Lean Cost Reduction

What is Lean Cost Reduction?

It’s an organized procedure for the efficient identification and elimination of unnecessary cost in a product, as created by both the product design and the production process used to make it.

Value Analysis, Cost Structure, Peeling the Cost Onion are all used in this overall procedure.  The idea is to create a leaner, lower-cost value stream for these 3 processes in your business:

1.  Product Design:  Concept to Launch

2. Product Manufacturing:  Order to Ship

3. “Getting Paid”:   Order to Cash

Lean looks at all of the various elements of cost as targets for elimination or at least dramatic reduction.  Lean Thinking considers 50% of your costs to be pure waste, 40-45% to be incidental costs, and only 5-10% to be truly value-added costs.

The direct attack on Cost Reduction results in these “pure waste” and “incidental work” cost elements being eliminated or reduced.  This is done in a workshop conducted either on-site or off-site.

JCM Work Designs/The Lean Sigma Team can design and conduct this workshop to meet your specific needs.  Please contact us for a formal proposal.

Peeling the Cost Onion:

Cost Reduction can be analogous to “peeling an onion” in the sense of looking at cost in layers. Since all costs ultimately get “rolled into” the product bill (yes, even the CEO’s salary), it is important to identify and eliminate any unnecessary cost whether it’s coming from materials, manpower, machines, methods, or measurement….the 5 M’s.

Layer 1 of the Cost Onion consists of:  idle labor, idel machines, unused capacity.

Layer 2 is: inefficient methods, poor or lack of standards

Layer 3 is: needless complexity, tolerances unnecessarily tight, product overdesigned

Layer 4 is: expensive labor, materials, machines and overhead

Layer 5 is: waste of overproduction, inventory, transportation, motion, extra processing, waiting, defects, and underutilized people.

Like almost all examples, it’s somewhat easier to peel the first layer, but as you get closer to the core it becomes more and more difficult.  This is certainly true of costs.

We have a workshop process to enable you to thoroughly examine each of these “Cost Layers” in order to dramatically reduce each of them.

JCM Work Designs/The Lean Sigma Team can design and conduct this workshop to meet your specific needs.  Please contact us for a formal proposal.

The 12 steps to Lean Cost Reduction

Lean Cost Reduction is a 12 Step process to reduce your costs.  Like any improvement, there is a standard process to follow to make a change.  Skipping these steps by jumping ahead or by just setting cost goals will not work.

The 12 Steps to Lean Cost Reduction:

1. What is the product?

2. What does it cost today?

3. How many components?

4. What does it do?

5. How many are required?
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The Value Analysis Job Plan

Value Analysis (VA) is a process to redesign the product in order to eliminate non-value added components or features.  There are many examples in the literature (on the web), including:  eliminating unnecessary fasteners, standardizing on the essential parts, knowing the customer requirements and designing the product to meet each requirement, Eliminating/Combining/Rearranging/Simplifying work elements to make the job easier and reduce costs, etc.

The VA “Job Plan” is used to work the product through these phases:

Information Phase: gather cost information, specifications, and processes used for the current product

Analysis Phase: relate the elements of product worth to their corresponding elements of product cost

Creative Phase: diverge to create many new ideas, then converge on the best ideas to create options

Evaluation Phase: verify technical feasibility, customer appeal, savings in time and dollars

Implementation Phase: plan and implement changes to the cost structure to achieve solid results

Using the VA Job Plan, we can help any business dramatically improve it’s cost structure and still stay in business!

JCM Work Designs/The Lean Sigma Team can design and conduct a VA workshop to meet your specific needs.  Please contact us for a formal proposal.

Total Cost Structure

Cost Structure

And there’s the issue of direct vs. indirect costs. Indirect costs can often be larger than direct labor and direct materials costs.

ALL costs are targets for Lean Cost Reduction!

This figure is one way to depict the various components of cost.   Simply put, even your CEO’s salary eventually makes it to the COGS (Cost of Goods Sold) element of the business financial statement.  We must figure out ways to significantly reduce costs in order to maintain or improve profitability.

There’s a difference between the “western” profit model and Toyota’s.

Western thinking:   Cost + Profits = Selling Price

Toyota thinking:  Selling Price – Costs = Profits

The difference here is quite profound!  Selling Price is NOT something the producer can pre-determine.   It is totally controlled by the market.

Therefore, if we work on taking the market-determined Selling Price and subtracting the COGS, we end up with Profit.   Cost is the key to profitability!  And cost is a “designed-in” feature of the business itself.

We can help you analyze the various elements of cost with the aim of dramatically reducing each of them to increase your profitability.  This is done in a workshop setting with these participants:

Finance & Accounting

Senior Management

Research & Development

Marketing & Sales

Human Resoures

Value Steam Management

Product Designers

Cost Reduction Workshop:

JCM Work Designs/The Lean Sigma Team can design and conduct this workshop to meet your specific needs.  Please contact us for a formal proposal.

Workout!

“Workout” is a workshop designed to take waste out of any business process. Typically it’s a 2-3 day event with a ½ day follow-up event about 4 weeks later.

It’s a 7-Step Process:

Step 1: Set the Stage for Success (Management Commitment)

Step 2: What’s Wrong? (Issue/Problem Identification and Quantification)

Step 3: What’s Important? (Prioritization vs. Established Criteria)

Step 4: What Can We Do? (Ideation/Brainstorming to Create Ideas for Removing NVA Work)

Step 5: How Do We Get On With It? (Moving to Action, Planning for Change)

Step 6: Making It Happen (Making the Changes….Removing NVA Work)

Step 7: Follow-Up (Verify the Changes Have Been Make & Results Achieved)

The Goal is to reduce the amount of non-value added work in the process, reduce the labor required, and reduce the cost of doing business the “old way”.

Examples of Workout Projects:
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