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Cycle Time Reduction

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  • #36724

    Giovanni
    Participant

    I am developing the Project Charter for a Six Sigma Project to reduce the cycle time of the  order fulfillment process of a manufacturing process. The problem that I having is to quantify the savings, unfortunately our finance department does not know how to do it.
    Does anyone have any ideas on how quantify it?
    Any input is greatly appreciated.
    Thanks, Giovanni

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    #106644

    Palen
    Participant

    Hi Gi
    Cycle time reductions create opportunities rather than add tangible direct cost savings to the bottom line. Where I work we normally quote in terms of:

    Direct Labour Recovery Rates (Cost per hour to produce a single unit will fall as productivity increases)
    Reduced cycle time can create further opportunities for savings. Inventory levels can be reduced because your ability to fulfil an order is improved. A simple method of calculating reduced inventory is to measure the amount of equity accured each month as a result of less capital tied up in finished and semi finished stock, and quote the positive difference of the extra interest on this money.
     

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    #106646

    aditya kumar nanda
    Participant

    hello sir .
      i  have knee interested about cycle time reduction. please assist me.

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    #106714

    Johnny Guilherme
    Participant

    Hi Giovanni
    If I understand you question correctly, the issue is with holding cost. You would have to estimate at any one time the amount of work in progress (and for that matter finsish goods stock) that is “lying” around and attach a value to it. Holding cost can be calculated. Where I work it is normaly between 15 and 20% of the actual value of the stock. By reducing your cycle time, then lead times will be reduced, but so will your work in progress. The holding cost will then come down. Other non quantifiable aspects would be as said reduced lead times, reduced quality issues as a result of lower work in progress.Hope this helps.
    regards
    Johnny Guilherme

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    #106717

    Gourishankar
    Participant

    Hi Gi
    Very interesting question .  I have done a similar project ( this one was on the purchasing process ) . I would view order processing as a macro process comprising of
    1. A material flow process ( affecting the production ) .
    2. A document flow process ( affecting the transaction )
    For the first one you need to create a material flow diagram and evaluate the impact of cycle time on the lead times and consequently the inventory turnovers . ( similar to that indicated in earlier posts)
    The second one requires a document flow  ( DFD) or a information flow diagram that captures cycle times to evaluate personnel productivity Or system productivity , depending on whether you order processing is manual or automated .
    For the proejct carried out at a client’s site , I tracked cycle times for the transaction process using a DFD , and arrived at a mind boggling figure ( cost of preparing a single Purchase Order was about $ 375 ! – for a semi automated purchasing process ( partly implemented ERP )
    The improved process not only brought down the lead times , but also reduced the transaction cost  significantly .
    Trust this will be useful
     
     
     

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    #106719

    Ranjan
    Participant

    Hi Giovanni,
    I am working on a project where I am reducing the cycle time for work completion to Invoice creation. In this case process improvement leads to reduce the cycle time. Is that the same case with your project? if yes then 1. Inventory holding cost 2.Opportunity loss (in terms of business or order loss) 3. Manpower cost
    you can work out on these parameters.
    Best Regards,
    Rahul

     

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    #106720

    Chris L.
    Participant

    Hi All,
    I agree with most of the comments made so far. I have been wrestling with this issue myself for a while and have agreed with our finance dept. that savings due to cycle time reduction are calculated as follows.
    As WIP reduces due to the improved cycle time, you can realise a one off saving of the total value of that WIP (value you are releasing from the process and improving the bottom line) together with an ongoing cost of capital saving for that same amount of value you have released from the process.
    Any feedback welcome.
    Chris L.

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    #106726

    Gourishankar
    Participant

    Chris
    I was just wondering if there’s a cause and effect relationship between cycle time and reduced WIP . I think you will have instances of high WIP inspite of reduced cycle times. Pl. correct me if I am wrong.
     

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    #106729

    Ashman
    Member

    Process map it.
    Ask Why, you may have a cluster project here and find one of your critical X’s further down the line, eq, poor machine reliability creating defects/rework (hidden factory) is not helping order fulfillment.
    I suggest you may find you can get 5 GB projects out of it.

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    #106730

    Deanb
    Participant

    Rahul,
    The key to estimating the costs (added or saved) in a cycle time project is to first understand the economics involved. There are at least 3 main economic states that can apply in a cycle time reduction project:
    1. Robustly total savings exceed the total cost. Even if you do not have the metrics to nail down the cost, there should be a reasonably robust consensus among the key players that the win was big and the cost marginal. An example: Reducing cycle time for a specific process could increase the processes cost 5% -but delight and win a huge repeat customer, or free up shop capacity to do another profitable contract.
    2. The marginal costs and marginal gains could be a push, but it is still worth doing strategically (say to win or maintain important customer relationhsips, or to have a competitive advantage).
    3. The marginal cost could clearly exceed the gains (marginal loss), in which case you may need to try to charge for the expedited service. Even this scenario may not be a total loss as it can provide marketing options for a price. The point here is to do these kinds of cycle time reduction projects for the right reasons.
    For what you are trying to do (produce cahs savings) is it is worth looking for projects that fit the economics case #1, as this a win-win scenario as you might fine in the Theory of Constraints approach, or the Toyota (Lean) approach. Not all projects will turn out this way however. It is important to know when they are #2’s or #3’s, and getting consensus on these relationships before trying to pin down the hard costs and gains.
    Good luck.
     
     

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    #106737

    MX
    Participant

    The easiest answer to your question is to look at the fully burdened rate of running the equipment or cost center for a period of time (an hour).  You will have one measuremnt of cost before implementing the change (total run duration x cost) and a second measurement of cost after reduction (new run duration x cost).  You can use this same principle to estimate the value of the “new” capacity created through this reduction.  Good Luck with your project!

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    #106738

    Anurag
    Participant

    I agree with Steve. Process mapping will help identify the steps that are the biggest cause for large cycle time at present. You can identify the value-added steps as well as non value added steps, collect data to see how much time it takes at each step.The improvements could be in terms of reduced resources (manpower and machine) required. As well as the impact of reduced cycle time. If you have a SIPOC you will understand the inputs that you need and the outputs of the process. You may conduct a brainstorming session with stakeholders (customers and Suppliers to the process) to capture the true outputs and inputs and create a Fish-Bone diagram to analyze the impact of cycle time reduction. (What happens if cycle time is reduced?) The list of items that get impacted due to cycle time reduction can range from reduced inventory to less WIP, to increased customer satisfaction, etc. (list will depend on your specific project) and all these will give you clue how to calculate tangible benefits and put dollar figures around them. You may do your homework around these financial benefits and then talk to your finance rep. to put real numbers for these benefits. The banefits might fall under various categories: Productivity, Cost Avoidance, Reduced inventory, Cash Flow, Margin on Revenue, Increased Revenue, etc. Anurag

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    #106742

    Ken Jantz
    Participant

    Seems like all the bases have been covered.  From a macro view, Finance is going to have trouble putting a value on anything that is not quantitative, as opposed to qualitative.  Increased sales (how do you know that will happen and at what level. That answer impacts revenue stream.  Will sales increase disproportionately to capacity?), increased customer satisfaction (unless you can tie current dissatisfaction on the customer’s part, to what level their satisfaction would increase, and how much sales would incrementally increase to that customer), productivity improvement (unless there will be the bottom line effect–people will be terminated or redeployed, or open HR reqs will not be filled), are all subjective and Finance will have problems pulling specific costs to apply.  These are “soft” savings & may never hit the bottom line.  “Soft” savings may give a warm and fuzzy, but do not necessairly increase company profits. 
    WIP, on the other hand, is a per unit cost, and is hard dollars.  Reduce the units you keep on hand, reduce the raw inventory, and cost reduction goes to the bottom line.  Finance can handle this.  Unit costs at sales point probably have warehouse costs allocated in them.  But, if you free up a lot of WIP, you’ll still have the cost of the warehouse.
    So, for the Project Charter, I would estimate the costs that positively impact the bottom line and deal with “soft” costs seperately as a management as opposed to strictly financial estimate. 

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    #106796

    DANG Dinh Cung
    Participant

    Good morning,
     
    Lead time reduction is financially interesting because it reduces
     
    (1)         needs of manpower and machine times (productivity improvement),
    (2)         inventory (with costs of capital immobilized, storage, handling and management),
    (3)         risk of obsolescence (the customer may change his order during you serve him),
    (4)         capital immobilized by inventory.
     
    Strategically, it helps serving Customer faster, beating competitors.
     
    I suggest following procedure :
     
    (1)         list all process steps from customer’s order arrival to invoice payment,
    (2)         calculate value added at each step
    (3)         sort theses steps by the product of processing duration multiplied and value added,
    (4)         try to reduce this product starting with steps the product of which are the highest.
     
    Best regards,
     
    DANG Dinh Cung
    [email protected]
     

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    #167103

    Yoki
    Member

    I have a question on the DFD. Can you provide me an example? I am working on a project on how to reduce the cycle time on each trasaction at our plant. I have no idea where to start

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