Now I'm too much awake, and too aware of the problem I was trying to forget this past evening with Julie for me to fall back to sleep. Not wanting to awaken Julie with my restlessness, I slip out of bed.
The house is all ours tonight. We started out this evening with nothing particular to do, when we remembered we had a whole house in Bearington with nobody in it to bother us. So we bought a bottle of wine, some cheese and a loaf of bread, came here and got comfortable.
From the living room window where I stand in the dark looking out, it seems as though the whole world is asleep except me. I'm angry with myself at not being able to sleep. But I can't let go of what's on my mind.
Yesterday we had a staff meeting. There was some good news -and some bad news. Actually, there was a lot of good news. High among the headlines were the new contracts marketing has been winning for us. We've picked up about half-a-dozen new orders since I talked to Johnny. More good news was the fact that
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efficiencies have gone up, not down, as a result of what we've been doing in the plant. After we began withholding the release of materials and timing the releases according to the completed processing of heat-treat and the NCX-10, efficiencies dipped somewhat. But that was because we were consuming excess in- ventories. When the excess inventories were exhausted-which happened quickly as a result of the increase in throughput-effi- ciencies came back up again.
Then, two weeks ago, we implemented the new smaller batch sizes. When we cut batch sizes in half for non-bottlenecks, effi- ciencies stayed solid, and now it seems as though we're keeping the work force even more occupied than before.
That's because a really terrific thing has happened. Before we reduced batch sizes, it wasn't uncommon for a work center to be forced idle because it didn't have anything to process-even though we were wading through excess inventory. It was usually because the idle work center had to wait for the one preceding it to finish a large batch of some item. Unless told otherwise by an expediter, the materials handlers would wait until an entire batch was completed before moving it. In fact, that's still the case. But now that the batches are smaller, the parts are ready to be moved to the next work station sooner than they were before.
What we had been doing many times was turning a non- bottleneck into a temporary bottleneck. This was forcing other work centers downstream from it to be idle, which reflected poorly on efficiencies. Now, even though we've recognized that non-bottlenecks have to be idle periodically, there is actually less idle time than before. Since we cut batch sizes, work is flowing through the plant more smoothly than ever. And it's weird, but the idle time we do have is less noticeable. It's spread out in shorter segments. Instead of people hanging around with noth- ing to do for a couple of hours, now they'll have maybe a few ten- to twenty-minute waits through the day for the same volume of work. From everybody's standpoint, that's much better.
Still more good news is that inventories are at their lowest ever in the plant. It's almost shocking to walk out into the plant now. Those stacks and piles of parts and sub-assemblies have shrunk to half their former size. It's as if a fleet of trucks had come and hauled everything away. Which is, in fact, about what happened. We've shipped the excess inventory as finished prod- uct. Of course, the notable part of the story is that we haven't
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filled the plant back up again by dumping new work-in-process on the floor. The only work-in-process out there now is for cur- rent demand.
But then there's the bad news. Which is what I'm thinking about when I hear footsteps on the carpet behind me in the dark
"Al?"
"Yeah."
"How come you're out here in the dark?"
"Can't sleep."
"What's wrong?"
"Nothing."
"Then why don't you come back to bed?"
"I'm just thinking about some things."
It's quiet for a second. For a moment, I think she's gone away. Then I feel her beside me.
"Is it the plant?" she asks.
"Yeah."
"But I thought everything was getting better," she says. "What's wrong?"
"It has to do with our cost measurement," I tell her.
She sits down beside me.
"Why don't you tell me about it," she says.
"Sure you want to hear about it?" I ask.
"Yes, I do."
So I tell her: the cost of parts looks as though it's gone up because of the additional setups necessitated by the smaller batch sizes.
"Oh," she says. "I guess that's bad, right?"
"Politically speaking, yes," I tell her. "Financially speaking, it doesn't make a damn bit of difference."
"How come?" she asks.
"Well... do you know why it looks like the cost has gone up?" I ask her.
"No, not at all," she says.
I get up to switch on a lamp and find a piece of paper and pencil.
I tell her, "Okay, I'll give you an example. Suppose we have a batch of 100 parts. The time to set up the machine is 2 hours, or 120 minutes. And the process time per part is 5 minutes. So we've invested per part 5 minutes plus 2 hours of set-up divided by 100. It comes to 1.2 minutes of set-up per part. According to the ac-
countants, the cost of the part is based upon direct labor of 6.2 minutes.
"Now if we cut the batch in half, we still have the same amount of set-up time. But it's spread over 50 parts instead of 100. So now we've got 5 minutes of process time, plus 2.4 minutes of set-up for a grand total of 7.4 minutes of direct labor. And the calculations are all based on the cost of direct labor."
Then I explain the way costs are calculated. First, there is the raw material cost. Then there is the cost of direct labor. And finally there is "burden," which essentially works out to be cost of the direct labor multiplied by a factor, in our case, of about three. So on paper, if the direct labor goes up, the burden also goes up.
"So with more set-ups, the cost of making parts goes up," says Julie.
"It looks that way," I tell her, "but in fact it hasn't really done anything to our actual expenses. We haven't added more people to the payroll. We haven't added any additional cost by doing more set-ups. In fact, the cost of parts has gone down since we began the smaller batch sizes."
"Down? How come?"
"Because we've reduced inventory and increased the amount of money we're bringing in through sales," I explain. "So the same burden, the same direct labor cost is now spread over more product. By making and selling more product for the same cost, our operating expense has gone down, not up."
"How could the measurement be wrong?" she asks.
I say, "The measurement assumes that all of the workers in the plant are always going to be fully occupied, and therefore, in order to do more set-ups, you have to hire more people. That isn't true."
"What are you going to do?" she asks me.
I look up at the window. The sun is now over the roof of my neighbor's house. I reach over for her hand.
"What am I going to do? I'm going to take you out to break- fast."
When I get to the office, Lou walks in. "More bad news for me?" I joke.
He says, "Look... I think I can help you out on this cost of products thing."
"Yeah? Like how?"