The Goal: a process of Ongoing Improvement

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 accountants, 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

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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 breakfast.’’
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?’’
"I can change the base we’re using for determining the cost of parts.
Instead of using the cost factor of the past twelve months, which is what I’m
supposed to be doing, we can use the past two months. That will help us,
because for the past two months, we’ve had big increases in throughput.’’
"Yeah,’’ I say, sensing the possibilities. "Yeah, that might work. And
actually the past two months are a lot more representative of what’s really
going on here than what happened last year.’’
Lou leans from side to side. He says, "We-l-l-l, yes, that’s true. But
according to accounting policy, it’s not valid.’’
"Okay, but we have a good excuse,’’ I say. "The plant 
is
different now. We’re
really a hell of a lot better than we were.’’
"Al, the problem is Ethan Frost will never buy it,’’ says Lou.
"Then why did you suggest it?’’
"Frost won’t buy it 
if
he knows about it,’’ says Lou.
I nod slowly. "I see.’’
"I can give you something that will slide through on the first glance,’’ says
Lou. "But if Frost and his assistants at division do any checking, they’ll see
through it in no time.’’
"You’re saying we could end up in very hot water,’’ I say.
"Yeah, but if you want to take a chance....’’ says Lou.
"It could give us a couple more months to really show what we can do,’’ I
say, finishing the thought for him.

---

I get up and walk around for a minute turning this over in my mind.
Finally I look at Lou and say, "There is no way I can show Peach an increase
in the cost of parts and convince him the plant is better off this month than
last. If he sees these numbers and gets the idea our costs are going up, we’ll
be in hot water anyway.’’
"So you want to try it?’’ Lou asks.
"Sure.’’
"All right,’’ he says. "Remember, if we get caught—’’
"Don’t worry. I’ll practice my tap dancing.’’
As Lou is on his way out, Fran buzzes me to say Johnny Jons is on my line. I
pick up the phone.
"Hello there,’’ I tell him, We’re practically old pals by now; I’ve been on the
phone with him just about every day—and sometimes three or four times a
day—for the past few weeks. "What can I do for you today?’’
"Remember our dear friend Bucky Burnside?’’ says Jons. "How could I
forget good ole Bucky,’’ I say. "Is he still complaining about us?’’
"No, not anymore,’’ says Jons. "At the moment, in fact, we don’t even have a
single active contract with Burnside’s people. That’s the reason I’m calling.
For the first time in months, they’ve expressed interest in buying something
from us again.’’
"What are they interested in?’’
"Model 12’s,’’ he says. "They need a thousand units.’’
"Terrific!’’

---

"Maybe not,’’ says Jons. "They need the whole order by the end of the
month.’’
"That’s only about two weeks away,’’ I say.
"I know,’’ says Jons. "The sales rep on this already checked with the
warehouse. Turns out we’ve only got about fifty of the Model 12’s in stock.’’
He’s telling me, of course, we’ll have to manufacture the other 950 by the
end of the month if we want the business.
"Well... Johnny, look, I know I told you I wanted business, and you’ve pulled
in some nice contracts since I talked to you,’’ I say. "But a thousand Model
12’s in two weeks is asking a lot.’’
He says, "Al, to tell you the truth, I didn’t really think we could do anything
with this one when I called. But I thought I’d let you know about it, just in
case you knew something I didn’t. After all, a thousand units means a little
over a million dollars in sales to us.’’
"Yes, I realize that,’’ I say. "Look, what’s going on that they need these
things so fast?’’
He tells me he did some digging and found out that the order had originally
gone to our number-one competitor, who makes a product similar to the
Model 12. The competitor had had the order on its books for about five
months. But they hadn’t filled it yet, and this week it became clear they
would not be able to meet the due date.
"My guess is that Burnside turned to us, because they’ve heard about us
offering such fast turn-around to everyone else,’’ he says. "Frankly, I think
they’re desperate. And, hell, if there is any way we can pull this off, it’d sure
be a good way for us to save face with them.’’
"Well, I don’t know. I’d like that business back again, too, but....’’
"The real kick in the head is if we had only had the foresight to build a

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finished goods inventory of Model 12’s while we had those slow sales
months, we could have made this sale,’’ he says.
I have to smile to myself, because at the beginning of the year I might have
agreed with that.
"It’s too bad,’’ Johnny is saying. "Aside from the initial business, it could
have been a big opportunity for us.’’
"How big?’’
"Strong hints have been dropped that if we can come through on this one, we
could become their preferred supplier,’’ says Jons.
I’m quiet for a moment.
"All right. You really want this, don’t you?’’ I ask him.
"So bad I can taste it,’’ he says. "But if it’s impossible. . . .’’
"When do you have to let them know?’’ I ask.
"Probably sometime today, or tomorrow at the latest,’’ he says. "Why? Do
you think we can really do it?’’
"Maybe there’s a way. Let me see how we stand and I’ll give you a call
back,’’ I tell him.
As soon as I get off the phone with Jons, I round up Bob, Stacey, and
Ralph for a meeting in my office, and when we’re all together I tell him what
Jons told me.
"Ordinarily, I would think this is out of the question,’’ I say. "But before
we say no, let’s think about it.’’
Everybody looks at me with the certain knowledge this is going to be a waste
of time.

---

I say, "Let’s just see what we can do, okay?’’
For the rest of the morning, we’re busy with this. We go over the bill of
material. Stacey checks on raw materials inventories. Ralph does a quick
estimate of how long it will take to produce a thousand units after the
materials are on hand. By eleven o’clock, he has calculated that the
bottlenecks can turn out parts for the Model 12 at the rate of about one-
hundred per day.
"So, yes, it would be technically feasible for us to take the order,’’ says
Ralph. "But that’s only if we work on nothing else for two weeks except the
thousand units for Burnside.’’
"No, I don’t want to do that,’’ I tell him, thinking about us screwing up
relations with a dozen customers just to please one. "Let’s try something
else.’’
"Like what?’’ asks Bob, who is sitting there with us, looking about as
enthusiastic as a bump on a log.
I say, "A few weeks ago, we cut our batch sizes by half, and the result was
we could condense the time inventory spends in the plant, which also gave us
an increase in throughput. What if we cut the batch sizes by half