, add features, improve quality, reduce costs and shorten lead times, your competitors have been doing it faster and better. Or it could be as simple as your patent expired.

You still have some options. Performing some market and customer research may yield some ideas to breathe new life into those now low-margin products. Below are some time proven strategies for increasing the value of a commodity product.

Create a new category for the product

Don’t confuse this with marketing efforts like new labeling or exciting new advertisements. I’m thinking about thoughtful extensions to a product. Let’s look at the wholesaler of proteins such as fish, poultry, pork or beef. How much of a premium are you willing to pay for a different brand of fresh fish? Much of the product is packaged under a store label.

Now take a look at the prices for marinated chicken or a breaded fillet of fish. There is often a 100% premium for this category. That doubling in price per pound is not due to the increased cost of production. It’s only a couple cents worth of ingredients and a small amount of labor. It’s not that it takes significant skill. Putting meat and marinade in a bag is pretty easy. What the processors have figured out is that there are enough consumers who don’t plan well, who are too tired or don’t have enough time between work and dinner to prepare this style of food. Producers have filled this lack of planning and time by offering a convenience. They have taken the marinating process offline for the consumer and give their customers something that is highly valued: The ability to deliver a delicious meal in less time.  The result? A high margin market for a previously commoditized product with an extremely limited capital investment for the producer.

Reduce risk and uncertainty for your customer

Are your products used in critical applications where downtime is expensive or causes bad publicity? If so, your downstream supply chain may be stocking up on inventory to ensure this downtime is minimized. Excess carrying cost, excess real estate costs and product obsolescence are all now costs that reduce profits for your customer. By providing 24×7 hour rapid replacement of parts, you can eliminate the excess inventory and create a differentiated service without making any changes to your product. Even better, determine if you can have an impact on reducing that downtime and make the changes necessary.

Improving outcomes and reducing costs for your customers

Visit with your customers all through the downstream supply chain and review their processes that relate to your product. Are they performing processes that you could perform more efficiently? Do they lubricate the product before it’s installed? Is it kitted in a warehouse with other products that you can provide? Are field installers modifying the product because they have found a different use or there’s a new requirement that never made it back through Purchasing?

Your customers can receive value from your existing data

The hot buzzword these days is Big Data. Any data that your company possesses was expensive to collect. Re-using it to provide value to your customer is a great way to differentiate from your competitors. If they are not capturing that data, it will be a difficult to duplicate what you are doing. Here are some suggestions that I have seen where manufacturers have re-purposed data they collect that was originally intended for use in timekeeping or labor productivity management:

  • Use real time labor tracking to provide the status and completion time of components to your customer. When they have a downed machine, being able to confidently predict when it will be back up is very valuable to them. The value of this information has no relation to the cost of the part they are waiting for.
  • Provide detailed records of the charged services that you provide to your customers. This ensures them that what they are being billed for is accurate and that your company is in control of the services it delivers. One company details and presents the services it delivers during natural gas extraction to its lease-holding customers. It turns out to be exactly the same data the company uses to track time for payroll and understand its labor cost per project.
  • Provide an auditable history of the product . It’s one thing to have a quality sticker applied to a product. It’s a different level of control to provide an auditable trail of quality checks throughout the production process. This is exactly how one company re-used its labor tracking data to increase its customer’s confidence that it was shipping high quality components.

 

Lean selling is the prescription for a commodity market

These are just a few examples of how to differentiate your company’s offering with little or no change to the product and limited capital investment. What’s different is that it requires your company to understand your customers supply chain and the challenges they face. Fortunately there is a tried and true process to get there. It’s called Lean and the first step is training your sales force in the basic principles.

Think this will be tough to justify with management? First, this isn’t the Lean that reduces waste inside your company. This Lean project increases revenues and differentiates your company from the competition. Second, your sales force already has a name for this. They call it solution selling. The reason solution selling is so hard for them is that the vast majority of sales trainers they hire don’t provide a formalized method to analyze their customer’s supply chain. They train the sales people to ask the customer to describe their challenges. Sales people are then supposed to eliminate those challenges with the products they offer. This approach is extremely difficult for salespeople because if a customer knows it’s a problem, it’s probably not an easy one to solve. The real opportunity is identifying previously unknown waste. It’s what’s called latent pain: Everything seems to be working fine from the customer’s perspective and no one is complaining. Your company’s opportunity is to teach the sales force about the “system” the product lives in and provide the tools (i.e. value stream map, 5 why’s) for the sales force to use to uncover those opportunities. You can probably name some situations where an enterprising sales person has done this already. The opportunity is to institutionalize that analytical and creative behavior throughout the sales force.

The good news is that these techniques apply to every product whether commoditized or not. Secondly, it’s a profitable experience for everyone. Customers, your sales people and your company all benefit when waste is removed and value is added back to a commoditized product.

Why Lean Fails

Lean desperately needs a political advisor.

Political campaigns are difficult because the candidate must become the person that provides a vision for a wide range of issues to a broad base of constituents. When candidates get into the details, people get lost, bored or they begin hearing things they don’t like.

As a result, successful campaigns limit themselves to one message that is used over and over again. “Hope and Change” and  “I like Ike” are two that come to mind.

If I were to shrink Lean’s message into a few words today, I think most would agree it is:

Eliminate Waste

It has all the trappings of success: It is short. It is easy to act on. Everyone wants to remove waste from their process. Unfortunately for Lean, removing waste from a process doesn’t necessarily add up to business success.

Lean has a classic campaign problem. Lean has a broad range of concepts, tools and metrics required to be successful. But it only has a short window to communicate to a wide variety of people and an even shorter amount of time to demonstrate success.

So what sound-bite is most frequently absorbed from an introduction to Lean? “Eliminate waste.” In fact, to make sure they don’t forget this goal, management will post the Seven Wastes of Lean on the wall. Kaizens are held and 5S efforts are not far behind.

No surprise at the outcome of this effort. Waste is identified and removed.

“Let the sales team know! We can produce more with no additional labor, equipment or overhead required. Costs are dropping. Finally, we can price aggressively and still make a profit. We’ll finally wipe out those pesky low-cost competitors.”

All is good.

Good, that is, until the competition reacts. They drop their prices to meet yours.

At that point, volume begins dropping. With all this extra capacity, idle people and machines stick out like sore thumbs. I don’t have to tell you what happens next.

Is it any wonder many people consider Lean a failed methodology? It results in lay-offs and shrinks the revenue opportunity. It is now harder to survive than before Lean was introduced.

While reducing waste is a great objective and simple message, there is a fundamental problem with it. It doesn’t tell people what to do with that extra capacity. As a result, some companies will inadvertently have it work against them.

Now for those of you itching to let me know all the other things that should have been done in conjunction with the reduction of waste, I’ll refer you back to the first couple of paragraphs in this blog. Requiring a re-engineering of your entire business practice in order to implement continuous improvement is not realistic.

If I were Lean’s campaign advisor, this would be the new campaign message:

Reduce Lead Time

I can still use the basic tools such as kaizen, 5S and even hang a poster. The difference is I am only going to focus on those things that will reduce lead time. More importantly, I know what to do with any gains that I earn: Reduce lead time.

This is important for three reasons: It works with existing metrics, shorter lead times are a sustainable competitive advantage. Finally, companies can cash that buffer, time, in for a wide variety of benefits. Let’s look at this in more detail.

First, reducing lead times will work with the current metrics in place at any company.  Have a Lean related success? Change the lead time on the master data screen in your ERP system. Every other metric will continue to work. If you are not willing to change the lead time then it doesn’t count as a success.

Second, Start quoting shorter lead times rather than reducing prices. Give your customer that time as an additional value. They will hungrily chew it up with their own inefficiency or use it to make themselves more competitive. And you will still get the satisfaction of nailing the competition. When they have to meet your lead time or lose an order, the competition will use overtime and premium freight to overcome their inefficiencies. Fists will start thumping on tables because both are immediate red flags. Management knows profits or volume will soon fall but no answer is in sight.

Third, a shorter lead time gives you more options to manage your business. Removing waste scatters benefits throughout the plant making it difficult to cash in. A shorter lead time puts all the efficiencies in one place: time at the tail end of the process. If increased volume isn’t your goal, you can cash that time in for a wide variety of benefits. For example, move overseas operations closer to your customers. This will allow you create jobs at higher wages because you can eliminate logistics costs. Enter new markets with no capital investment. Get rid of that last bit of Overtime and Premium freight. Or invest the time back into more improvements.

Lean for President!

 

Hitting the Continuous Improvement wall

Ask a manufacturing engineer or production supervisor how long they have been under pressure to reduce costs and improving productivity and they’ll most likely say since they started working.

Improvement methodologies such as Total Quality Management and Design for Manufacturability come on strong and manufacturers rally around them as a new approach to wringing incremental performance out of operations.  And yet decades later on the production floor, some weeks everything performs flawlessly and other weeks it seems that Murphy’s extended family has come to visit.

Fatigue with the improvement projects can set in over the years because the big issues of a production line have been managed.  The machines are rarely down for more than an hour.  Kan bans to manage and reduce WIP have been implemented.  As the teams move down the Pareto chart, the big gains have been achieved and each new effort seems to return less gain.  Eventually people move on to other issues and performance of the production line flattens out.

Chasing down the biggest issues first is so ingrained in our minds that it seems almost like a law of nature.  Invoking a justification of Pareto analysis, commonly known as the 80/20 rule brings nods of agreement in justifying the order of how issues should be addressed.

But there is a follow up question that should be asked that almost never is: “Even though we’ll solve our biggest issue, how much variability will be left in our system based on the remaining issues.”

This is an important question because the process will suffer from the cumulative effects of the remaining variability.  The workforce can be a significant cause of variability.  So as the number of employees that participate in the process increase there is going to be a cumulative effect of variability from each employee within the overall process.

This is supported by statistical analysis which will be described shortly, but for those not familiar with statistics, a more familiar way of explaining this would be as follows:

Let’s say we wanted to meet a co-worker after work at a restaurant to celebrate an event.  If we invite one person, we can be fairly certain they will be there on time.  But as we increase the number of co-workers invited, it becomes increasingly likely that some will be late.  A few will have last minute calls from customers; others will be stuck in meetings that run over.  And others will have emergencies at home that require their immediate attention.

The same happens in production; as the number of people increase within a process, the inevitable delays that occur increases as the number of people increase.  Without directly managing all the little issues that cause this delay for each individual, there’s a limit to the amount of improvement that can be achieved in production.

But compared to a celebratory night out after work where only 2 people need arrive to begin the party, in manufacturing, everyone has to show to begin working.

Statistical analysis can be used to describe this scenario and even predict the variability and delay.  The cumulative effect of the delays can be expressed as what is commonly referred to as the Sum of Independent Variables.  Statistics show that the means (average) and variances of multiple independent variables are cumulative.

As each employee is an independent variable, their effect in terms of delay on production is cumulative.  In order to bring a process into control requires the management of all the independent variables affecting the process including the workforce.

This can be described through a manufacturing example as well.  Disruptions are considered when an operation is completed sooner or later than expected.

In this example, the process has been in place for years and the big issues causing disruptions have been resolved.  For the most part the equipment is never down for more than a couple of hours and material quality and dimensional issues have been ironed out.  The labor standard that is used to measure, cost and schedule the process is now a reflection of the actual average time it takes to complete this process.

To begin with, the example starts out very simply.  There is one person on the line.  This defines N (N equals the number of independent variables or people in this case) as equal to 1.

Experience would tell us that most days the process goes as planned.  Almost nothing happens out of the ordinary and production runs as expected.  Here are some examples of the disruptions that do occasionally occur in this process.

  • While typically punctual, a couple of times a month an operator is late getting into work and production starts behind schedule.
  • Skill levels vary between operators and they complete an operation in slightly different amounts of time.
  • The operator is delayed by others such as a maintenance person or material handler

The curve below describes an example of the frequency and impact of those events; it’s a familiar shape and known in statistics as a Gaussian distribution or normal curve.  For the purpose of this example the average time (or labor standard) to complete this operation is 2 hours for N=1.  The variance in production time this example has been measured at 30 minutes, but the curve could apply to any cycle time and variance.

Distribution of variance in time in a single operation where there is one operator.

Average (Mean) = μ  =  2 hour

Variance =  б2 = 30 minutes

To make the example more typical of an actual production scenario, 14 more operators and operations are added to the process.  Each one of these people is considered an independent variable.  As stated above in the discussion of the Sum of Independent Variables, the mean and variance of the delays that each person causes are cumulative.  Now N (Number of independent variables) = 15.

The average production cycle time is:

Mean = N * μ = 15 * 2 = 30 hours

Variance  = N * б2 = 15 * 30 = 450 minutes = 7.5 hours

 

When the independent variable ( a production operator in this case) has a Gaussian distribution, the distribution of the sum is also Gaussian.  The graph below shows how the distribution broadens as N is increased.  For convenience of graphing, the mean is set to zero.  Obviously with a non-zero mean, the distributions would also shift to the right of the graph. In other words, the mean for one person is two hours, the mean for 15 people is 30 hours, in this case all distributions are set at 0.

Distribution of variance in time as the number of people and operations in a process changes (N=5,10,15 or 20 people)

With N=1 person, the variation in work time is relatively small, centered around the standard work interval of 2 hours.  With N=10 or 15 people, it seems like almost every day there is some event occurring.  Between machine jams, operators calling in sick, temporary help on the line due to turnover and maintenance mechanics who are busy working on other equipment, the variations in performance add up over the course of a month.  Every once in a great while, it seems like nothing goes right and hours of production are lost.  This cumulative effect is reflected in the Gaussian distribution with N=15 in the figure above. The variations in the total production time are significantly greater than one might expect by intuitively extrapolating from one operator to 15.

Because these individual delays are typically small, it feels like they are unmanageable or that investing in solving all the different causes would not justify the returns.  However there is a difference between managing production equipment and individuals.  Controlling each piece of capital equipment, while similar, requires a different approach due to their unique design of tooling, dies and capacity.  Individuals, while also unique, all respond well to equitable and fair management.  This means the investment required to decrease labor related delays on production can be spread across all operators and support staff on the line.  Additionally, it affects the operators and support staff on all production lines.  The result is instead of working down the workforce related variables one person at a time, the workforce as a whole improves providing significant improvement.  In this example, the improvements reduce delays.

To understand the return on investment possible, if the disruptions to the operation due to labor is reduced by 10% the variance of the operation is reduced by 45 minutes.

The result is production schedule adherence improves, and the need for overtime decreases, idle time in downstream operation is reduced and costs such as premium freight and inventory buffers are reduced as well.

As one of the three pillars of Lean, the workforce has long been recognized as critical to the success of operation.  But in practice, because an individual’s impact on an entire operation in terms of delay can be small, managing the individual is often moved down in priority. Experienced Lean practitioners may suggest these small variances are why self empowerment is important. But viewing the cumulative impact of small variances across an entire production team and supporting staff is something an individual can’t see. The value of the effort is found in identifying and systematically managing common, small variance across the entire workforce.

Variance reports apply to Timekeeping and Payroll too

As I introduced in my book Lean Labor, the Perfect Paycheck is a concept borrowed from the manufacturing term “Perfect Order”. A Perfect Paycheck one that is accurate, delivered on time, and at the right price.

Delivering a Perfect Paycheck is a good first step in achieving Lean Labor. That’s because not only does it deliver quick reductions in waste, but more importantly it sets up an accurate baseline of data to make better labor related decisions during the day.
But let’s face it, when it comes to spending more time building jet engines or making sure an employee’s time card is accurate, the jet engine gets the attention. This is the challenge that people in IT and Payroll present to me when their Perfect Paycheck efforts aren’t broadly adopted.
While there can be a variety of reasons for Lean or any type of project to stall, one common theme is that the participants don’t understand the issues and the benefits. Effort and reward may be experienced by different people or departments. Or when it comes to timekeeping and payroll, often it seems that the administrative pain isn’t worth the gain. A couple of minutes here and there are much less important than ensuring an order is delivered on time.
When it is Operations that doesn’t seem to be adopting the changes required to achieve the Perfect Paycheck I ask “What are they being asked to do and what are the consequences if they don’t?”. While the responses are varied ranging from the Payroll department will fix the mistakes to people aren’t paid accurately all the time, it typically boils down to one situation. The Operations group doesn’t understand the cost of not making change and feels that they have other tasks to do that have more impact on the company.
One of the simplest techniques to remedy this is what I call the “Paycheck Variance Report.” Operations is very familiar with tracking and controlling variances. A variance is an unexpected change in cost or time needed to complete an operation. Variances can originate from a wide variety of places. It might be that the price of the materials shot up recently or someone was on overtime when they worked that week and it cost more than expected. It could also be a positive variance where someone was able to accomplish something faster than expected and it cost less. Operations and Finance reviews these variances closely and while they know they can never get every variance under control, they do make a continuous effort to do so. One area I have never seen tracked in a variance report is the timekeeping and payroll process. As you might imagine, since these processes are not tracked, they are not improved unless the variance is too large to miss. In order to make your Paycheck Variance Report simple to understand within your company, get a sample of a variance report that is written today and copy the format.
I suggested to one payroll project manager who was suffering from project crawl that they start tracking all the issues and recording how much time and money it was costing Operations and the company as a whole. He could then deliver this Paycheck Variance Report to the Operations Manager on a monthly basis. He would then be able to look at this report like he would his other variance reports. He may not act on every one, but you can be sure that if any of the issues ranked higher in terms of cost or time than a more traditional variance, he would be on it in a flash. One thing about Operations, when it comes to saving time or money, I have never seen them biased about what they need to do to execute on the project. But they must be convinced that what they change is going to be worth the effort.

Human Resources: We need your help to optimize the labor supply chain.

As the topic of finding skilled workers to work at manufacturers continues around the world, leave it to China to push a solution forward. China’s Ministry of Education has announced the cancellation of majors at its colleges that have not found employment for more that 60% of its graduates for 2 consecutive years. I read this announcement recently in a Wall Street Journal Blog.

This will probably have the desired effect of pushing those on the edge of a decision between majors to the one with more job opportunities. I wonder though, how motivated will a student with a desire to study history be as they move through a civil engineering curriculum.

What the Ministry of Education has done is to put a “push” system in place. They are trying to forecast the demand for new hires and supply the correct student mix.

China is not alone in struggling with this problem. The U.S. is dealing with slack demand for investment bankers and consultants while skilled trade openings go unfilled. All the while students are taking on too much debt to obtain a degree that can’t produce enough value to pay the loan back once the degree or certificate is earned.

If I were to apply a couple of supply chain concepts to the education system, I would think about the following.

How can we change the system from a push to a pull? We are constantly making the wrong mix of students, ensuring too little employment for some and shortages (petroleum engineers and welders for example) of others.

Is it possible to shorten the lead time of education to improve the ability to respond to changes in demand for a specific degree? Four year degrees have been around for a long time. Is it really necessary to have that much time invested before a student can start delivering value to a company?

Are the risks and rewards in the labor supply chain in the right place?

Students must invest heavily with high uncertainty about their ability to earn a return on their investment. But their risk is mitigated heavily as they are able to take loans that do not look at career choice as an indicator of their ability to pay in the future.

Educational institution risk comes in sourcing students rather than ensuring employment. They also have the shortest ROI as they are paid before they even deliver their services.

Hiring companies have little control over the labor supply chain until a degree or certification is earned. So they are at the mercy of supply and demand for a resource that is critical to their success. But they contribute to this problem as well by releasing unneeded employees back into the market when production demand slackens.

I wish I had an answer in a neat package, but I don’t. What I do believe is this is a prime opportunity for HR departments to become supply chain experts just as their counterparts in Operations did as they improved inventory management over the last two decades.

The company needs HR expertise. If I were in an HR department today, I would immediately take the following actions:

  1. What are the specific skills required to do the job? Is a certification or degree needed or can a person begin work today as they finish their coursework?
  2. Reach out to local schools and invite them to talk to the hiring managers to collaborate on curriculums can be redefined to put students to work sooner.
  3. Begin holding open houses to the parents of high school children. Bring them into the company and show them that manufacturing has changed and jobs are available.
  4. Think about a more flexible work strategy that will allow your company to flex up and down with changing demand while limiting the swings of hiring and layoffs that disrupt the entire labor supply chain.

Accomplishing these tasks would resolve student debt issues, improve flexibility of the workforce and allow companies to hire the employees they need today without impacting the revenues of the educational system.

Can productivity and innovation be compatible co-workers?

“Improve productivity” is one of the oldest goals in manufacturing. We’re told with higher levels of productivity come lower unit costs and all will be good. Market share improves, jobs are secured and even the standard of living can increase.

It’s such an important metric that it is measured by government agencies around the world such as the Bureau of Labor Statistics and the United Nation’s International Labor Organization.

And yet while the U.S has continued to relentlessly improve productivity, its manufacturing industry has only shrunk over the past 20 years. When I visited China recently many companies spoke of offshoring their labor intensive operations to even lower labor cost countries, repeating what occurred in the U.S.

Many employees today look at productivity efforts as just another program to reduce headcount. It’s no wonder when I speak to people about continuous improvement efforts, only the ones who are in crisis want to act immediately. They are going to lose their jobs anyway.

Productivity is simply the output divided by the input. In this case, the input is labor. For some reason even though companies have four choices in how they can improve levels of productivity, they will often favor the three that eliminate employees or reduce their standard of living. They are focused on the denominator – labor.

  • Outsource or Offshore the work to someone who earns lower wages
  • Automate the process and eliminate the labor
  • Directly reduce wages

But companies have a fourth way they can improve productivity:

  • Increase throughput using the same labor

The one method that actually maintains jobs and standard of living. Unfortunately the fourth option is the one that is least used (I base that statement on the employment levels in manufacturing over the past decade).

What’s confounding about this choice of action when it comes to productivity is that it results in undermining of what CEO’s say is the largest factor in their ability to compete: Workforce talent and innovation.

In a survey conducted by the U.S. Council on Competitiveness (click here to download the paper) 406 CEO’s around the world say that innovation is the number one most important driver of competitiveness, followed by their company’s ability to access and control labor and material costs. Below is a stack ranked list of the driver of competitiveness taken from the paper.

This is the part that I have trouble understanding. Out of the four options that companies have to increase productivity, why would they focus their efforts on the three that inhibit innovation? If a company is looking for new and better ideas, does outsourcing and automating the generators of those ideas out of the company improve or detract from competitiveness?

I’m not suggesting no one automates or outsources anything. Certainly the automation of highly repetitive or inherently unsafe processes is a good thing. What I’m suggesting is that management take a look at their mix of productivity projects and increase their efforts to increase throughput using the same labor by an extra 10 percent.

I’ve documented companies in my book and on this site who have done so and the results are incredible. When employees see that management is working to achieve corporate goals while still keeping the workforce intact, the ideas begin to flow from everyone.  That flow of ideas means companies can achieve what is most important to their CEO’s: A talented workforce that has the ability to think and execute on innovation.

The next time you are challenged with increasing productivity or lowering labor costs. Take a minute to focus on the numerator of productivity: throughput. Throughput can be increased by making more product to sell or it can be from bringing back in materials and services that have been previously outsourced. The good news is when you begin thinking like that, you are not alone. Your entire company wants to help you be successful.