Deborah teaches college Accounting and has a master's degree in Educational Technology and is holds certifications as a CIA, CISA, CFSA, and CPA, CA.
A company's ability to generate profit depends largely on its ability to manage its costs. In this lesson, you'll learn how the lean production model and theory of constraints can increase profit.
Most companies exist to provide a product or service to customers and make a profit. The basic formula for calculating profit is selling price minus costs. A company can only charge its customers the selling price that customers will pay and if it's too high, it'll drive customers to the competition. Many companies focus on controlling costs to increase profits.
Mr. Pane owns the Wow Window Company. His company is profitable but he'd like to examine his existing processes to identify areas of potential cost savings. Let's examine two ways of looking at processes to ensure Mr. Pane's company is generating the most profit it can.
Lean Production Model
The lean production model examines production with the goal of increasing company profit by focusing on cost reduction and waste elimination in the organization. Any process that doesn't add value to the customer is considered waste that could be eliminated to save money. The lean production model consists of five steps:
Define value from the customer's perspective
Identify value streams in the organization
Create flow to the customer by eliminating waste
Respond to customer demand
Aim for perfection
Okay, let's now take a closer look at each one of these steps with some examples.
First off, by focusing only on activities that add value for the customer, all non-value activities can be eliminated to decrease costs and increase profits. When Mr. Pane reviewed the painting process for his windows, he noted that the paint used is ordered from overseas at significant cost. When the paint was originally chosen, no other paint was available, but now a much cheaper alternative is available locally. The quality of the two paints is virtually identical so continuing to use the more expensive paint won't provide any additional value, especially from the customer's point of view.
The value stream consists of all the activities that are used to create and deliver the product or service to the customer. In other words, what needs to happen to get the product to the customer? By focusing on what the customer wants, the organization can quickly respond to those needs.
Mapping the value stream identifies areas of waste, which can then be eliminated so that the product flows to the customer as efficiently as possible. Wow Windows mapped its value stream and identified that large amounts of material used in the manufacturing process are stored off site and must be shuttled to its production facility daily. The extra transportation is adding time and cost to each window it manufactures. Perhaps they could invest in an on-site storage to eliminate the waste.
Part of responding to customer demand involves understanding what your customers want and changing company processes to make sure it happens. A process review at Wow Windows revealed that many calls are made to the customer service department to inquire about warranty information. Customers have noted that it would be helpful for this information to be available online, which it currently isn't.
Changing the process and the location of the information will allow Wow Windows to save money, as its employees won't have to spend as much time on the phones and requests involving direct customer satisfaction may improve from this seemingly small convenience.
Finally, aiming for perfection means the process of creating value is never finished. Continuing to review processes and understand how they're connected will help to find more areas of waste that can be eliminated to save costs and increase profit.
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Okay, let's now look at the theory of constraints in order to fully understand lean manufacturing as a part of process management. Although the theory is also concerned with maximizing profit, it goes about this a little differently. The theory of constraints involves identifying the most significant factor or constraint, known as the bottleneck, that's hampering the company from achieving its goals. Instead of focusing on customers to increase profit, the theory of constraints seeks to increase throughput or how many units a company can produce in a specific period of time. The five steps in the theory of constraints are:
Identify the constraint
Exploit the constraint
Subordinate all other processes
Elevate the constraint
Repeat the process
Let's look at each of these steps in turn, with some examples.
First, the bottleneck must be identified for the throughput to be improved. A review of the wooden doors manufacturing processes for Wow Windows identified that it takes three minutes for a machine to carve the design into each wooden door. Since the company only has one of these machines, all manufacturing after this point has to wait until this process is finished. Even if it has the labor to produce more windowed doors on each shift, this particular machine represents a constraint in the manufacturing process.
In order to exploit the constraint, quick changes must be made to the bottleneck itself to reduce downtime. For example, Mr. Pane could run general maintenance on the machine to see if that will cut down the carving time or make sure any wood shavings are removed in another area so that the next door can be placed on the machine.
Next, all activities that support the bottleneck should be reviewed to ensure that the bottleneck is operating as efficiently as possible. Mr. Pane could change the manufacturing process so that doors are at the machine and ready to be carved and labor is available to quickly remove the door after carving to take it to the next process.
If the bottleneck still exists, major changes such as an investment in machinery may be required to relieve it. For example, Mr. Pane could decide to simplify the design on the doors or he could purchase another carving machine to remove the bottleneck.
Finally, the process must be repeated. The theory of constraints is a continuous process because another constraint requiring management's attention will be identified once the current constraint is resolved.
Companies want to minimize costs and maximize profit. The goal of both the lean production model and the theory of constraints is to maximize profit, however, the lean production model focuses on activities that add value to the customer and the theory of constraints focuses on addressing activities that represent bottlenecks in the manufacturing process. Although each model has different steps, they both acknowledge the need for continuous review and improvement if profits are to be maximized and can be used in conjunction to achieve the best results possible.
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