Lean often has a bad reputation. I’ve heard countless times that Lean is an excuse for reducing headcount. Nothing could be further from the truth. Lean is a practical means to becoming more efficient, more disciplined, and less wasteful to set your team up for ongoing success. Ultimately, we want to work smarter, not harder over the long term. If the only the strong survive, then we need to be sure that we’re not just floating in the back of the pack when the wolves are on the prowl.
Productivity is the practical measure of our performance. Productivity simply compares output value to input effort. Obviously, we want to maximize the output associated with a given input. There are 3 general areas to consider when measuring and managing our productivity; Product Lifecycle Costs, Production Costs, and Costs of Poor Quality. Be assured, each of these can be broken down further for more granular examination. Let’s discuss each broad concept briefly.
- Product Lifecycle Costs:
This category is oriented around the design, sales and support of the product or service you offer. Lifecycle costs on the front end include R&D, supplier qualification, product certifications, capital planning, and other costs related to launching a new product or service. Ongoing costs would include advertising, marketing, promotions, sales concessions, and the like. The lifecycle costs are unavoidable, but need to be closely managed and controlled. As productivity is a comparative measurement, we use it to validate that our results, year over year, improve with respect to our investment, measured typically in time or dollars.
- Production Costs:
Production costs is easily the default aspect of productivity that people gravitate towards, but it is far more complex than most people recognize. True, direct labor is the most familiar productivity metric people know, there are many more germane aspects to consider. With respect to labor dollars, we must consider indirect as well as direct labor, discretionary overtime, and the various support functions (both management and departmental) that burden it, both hourly and salaried. Furthermore, we must recognize that materials’ costs far outweigh labor costs in production – often by over 5 to 1. Therefore, productivity must include measures related to raw material and component costs, carrying costs, obsolescence risk (both from damage and demand changes), inbound quality assurance costs, and supply chain risk due to outage, supply disruption or forecasting error. Productivity with respect to production costs tends to draw the most attention because it is the most complicated of the three types and yet the easiest to observe with the naked eye.
- Costs of Poor Quality:
The costs associated with poor quality are interesting cause this is the only conceivably avoidable costs in our discussion. However, even Six Sigma certified processes produce defects, though admittedly only about 3 per million opportunities. When we produce good parts or services, without concern or complaint, we have the ability to minimize this cost category, but we will never eliminate it entirely. Counterintuitively, quality output doesn’t inherently cost us more. Rather, lack of quality is where the cost literally eats us alive. Whether your quality costs are currently internal (training, certifications, inspection, etc.) or external (warranty claims, repair, litigation, brand erosion, etc.), the productivity behind your cost of poor quality gives you insights you can leverage for ongoing improvement.
Productivity is more complex than just unit output verses direct labor input. Productivity and its improvement applies to the entire enterprise from concept to production to support and after. The productivity lever is critical to then open up capacity for expansion, resulting in higher overall output without increasing fixed capital costs – further suppressing “per unit” costs. This makes productivity the secret weapon in your long-term business strategy, should you become skilled in applying it.
Lean in and Lean on.