Production Management Part 2: Efficiency (Cost Control)

October 3, 2011 at 10:24 am 12 comments

High efficiencies are the “success” mantra of effective production management. Technicians in production units are always struggling for higher and higher efficiency levels. As we often read, operating closer to capacity helps units cover costs and compete effectively with other units.

Take the process of yarn twisting. It is a fairly routine process in textiles.

As a sample calculation, the raw material for a particular yarn is worth ~INR 100 per kg. Twisted material sells at ~INR 116 per kg. Consider a twisting unit where the capacity is 50 tons per month. Let’s consider two months, one when the actual production is 45 tons, and one where it drops to 30 tons.

Note three changes:

a)      When production volumes dropped, labor charges shot up to INR 5.33/kg INR 3.55/kg; of course, this may be offset by some component of work-force being variable.

b)      Overheads per kg have also increased to INR 1 from INR 0.67 when production dropped.

c)      Therefore, one ends up making INR 2.67 per kg (~2.4% of sale price) vs. INR 4.87 per kg (~4% of sale price), a fall of 1.6%.

The above example simply illustrates a universal truth of production management. Operating close to capacity is critical for any production unit if one wants to maintain margins.

How does one do that? There are a few things one should always try to maintain in his/her unit:

1.      Minimize changeovers

In a particular textile unit in Tarapore, whenever the quality changed, the settings of the machine needed to be adjusted. This adjustment cost technicians at least 45 minutes (a loss of 3% in efficiency). Moreover, the first couple of hours the machine never ran at full speed since the quality had to be set on that machine. This cost an efficiency loss of a further 2-3%. The owner decided to run only two qualities. His conversion costs when he did that reduced by about 1-2%. He passed on part of this advantage to his customers and the cost advantage was so great that he was able to acquire new customers and off set any loss in market caused due to discontinuation of some qualities.

Changeovers in any production unit take time. To minimize this time, one needs to operate a limited number of qualities. Also, one needs to optimally build inventory so that one is able to respond to orders for different qualities and run a single quality for the longest possible period of time.

2.      Machine Spares

Never be stingy when it comes to having machine spares. “This motor is not working”, “Machine belt is not working”. Repairs take time. The machine may stay closed when this repair is being undertaken however salary and overhead costs will keep on running. The cost of spares turns out to be lesser when compared to the costs of efficiency loss.

3.      Efficiency Initiatives

The argument of carrot and stick in production units is never ending. However, consider the present situation. NREGA guarantees an income of INR 140/ day doing almost nothing in villages. Compare this to workers in production units earning about INR 240-250/ day. One would say that there is still an incentive of INR 100/ day. But, the costs of living for a laborer in production units tend to be higher in production locations than in their villages. The net advantage might not be that great. Laborers are aware of this.

The above argument is one which is widely discussed among production managers who are lamenting the lack of labor in their factories. If the stick were to be used even after this huge shortage of labor situation, resignations would follow.

The carrot seems to be a better way to tackle efficiency in the present scenario. What efficiency initiatives also end up doing is providing a greater earning to the labor per day. The unit ends up getting higher production and ends up benefitting. A “win-win”! However, these schemes need to be designed very well lest they prove to be negative.

Two laborers were running two machines close to each other in a unit. There was an incentive on efficiency. The quality on both the machines was also the same. The supervisor set the same standards for both the machines. However, the pre-processed raw material was better on one machine. Both the laborers realized this and were hell bent on running the better one. A simple solution was to change the standards and that was done.

But here, one needs a sharp supervisor who is well aware of these differences and can adjust the initiatives accordingly to achieve maximum output.


4.      Data maintenance and gathering

Log books detailing efficiency losses and reasons for the same need to be maintained. These also need to be reviewed from time to time. The review helps in arranging for better spares, identifying mechanical and/or labor situations.

Ask any unit technician about how his unit performs. His first comment would usually revolve around the efficiency of his unit. It is very important to a unit and more often than not, decides the survival of the unit in the long run.

 

Coming up next: Part 3 – Quality Control

 

By,

Vibhor Tikiya

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Entry filed under: Business Strategy, Observations, Production Management, Uncategorized. Tags: , , , , , , .

Production Management in Real Life – Part 1 Production Management Part 3 – Quality Control

12 Comments Add your own

  • 1. Rahul Jhaveri  |  October 17, 2011 at 8:03 am

    Just to draw an example from diamond manufacturing units – as I have in the previous comment – the ratio between fixed and variable costs has become key in increasing efficiency. Over the past few years we have succeeded in linking upto 70 to 80 percent of our manufacturing cost to production (which used to be 40 percent). It was a tedious exercise to negotiate with unions but even workers and supervisors saw the benefit by linking their salaries to their production. It was linking the salaries of supervisors which made the biggest difference because they in-turn looked at their department as owners would and began to take necessary steps to optimize production. We successfully made everyone feel responsible for production efficiency and become co-owners. The next step is to move from a linear unit linked incentive model to a more dynamic bell-curve model where workers would be compensated compared to the efficiency of other workers. The tricky part is to be able to effectively communicate this concept to the workers – because of which we have put it on hold.

    A big problem with efficiency in diamond polishing units, which you have also mentioned, is optimally building inventory with limited number of qualities. Raw material costs are high and prices are volatile which makes building inventories a tedious task. Often units purchase rough at losses just to sustain their production. It is a harsh truth about our industry mainly because of the oligopolistic nature of diamond miners. The only way a person can balance out effectively is to have a trading model which compliments their manufacturing. It would give units the flexibility to sit on excess trading inventories which they can route to manufacturing as and when required but still manage to profit from trading activities. Larger companies have managed to contractually bind miners to give constant supplies but it is a the smaller companies which really need the stability who have to suffer.

    Reply
    • 2. escapevelocityblog  |  October 20, 2011 at 11:47 am

      Hi Rahul,
      Thanks for sharing so much of your actual experience, would love to know more about how you effected the change mentioned in the first paragraph of your comment.
      Regards,
      Zen

      Reply
      • 3. Finch  |  November 3, 2011 at 8:48 pm

        I went to tons of links before this, what was I thniikng?

      • 4. escapevelocityblog  |  November 7, 2011 at 5:10 am

        Hi Finch

        Glad you found the information useful. Do keep visiting our blog.

        Best,
        Roshni

    • 5. Patty  |  November 3, 2011 at 12:19 pm

      I suppose that sounds and smlels just about right.

      Reply
      • 6. escapevelocityblog  |  November 7, 2011 at 5:07 am

        Thanks Patty, and do continue to reading our blog.

        Best,
        Roshni

  • 7. Rahul Jhaveri  |  October 22, 2011 at 1:13 pm

    1. Over time we had cultivated a relationship with workers and Union leaders based on trust.

    2. We realized that a lot of workers had taken loans and needed job security as well as a chance to make more money. By linking their pay to production, they had the incentive to push harder so that they could reduce their debt. We listened to their needs and tried to work them into the agreement and made them responsible for how much they made.

    3. In 2008 in spite of industry wide layoffs, we retained a lot of workers. They got a sense of security and were open to changing because they realized that the unit’s success depended on the work everyone put in collectively.

    4. For the majority of workers their take-home was the same. A marginal percentage of workers were at a dis-advantage because their productivity was lower. However, this gave them a push to increase their productivity or quit (which opened up seats for more productive workers).

    Reply
    • 8. escapevelocityblog  |  October 24, 2011 at 6:08 am

      Hi Rahul,
      Thanks for sharing the info. Am guessing the retention you mention in point 3 (during a time of industrywide layoffs) must have gone a long way towards firming up the atmosphere of trust.
      Regards,
      Zen

      Reply
    • 9. Crissy  |  November 3, 2011 at 1:07 pm

      Shoot, who would have thought that it was that easy?

      Reply
      • 10. escapevelocityblog  |  November 7, 2011 at 5:07 am

        Thanks Crissy. Hope that helped.

        Do continue visiting our blog.

        Best,
        Roshni

  • 11. Sonny  |  November 3, 2011 at 4:19 pm

    YMMD with that aswenr! TX

    Reply
    • 12. escapevelocityblog  |  November 7, 2011 at 5:09 am

      Hi Sonny,

      Thanks for appreciating our blog and do keep visiting for more interesting information

      Best,
      Roshni

      Reply

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