Sunday, November 30, 2008

Quality Improvement from Setup Reduction

Setup reduction is usually accompanied by quality improvement. Why is that? There are several reasons: equipment improvement, elimination of adjustment, and faster feedback on quality are the key ones.

Quality improves when equipment improves: Many machines need to be overhauled and improved as part of setup reduction. Bearings may be worn, there may be oil leaks that require repair, nuts and bolts may be loose, and filters and fluids may be due for replacement. All of these repairs can lead to improvement in capability and repeatability of the machine. This will improve quality. It is also usual to move all key gauges to one point, where they can be easily monitored. This improvement will allow the operator to ensure that the machine is working at an optimum setting at all times. Again, quality will usually improve as a result. Not only machines, but tooling will be improved as part of setup reduction. With more frequent setup, weaknesses in design will be found, and improved. More frequent checks of the last part in a run will ensure that the tooling is kept properly adjusted.

Quality improves when adjustment is eliminated: A key cause of variation in quality is variation in machine settings. Many operators are constantly making small adjustments. One operator sets the machine differently from another. This lack of process control needlessly causes defects and variation. Once the correct settings have been established, there is no need for constant adjustment. It is also frequently found that purchasing agents change vendors to get a better price. While the specifications are apparently followed in material selection, small variations will be found in material quality. Setting the specification properly can be a key element in the elimination of adjustment. This also leads to better quality. The higher yield achieved justifies keeping a tighter specification, and possibly somewhat higher prices. Looking at the system as a whole, rather than from a limited perspective, shows its importance in this instance. Looking upstream, incoming quality from internal operations will also be improved, as variation that causes extended setup time for extra adjustment is discovered and corrected.

Faster feedback leads to better quality: This is a key to quality improvement through setup reduction, as long as setup reduction is followed by batch size reduction. It is possible to improve the learning curve, and to speed up the feedback cycle, when batch sizes are smaller. If a mistake is made, in features, specifications, settings, and other aspects of the production process and product design, it can be corrected next time the product is run. Faster learning also leads to reduction and even elimination of inspection throughout the process. Not having large quantities on hand that need to be depleted should a defect be found, or a design feature changed, the time to improvement is shortened, and equally important, fewer customers will have been inconvenienced. Fast improvement to a feature can also have the beneficial feature of showing the market responsiveness to customer opinion.

Thursday, November 6, 2008

More economic arguments for setup reduction

In addition to the cost of acquisition, there can be significant expenses in actually being in possession of inventory, including, but not limited to:

- Borrowing costs of capital
- Cost of storage space – racking, storage bins, building space rent, lighting, heat, etc.
- Insurance
- Spoilage of inventory (e.g. obsolescence or deterioration)
- Theft, pilferage and other losses
- Damage to inventory – physical damage from lift trucks or during other handling
- Cost of handling to move or rotate
- Cost of management, measurement and accounting for inventory
- Cost of inefficiency due to inventory issues – e.g. layouts may be less than optimal in a large factory with large amounts of inventory
- Loss of business due to inventory problems – e.g. inaccuracies in inventory records that lead a business to assume that there is sufficient inventory, when there in fact is not, leading to overdue deliveries

A reasonable rule of thumb is to estimate that inventory holding costs can equal 25% to 33% of the inventory value each year.

Also considered by some is the opportunity cost – the value of other uses of the money identified above. It should be noted that opportunity cost is not a category in a financial statement.

Some estimates put the total cost of inventory as high as 50% per annum.

We have seen some of the benefits of quick setup:
- flexibility, for better customer service
- lower costs, due to less inventory

Other benefits to be explored are:
- improvement in quality
- improvement in safety
- improvement in general operations, due to need for coordination
- ability to work to customer order instead of forecast
- smaller factories improve communication
- improvement in problem solving
- ability to level loading

Wednesday, November 5, 2008

Setup reduction and flexibility - the economics

The above image shows how quick setup provides flexibility to an operation. By reducing the time spent setting up, it is possible to retain the original productivity, but reduce run size.

There may be marginally higher costs to initiate each order. These could include more material handling, more supervisory time (on paperwork, and the like), more maintenance time (on last off inspection to determine tool condition), more time spent preparing and cleaning up after each setup, and perhaps other similar activities. In the above example, the WIP was reduced by a factor of 12 (i.e. greater than 90%).

Depending on circumstances, the cost of holding WIP and finished goods is 30% to 50% annually (including opportunity cost). There is also a value to the business of the increased flexibility that is harder to determine – but it pertains to how well the customer is served, and what benefits this provides. It is mainly the cost of servicing return business compared to the cost of obtaining new customers. Furthermore, to achieve this level of flexibility, quality and maintenance must be very good, further reducing the cost of production.