Adopting Zero-based Thinking

Transcription

1 Adopting Zero-based Thinking The real cost of imperfection Phil McIntyre Managing Director

2 Our Situation We didn t move onto initiative # 127 for two reasons 1. Associate Engagement 2. Losses We weren t nearly as good as we thought.

3 Learning to See

4 Learning to See

5 What is a Loss? The difference between actual cost & ideal cost Actual Cost Loss Ideal Cost Total real dollars spent to manufacture a product. Cost Reduction Opportunity Absolute minimum cost required to manufacture a product. (theoretical cost)

6 What is a Loss? Actual Variance to budget Budget Losses built into budget Theoretical Loss Loss measures actual performance versus theoretically ideal performance Loss = Theoretical Opportunity

7 Driving World-Class Operational Excellence The Milliken Performance System Losses Timeline The Micro- Economic Perspective The Proof of Concept Perspective The Macro-Economic Perspective and Strategic Clarity Sustaining the gains Where can we intelligently improve the house? 1996 through today

8 Driving World-Class Operational Excellence The Milliken Performance System Losses Timeline The Micro- Economic Perspective The Proof of Concept Perspective The Macro-Economic Perspective and Strategic Clarity Sustaining the gains Where can we intelligently improve the house? 1996 through today

9 Historical view of Conversion Cost in Manufacturing The Variance-Based Approach Difference in actual costs vs. expected (standard) costs. Labor Energy Supplies Support Operators Operators Technicians Variable Overhead Etc. Typical Manufacturing Variable Conversion Costs (excluding Raw Materials) Is this the proper definition of good? Electricity (kwh) Natural Gas Water Etc. Long-Life supplies General supplies Etc. Indirect Materials Size Dye stuffs Etc. Common Fallacies with the Variance-Based Approach 1. Cost is typically segregated by process 2. Performance against a pre-determined standard, usually established by individual sku, is considered acceptable if break-even

10 Targeted Cost Reduction What is a loss? Typical Manufacturing Variable Conversion Costs (excluding Raw Materials) Labor Energy Supplies Indirect Materials PM & Clean Breakdowns Change Over (Style Change) Off-Quality Minor Stops Waste Advantages of the loss approach 1. Cost is segregated by Activity rather than Process 2. Cost-reduction projects are easily definable. 3. Resources can be allocated proportionately to the opportunity.

11 Loss Categories Aligned with Our Business JIPM Losses 1. Equipment Failure 2. Set-up & Adjustment 3. Cutting Blade Change 4. Start-up 5. Minor Stoppage & Idling 6. Speed 7. Defect & Rework 8. Shutdown 9. Management 10. Operating Motion 11. Line Organization 12. Logistics 13. Measurement & Adjustment 14. Energy 15. Die, Tool & Jig 16. Yield Milliken Losses 1. Breakdowns 2. Change Over 3. Start-Up & Shutdown 4. Minor Stops 5. PM & Cleaning Downtime 6. Planning 7. Material Handling 8. Speed Loss 9. Off-Quality 10. Rework 11. Waste 12. Obsolescence 13. Allowances 14. Inventory Variances 15. Training 16. Inspection & Testing 17. Indirect Materials 18. Purchase Price Variance/Claims 19. Over/Under Spending 20. Spending not Captured

12 Loss Categories OEE Losses (Downtime) Performance Rate (Speed) Quality Losses (Yield) Yield Losses Other Conversion Costs Milliken Losses 1. Breakdowns 2. Change Over 3. Start-Up and Shutdown 4. Minor Stops 5. PM & Cleaning Downtime 6. Planning 7. Material Handling 8. Speed Loss 9. Off-Quality 10. Rework 11. Waste 12. Obsolescence 13. Allowances 14. Inventory Variances 15. Training 16. Inspection & Testing 17. Indirect Materials 18. Purch. Price Var./Vendor Claims 19. Over/Under Spending 20. Spending Not Captured

13 Loss Analysis Milliken & Company Average loss landscape per plant $MM/year $MM/ Year 175 asso./site $50MM in rev/site $11.7MM Note: All losses are full variable

14 Loss Analysis Milliken & Company Average loss landscape per plant $MM/year $MM/ Year 175 asso./site $50MM in rev/site $11.7MM Note: All losses are full variable

15 Loss Analysis Milliken & Company Average loss landscape per plant $MM/year $MM/ Year 175 asso./site $50MM in rev/site $11.7MM 23% of revenue Note: All losses are full variable

16 Loss Comparison Millions $ / Year 175 assoc/site ~ $50 mil in rev/site $11.7 MM Average loss per plant (millions)/year Milliken & Company 49.6% Note: All Losses are Full Variable Planned Downtime includes: Changeover, Start-up and Shutdown, PM & Cleaning Unplanned Downtime includes: Breakdowns, Minor Stops, Planning

17 The Micro-View: Lessons Learned Things we did right: 1. Used losses to drive activities 2. Compared losses across sites, even non-model sites 3. Focused initially on directionally accurate 4. Educated production associates correctly (no job loss threat plus they became problem solvers) 5. Didn t worry about creating capacity we were used to it! 6. Made losses fit us Things we did wrong: 1. Didn t worry if the loss improvement was seen upward 2. Didn t expand our loss perspective early enough

18 Driving World-Class Operational Excellence The Milliken Performance System Losses Timeline The Micro Economic Perspective The Proof of Concept Perspective The Macro Economic Perspective and Strategic Clarity Sustaining the Gains, Where can we Intelligently Improve the House 1996 through today

19 Proof of Concept: The Formula Labor Supplies Utilities Other 1 Breakdown 2 Change Over 3 Start-Up & Shutdown 4 Minor Stops 5 PM & Cleaning 6 Planning 7 Material Handling 8 Speed 9 Off Quality 10 Inspection & Testing 11 Rework 12Waste 13 Obsolescence 14 Allowances 15 Inventory 16 Training 17 Inspection & Testing 18 Indirect Materials 19 Purchase Price/Vendor Claims 20 Over/Under Spending 21 Spending not Captured 14 Other Per Unit Cost Utilities Supplies Labor Revenue $ 90.0 Total COGS $ 70.6 Raw Material $ 43.6 Total COGS less RM $ 27.0 Losses as a % of COGS less RM 54% SG&A $ 11.0 Net Income from Operations $ 8.4 Interest Expense $ - Net Income before Taxes $ 8.4 Income Tax (29%) $ 2.4 Net Income $ 6.0 All figures in $ Millions

20 The How Step 1 Labor Supplies Utilities Other 1 Breakdown 2 Change Over 3 Start-Up & Shutdown 4 Minor Stops 5 PM & Cleaning 6 Planning 7 Material Handling 8 Speed 9 Off Quality 10 Inspection & Testing 11 Rework 12 Waste 13 Obsolescence 14 Allowances 15 Inventory 16 Training 17 Indirect Materials 18 Purchase Price/Vendor Claims 19 Over/Under Spending 20 Spending not Captured Cost => Losses

21 Challenges/Lessons Learned on Translating Cost to Losses 1. Losses should be used initially to directionally point you to projects, not for $ 2. You need to put $ to losses as quickly as possible 3. Is the data available from a plant level? 4. Is the data machine specific? 5. Avoid adjustments early recognize adjustments will eventually be needed

22 Qtr 1 '11 Qtr 2 '11 Qtr 3 '11 Qtr 4 '11 The How Step 2 Cost => Losses => Per Unit Cost 1 Breakdown 2 Change Over 3 Start-Up & Shutdown 12 Obsolescence 4 Minor Stops 13 Discounts 5 Speed 14 Returns/Allowances 6 PM & Cleaning 15 Freight 7 Planning 16 Indirect Materials 8 Material Handling 17 Training 9 Inspection & Testing 18 Energy 10 Over Spending 19 Inventory 11 Waste 20 Run Cost Other Utilities Supplies Labor

23 Zero Loss Improvement Milliken & Company Average loss landscape per plant $MM/year $MM/ Year 175 asso./site $50MM in rev/site $11.7MM Milliken & Company reduced losses 30% on average per plant within the first 24 months of Milliken Performance System implementation $3.5 million reduction per plant Note: All losses are full variable

24 Loss Reduction Improvements Speed Off-Quality Returns & Allowances Minor Stops Breakdowns Process Reliability Material Handling Inspection & Testing Waste (RM Yield) Planning Energy Performance Changeover PM & Cleaning Start-Up / Shut Down Zero-Based 12% 19% 23% 22% 26% 25% 27% 27% 30% 34% 36% 41% 60% In 2017, we initiated over 1,000 projects with an average savings per project of $19,600 Standard-Based 67%

25 Challenges/Lessons Learned on Translating Losses Back to Cost 1.In order for some loss improvement to translate to cost improvement a decision is required. Know ahead of time how you will react to a loss improvement. 2.Put your efforts in reducing the losses i.e. understand the level of accuracy you need 3.Calculate yield losses on the basis of cost only, not sales price, i.e. avoid cost avoidance or missed opportunity 4.Strategically (and carefully) add loss categories

26 Qtr 1 '11 Qtr 2 '11 Qtr 3 '11 Qtr 4 '11 The How Step 3 Cost => Losses => Cost => Financial Statements Other Utilities Supplies Labor Revenue $ 90.0 Total COGS $ 70.6 Raw Material $ 43.6 Total COGS less RM $ 27.0 Losses as a % of COGS less RM 54% SG&A $ 11.0 Net Income from Operations $ 8.4 Interest Expense $ - Net Income before Taxes $ 8.4 Income Tax (29%) $ 2.4 Net Income $ 6.0 All figures in Millions of $

27 Baseline Information Performance System Capabilities Cost of Goods Sold Fixed Cost Raw Material Cost Zero-Based Cost Opportunity In 1995 Losses By 2017, we had reduced LOSSES by 45% (from 57% of COGS to 30%of COGS) Variable Cost 57% 57% of COGS (excluding Raw Material except but including Yield Losses) was identified as a LOSS Losses 30% LOSSES became 30% of COGS (excluding Raw Material except but including Yield Losses) was identified as a LOSS

28 Cost of Goods Sold Where did the change come from? Performance System Capabilities Fixed Cost Raw Material Cost Variable Cost Losses 57% What pillars drove the change? Losses 30% Loss Reduction Activities by Pillar 5S 2% Continuous Skills Development Daily Team Maintenance 11% 13% Planned Maintenance 18% Quality Management Focused Improvement 13% 31% EEM 4% CNPD 4% Our equipment was not as stable and capable as we thought Lean 4%

29 Driving World-Class Operational Excellence The Milliken Performance System Losses Timeline The Micro Economic Perspective The Proof of Concept Perspective The Macro Economic Perspective and Strategic Clarity Sustaining the Gains, Where can we Intelligently Improve the House 1996 through today

30 Qtr 1 '11 Qtr 2 '11 Qtr 3 '11 Qtr 4 '11 Proof of Concept: The Formula 1 Breakdown 2 Change Over 3 Start-Up & Shutdown 4 Minor Stops Other 5 PM & Cleaning 6 Utilities Labor Supplies Utilities Other 6 Planning 7 Material Handling 8 Speed 9 Off Quality 9 Inspection & Testing 10 Rework 11Waste 12 Obsolescence 13 Allowances 14 Inventory 15 Training 16 Inspection & Testing 17 Indirect Materials SKU Supplies Labor Revenue $ 90.0 Total COGS $ 70.6 Raw Material $ 43.6 Total COGS less RM $ 27.0 Losses as a % of COGS less RM 54% SG&A $ 11.0 Net Income from Operations $ 8.4 Interest Expense $ - Net Income before Taxes $ Purchase Price/Vendor Claims Income Tax (29%) $ Over/Under Spending 20 Spending not Captured Net Income $ 6.0 All figures in Millions of $

31 Cumulative % of Total Profit/(Loss) Losses tied to individual sku s Whale s Tail Analysis CUMULATIVE PROFIT CHART A Organization Link B. Metric Formula C Organization D Customer(s) ABM -- COMPLEXITY CUMULATIVE PROFIT BY SKU TECHNICAL/INDUSTRIAL INTERNAL MEASURE IN DESCENDING ORDER OF FABRICATIONS TOTAL PROFIT (LOSS) E. Process Owner F. Benchmarks PHIL MCINTYRE 150% 100% 261 SKU's (81% OF TOTAL)= 141% OF PROFIT/(LOSS) 305 SKU's (95% OF TOTAL)= 140% OF PROFIT/(LOSS) 50% 15 SKU's ( 5% OF TOTAL)= 64% OF PROFIT/(LOSS) 321 SKU's (100% OF TOTAL)= 100% OF PROFIT/(LOSS) 1 SKU (.3% OF TOTAL)= 11% OF PROFIT/(LOSS) 0% Number of Products Product Definition: Style K Chart Prepared By L Organization Representative M Customer Representative C:\Users\rmgpm2\AppData\Local\Temp\notesC9812B\[Whale Graph Pd xls]w hales tail Milliken 2006HUGH Design, COX Inc. PHIL MCINTYRE N/A

32 Challenges/Lessons Learned on translating Cost to Financial Statements 1. Who has visibility of financial improvements and who should have it? 2. Understand pricing, i.e. do top line changes mask improvements driven by COGS improvements? 3. Understand the strategic impact of improvements i.e. 200 lines of operation at 40% OEE is equivalent to 123 lines of operation at 65% OEE. What are you going to do with that capacity?

33 Driving World-Class Operational Excellence The Milliken Performance System Losses Timeline The Micro Economic Perspective The Proof of Concept Perspective The Macro Economic Perspective and Strategic Clarity Sustaining the Gains, Where can we Intelligently Improve the House 1996 through today

34 Financial Impact of MPS on Milliken & Co.

35 Milliken Performance System: Hard Benefits 200 Production Labor Productivity Revenue Per Production Associate (Indexed to 2004 = 100) From 2004 to 2017: 5% Annual Productivity Improvement 3% Annual Productivity Improvement since

36 Milliken Performance System: Hard Benefits Manufacturing Management Productivity Revenue Per Manufacturing Management Associate (Indexed to 2004 = 100) From 2004 to 2016: 9% Annual Productivity Improvement 4% Annual Productivity Improvement since

37 Milliken Performance System: Hard Benefits Asset Utilization Invested Capital Turns: Revenue/Invested Capital (Indexed to 2004 = 100) From 2004 to 2016: 5% Annual Productivity Improvement 2% Annual Productivity Improvement since

38 Milliken Revenue and Earnings Since Revenue % CAGR Earnings % CAGR

39 Zero-based thinking Takeaways Losses The most effective way to leverage a performance system to achieve operational excellence is to understand and focus on loss elimination. Implementation Plan for the strategic impact of improvements and align the organization early on the critical metrics for success. Results & Benefits The results that come from implementing an effective performance system that focuses on losses are significant and sustainable.