In an increasingly competitive global environment, organizations must innovate to find opportunities to improve their productivity and reduce total cost. Initiatives that consider all aspects of process improvement and waste reduction will find the greatest level of success in improving efficiency.
What Is Productivity?
Productivity is output, efficiency, and production. In economic terms, it is the rate at which a company produces goods or services in relation to a needed amount of materials and employees. Productivity can be defined in two ways:
1) Total labor productivity is simply output divided by the number of workers, or by the number of hours worked. Output can be anything from number of packages to airline miles flown, but more generally it is some very broad aggregate like gross domestic product. Measures of labor productivity capture the contribution to output of other inputs than hours worked.
2) Total factor productivity, by contrast, captures the contribution to output of everything except labor and capital. Innovation, managerial skill, organization, waste minimization (all forms) and even luck can contribute.
The two productivity concepts are related. Increases in total labor productivity, the amount of output created (in terms of goods produced or services rendered) per unit input used, can reflect the fact that each worker is better equipped with capital. Alternatively, gains in total factor productivity, or any effects in total output not caused by inputs or productivity, are frequently obtained through the use of innovative process improvements or organizational change.What Is Waste?
Waste can be identified many ways and as many things, but ultimately it is any activity that requires allocated resources but adds no value from the customer’s perspective. Some activities, while not directly adding value to a product or process – such as time spent on equipment maintenance or the accounting function – are necessary in the production of goods or services and must be perpetuated. Other types of non-value-added activities, like maintaining underutilized inventories or the time wasted searching for tools, must be reviewed and constantly re-evaluated, and if identified as waste, the appropriate steps must be taken to eliminate them.
Many initiatives and systematic approaches for improving efficiency have been adopted by manufacturing organizations to help improve their products and processes by focusing on quality, improving productivity and reducing all types of waste.
Productivity Improvement Methodologies
The Toyota Production System, developed in Japan in the 1940s, is the framework and philosophy organizing the manufacturing facilities at Toyota and the interaction of these facilities with their suppliers and customers. The philosophy was largely developed and popularized by Toyota engineer Taiichi Ohno. The main goal of TPS (commonly referred to these days as lean methodologies) is to eliminate all forms of waste within manufacturing operations, but has become a very popular tool for improving efficiencies in ALL types of organizations.
Another improvement method called Total Quality Management (TQM) is a management approach for an organization. TQM is centered on quality, based on the participation of all organizational members and aimed at long-term success through customer satisfaction and system-wide benefits. Popular in the U.S. during the 1980s, it was developed by W. Edwards Deming and is largely based on the quality revolution started in Japan in the 1940s.
Six Sigma was pioneered by Bill Smith at Motorola, and popularized in manufacturing environments by General Electric’s former CEO, Jack Welch. It emphasizes the use of mathematical and statistical tools to manage process variations that can cause defects,# and systematically works toward managing the ultimate goal of consistent and measurable quality.These approaches to improve productivity and minimize waste are being used by many organizations to improve their products and processes. Based on the results of the 2006 IndustryWeek/MPI Census of Manufacturers, the implementation of lean methodologies have significantly increased in popularity. In 2006, 40.5 percent of all manufacturers surveyed have adopted lean as their primary improvement method, a jump of nearly 5 percent from the 35.7 percent reported in 2005.
Lean methodologies based on the Toyota Production System are management philosophies that focus on the reduction of “the seven deadly wastes:”
• Overproduction
• Waiting time
• Transportation
• Processing
• Inventory
• Motion
• Scrap in manufactured products or any type of business
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By eliminating waste (roughly translated in Japanese as “muda”), quality is improved, production time is reduced and cost is reduced. Lean “tools” (more than three dozen, and growing) include constant process analysis and continuous improvement (kaizen), “pull” production (by means of kanban) and mistake-proofing (poka-yoke). Lean, as a management philosophy, is also very focused on creating a better workplace through the Toyota principle of “respect for humanity.” While some believe that lean methodologies are a set of problem-solving tools, most experts now agree that it is a holistic, comprehensive, enterprise-wide program designed to be integrated into the organization’s core strategy. Key Lean Principles Also Include:
• Continuous improvement: Efforts to reduce costs, improve quality, increase productivity and share information. • Flexibility: Efforts to produce different mixes or greater diversity of products quickly, without sacrificing efficiency at lower volumes of production. • Supply chain enhancement: Building and maintaining a long-term, strategic relationship with suppliers through collaborative risk-sharing, cost-sharing and information-sharing arrangements.
Lean basically gets the right things to the right place at the right time in the right quantity while minimizing waste and being flexible and open to change.
Lean Implications For MRO/Indirect Materials Procurement And Inventory
Indirect procurement activities concern “operating resources” that a company purchases to enable its operations. It comprises a wide variety of goods and services, from standardized low-value items like office supplies and products used in facilities maintenance, repair and operations (MRO), to complex and costly goods and services like heavy equipment and consulting services.
Purchasing organizations in many industries sometimes assume incorrectly that “just-incase” stores of indirect goods, specifically those used in the maintenance and repair of plants and facilities, are less costly than the cos
