Calculating Changeovers High Cost

Calculating and Cutting Changeover's High Cost © 2005 by John R Henry, All rights reserved

PackExpo2005 Las Vegas John R Henry CPP Changeover.com [email protected] 787/863-9134

Downtime defined •

Downtime – Any time the line should be running but is not, sometimes called “unplanned downtime” -Primary causes of downtime-

© 2005 by John R Henry, All rights reserved

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Changeover Operational problems such as jams, breakdown, need for adjustment, high reject levels Maintenance (often does not cause enough downtime) Lack of materials Lack of trained personnel

Changeover defined •

Changeover - The total process of converting a line from running one product to another. -The 3 Ups-

© 2005 by John R Henry, All rights reserved

– Clean-up - The removal of all previous materials, components and product from the line. – Set-up - The adjustment or changeout of the line in preparation for the succeeding product. – Start-up - The period of time after the line has restarted but before it is running at normal speed and efficiency. •

Lean changeover - Changeover in which there is no wasted material, labor or time.

Changeover time defined

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• Changeover time - The total elapsed time from the last unit of good product at normal speed and efficiency to the first unit of good product at normal speed and efficiency.

The problem with changeover?

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Its all about the Benjamins

Types of changeover costs • Tangible costs - Costs for which a reasonably accurate dollar value may be calculated.

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• Intangible costs - Costs which are difficult or impossible to quantify.

The fact that a cost cannot be dollarized does not mean it is not expensive!

Tangible Costs © 2005 by John R Henry, All rights reserved

Lost Production The most visible cost of changeover is lost production. Line speed = 250PPM © 2005 by John R Henry, All rights reserved

Contribution = $0.50/Package Average changeover time = 60 minutes Cost per changeover = 250 X 60 X .50 = $7,500 ($125/minute) Annual cost = 240 X $7,500 = $1,800,000

Lost Capacity Lengthy changeovers reduce the available plant capacity

© 2005 by John R Henry, All rights reserved

Assume: Line speed = 250PPM One shift operation (8 hours) 1 hour/day of changeover Theoretical capacity = 120,000PPD Actual capacity = 105,000PPD Annual capacity loss = 15,000 X 240 = 3,600,000 Pkgs. If contribution per package = $0.50, cost of lost capacity is $1,800,000 Lost capacity is lost production from a different point of view

Direct labor costs Assume: 2 mechanics @ $25/hr 3 operators @ $15/hr © 2005 by John R Henry, All rights reserved

Labor costs/changeover = (2 X 25) + (3 X 15) =$95/hr Total annual labor cost = 240 X 85 = $22,800 There will also be inspection, material handling, supervision and other indirect labor costs.

Effect of lot size on inventory 500M 400M

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LOT SIZE

300M

250M Average inventory levels

200M 100M

50M M

T

W DAYS

T

F

Impact on inventory Assume value/unit = $4.00 Assume 30% carrying cost © 2005 by John R Henry, All rights reserved

Assume reduction in average inventory from 250,000 to 50,000 Annual inventory savings = 200,000 X 4.00 X .30 = $240,000 Additional savings may attain from reductions in raw materials inventories.

Rejected product and material • In setup – Packaging components and product are often used in setting up machinery and need to be discarded. © 2005 by John R Henry, All rights reserved

• In startup – Startup is characterized by higher than normal reject levels. This rejected product represents either a total loss if discarded or a partial loss if reworked. – During startup product may be produced which is acceptable but not perfect. This variation may be perceived by the end customer with negative effects.

Intangible Costs © 2005 by John R Henry, All rights reserved

Customer response

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Lengthy changeovers will reduce the plant’s ability to respond to customer demand in a timely manner.

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This is not usually an issue in normal operation when everything is going to schedule. Few plants have the luxury of “normal” operations.

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Improved customer response will be a significant competitive advantage when a customer has an unscheduled need.

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Contract packagers particularly need to make rapid customer response a core strategy

Reduced market share • Reduced production output may result not only in reduced sales but also in reduced market share. This will have long term strategic implications. © 2005 by John R Henry, All rights reserved

Stress • When changeover times are long, there will be increased pressure to get lines up and running again. This causes increased stress:

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– On people-As people are pushed harder, they become more prone to error as well as cutting corners. – On machines-Excessive changeover time will result in machines being run harder and longer with less time for proper repairs and, most importantly, for preventive maintenance.

Innovation

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IBM Ad

Importance of knowing costs • Justification of expenditure – Operating expenses for machine upgrades – Capital expenses for machine replacement – Direct and indirect expenses for training – Lost production while modifying machinery © 2005 by John R Henry, All rights reserved

• Comparing the time gained from changeover improvement to the expenses incurred is comparing apples to oranges. • Costs and benefits must both be expressed in dollars for useful decision making • Downtime from changeover is a significant cost that is often unrecognized

Accounting must be involved • Changeover costs must be determined by finance/accounting to develop and “official” number that will be accepted by management

© 2005 by John R Henry, All rights reserved

• Cost data developed by engineering or production are not always believed

Real life examples • OTC pharmaceutical tablet plant- @$25,000/hour • Prescription pharmaceutical tablet plant @$16,500/hr © 2005 by John R Henry, All rights reserved

• Distilled spirits bottler @$22,000/hr • Skin care products @$11,000/hr

Two paths to lean changeover • Mechanical – Focuses on improvement to machinery to make it faster and easier to change in a repeatable manner. © 2005 by John R Henry, All rights reserved

• Operational – Focuses on people, processes and procedures to eliminate wasted efforts and time from changeover

Lean changeover requires total involvement!!

Three tasks of changeover • Eliminate all unnecessary tasks. • Externalize to the maximum extent possible any tasks that cannot be eliminate. © 2005 by John R Henry, All rights reserved

• Simplify whatever tasks remain

MEASURE, MEASURE, MEASURE!

© 2005 by John R Henry, All rights reserved