Operational optimisation often involves well-intentioned efforts that end up delivering suboptimal outcomes, ultimately impacting business results. Today, we will focus on the hidden cost of ‘efficiency’.

Why are we really in business?

Let’s start with a question – why are we in business? Is it to serve society? To fill a need gap? To serve a larger purpose? Put aside all the lofty responses; at the end of the day, the answer is simple – ‘to make profit’. No argument there, is there?

And yet, in a significant number of manufacturing operations, good performance seems to be defined by the hustle and bustle of activity on the shopfloor. Machine efficiency is equated with continuous operation. This, however, impacts the overall efficiency of the factory.

When business is good (read as order inflows are strong), success is generally defined as meeting delivery commitments (on time, in full, and with the specified quality), repeatedly, day after day, while maintaining a healthy bottom line.

This is an ideal situation, but business does not move in straight lines – it moves cyclically, and at some point, competition in the market begins to pressure-test performance parameters.

Rapidly changing global supply chains pose challenges for the Indian manufacturing sector, while also opening up opportunities to become more relevant to global markets – for example, today, 25 per cent of iPhones sold globally are manufactured in India. Despite the opening up of Indian markets in 1991, the manufacturing segment has benefitted from a comfortingly large domestic demand, along with a degree of tariff and non-tariff protection that has, to an extent, shielded the sector from international competition. The picture, however, is rapidly changing. Opportunities in international markets are increasing, bringing with them direct exposure to global competition.

Increased competition requires faster deliveries, tighter quality specifications, greater variety, and more competitive pricing. This puts pressure on the bottom line, which, as we acknowledge, runs contrary to our primary reason for being in business.

The three pillars of manufacturing success

So let’s pause here and step back. There are three pillars on which the success of a manufacturing operation rests: Quality, delivery and cost

Basic as it may seem, when the going is good, higher margins make higher costs with lower rigour seem justifiable. The result is a heady feel-good factor that makes the business vulnerable when it faces headwinds.

As demand comes under pressure, so do margins. The business leader is forced to acknowledge that it is no longer ‘business as usual’, and the first reaction is, ‘we need to work harder’. A machine seen idle at such times is perceived as alarming. As a result, it becomes the manager’s endeavour to keep every machine running. This marks the beginning of ‘the hidden cost of efficiency’.

Busy machines, poor flow

From the outside, the factory appears to be operating at full capacity. Machines are running, people are busy, and schedules are packed. However, a closer look reveals a different story:

• Delivery commitments are slipping
• Inventory is piling up between machines
• Teams are working overtime to catch up
• Customers are becoming impatient
• Margins are shrinking

In such situations, the message from the top is, ‘We have to work harder.’ However, more often than not, the result is not what is expected. In reality, the harder the drive to improve, the more it aggravates the problem.

Why is this so? The real issue to be addressed is ‘flow’, not ‘utilisation’.

‘Utilisation’ is often mistaken for ‘efficiency’ because it is viewed at the machine level. This is misleading – efficiency must be evaluated at the level of the factory as a whole, even if it means keeping some machines idle at times.

What ultimately determines output is not how busy each individual part of the system is, but how smoothly work flows through the entire system.

Let’s break down the problem. Let us analyse the rate of output carefully and compare it with the output of each machine (let’s call them ‘work centres’).

What do we find?

We find that the rate of output of the factory is dictated by the output rate of the slowest work centre. This leads to two critical insights:

1. The rate of output of the factory can only be increased by improving the output of the slowest work centre.

2. Keeping machines running longer than required, and processing parts in excess of demand, is counterproductive. The output limit of the slowest work centre acts like a dam in a river (using the analogy of flow), leading to hidden costs such as:

a. The cost of running machines to process parts that must be stored (pile-up)

b. The cost of unprocessed inventory (blockage of working capital)

c. The cost of multiple handling

d. The cost of damage arising from the same

The way forward: Focus on the constraint

The way forward is to take a holistic approach and seek answers to the following questions:

1. Which work centre must be kept running at all costs?

2. How should we enhance the output of the identified work centre?

3. Where should resources be committed, and to what extent, in order to optimise output before moving to the next level of enhancement?

Let’s address each of these questions as we explore operational optimisation.

A walk around a busy shopfloor will provide the first answer, as we observe inventories between work centres. Typically, there will be semi-processed inventory awaiting the next operation before every work centre. However, one work centre will have the highest accumulation, while downstream work centres will show comparatively lower inventory levels. This clearly indicates which work centre dictates the output of the factory.

All focused efforts to keep this work centre running will deliver true system efficiency – maximum output using existing resources.

The next step is to maximise the running time or uptime of the identified work centre, which involves dedicated condition-based maintenance (to be discussed in future columns). The OEE (Overall Equipment Efficiency) of the entire factory is dictated by the OEE of this work centre. Simultaneously, cycle time must be studied and aligned as closely as possible with the running time of the work centre by minimising idle time, such as unproductive loading and unloading. Further details on this approach will be discussed in subsequent pieces.

Finally, while the direction of resource commitment is clear, the question of ‘to what extent’ remains. The answer lies in business plans and anticipated demand. Ideally, capacity should be built to meet medium-term demand projections (as defined by the business), with a buffer of at least 25 per cent to accommodate surge demand and unforeseen contingencies.

There are, however, some caveats. Care must be taken to determine whether the same work centre continues to dictate output, or whether that role has shifted to another.

It is a rewarding journey, every aspect of which we will explore step by step together.

The approach to operational optimisation is an iterative journey.

About the author:

Zurvan Marolia is the former Senior Vice President of Godrej & Boyce Mfg. Co. Ltd, part of Godrej Enterprises Group. He is a former member of the National Manufacturing Council of the Confederation of Indian Industry (CII), and a former Chair of the Manufacturing Council of Godrej & Boyce. Marolia is now a freelance consultant and can be reached at zurvan@takttime.com.