Reduce Variation and Save Money
Analysis will show if a process improvement is worthwhile.
by Edmund S. Fine
It almost goes without saying that you have to spend money to make money. But managers sometimes resist the idea of spending money to save money. Here's a way of deciding whether an investment in cutting cost by reducing variation will pay off.
Assume that a company operates on a six-sigma philosophy--a stable process must qualify to a Cpk (process capability index) of at least 2, and the continually monitored process is permitted to have a mean drift of 1.5 standard deviations before corrective action is taken to adjust the process.
This operating mode yields a long-term defective rate of no more than 3.4 parts per million (ppm) and often has a performance far superior to that.
Assume further that one of the company's products is a packaged bulk item, finely divided and fairly uniform (ground coffee or soap powder for example).
The product is shipped in 500-gram packages and the long-term (stable) standard deviation of the filling process has been found to be 4 grams.
By the six-sigma rules, the nominal weight must be set at 524 grams. In doing so, the company is giving away a long-term average of 4.8% (24/500) "free" product in each container.
A new engineer is hired. He examines the process and is amazed that the company has been shipping almost 5% more product than the nominal. Through experimentation and a few process improvements, he finds that the long-term standard deviation of the filling process could be reduced to 1 gram.
This would enable the company to set the nominal weight at 506 grams and to reduce the amount of free product to a long-term average of 1.2% (6/500). However, these process modifications and improvements are not free; to both reduce variation and save money, the economics of the situation must be examined.
The process modifications could save an average of 18 grams per package. The savings would have to be multiplied by the number of packages produced per month to obtain the dollars per month that the company would be saving. The savings must be balanced against the cost of the process improvements, which usually accumulate in the first month (see sidebar).
Various books on engineering economics have different and often complex criteria for making such decisions, but the following guideline usually works:
If you can recoup the cost of process improvements within a year, proceed with the project. If, however, the cost of the process improvements will not be recouped within two years, don't do it--there are too many uncertainties beyond that time frame.
If the cost of the process improvements will be recouped in one to two years, a detailed engineering economic analysis is probably necessary.
This analysis will take into account factors such as market forecasts, variabilities in the cost of raw materials used to make the product, projections of possible further improvements to the production machinery, and so forth.
At this level of complexity of an engineering economic analysis, it is necessary also to factor in the time value of money. Such analysis usually is not necessary for very rapid or slow paybacks; those decisions become self-evident without it.
Thus, the paradox of reducing variation and saving money can be seen at work, but it is not a cure-all. A quick economic analysis will show if a process improvement is truly worthwhile.
EDMUND S. FINE is associate principal engineer at Sverdrup Technology in Huntsville, AL. He has a master's degree in industrial engineering from New York University in New York City. Fine is a senior member of ASQ.
Saving money through variation reduction
Finished product costs $0.002 per gram.
Shipments average 100,000 boxes per month.
Shipments contain an average of 24 grams free product per box.
Process improvements would reduce this to 6 grams of free product per box.
Saving 18 grams per box yields a savings of 18 x 0.002 x 100,000 = $3,600 per month.
The cost of the process improvements is $25,000 (with no change in process operating costs after the improvements are made).
The process improvements to reduce variation would pay for themselves in less than seven months, making this project a go.