The reasons for high production and operating costs

As consultants, one of the most common complaints we hear from production departments is that the CEO and CFO place too much emphasis on OEE: “Machines are expensive and therefore should always be running.” However, this is a mistaken idea because whether machines run or not has no influence on their already existing fixed costs.

Variable costs, on the other hand, can be influenced.  In most modern production companies, the highest variable costs are material costs, and account for more than 70% of the overall manufacturing costs and over 50% of operating costs.

The Kaizen motto is:

  • produce only what is needed;
  • only when it is needed and
  • only in the required amount.

In other words: only bottleneck resources should always be running, other resources should only be running when they are needed. This is the cheapest production method and the secret of the Toyota Production System, i.e. tact time production - the basis for process synchronization and just-in-time production.

1. Causes for high variable costs

  • unnecessary material stocks due to OEE-focused management
  • unnecessary material stocks due to unrealistic planning
  • high stocks of semi-finished products due to non-synchronous processes
  • unplanned additional expenses due to overtime, rework, express surcharges, ...

In an orchestra there is one conductor who gives the tact for all musicians and ensures that the result (music) is harmonious. In a factory you have a similar situation, to ensure the harmonious flow of a synchronized production, there should only be one tact-giver (planner). Multiple planners would result in the disharmony of high inventories due to push production.

The planner (tact-giver) should maintain a bird’s-eye perspective to set the most efficient pace for production and decide the specifications for each resource: making sure that they produce only what is needed, when needed and in the amount needed.

2. Causes for high fixed costs

  • Machine and facility investments without long-term planning simulation on the impact of various scenarios (regarding forecast plan, shift calendar, machine capability, procurement time, etc.) on delivery capability, production lead time, inventory fluctuations, manufacturing costs
  • inefficient use of space due to high degree of WIP and unnecessary inventory; unnecessary transport routes
  • use of unnecessary resources due to push production
  • low resource productivity due to overcapacity
  • acquisition of complex and expensive equipment (over-engineering) instead of using low-cost production methods

In a sense, fixed- and variable costs are closely linked and depend on the prevailing production philosophy: either a tact-time production method (with a single tact-giver) or an OEE-focused push-production. There is a common misconception that tact-time production is only suitable for serial production. This is certainly not the case. Tact-time production is suitable for all types of manufacturing, including mechanical and plant engineering, aerospace, shipbuilding, etc. The external tact-giver is the delivery date, the internal tact-giver is the bottleneck process.

Only results count

In our Kaizen consulting for just-in-time production to reduce operating costs, we follow the motto "only results count"!

  • KPC analyses your current situation, the problems and their causes.
  • According to the Kaizen philosophy, we create a tailor-made catalogue of measures and an implementation plan for your company, following our motto: "only results count".
  • KPC on-site support
  • The engaged and creative cooperation between our Lean consultants and the client’s team in the successive implementation of measures leads to Lean production with increased productivity and lower operating costs.