Our team has had the opportunity to assess and transform hundreds of different manufacturing facilities. Most manufacturing executives think alike and take a similar approach to transforming their organization. Most initiate difficult projects with high capital or personnel costs. In a recent article by McKinsey & Company, they categorized these big projects as “Boulders”.
Our experience with transformation success takes a different approach. If manufacturing executives altered their lens slightly, they might get to the same destination with far less effort. Instead of the Boulders, we believe manufacturing executives should focus on what McKinsey refers to as the “sand”. These are projects that are smaller, easier and quicker to execute. This is where our firm focuses first, so we can unlock meaningful value at a much more rapid pace.
After we recently completed a turnaround program, the company’s CEO said “there truly was greater than $50MM of opportunity in labor, materials, rework, and space requirements. This was a breakthrough opportunity that was formed by picking up “thousands of small bills” versus the “large, obvious bills” we had been focused on throughout the years.”
We typically see the following reasons for companies embracing complex projects:
Some don’t believe there are simple benefits left to capture. We have heard people say things like: “We have already picked all the low hanging fruit.”
Some lack the infrastructure or skills to tap align the organization and motivate them to identify and capture the “sand”.
Some simply have pride in what has been accomplished and can no longer clearly see the next level of development.
One senior executive, in a recent kickoff meeting for a company-wide transformation, to us, “You can’t improve our operations. We have world class equipment and world class processes. Spending any time on operations would be a complete waste of company resources.”
However, many executives want to improve their profits and don’t care whether the solutions are elaborate. For these executives, opportunities abound in the sand. In fact, we typically see those opportunities very quickly and help our clients turn them into meaningful benefits with limited capital.
The following examples demonstrate the point:
$10M impact in an hour (Direct Labor Reduction): The organization had 800 operators in one of their factories. After a couple of weeks in the facility, it was apparent that our view of the opportunities and benefits (20% reduction in variable costs, including 50% direct labor reduction) did not align with the Vice President or Operations (5-10% direct labor reduction). We decided to take a unique approach to get alignment. We suggested to him that we could select any 10 areas of the operation he chose. We would assess each area with him, 2 minutes per area to observe and 2 minutes to explain how we could take a low cost, practical approach to reduce the labor in that specific area by 50%. We started the assessment with 10-$20 bills and explained that we would give him $20 for each area that he did not agree with our explanation and approach. After an hour, we completed our assessment of all 10 areas. We still had $200 in our pocket. We mutually agreed to a 30% reduction in Direct Labor. This one-hour exercise resulted in an additional $10M in material benefits.
$13.8M in 30 minutes (Space Reduction): One day we were walking through a warehouse with our client, the Vice President of Operations. We asked, “Do you have any goals this year for space compression?” He said, “Yes, we do. We have a target of a 10% reduction in space. Of course, our team is on it for the most part. We have the first 5 – 7% figured out but you know that last 3 – 5% is the toughest! We don’t have the low hanging fruit left to pluck. Do you think you and your team could figure that part out?” Once again, our team saw the situation differently. We responded and said, “Not only do we think we can figure the last 3 – 5% out, we think that you should be able to reduce your space by a full 50% and we think it can be done in 90 days”. He agreed to allow our team to prove our assertion and 89 days later, 50% of the space was completely emptied. The resulting variable cost difference was $1.8M and the company had the ability to sell off the warehouse that was easily valued at over $12M. Not bad for a 30-minute walk through.
$2M in 45 minutes (Throughput): As we began our assessment of the manufacturing floor, the client had told us they had budgeted $2M for capital improvements to overcome a throughput challenge. After assessing the situation, we didn’t think spending the money would be necessary. Our assessment revealed the key driver was managing the time to transfer from one part to the next. The executive allowed us to demonstrate our hypothesis. We installed a limited number of sensors and timers which reinforced effective pre-staging of materials and an efficient exchange of materials. When measured, these changes drove a 30% increase in productivity in less than a week. This proved there was no need to spend the $2M on capital improvements and shifted the bottleneck in their business. Our team spent less than $300 and installed a simple solution in 45 minutes to evaluate and plan.
$15M in 15 minutes (Throughput): A client asked us to review an area where they had performed a number of improvement initiatives. They told us about the great work they had done. We asked what they viewed as the next level of improvements. The response floored us: “We are going to focus in other places, we think the juice would not be worth the squeeze in this area anymore”. Was there any “juice” was left? We reviewed the area and identified they had 3x the amount of space required, carried about 5X the amount of inventory, labor was 20% too high and throughput could be improved by 20%. Overall, this turned into close to $15M in value and was initially identified in 15 minutes.
While you might think of these items as isolated opportunities, our experience would suggest that it is not true. We do not believe that “the fruit is too high up to be picked”. We don’t even believe that “the fruit is low hanging”. We are more likely to think that it is laying on the ground, just waiting to be picked up by a team that can clearly see it, value it and engage the workforce to help pick it up.
In the article we referenced earlier, McKinsey & Company also noted, after studying 20 transformations in detail, “our data indicated that on average, 50% of the total program value typically comes from sand” and that “sand initiatives are often easier and quicker to execute”.
Let’s circle back to the executive that said “You can’t improve our operations. We have world class equipment and world class processes. Spending any time on operations would be a complete waste of company resources.” He did engage FOUR40 Partners and in less than 4 months, we reduced costs by 16%, including reducing labor by over 50% and space by over 30% while improving morale in the organization.