Calculating Lean Benefits: Improving Direct Labor Productivity

Looking for labor savings is where companies often go when trying to reduce costs. Moving production overseas is (usually) done to save labor costs, although there may be other reasons. Paradoxically labor is the lowest percentage of product cost, and as the level of automation grows, direct labor shrinks even further. It is a cost, however, and a Lean transformation will have a dramatic positive impact on productivity.

Let’s first explore how. Here are nine Lean-related changes that will improve productivity in manufacturing:

  1. Standard Work Definitions. A foundation discipline of Lean Manufacturing is to document the work in detail down to the work element level. This effort is guaranteed to uncover opportunities for improvement. Training and auditing are a part of this effort.
  2. Reduction in Scrap and Rework. Doing things twice or throwing them away is also wasted time (as well as material). Reduce this and productivity goes up.
  3. Improved Line Balancing. When the workflow is improved through better allocation of tasks from station to station, there will be less blocked and waiting time for operators. This is an extremely important step in Mixed Model Line Design.
  4. Improved Physical Layout. A new layout gives you the opportunity to put processes closes together, and to reduce physical distance. This results in less transportation and motion, two of the Seven Wastes.
  5. Optimized Sequencing Plan. In a Mixed Model workflow, different products have potentially different work content. If you don’t sequence skillfully, productivity will be impacted negatively.
  6. Flexing (Operator Movement). If workers can move to where the work needs to be done (instead of waiting), productivity will take a dramatic jump up. This is especially important in a mixed model line where imbalances are hard to eliminate.
  7. Check-Do-Check Operator Inspection. Incorporating operator-performed inspection of the work coming to them as well as their own work can do a lot to reduce workmanship errors. If errors do occur, they are found at the place where the work was done, which is a huge advantage in preventing mistakes on future units.
  8. Optimized Material Presentation. A shocking amount of time can be spent simply on part acquisition by the operators. Think about how instruments are delivered right to a surgeon’s hands and allow the operators to add value.
  9. Visual Work Instructions. Reducing confusion about what to do next, especially if many different models are built on the same line, can improve productivity. A graphical or visual work instruction can reduce the reorientation time when a different product arrives.

If your proposed improvement project includes any or all the changes listed above, then you can expect a productivity improvement. But how much, and how do you quantify that benefit? Let’s proceed.

One way to get a sense of the potential opportunity is to record the work on video, and then analyze the work elements. Note: TimerPro is a great software tool to help with this analysis as well as to document standard work and balance the line. You may be shocked at the level of muda or non-value-adding “work” that is being done today. Look through the lens of the Seven Wastes, and you will see waiting, blocked flow, walking, rework. A huge percentage of each cycle in many companies is part selection, i.e. the time required to simply get the material needed to do the work. Also look for subtle waiting time, especially in a short takt line, when small delays add up quickly over the working day. Based on observation alone you may realize that the Current State labor productivity is 30% waste or more!

Not all this waste will be eliminated immediately, but you should be able to get a feel for the size of the opportunity for purposes of this estimate. Remember that our potential Lean Benefits is a back of the napkin estimate, so you want to be conservative and not waste time trying to “polish a turd”.

If you agree that a 10% productivity improvement is possible (and that could be very conservative), you then need to convert that to dollars. If accounting can give you the burdened payroll dollars for the area in question, use that number. Otherwise estimate the payroll by multiplying the number of direct workers by the total working hours per person by the average burdened labor rate by the number of working days in the year. That will give you an estimate of the total annual payroll. Multiply that by your anticipated improvement to calculate the labor dollar savings.

Final Important Comment: If productivity improves, then you will need fewer people for the same level of output, right? You need to be extremely careful about how you handle the “excess” workforce. It is true that if you leave them on the payroll then there is no actual labor savings. If, however, you lay them off that sends an extremely negative message to the “survivors”, that process improvement means that they can lose their jobs. Good luck on future projects or Kaizen efforts if you do that.

What you need to have is a clearly communicated policy of No Layoffs related to process improvement. Excess people will be moved to other areas of plant, be retrained to do other jobs if necessary, and work on continuous improvement opportunities. During the Great Recession of 2008, Toyota Material Handling took the opportunity to bring additional work in-house by adding processes that had previously been outsourced. Not only did that provide work for their people, but quality for those items was better! There were no layoffs of permanent employees.

The best strategy is to absorb any additional people through growth. If you are using Lean as a competitive weapon to grow your business, these extra people will be needed and are already trained. If growth is not an option, then any headcount adjustments will need to be done through attrition, and not through layoffs.

In the next article in this series I’ll be moving on to potential savings in Floor Space. By setting ambitious goals for space utilization, this is a benefit that should be easy to estimate!

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