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.

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