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LEAN MANUFACTURING AND SIX SIGMA

Description

LEAN AND SIX SIGMA MANUFACTURING
PRACTICES
THROUGH
INFORMATION AND COMMUNICATION TECHNOLOGY

Two day Training programme
5th and 6th may 2007

ORGANIZED BY

SQC & OR UNIT
INDIAN STATISTICAL INSTITUTE,
COIMBATORE

Faculty:
Prof. A. Rajagopal,
HEAD, SQC&OR unit
INDIAN STATISTICAL INSTITUTE
Coimbatore-43
Ph: 0422-2441192
Mob: 98422 45219

Transcript

TWO DAY PROGRAMME ON LEAN & SIX SIGMA MANUFACTURING PRACTICES Faculty: Prof. A. Rajagopal, HEAD, SQC&OR UNIT INDIAN STATISTICAL INSTITUTE Ph: 0422-2441192 STATISTICS AS A KEY TECHNOLOGY IS NOT MERELY AN OPERATIONAL TOOL FOR PROFITABLE BUSINESS. BUT AS A POWERFUL ACCELERATOR AND CATALYST FOR ECONOMIC DEVELOPMENT PROF: P.C.MAHALANOBIS

The value of time When, You Don’t Work “On Time”, You Can Explain, “ TIME IS NOT GOOD LONG LIFE WITHOUT QUALITY (OR) QUALITY WITH GIVEN LIFE Quality Time Price PPM Competitive Edge Willingness to pay TO BE THE FIRST AND FAST PLAYER TODAY’S BUSINESS ISSUES: Quality and price are two axis of business so long. The Third axis emerged as -"THE TIME"- the factor taking leading position in business. “SPEED" is the need of hour. “To be FAST and to be FIRST has become the challenge". Conventional Business approach is moving towards higher production (Quantity), which some time affects the Quality and may force to sell in discounts or as seconds, and to carry out "High Inventories“ “ Quality in time" at the "least cost" is the mission statement, moving ahead in this changing environment. "Statistical Methodologies" -that study the uncertainties, Analytical approach that economies the cost and which minimizes the waiting time/ idle time through such “No investment”- “No cost tools” enabled to maximize the return on valued resources. TAKING OF THE BLINDERS… “In strategy it is important to see distant things as if they were close and to take a distanced view of close things” Miyamoto Musashi The Book of Five Rings COMPETITIVE REQUIRES INNOVATION No existing market share is safe today, no product life is indefinite. Not only is this true for high technology, but it is also true for all consumer products. Competition will tear away market niches and technology advantages from the established business through the weapon of innovation. Companies will become merely a shadow of their ‘glory days’ or will vanish if they do not find a way to re-create their market success through a steady stream of innovative products and customer – oriented solutions. INNOVATING FOR COMPETITIVENESS Innovation requires the planned abandonment of established, familiar, customary or comfortable ways of working… whether in product or services, competencies or human relationships or the organisation itself. Business Assessment Change Management Break through Planning System Strategic Decision Making Conclusion : Innovation means that you must be organized to allow constant change. MANAGEMENT OF TIME

DO THE UNPLEASANT FIRST: We can not expect every thing in life to be pleasant. Like the two sides of the coin, the unpleasant always goes with the pleasant. The one who does not postpone making a decision, right or wrong, to fulfill a responsibility, that person alone can be successful. Postponing something because it is unpleasant is wrong. It has the potential to create a crisis and when it occurs, we will be inadequately equipped to face it. RECOGNIZE THE PROBLEM AND ACT : We get used to the problem so much so chronically, that we don’t recognize it as a problem. When there is a problem, we tend to say, “There is no problem, Everything will be alright”. But it will not be all right. MURPHY’S LAW: What can go wrong, will go wrong. The possibility of something going wrong is much greater than its going right. One can act upon a problem, however small it is, only when the problem is first accepted. Action presupposes a decision, a will, and the will can exists, only when there is recognition. KARMA: “ Everything will be all right if my karma is good”. Karma does not work that way, the theory of karma is not fatalism. It does not justify passing the buck. It pins down the responsibility upon us. so accept problem as it occurs. DEALING WITH THE ISSUES: For any business man, interference from competitor will be a problem. This is not created by him. This has to be faced. This requires inner strength. It is like learning to drive a car. The instruction cannot reproduce all possible traffic situations. The learner has to deal with particular situation as they occur. EVERY EFFECT IS A CALCULATED RISK: When you make a business projection for the following year, factors like potential demand, availability of raw material, changes in tax structure, shrikes are taken in to account. Since every intelligent effort involves a calculated risk, only two results can be expected from every effort – Success to different degree – Failure to different degree. With every failure, a person seems to become more and more frightened and a time comes when are is not able to act at all. So it is important that we are prepared for failure in our effort, because success may not always come. Our power are limited, and there are factors beyond our control. ACCEPT LIMITATIONS: To be for failure, it is necessary to recognize one’s limitations. Our knowledge is limited and so we can not avoid many situations from occurring- otherwise we could avoid all accidents. sometime we have the knowledge but our power is limited and we feel helpless . If you permit yourself to be depressed for reasons you seem to have no control over, you become helpless and the outside factors will make you more and more inefficient and ineffective. Depression is a reaction. In action, you have freedom to exercise your will. Acceptance of facts is a precondition to an action, Non –acceptance is an ideal condition for reaction – in fact Non- acceptance itself is a reaction. Non –acceptance does not alter the facts- the reaction creates a chain of reactions. SO ACCEPT THE FACTS AND KEEP ACTION.

“ What ever a leader does, other people do. The very thing. What ever the upholds as authority, an ordinary person follows that”. – BHAGAVATGITA. KRISHNA TO ARUGUNA: If you runaway from this battle field, all others will also follow you. If you fail to do what is to be done, others will also do exactly that, because you are leader, whether you like it or not. – Set our Example. Understanding lean Lean: A systematic approach to identifying and eliminating waste {non- value-added activities) through continuous improvement in pursuit of perfection by flowing the product at the pull of the customer. Lean champion: Subject matter expert in the tools of lean typically chosen to lead lean training, lean projects, and lean transformation. Lean enterprise: Any organization that continually strives to eliminate waste, reduce costs, and improve quality, on-time delivery, and service levels. Understanding lean Lean production: The opposite of mass production. Muda: A Japanese word, usually translated as “waste”, that refers to those elements of production that do not add value to the product. Takt Time: The available production time divided by the rate of customer demand. Takt time sets the pace of production to math the rate of customer demand and becomes the heartbeat of any lean system. Example for takt time 7.0 Max 11.7 Avg 14.0 Min Takt time 12600 1800 Takt time (Max) = 12600 1080 Takt time (Avg) = 12600 900 Takt time (Min) = 1800 Max 1080 Avg 900 Min Demand 12600 Total seconds 210 Total minutes -0 Other -5 Maintenance -220 Changeover -5 Meetings -10 5S -20 Lunch -10 Breaks 480 Shift Minutes Time Available Business Process Improvement system

Ground Rules Leadership Vision

A Process Is A Collection Of Activities That Takes One Or More Kinds Of Input And Creates Output That Is Of Value To The Customer Definition of a process 6  #2: When convinced of the value of thinking in terms of processes, most people still don’t think in terms of processes  #3:The word “process” generates fear and resistance. Processes All activity takes place in terms of a process.  The quality of the process determines the quality of the output. Shocking lessons  #1: Most people do not think in terms of processes. They would rather think terms of isolated events. Black Belt Projects Supplier Quality “ Voice Of The Shareholder” (Profitability Analysis) “ Voice Of The Customer” (Surveys) Stakeholder Requirements Customer Requirements Prioritization Core Processes And Output Measures Internal Processes And Output Measures Key Subprocesses And Input Measures Other Stakeholders

Strategic Focus Pick-Up & Delivery Order/ Leasing Billing Customer Service Equip. Mgmt. Core Process (Level I) Subprocesses (Level 2) CSR Qualifies Customers’ Needs CSR Enters Case In CIS Branch Schedules Repair Servicer Fixes Problem CSR Verifies Customer Satisfaction Customer Calls For Repair CSR Completes Case Subprocesses Through Microprocesses (Level 3 And Below) Levels of Process The Dimensions Of Process Focus Design Design For Six Sigma Improvement DMAIC Management Process Management 3 Dimensions of Process BPMS What is BPMS? A nine step methodology designed to create ongoing accountability for managing entire cross-functional processes to satisfy process goals Why BPMS ?

BPMS Step 1: Create Process Mission C O P I Process Mission Statement Key Process Verbatim Issue Requirement  Purpose: Importance: Boundaries: Process Goals: Process Owner Beginning Point End Point S Proc. CTQ Rqmt Output Proc Input Operational Definitions Data Owner Definition Unit How Many DPU  Process Management System Clarify Operational Data Definitions Validate System Data Display Step 3: Document Customer and Process Requirements Step 2:Document Process Step 4:Identify Output and Process Measures Step 5: Build Process Management System Step 6 Establish Data Collection Plan Step 7: Process Performance Monitoring Step 8: Develop Dashboards with Spec Limits and Targets Step 9: Identify Improvement Opportunities Process Management System Trend Chart Problem Pareto Root Cause Corrective Actions         

A.

B. D. E.

C.

BPMS UCL LCL Step-1 : Create Process Mission

Step-2 : Define & Document the Process

Yet to be incorporated Ready for all plants Flowcharts are to be drawn on four different perspectives on a process What one think the process is. What the process really is. What the process could be. What the process should be. 30 Use SIPOC to define the process. Starting at the Top Key business activities can be defined at different levels of the organization:  Level 1 = highest – level view of work in the organization  Level 2 = work that flows across several departments or within a n entire department or work area  Level 3 = a detailed view of of a particular process Filling Sealing Packing New Product development Demand Generation Demand Fulfillment Customer Service Ordering Materials Producing Picking Shipping Mixing Level 1 Level 2 Level 3 35 Which Flowcharting Technique Should I use? Basic Flowchart Activity Flowchart Deployment Flowchart  To identify the major steps of the process and where it begins and ends  To illustrate where in the process you will collect data  To display the complexity and decision points of a process  To identify rework loops and bottlenecks  To help highlight handoff areas in processes between people or functions  To clarify roles and indicate dependencies 31 Types of Flowcharts Useful for Understanding Process Flow  Activity flowcharts Sales Technical Shipping Coordinator  Deployment flowcharts Activity Flowcharts Activity flowcharts are specific about what happens in a process. They often capture decision points, rework loops, complexity, etc. Hotel Check – out Process 1 Approach front desk 3 Wait 4 Step up to desk 6 Wait 7 Give room number 8 Check bill 10 Correct charges 11 Pay bill NO NO NO YES YES YES Start/End Action/Task Sequence Process Name Date of creation or update & name of creator Clear starting and ending points Clear direction of flow (top to bottom or left to right) Consistent level of detail Key of symbols Numbered steps 2 Is there a line? 5 Clerk available? 9 Charges correct? Decision Deployment Flowcharts Deployment flowcharts show the detailed steps in a process and which people or groups are involved in each step. They are particularly useful in processes that involve the flow of information between people or functions, as they help highlight handoff areas. Invoicing Process Shipping Customer Elapsed Time 5 days 10 days 7 Reviews weekly report of overdue accounts Sales Billing 6 Receives and records payment 5 Files invoice 3 Sends invoice to customer 4 Notifies billing of invoice 2 Notifies sales of completed delivery 1 Delivers goods 8 Receives delivery 9 Records receipt and claims against this delivery 10 Receives invoice 11 Checks invoice against receipt 12 Pays bill People or groups listed across the top Time flows down the page Horizontal lines clearly identify handoffs Steps listed in column of person or group doing step or in charge 43 Value – Added and Nonvalue – Added Steps Value – Added Step:  Customers are willing to pay for it.  It physically changes the product.  It’s done right the first time. Nonvalue – Added Step:  Is not essential to produce output.  Does not add value to the output.  Includes: • Defects, errors, omissions. • Preparation/setup, control/inspection. • Over – production, processing, inventory. • Transporting, motion, waiting, delays. 47 How to Create an Opportunity Flowchart  Divide page into two sections • Value – added section smaller than cost – added – only section  Time flows down the page  Only join two Value – Added steps with an arrow if there are no Nonvalue – Added steps in between Yes No No No Yes Yes Loop Loop Loop Value – Added Steps Nonvalue – Added Steps Step-3 : Document Customer & Process Requirements

7 VOC Process Outcomes:  A list of customers and customer segments  Identification of relevant reactive and proactive sources of data  Verbal or numerical data that identify customer needs  Defined Critical – to – Quality requirements (CTQ)  Specifications for each CTQ 1. Identify customers and determine what you need to know 2. Collect and analyze reactive system data then fill gaps with proactive approaches 3. Analyze data to generate a key list of customer needs in their language 4. Translate the customer language into CTQs 5. Set specifications for CTQs

What is Critical to Quality 23 Example: CTQ Tree Need Drivers CTQs General Specific Hard to measure Easy to measure Ease of Operation and Maintenance Operation Low qualification of operator Easy to setup (training / documentation) Digital Control Maintenance MTBF Maintenance Documentation Minimum special tools / equipment required Modification Cost Mistake Proofing and One of 7 Management Tools – Tree diagram Standardization Down time Establishing a Performance Standard

Customer Need CTQ Product/ Process Characteristic Measure Specification/ Tolerance Limit(s) Target 95 % 90% Defect Definition Below 90% Better Throughput % Trained No. Trained against no. identified for training in a chosen subject Step 3 – Document Customer/Process Requirements VOC Guidelines Your Outputs Key Issues Customer Requirements CTQ’s Voice of Customer Outputs of your process are designed to satisfy customer needs profitably Customer needs are stated in the language of the customer Clarification of the customer’s language identifies the key issues Defined as customer performance requirements of a product or service Key issues are translated into customer requirements Sample CTQ’s Reliability Durability Accuracy Timeliness Failure Recovery Efficiency Cost Savings Easy to Use Quick Response Internal Customers Leadership Process Owners Stakeholders External Customers Clients Consumers Regulators Brokers VOC Translation Process BPMS Step 3 – Document Customer/Process Requirements VOC Guidelines

Step 4 – Identify Output/Process Measures: Measurement Matrix Guidelines BPMS Process Input Variables (X’s) Process Variables (X’s) Output Variables (Y’s) CTQ Template BPMS Objectives : Consolidate work performed in steps 1-5 onto one concise page which captures the essence of your process. Establish process specs/targets, control limits, and response plan for out-of-control/under-performing metrics. Why Is This Important? : A process management system allows a process owner to quickly respond to performance trends. It is an enabler for process optimization. Tools : Control Plan Step 5 – Build Process Mgmt. System Step-5 : Build Process Management System

 BPMS Data Collection Roadmap Step 6 – Establish Data Collection Plan Guidelines Develop Operational Definitions & Procedures

Plan for Data Consistency & Stability

Begin Data Collection

Continue Improving Measurement Consistency

Data Collection Plan BPMS Step 6 – Establish Data Collection Plan Guidelines Decision to Collect New Data

Decision to Sample

One BB to finalise sampling strategy Validating Measurement Systems

Data Collection Considerations

BPMS Step 7 – Process Performance Monitoring Guidelines

Upper Control Limit Average Lower Control Limit Measurement Time Process Performance Monitoring

BPMS Step 7 – Process Performance Monitoring Charts BPMS

Identify Universe of Potential Measures Narrow List of Measures Data Collection Determine Measures w/Best Relationship to CTQ’s Finalize Dashboard Dashboard Creation Roadmap Step 8 – Develop Dashboards Guidelines External Environmental Information Dashboard Indicators Internal Environmental Information Process Review Satisfied with Indicators? Continue Control Actions Yes Plan/Implement Improvement Actions to Correct No Action Troubleshoot DMADV QC/SGA/ Quick Hit/ DMAIC Identify Problem Diagnose Root Cause Remedy Cause Process Improvement Process Redesign (process not capable of performing to standards) Step 9 – Operate Process Management System & Identify Improvement Opportunities No   Business Big Y’s Project Y Process Y’s Y Y Y Y Key output metrics that are aligned with strategic goals/objectives of the business. Big Y’s provide a direct measure of business performance. Key output metrics that summarize process performance Key project metric defined from the customer’s perspective Any parameters that influence the Y X 1 X 2 X 3 Project Y Alignment Management PROCESS Project Identification Customer wants and needs should drive our actions!

A Great Project Should…

Selecting the Right Projects

Top priorities based on impact and performance: strategic issues Low Medium High Low Impact Medium Impact High Impact Delivered CTQ Importance Performance Project Prioritization Matrix

Low Med Hi EFFORT Low Med Hi IMPACT Increasing Desirability Low Med Hi Probability of Success

Project Selection A Good Project

A Bad Project

Project Chartering

Five Major Elements Of A Charter

The Goal Statement

S pecific M easurable A ttainable R elevant T ime Bound 8 Steps To Bind A Project

8 Steps To Bind A Project 8 Steps To Bind A Project

Project Selection Workshop

CTQ Selection Workshop

CTQ Selection Workshop 3 2 1 Wtg KFAs SBO’s Sl.No CTQ Selection Workshop Step 2 Core Processes of Each Function Impact of Core Processes on each KFA Sl # Key Focus Areas Wtg of KFAs Core Process 1 Core Process 2 Core Process 3 Core Process 4 Core Process 5 Core Process 6 Core Process 7 Core Process 8 Core Process 9 Core Process 10 Process Absolute Importance (Column Sum : Sum of scores the process wrt SO) Process Relative Importance (Realative Importance = Absolute Importance / Total) List your process and What level of impact it will have on the KFA , 1=Low, 3=Medium, 9=High CTQ Selection Workshop Step3 Priority of CTQs Sl # Process CTQs / Metrics As Is Must Be Gap Ease to Implement Impact on Margins Translation Opportunity Root Causes Already Known with Confidence? (Yes / No) Is Problem Because of Variability? (Yes / No) Data Availability on Xs and Y Priority 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 1=Low 1=High 1=Low 3=Low to Medium 3 = Medium to High 3=Low to Medium Priority = 5=Medium 5=Medium 5=Medium Gap*Ease*Impact*Translation 7=Medium to High 7=Low to Medium 7=Medium to High 9=High 9=Low 9=High CTQ Selection Workshop Step-4 : List of projects Front line Project Selection Thinking line for Project Selection Thinking line for Front-line project selection :

Production cycle time

PRODUCTION CYCLE TIME Time gap between the starting time to produce a completed item (or Batch, ready for dispatch) till the next item (or Batch ) is started. The total time is production cycle time. CONTINUOUS IMPROVEMENT: Continuous Improvement View of Losses of Deviations from Normal L(y) =K(y-m) 2 = Taguchi Loss Function Where, y = the value of the quality characteristic for a particular item of product or service, m = the nominal value for the quality characteristic, and k = a constant, A/ d 2 A = the loss (cost) of exceeding specification limits (e.g., the cost to scrap a unit of output), and d = the allowable tolerance from the nominal value that is used to determine specification limits. LOSS FUNCTION : The Continuous definition of quality, return to the sample of the production of stainless steel ball bearings, Every millimeter higher or lower than 25mm causes a loss that can be expressed by the following Taguchi Loss function: L(y) = K(y-m) 2 = (A/d 2 )(y-m) 2 = (Rs.1.00/ 5 2) (y-25mm) 2 = (0.04)(y- 25mm) 2 if 20  y  30, L(y) = Rs.1.00, if y < 20 or y > 30 Table shows the values of L(y) for the Quality characteristic (diameter of ball bearings) ILLUSTRATION: ORDERING TIME, SETUP TIME, OPTIMUM PRODUCTION QUANTITY The basic principle of inventory optimization and materials management is to minimize the competing costs of having either too little or too much in inventories of raw material, work in process, or finished goods. Inventories provide indispensable buffers to improve the leveling of production activity, but they constitute a major investment of the funds of most firms. The traditional method of timing production runs and inventory replenishment has been by reorder point. INVENTORY OPTIMIZATION AND MATERIAL REQUIREMENTS PLANNING Reorder point control should be replaced with MRP for production items and by DRP (distribution requirement planning) for finished goods inventories. Under reorder point, total costs of inventory policy (TC) are generally taken to include the following as the most important cost elements: TC = setup costs (or procurement costs) + holding costs + stock out costs A first approximation to the cost categories of this equation is to specify the total cost to be (for never stock situation) For D= Annual Demand, p=price per unit The procurement or setup cost is “c” dollars per order, and the order or production run amount is “Q” units per batch. If the item is produced, it is at a daily rate of “r” and depleted at a daily rate of “d”. The value for the effective rate of interest, i, is often taken to be about 30 percent, to include the opportunity cost of capital. insurance, obsolescence, and other costs of holding. The above TC equation is minimized when This equation is for the case of setting up a machine to run the item to a certain inventory level, then running that machine on another item until stocks are nearly depleted. The economical production quantity, or EPQ, is the approximate optimal value of units per batch to manufacture, assuming simplistic uniform demand rates for finished goods with simplified work centers. Although reorder point continues to be commonly used, superior total planning control is possible with computer-based MRP. Economical Production Quantity (EPQ): INVENTORY THEORY AND MODELING: Proper control of inventory requires a delicate balance and careful, detailed planning. To the controller who sees funds tied up in material in the warehouse, work-in- process inventory, and finished goods not shipped, the natural reaction is that inventories are too high. To the production superintendent faced with the prospect of interrupted deliveries or silent production lines due to inadequate raw, in-process, or finished materials, the response must be that inventories are too low. Therefore, a balance is needed between holding large quantities to satisfy the latter and frequent stock replenishment to satisfy the former. This might be represented, as in below figure If the replenishment quantity q is represented on one axis and the total inventory cost in dollars is represented on the other. Many reasons exist for keeping inventory. They include: to improve customer service; to hedge against demand surges and variation of production level; to take advantage of favorable prices; to ensure against error and loss; and to avoid production stoppage. Overproduction for any of these reasons can, on the other hand, increase costs through high investment and low capital turnover, material obsolescence, spoilage an deterioration, storage and handling excesses, and inefficient use of space due to overcrowding.

A second concept is that records will be reviewed periodically (weekly, monthly, quarterly, etc.) and if the level of inventory for that ; item has fallen below a certain target level, anew ) order will be placed. If it has not, the record will be , returned to the file for review again at the end of the next period. Target levels, period lengths, and e replenishment quantities are dependent on frequency of use, replenishment lead time, and criticality of item. This system is usually more difficult to establish but results in lower clerical cost to maintain stock control. Both transaction reporting and periodic review systems can be maintained manually or by computer, if the inventory system is of sufficient size to warrant computer control. EXAMPLE: A manufacturer uses wooden pallets for unit load shipping of the product. These pallets are used regularly at rate of 100 per month and purchased from a vendor Rs. 3.50 per pallet. They are stored in an unheated but covered shed until needed, 19 and it is estimated that it costs 20 percent of the unit value to pay for the investment and storage costs. PERIODIC REVIEW: A fixed cost of 150 in clerical time and processing is incurred every time a replenishment order is processed. If pallets are available when needed, re -handling of the unit load of final product is necessary at a cost of Rs10 per unit. Delivery normally takes from 6 to 10 days from the time of order, and 6, 7, 8, 9, or 10 days are equally likely. To determine the EOQ, the following is considered: If C = replenishment cost S = storage cost I = number of inventory turnovers per year T = total cost per year for storage and replenishment R = rate of demand Q = order quantity (EOQ) then Q can be calculated to be the order quantity which results in the lowest cost T Q =  (2CR/S) =  (2(50) (100)/ (0.2)(3.50))= 120 Pallets/ Order. I = ( R ) (Number of Months)/ Q = (100)(12)/ 120 = 10 Turnovers/ Year In this example, a transaction system is to be used, and a reorder point needs to be determined which will provide protection during the reorder period of 6 to 10 days. Since it is equally likely that delivery can be at any time between 6 and 10 days, inclusive, the reorder point will be selected at the point that gives a cost balance between overstocking during the lead time and under stocking. Each time period of days from 6 to 10 has 1 chance in 5 of occurring in the replenishment cycle. By weighting the chances of various delivery possibilities by the cost of overstocking versus under- stocking, a weighted average of delivery days can be computed which establishes a basis of the reorder points. In this example it may be computed as follows: Number of items demanded per day = 100/20* = 5 . *20 days assumes a 5-day workweek Average cost of overstocking = (5)( 3.50)(1/5)(x- 5) where x = delivery period between 6 to 10 days Average cost of under stocking =(10 X 1/5)[10-(x -5)] Solving for x as the point where the weighted-average overstocking cost equals the weighted-average under stocking cost: (5)(3.50)(1/5)(x- 5) = (10)(1/5)(10 -x) 3.5x- 17.5 = 20 -2x 5.5x = 37.5 x= 6.8 The weighted-average delivery period for the purpose of planning the reorder point is 6.8 days. Reorder point = (100/20)(6.8) = 34.0 In summary, place an order for pallets when the pal- let inventory drops to 34. Thus, you will provide an economical stock system for pallets as long as the costs and d factors or the delivery time factors do not change. Pay back time PAYBACK TIME

The Payback Calculations follows: P=I/O Where P= Payback Time, I= Initial increment amount invested and O= The uniform annual incremental each inflow from operations. Essentially, payback is a measure of the time, it will take to recoup in the form of cash from operations only the original amount invested. Given the useful life of an assets and uniform cash flows, the less payout period , the greater the profitability or given payback period, the greater useful life of the asset, the greater the profitability. Note that, payback does not measure profitability, it does measure how quickly investment amount may be recouped. An investment’s main objective is profitability, not recapturing the original outlay. If a company wants to recover its investment outlay rapidly it need not bother spending in the first place. Then payback time is ZERO; NO WAITING TIME is needed.

RETURN ON INVESTMENT (ROI): The return on investment is measured by adding back interest to net income after taxes and dividing by total assets. It is a measure of the after –tax profitability with which the firm’s total resources have been employed. Return on investment = Net income + interest Total Sales =192,000 + 40,000 2,000,000 ROI=I= S-P P Where P= The amount borrowed (or the amount invested ) S= The amount paid back (or the amount collected) at the end of the year RATE OF RETURN: For example, assume the following situation. Invest Rs.10,000 in a laborsaving machine. Labor savings = Rs 2500 per year. Useful life = 10 years. Company desires 10 percent return on investment. Machine will be depreciated for tax purposes over 10 years on a straight-line basis. Company has 50 percent tax rate. Machine will have no salvage value. Annual Cash-Flow Computations: Compute the annual cash flow as follows (in this example, the savings are the same each year): Cash in from labor savings ………………………………………….Rs. 2500 Cash out for taxes ………………………………………………… Rs. 750* Annual Net cash inflow……………………………………………..Rs.1750 * Income subject to tax = Rs2500- Rs.1000 depreciations = Rs.1500 at 50% = Rs750 RATE-OF-RETURN CALCULATIONS: The investment outlay is Rs.10,000. The annual cash savings is Rs . 1750. A 10 percent return is desired. Look at Table B-4. Under the 10 percent column, read down to 10 years. The factor is 6.44. Multiply 6.44 by the annual savings of Rs.1750. The result is Rs.11,270. This means that the present value of the future cash inflows of Rs.1750 per year is worth Rs.11,270 today if a 10 percent return on investment is desired. Since the investment is only Rs.10,000 and the present value of future inflows is Rs.11,270, the investment would be made. If the actual return is desired, divide the investment by the annual savings, Rs.10,000/Rs1750 = 5.71, Again, look at Table B.4 and read across from year 10. The factor 5.71 is between 12 % and 14 % or about 13% return on investment. COMPLEXITIES: Variable Annual Savings : The cash savings generated from a capital project are seldom the same for each year of the life of the project. The savings may be different because of the use of accelerated depreciation, varying production levels, changes in tax rates, and other related items. The discounted cash-flow concept can be used with varying annual savings in two ways, as illustrated in the following example company has the opportunity to invest Rs.1000 in e of four alternative projects. Each project has an estimated life of 6 years and a total return of Rs.1800. The flow of the savings is as shown in this array. Rs Rs Rs Rs Rs Rs Rs Rs 0 2 4 6 8 10 12 14 16 18 20 30% 20% 10% 0 30% 20% 10% 0 Rate of return Reciprocal pf Payback Period RECIPROCAL OF PAYBACK PERIOD COMPARED WITH RATE OF RETURN INTERNAL RATE OF RETURN: One approach is to calculate the rate of return on each project. The internal rate of return is the rate which is being earned on the unamortized balance of the investment, such as the rate on a home mortgage. Using Table B-4, the calculation is made using a trial-and-error approach. What rate will bring the future cash flow back to Rs.1000 today? The rates are, Project A: 25 + percent Project : 30 + percent Project C: 16 percent Project D: 25 percent NET PRESENT VALUE : The net present value of an investment is the difference between future cash inflows discounted at a specified rate and the amount of the original investment. If a desired rate of return is known, the present value of the future flow can be determined. Assume the company wants a 20 percent return on investment. The present-value factors for 20 percent for each year are given in Table B-2. Applying these factors to the flows for the four projects, a present value for each project is as follows: Project investment Present Value Net Present @ 20% A Rs.1000 Rs. 1092 Rs. 92 B 1000 1188 188 C 1000 996 – 4 D 1000 1142 142 Refer the table B-2 Using the net-present-value (NPV) approach, we see that project B has the highest net present value. Projects A, B, and D all have positive net present values, which mean that these projects all return more than 20 percent. Project B has the highest NPV, which makes it the most attractive alternative. Project C, with a negative NPV, returns slightly less than 20 percent. How would you rank projects if the original outlay is different? The one with the highest investment is likely to have the highest absolute Rupee NPV but may have a smaller return. Projects of this nature can be ranked by the use of a profitability index. PROFITABILITY INDEX: Project A has the lowest Rupee NPV. It also has the lowest investment outlay. The index shows, how- ever, that it has the highest return; i.e., the Rupee received discounted at 20 percent are higher relative to the investment than the Rupee received in either project B or project C. Rs. Rs. Rs. Rs. Rs. Rs. TABLE : B-1 PRESENT VALUE OF RS.1 RECEIVED AT END OF THE YEAR INDICATED Present Value =1/(1+i) n TABLE : B-2 PRESENT VALUE OF RS.1 RECEIVED AT MIDDLE OF THE YEAR INDICATED Present Value =1/(1+i) n-1/2 TABLE : B-3 PRESENT VALUE OF RS.1 RECEIVED AT END OF EACH YEAR FOR N YEARS TABLE : B-4 PRESENT VALUE OF RS.1 RECEIVED AT MIDDLE OF EACH YEAR FOR N YEARS Emulating the bench mark of Koba Yashi – Mitsubishi Success Model The Keys Small group activity a. One suggestion per month per person. b. Short standing meetings to stress efficiency. Cleaning and Organizing KEY: 1 Measured Management Objectives ( Safety, Horizontal Hierarchy, Clear Instruction from TOP) KEY: 2 KEY: 3  Reducing Inventory. (Work – in – Progress) a. All activity that don’t add value to product are wasteful. KEY: 4  QUICK CHANGEOVER TECHNOLOGY

KEY: 5  Value Analysis of Manufacturing Methods (Improvement in Methods)

KEY: 6  Zero Monitor Production

KEY: 7  Integrating Functions

KEY: 8  Maintaining Machines and Equipment

KEY: 9   KEY: 10 WORK FLOOR TIME POLICES

 KEY: 11 QUALITY ASSURANCE SYSTEM

We must build quality in the processes themselves! I’ll inspect what I make POKA YOKA KEY: 12 DEVELOPING YOUR SUPPLIERS

KEY: 13 ELIMINATING WASTE WITH A “ TREASURE MOUNTAIN MAP”

 KEY: 14 EMPOWER WORKER TO MAKE IMPROVEMENTS

 KEY: 15 SKILL VERSATALITY AND CROSS TRAINING  KEY: 16 PRODUCTION SCHEDULING  KEY: 17 EFFICIENCY CONTROL

 KEY: 18 USING MICROPROCESSORS

 KEY: 19 CONSERVING ENERGY AND MATERIALS

 KEY: 20 LEADING TECHNOLOGY – SITE TECHNOLOGY

Taiichi Ohno's original enumeration of the seven wastes plus underutilized people. These are: Eight wastes

Value stream mapping Value stream mapping – from rfq to delivery

Four steps to Value stream mapping Step 1: product development

This value stream can serve more than one customer, but be sure to use similar primary processes. Use a pencil rather than a computer. Step 2: process design

Perform an upstream walk-through for each process step, observing and documenting as much of the following as possible. Step 3: preparation Record as much information as is pertinent in the process description box. Step 4: planning

1% error Adds Directly to The Bottom Line This business was very focused on its core processing activity, but less focused on the support functions. One of these support functions was the off-line handling and managing of its molds, which were quite fragile and breakable. This was considered to be a less important activity than production and, as long as the molds were ready for production as required, Plant Management largely ignored this activity. Also, the budget for this section was relatively small; in anyone year they would spend about $200,000 on the replacement of molds that were broken off line. As this was only about 1% of costs, the activity was never previously targeted in typical cost reduction programs. 1 % error Adds Directly to The Bottom Line As part of an operational review, this organization investigated its 1 %errors and this previously ignored cost. A comparison with similar plants showed that it was possible to operate with almost zero breakages and that the current expense could be eliminated with better handling and management. The procedures from the other plants were adopted to address the issue. This resulted in breakages being almost eliminated. Focusing on this previously ignored 1 % error and adopting simple procedural changes added $200,000 to the bottom line. Contd… Process capability PROCESS CAPABILITY RATIO The concept of Process Capability Ratio (PCR), was defined as PCR = USL – LSL / 6 σ (two – sided) For one – sided upper specifications only, the PCR is defined as PCR U = USL – µ / 3 σ ( upper) And for one – sided lower specifications only, the PCR id defined as PCR L = µ – LSL / 3 σ ( Lower) The PCR aids in the evaluation of processes with respect to their specification limits. Recommended Minimum values of the Process Capability Ratio 1.60 1.67 Safety, strength, or critical parameter, new process 1.45 1.50 Safety, strength, or critical parameter, existing process 1.45 1.50 New processes 1.25 1.33 Existing processes One – Sided Specification Two – sided Specification  Process follow out for a normally distributed characteristics (One-sided specifications). For Two sided Double the value of Y- axis INDICES OF PROCESS CAPABILITY SHORT TERM CAPABILITY LONG TERM CAPABILITY Example: PCRs AS FRACTION NONCONFORMING PCRs may be translated into an expected fraction nonconforming, assuming a normal distribution for the characteristic of interest. For instance , a PCR = 1.25 for a two –sided specification indicates that PCR = USL – LSL / 6 σ = 1.25 So that USL – LSL = 7.5 σ and Z = 3.75 σ / σ = 3.75 More extensive tabulation from Normal Distribution Table, show that, 1 – Φ (3.75) = 0.000088 Since we are considering a two – sided specification, the expected fraction non conforming is 2 (0.000088) = 0.00018. Currently, quality controllers are concerned with parts per million (ppm) defective. For PCR = 1.25, we expect 180 ppm non conforming. THE SIGMA CONVERSION GUIDELINES Short – Term To Long – Term FROM Short – Term Long – Term No Action – 1.5  + 1.5  No Action Product quality   WHEN TO USE DPO AND WHEN DPU?

PERFORMANCE MEASURES AT A GLANCE d: Number of defects dpu: Defects per unit dpo: Defects per opportunities Dpmo: Defects per million opportunities Zst: Short term sigma rating Zlt: Long term sigma rating = Zst + 1.5 Y tp: Through put yield Y rt: Rolled through put yield Cp: Process capability (Potential) index Cpk: Process capability (performance) index PPM: Parts per million defects Yes NO   YIELD: THE CLASSICAL PERSPECTIVE Y final == S / U where Y final == Final yield U == Number of units tested S == Number of units that pass Is the classical calculation of yield con-elated to other- major business metrics? -Yield has always been considered a very important metric for guiding the business; however, no correlation is observed between yield and profit margin. How can this be explained? IDEA OF ROLLED THROUGHPUT YIELD

       

EXERCISES The 10 steps And Minimizing inventory investment

Step #1: Get Organized

Step #2: Apply the Fundamentals with Rigor

Step #3: Focus on Function, not Cost

Step #4: Identify and Focus on Leverage Points

Step #5: Limit and Prioritize Resources

Step #6: Work on the 1% errors

Step #7: Eliminate Duplication

Step #8: Question Everything

Step #9: Take Some Chances

Step #10: Ignore Tradition

Quality tools with jidoka and poka yoke Andon: A Japanese word meaning light or lantern. It is triggered by an abnormal condition or machine breakdown. It is a form of communication indicating that human intervention is required. Many times these are presented like a stoplight (red = stop, yellow = caution, green = go). Poke – yoke (error Proofing): low – cost, highly reliable devices or innovations that can either detect abnormal situations before they occur in a production process, or, if they occur, will stop the machines or equipment and prevent the production of defective products, those that prevent errors by an operator, and those that detect errors by an operator and give a warning, and those that defects in products and prevent further processing of them. Heijunka: A method of leveling production for mix and volume. jidoka: This defect detection system automatically or manually stops production and/or equipment whenever an abnormal or defective condition arises. Any necessary improvements can then be made by directing attention to the stopped equipment and the worker who stopped the operation. The jidoka system posits faith in the worker as a thinker and allows all workers the right to stop the line on which they are working. It is now called autonomation in English. Continuous flow production: A production system where products flow continuously rather than being separated into lots. No work in process is built up. Manufacturing resource planning (MRP II): MRP as just defined, plus capacity planning and a finance interface to translate operations planning into financial terms, and a simulation tool to assess alternate production plans. ERP is enterprise wide resource planning waste. Material requirements planning (MRP): A computerized system typically used to determine the quantity and timing requirements for production and delivery of items (both customers and suppliers). Using MRP to schedule production at various processes will result in push production, since any predetermined schedule is only an estimate of what the next process will actually need. Overall equipment effectiveness (oee): A machine’s overall equipment effectiveness is the product of its availability. Performance efficiency, and first – pass yield. First- pass yield (fpy): The time required to complete one cycle of an operation. The time elapsing between a particular point in one cycle and the same point in the next cycle. If cycle time for every operation in a complete process can be reduced to equal takt time, products can be made in single-piece flow. Cycle time The quality rate, is the percentage of units that complete a process and meet quality guidelines with out being scrapped, rerun, retested, reworked, returned, or diverted into an off-line repair area. FPY is calculated by dividing the units entering the process minus the defective units by the total number of units entering the process. Mistake – Proofing emphasizes the detection and correction of mistakes before they become defects delivered to customers. It puts special attention on the one constant threat to any process: human error. Mistake – Proofing is simply to pay careful attention to every activity in the process and to place checks and problem prevention at each step. It’s a matter of constant, instantaneous feedback, rather like the balance and direction data transmitted from a cyclist’s ears to brain, keeping his or her bike upright and on the path. MISTAKE – PROOFING (OR POKA – YOKE)

The basic types of “Mistake – Proofing Device” are: Control: An action that self – corrects the process, like an automatic spell –checker / corrector. Shutdown: A procedure or device that blocks or shuts down the process when an error occurs. Example. The automatic shutoff feature of a home iron. Warning: This alerts the person involved in the work that something is going wrong. Example. A seat – belt buzzer. So is a control chart that shows that a process may be “out of control”.

IMPLEMENTING THE LEAN KAIZEN Vision Statement Broad Objectives

Market Imperatives

Current Conditions Backlog: 2-3 weeks (shippable orders) Setup times: punch, 45 minutes brake, 40 minutes hardware, 30 minutes spot weld, 25 minutes Material management: batch-push Subcontract lead times: 1-2 weeks Lot sizes: 90 days Inventory turns: 8 turns/year Lead time: 5-8 weeks (including outside processes) Facilities layout: process functional, multiple buildings Quality: Cost = 2% of sales Productivity: Rs. 8500 per employee/year (Rs. 12000 direct labour) To – be Vision Backlog: 3 days maximum (shippable orders) Setup times: punch, 9 minutes brake, 12 minutes hardware, 5 minutes spot weld, 9 minutes Material management: demand pull Subcontract lead times: 2-3 days Lot sizes: 2 weeks Inventory turns: 20 turns/year Lead time: 9-11 days (including outside processes) Facilities layout: cellular, single building Quality: cost < 1 % of sales Productivity: Rs. 10000 per employee/year (Rs. 130000 direct labor) Model-line personnel will exhibit the following characteristics:

Role of Steering Team:

Cond…

Role of the Continuous Improvement Coordinator

Cond…

THANK YOU

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