Fueling Profit Growth through a New Facility Layout
By Guy Schneggenburger
In order to get extraordinary cost savings, business managers must think and act differently than they have in the past. Taking a fresh look and discovering creative approaches to fundamental business practices is a necessary step in achieving extraordinary results. Operations facility layout (e.g. warehouse or factory) is one of the most manageable, yet least managed, expense drivers for an organization. Whether the business a public multinational or a local family business, a facility's layout is a commitment to a specific way of doing things that can only be changed by modifying the layout of physical equipment. This article will share principles behind The KGI System™ for achieving results such as:
The principles for an effective facility layout are simple and powerful.
Organize around Value Creation
The true source of revenue for businesses is the value they create for customers. Businesses often get distracted by issues unrelated to this key objective. For example, tight management of Work-In-Process ("WIP") inventory is irrelevant to why a customer buys from a business – eliminate the WIP! While departmental organization around machine types or skills is a control mechanism, it is irrelevant to a sale – eliminate the departmental organization! "Organizing around Value Creation" means discovering the customer-defined Value features in the product or service, and setting up the means to flawlessly deliver that Value each time there is an opportunity. Activities and practices that do not directly result in Value Creation should be challenged.
"Flow" is the establishment of simple and efficient movement through the Value Creation process. It is a consequence of maintaining small batch sizes, eliminating boundaries, preserving information, and doing tasks correctly the first time. The better the Flow through a process, the less management the process needs. The better the Flow is, the more reliably fewer people can produce the results.
Pull Production at the Rate of Customer Demand
This is often called the establishment of "Takt Time" for a factory. Takt Time is the ratio of time available to required units of production. It tells how much time is available to make each unit and thus, states the pace at which the Value Creation activity must operate. It is the key to synchronization of the business so that all activities are capable of contributing to the Flow of Value to the customer. In facilities lacking Takt Time calculations, machines are often idle or produce an item that isn't immediately needed. The absence of a uniform pace requires the facility to have too many mechanics and changeover techs. Takt Time pre-defines changeover and production times with disciplined scheduling. Production is triggered by the customer, and it is completed at the rate required by the customer.
When something doesn't work in Takt Time, the team studies the issue to determine how it can successfully create an optimal, continuous output even though it may be short of its maximum potential. For example, an injection molding machine that can produce a peak of 400 units/hour might be limited in Takt Time to only schedule a set amount of 300 units/hour that it can reliably produce day after day.
Establish Visual Control
"Visual Control" is the means by which the apparent complexity of a Value-Creating, Flow-organized, synchronized business is managed. Everything has a place, and everything is in its place. Having Visual Control means that it is obvious to even an untrained observer that a product is not where it belongs, or a process is running incorrectly. A manager should be able to look at the situation and immediately identify whether it is on-plan or off-track. Once again, this precludes the need for a dedicated manager with extensive knowledge of the situation.
Exceptions are the bane of any business. They are the annoying reality of life that customers buy 3 times more product on Wednesday than on Monday, or certain customers tend to place orders that require 4 weeks of production for immediate delivery. Trying to anticipate exceptions (requests on the system that break Flow) results in high inventory, high labor, and expensive control activities. Exceptions are removed by engaging the customer in a true dialog in which both parties educate each other on the best way to interact.
The KGI System™ applies these principles to any of the following layouts:
Distribution. The consequences of implementing a design change to a facility layout can be dramatic. One of our recent clients is a $400M distributor of building materials with 80 large outdoor shipping points throughout the U.S. Our project involved 15 of these locations, and one of the first tasks the team performed was a study of material travel in the client's flagship distribution center.
Our study of material travel found that the average employee expended 10 tanks of propane per week and 17 miles per day moving a forklift around the distribution center retrieving products for shipment. KGI redesigned the distribution center's layout in a manner that reduced an employee's travel to 1.25 miles per day and their propane consumption to 1 tank per week. The savings in time alone allowed the company great flexibility in its operating structure. In one case, the result of an optimized facility layout provided for an immediate headcount reduction of 50%; in another case, the elimination of one of the distribution centers entirely.
Manufacturing. The potential is equally large with manufacturers. An $80M kitchen appliance manufacturer had a traditional factory layout where production machines were grouped by type. Parts were manufactured in one section of the factory and then were moved to a central warehouse from which they were issued to the assembly lines that made the actual appliances. The layout enforced the need for transportation, batching, Work-In-Process, and indirect employees for moving material. The KGI team optimized the layout to integrate the manufacturing machines with the assembly lines and removed the central parts warehouse. The company was able to produce the same number of finished appliances and eliminate 33% of the square footage, 70% of the WIP, and 80% of the indirect employees. As a result, the company subleased the excess space and achieved further savings. While the company had made some productivity process improvements within departments prior to KGI's involvement, the significant improvements required changes to the entire layout of the factory.
Office. Several years ago, KGI worked on an engagement with a multi-billion-dollar service company that processed documents requiring multiple levels of checks, reviews, and approvals. Despite the company's outstanding information systems, we found that the physical organization of the process participants created inherent process delays. Our new layout plan involved mixing executives, managers, and clerical employees into small, functional groups organized around specific types of transactions. The outcome for the company was that its time investment in a transaction went from 26 hours to 6 hours, and the elapsed time of a transaction went from 23 days to 4 days. With the increased capacity and lower cost structure, the company lowered its pricing and levered its competitive advantage in winning significant market share.
Many types of wasteful activities are institutionalized by a facility's layout. It is evident that a company's efforts to improve Operating Income through process improvement projects are severely limited if the company limits the scope of the projects to exclude large changes and challenges to the existing layout. We understand that facility layouts being used today are the accumulation of thousands of separate decisions that have been made over time as companies sought to adapt to changing conditions to ensure continued success. The band-aids that allowed for quick fixes eventually need to be addressed. No one sets out to design a poorly performing layout, but over time, waste and inefficiencies build up and are difficult to remove because they are interwoven with so much that works well.
Once it is established that there is value in challenging a business's physical layout, it is important to understand that there is a method for developing improvements. The KGI System™ identifies the core value-creating activities that the company performs and then drives the changes in layout that optimize the ability to do those activities while minimizing associated waste.
Consider a simple distribution center problem: When should a company commit to a random, high-density, replenishment approach rather than a spread-out, dedicated-position method for product storage? The answer isn't always clear, but the consequences of a poor decision can be mil-lions of dollars due to lost productivity and unnecessary expense. KGI has the experience and the methods to determine the best answer. We consider factors from sales patterns to machine safety zones, specialized storage to process flow, and salary expense to equipment depreciation in making our recommendations and implementing the solutions.
Whether a Company is struggling financially or on the cusp of breakthrough growth, KGI can help. Our seasoned experts work alongside management to solve complex cash flow issues, operational challenges and other business crises. If liquidity or sale is needed, KGI provides a powerful combination of services and expertise to achieve outcomes that cannot be duplicated by other standalone consulting firms.