Category Archives: cost accounting

Dealing with Bottlenecks

Regardless of the nature of your operation, there are two major pacesetters:  Demand and Bottlenecks.  Demand is self explanatory:  the operation has to adjust to sales or service market demand.  In the case where demand is not limiting, bottlenecks set the pace and restrict potential of your entire organization.  If you are molding parts and can only mold 20 key parts per hour, that is all the plant can produce.   Any increase in the number of molded parts will yield an increase in the output of the entire plant.  So all efforts become focused on relieving the flow constraint, or bottleneck.  The most common reaction to limited capacity in one area is to work overtime.  Overtime can be switched on and off as the need arises, and many workforces relish overtime opportunities, but overtime comes with a steep price.

The High Cost of Overtime

Overtime is the quick response to bottlenecks, but not being very judicious with OT can have a rapid and disastrous effect on the bottom line and ware out your workforce.  Here is a calculation of average unit cost using overtime:


Working Saturdays alone and assuming no decrease in output per day per person, average part cost increases by 8%.  Working both Saturdays and Sundays increases average part costs for all units by 21%.

Applying this increase to an accounting model, with direct labor at 20% of costs, shows a % profit reduction of 17% for working Saturdays and profit erosion of 43% working both Saturdays and Sundays:


Working  Saturdays and Sundays may also be accompanied by lower productivity.  Either the team is worn out, missing a few key members, or supervision is lax, so productivity  suffers on the weekend.  In addition, people are worn out or the queue of parts is eaten up with extended use of overtime, so productivity suffers on the following Monday due to lack of parts or personnel.  If so, we can expect the average cost of overtime to be calculated as follows, with up to 25% increase in overall labor costs:


Applying this to the accounting model as before cuts profits in half:


Overtime is a great tool to balance plant flows – use it for that.  If a new process still has some kinks, or we are training some new personnel or on a new process, or even to meet some strict deadlines, OT may maker perfect sense.  But overtime should be reserved for extreme situations, and only for bottlenecks or make-or-break scenarios.  It should always be carefully monitored.  As labor content is increased, the effects on profit is magnified – if labor is 40% of sales all profits are consumed by working weekends.

Other Ways to Relieve Bottlenecks

  • ensure quality is high so the bottleneck is not driven by a “factory within the factory”
  • split shift – staggered hours in department
  • second shift on certain machines or departments
  • split shift – covering lunch and breaks
  • improve setup times
  • expand setup crew
  • increase equipment or machinery
  • fastest operators
  • direct traffic – make sure limiting resource always busy
  • break task down into smaller steps – pre-do or post-do some work (may include vendors)
  • off load some processes that can be done by other machines

We need to adjust our thinking and improve the processes or balance the labor force.  Overtime should be a last resort:  working Saturdays and Sundays is not the answer.  At the very minimum, OT just be justified and pre-approved, with an estimate up front of cost and benefit.

© 2013 Value Stream Focus LLC.  Let Value Stream Focus help you get your organization moving on a path of Continuous Improvement and Cost Reduction.  Call 760-500-6006 or email 



Transforming Lean Through Middle Managers

Interview with Paul Yandell, President of Value Stream Focus LLC

interview by Joe Dager of Business 901 on April 2, 2011.  See and hear original interview at Transforming Lean Thru Middle Managers” (

Paul Yandell:  When I talk about managing from below, I speak to middle managers; I was a resident with them. Most of us have been middle managers and understand those frustrations. I hit on a theme of the “Guerilla Manager” years ago, and I have spoken on this theme to a number of national and local forums. It really resonates with people, because people stuck in the middle are struggling with, “What do I do? How do I be effective?” Many of them are waiting for leadership. I have also done a lot of teaching, and I find many of my students feel the same way. They’ll ask “I’m learning Lean tools, but how do I put them to use?” I’m trying to say “Just go right ahead. Don’t wait for your CEO to say, ‘We’re going to go down this path.’ Just start leading the company from the middle and you can be quite effective.” We did that at Dimension One Spas, and we completely turned around the culture and transformed the company to a Lean company. We ended up winning a regional Shingo prize. It was a validation of our efforts.

It was really like a middle management revolt, if you will. The owner, like many small business owners, didn’t take a strong interest in manufacturing. They want to make sure there are no problems in manufacturing, but they’re not really sure how to build things. They’re more sales people or finance people, generally. When they see someone getting traction, they generally kind of say, “OK.” As long as you’re getting top management <i>support</i>, you don’t need top management <i>leadership</i>. I think many people think they need leadership. There’s a big difference. I think you can lead from the middle if you have support from the top.

Joe Dager:  You’re singing my message, Paul. I’ve already started the podcast because I thought what you just said there was golden. So with me today is Paul Yandell. This is Joe Dager with the Business901 podcast, and I’d like to welcome Paul. Paul, can you give me that elevator speech about your company Value Stream Focus?

Paul:  Well, Value Stream Focus is a small consulting company. We just started several years ago working with companies to lower their cost. That’s really what companies are looking for. I use a number of tools starting with Lean. My background is Lean. We’ve added Six Sigma and of course, common sense goes a long way. We’ve combined those in the pot, and bang! Costs go down. That’s basically how it works.

Joe:  Well, you’re one of the few people that I’ve ever heard talk about middle management. And to me, I’ll flat out say it. In every successful company that I’ve been associated with, middle managers were the keys, and the unsuccessful ones, middle managers were the keys.

Paul:  That’s it. I mean, if you understand middle management, then you can make it work. Middle management you have to realize started out as being basically lower management. Most of them learned on the job in some capacity. They’re not highly trained, generally speaking, or they’ve had technical training. Some of them are very, very well‑trained. But you have a mix of these people, and you have to speak to them. They were really good at doing the status quo. That’s how they got to be middle managers, and they’re going to cling to that.  To your best operator, you say, “OK, now you’re in charge of the operators,” and then you grow, and then you grow, and then you grow, and 15, 20 years later that guy’s your production manager and he’s good at all the old little things, the tricks, the piles under the desk, knowing where everything is, all the tribal knowledge.

They’re not inclined to change, and until they see benefits, they could really kill you. So there’s a lot of nodding, and they all know that managers and owners change, and they’re agreeable. But in the end, their comfort zone is doing what they were successful at and, until they can be successful at something else, why would they do anything differently, really? You know, why would they change?

Joe:  Yes, and I think that’s the key. Because everybody always comes down saying, “Oh, we’re going to do this and we’re going to do this,” and the poor middle manager’s stuck in the middle, because he still has to get it out the door. He still has to assist the people to perform and he’s always the one stuck in the middle. We always talk about leadership, and we’re always talking about respect for people or the worker, but who respects that middle manager?

Paul:  Well said. The other side of it is this. I mean, there’s a certain level of fear on that shop floor. Those employees know most businesses have some kind of seasonality or growth spurts, and they know when business turns down a little bit, they can look around and they know some of their peers are not going to be in the room in the next month or so. They also know that by and large the office never changes. So, they basically don’t…And we’re talking in the manufacturing setting, but it applies to an office or service setting as well. Middle managers are survivors. They know how to do work quicker when they need to work quicker. They know how to kind of stretch it out when they need to stretch it out. I mean, this is their life, this is their world. If you’re trying to change that equation, you really need to speak to those people. Not only the people who are in management positions, but the informal leaders as well. It might be the janitor is a really important person in your business, because he’s related to 20 other people in your company, and he’s kind of the patriarch or the matriarch, whichever.

You just have to realize all of these equations and cross currents that are out there. Of course, the CEO is the most powerful person, but making a speech and wanting to make change doesn’t make change. We all know that structure has to go with culture; the two have to go together. You see it in literature a lot, that culture eats strategy for lunch. It’s so true. So you need to have a structure and a culture together that will facilitate the strategy that the CEO wants to implement. They can’t implement it without some effective way of handling change on the lower and middle ranks. The best and most effective way of managing change is really through kaizen and through people thinking together and all an atmosphere that people can make mistakes and they’re not penalized for it.

Going back to the whole middle management conundrum–they’re afraid to make mistakes, because they’ve seen people who make mistakes. If you have any black mark on your record, when it comes to layoffs those are the first guys that go. Everybody knows, I mean, they’re not stupid. They may have had less opportunity or they may be an immigrant, but they’re not stupid.

For example, some of the people on the shop floor, they were doctors and lawyers and teachers in a former life. This is the opportunity they have in the United States, and we have to be aware of that. I think that we have to give them more credit and speak to them if we want to make lasting change. I’ve been successful at it. I feel comfortable with that statement.

Joe:  Well, leadership still has to call you in, though, to get in touch with the middle managers, because those are difficult people to reach, they’re not the easy ones to be on an email list or to be accessible that much through the phone at any time, because they’re on the floor.

Paul:  Well, here’s what happens. If you look at the four drivers of Lean, if you simplify your model, and you look first at workplace organization. Then from there you look at flow, uninterrupted flow. Next you look at quality at the source. Finally you look at single‑minute exchange of die. If you look at that progression…you can build meaningful change.  We’re going to start with organizing the workplace, the 5S or 6S– lots of different versions of that–when you start and localize, and you start cleaning up and sorting and finding tools that maintenance thought were stolen from them but instead were just left in work areas and so forth, and you start cleaning and organizing, it makes a big impact. 5S is the biggest; it’s visual change, and everyone can see it.  Work improves.  Flow improves.   These are all things that could be done in middle management ranks without a budget and without a lot of fanfare. Let’s give ownership and top management credit, too. They’re sensitive, they just don’t know quite how to get the message across, but when they see that happening, they’re going to like it. They’re going to applaud it.

The middle managers who are trying to effect change, people like plant managers or production managers who are starting these efforts, they ought to be shown off. Now, what I have learned is that, if you start cleaning and organizing and helping people improve their workstations, pretty soon other departments line up and they want the same thing. “Hey, when are you going to come and fix my area? When are we going to do a kaizen in my area?” And what will happen is, it will start getting a life of its own.

The other thing, though, you have to be sensitive to is, let’s talk about budgets for a minute. Let’s suppose you’re trying to change an organization, but you’re doing it on your own, you don’t have a budget. You’re certainly not going to shut down the plant for a week while you do a Kaizen in one department. Or, you don’t have a lot of money like that you can throw at it.

If you look at the basic setup of kaizen, you can do that in a couple of afternoons and on a Saturday. What we did is, we developed a formula of what we call a mini‑kaizen. On Tuesday afternoon, we would get together at maybe the last hour or two of work and a few hours of overtime. We bring in pizza for the guys. We would do a brief introduction to Lean concepts, an idea of what we’re trying to do, talk about those four drivers of Lean that I mentioned.

Then we would meet again on Friday, after they had thought about it; maybe do an exercise like a paper airplane exercise or something where the guys could understand what we’re trying to do with single‑piece flow or maybe a cellular manufacturing change.

On Friday, we talk about what we’re actually going to do. What is the task at hand that we want to do on Saturday? Bring the guys in and do the transformation on Saturday. We had support from the departments on either side of a given department. We had maintenance and engineering involved, and so forth. Then from that, we were able to make huge transformations in the plant without a big budget and without having to go to top management approval, for the most part. Pretty soon you can start turning an organization on its end. I mean, it doesn’t take very long. It catches on like wildfire. Because people are interested, people want to be involved.

Joe:  I think that’s a great strategy to do, because success breeds success.

Paul:  Oh, yes.

Joe:  And the people looking from the outside in, they want to get in the cool group!

Paul:  Oh, yes. Now, here’s even better if you want to be in the cool group. If you can give away T-shirts, if you can start branding your effort. One of the guys’ mothers was Japanese, and so she wrote “Kaizen” in Japanese. We made this emblem to brand our efforts, along with the words “Dimension One Kaizen”. We made T‑shirts to that effect. We were branding it all over the place in our company. Then we had a Japanese customer come in. Of course, most of our workforce in this case was Hispanic. A customer from Japan came and he saw this insignia, and he was looking, and he’s looking, and he couldn’t figure it out. He goes, “Zen Kai, Zen Kai. Oh, Kaizen!” We had it reversed! Instead of “good change”, we had “change good”. But of course, in Spanish that’s how you say it. Actually it worked out, worked well. We had the wrong translation, but we got it right.

So those kinds of things become part of the culture of the company. Everyone wants a kaizen T-shirt or a zenkai T-shirt. That’s an easy way…I mean; a T-shirt’s a pretty easy way to build change in your company.

Joe:  You won a Shingo Prize by working with middle management, right?

Paul:  Yes. In fact, to be honest, we won a Silver Shingo and not the Gold Shingo. I asked the Lead Examiner (Jake Raymer, Director of Education, Shingo Prize, Utah State University), “So why did we not win Gold?” And he says, “Because ownership has no idea what you’re doing.” He said, “It’s unreal, Paul, what you’ve done. It’s unreal. But I’ve got to tell you, the owners ‑‑ it was a husband and wife team ‑‑ they don’t really have a clue.” I thought, wow. And it’s so true [laughs], I couldn’t argue with that. So I mean, all of the elements were in place. All of the numbers were in place, all the benefits in place. After we had done a conversion in the warehouse and basically cut our inventory by over, by half, basically, cut it in half in two‑and‑a‑half months. We’re walking through the plant, the owner and I. And Bob says, “Well, Paul, I don’t know where you got this Lean stuff, but it really works.” There you go, that’s support but not leadership, I would say.

Joe:  You talked about the change group structure. Can you tell me and explain that more to me?

Paul:  Well, understand that this was happening in the late 1990s, and no one really knew exactly what Lean was. We all of course had heard of JIT and trying to know what that means. We started having brown bag lunches where we actually bought a couple books. This is people from engineering. We didn’t have manufacturing/engineering at the time, but we had some engineers, and my production planner and myself, and a couple production managers. We would read these cases in early books and kind of talk about them at lunch, and that kind of developed awareness. Then I got permission to teach a class. I called it Advanced Manufacturing Techniques, and I taught that in‑house. It was basically elements of Lean, and again, I taught this to the same group. So, we did it at lunch. What we did is, we brought in pizza or something, and we had it on Tuesday and Thursday, and I had half the crew on a Tuesday and half the crew on Thursday. We made it a hour‑and‑a half. This way, by bringing the lunch they give you their time, as it works. So if you bring them a pizza, then you can ask a guy to sit through lunch and a class and it’s not uncool.

I gave the same class twice a week, and I treated it as a serious class. I gave outside reading, tests, exams, and so forth. We included some statistics and some Shingo writings and so forth. That kind of developed awareness in middle management. So then I was surprised by a few of the guys that I didn’t expect much out of who really stepped up in the class.

They became leaders when we started doing Kaizen; it was very scary to do a Kaizen, our first Kaizen. We had no idea what we were doing. We had no consultants and no budget for it. We didn’t even talk with the owners about it. We just decided, OK let’s try this. Kind of scary and the first Kaizen we did was really just a 5S Kaizen in the department where there weren’t any measurable results other than it looked cleaner and better, if you will.

We found–I joked earlier about maintenance tools–we actually found a lot of maintenance tools. Our Maintenance would say, “They stole our tools,” and all this, but what happened is the bell rang, and Maintenance walked out of the job and left some tools around. I don’t think that’s too uncommon. We did a 5S and it wasn’t much to be excited about.

The next department that we went to, we transformed in from a basically a huge batch operation into a cell. In that case, it was dramatic. We changed three days inventory into about an hour’s inventory or less. Everybody, the whole place stood on end when we did that. We freed up a relatively huge amount of space without that entire inventory, as you can imagine.

I developed a three man team to drive the change.  This is very important. This is the first time I was able to get a manufacturing engineer; he came out of engineering, basically to step sideways into manufacturing engineering. I had one guy who did documentation, and we attached a maintenance person to this team as well.

So we had a guy who understood about as much about Lean as I did. We had a documentation guy who came out of the quality department, didn’t know anything about Lean but he was fully bilingual, as I am, and most of our workforce was Hispanic and not all of them were bilingual. Working in different languages was part of what we needed to do.

Then we also had this maintenance guy who was attached, who I took out of maintenance. So at this time I was the Plant Manager, essentially, and Vice President of Manufacturing. We had the cellular change and we were able to relocate electrical drops and so forth with the help of this maintenance guy. And that became our core structure. And that Lean Team, if you will, rolled the changes. Three guys could drive the change throughout and then we could leave with our documented work constructions, photo documented and really leave our mark.

In that case we did a paper airplane exercise. No one had ever heard of one‑piece flow, it was very scary. One thing about doing a paper airplane exercise, you can always put the troublemakers and the disbelievers in a few of the chairs. I am sure most of the listeners are familiar with that. There are a few tasks in that exercise that are little bit more frenetic than other tasks, and so you put the influential disbelievers in those chairs and you have fun with them and pretty soon they are on your team and they’ll say, “OK, let’s try it.”

Literally we left work on a Friday with this huge batch, operational in three days of inventory, and then we came back on Monday with a little cell and all this inventory we basically moved out of the space and then weaned it down.

Within a week, basically, since we didn’t have to make a lot of inventory, we had a few days that we could continue moving in to our new digs, if you will, and painting and making it look right on Monday and Tuesday while we worked off the extra inventory. Wow. That became a model for the rest of the plant.

Once you have a few successes it takes off.  Start with a few easy 5S type kaizens and then you’re on your way, I would suggest.

Joe:  What was your largest hurdle to overcome?

Paul:  Materials group was living in MRP Land and we kept having troubles with materials, so what we did is start a Kanban system throughout the plant for all of the re‑supply of the floor. I worked and I worked and I worked. I was actually good friends with the VP of Operations his title was, basically, materials manager and a lot of other hats. The plant was humming but we kept having problems with materials and finally that gentleman decided to go and develop his own business in insurance. The owner came to me with him and they said, “We want you to take over materials. We’ve seen what you’ve done in the plant.” No problem. We put in the Kanban system with our vendors and we chopped that inventory in no time.

Soon we had vendors bringing in their other customers saying, “Hey, customer, can’t you be like Dimension One and do it this way? Look how great it is.” We ran out of stock‑out problems and we greatly reduced our inventory. We freed up all kinds of space. You can only do so much as middle manager, because you’re not the boss. You can show people what could be done, you can teach them, you can offer to help them, but at some point it really does help to be the boss.

Once I’m the boss of the warehouse, of purchasing, it was like OK, good. They had seen enough. I visited another company with them to see what a vendor Kanban situation would look like. They bought in. In no time they were singing the song. Leslie May, who became my Purchasing Manager, I’ve seen her do presentations at CSEMP’s national conference on how to do a vendor Kanban.

This is something we just did ourselves. People are willing to learn if you give them an opportunity and they’ll own it if you let them.

Joe:  I think that’s what’s so important because I always hear this top‑down driven type culture and these mandates that we’re going to be a Lean company and it’s got to be the vision from leadership and it’s got to be this saying we’re going to become Lean and everything and I flat out don’t think that works. In certain circumstances it might work, but…

Paul:  Of course, it does work but let’s agree that middle management makes it work. So if the top management says, “This is how we’re going,” and he’s able to get alignment within his company top to bottom, then he’s got it. The real problem is alignment. If you say you’re going to change but you don’t change your structure…I mean, Lean is all about turning the triangle upside down. If you look at a triangle, a normal triangle with the apex at the top, this is in a people‑centered organization, the classic organization where the boss tells everybody else what to do. If you are continuously, that’s how all your information flows, and then what happens is it’s hard to drive change through that organization. You’re going to tell people what to do, but they may or may not buy into it. They’re kind of waiting for you to go away or for the wind to change.

Now, if you can–through continuous improvement, through Lean techniques–if you can switch that, flop that triangle around so the apex is at the bottom, now what happens…you have a flat part of the triangle at the top, if you will. You have a situation where the supervisor in saying, “OK, I need you to make green ones, 200 of them, and then I need you to make a bunch of red ones, 200 of them.” Instead, now the conversation is, the supervisor is at the bottom of the triangle, and the center of work is now the operator. Now the conversation is, “OK, operator, how can I help you do your work better? How can I help you improve your operations? How can I help you do a better job?”

Suddenly, the conversation has changed and it will never go back, because the operator goes, “Oh, well you know, my back hurts every day. If you could raise this desk another two inches, this table, or if you could improve my chair, they’d give me a back to my chair, I’d be a lot better.”

Now the operator does 15 percent more work and their back doesn’t hurt and now, all their friends, they want you to pay attention to them, too. Because, you know, “You helped Mary, why don’t you come over and look at me? I need a better light over here. And you think I could get a new knife? This one has a bad blade, and it takes me forever to cut this item.”

You’d find out all this stuff that you never knew. If you just walk through the area and look at it, everyone looks busy, everyone looks like they know what they’re doing, and no one tells you what they need, because no one ever listened before, why should they listen now? You don’t want to be a complainer. That’s middle management right there.

Joe:  Yes, and I think you hit the nail on the head, because I guess I would summarize that you become an enabler of work.

Paul:  Well said, you’re an enabler instead of a taskmaster.

It’s totally different. I mean, here’s how Taiichi Ohno set up Toyota. He basically says, “Look, the Kanban is the production control system. It’s a pull system. It’s all based on demand. It’s not based on what the boss says to do today. Your boss is the customer. If the customer orders black wire, you strip more black wire. If the order flow switches over to short red wires, you’re going to strip more short red wires. You don’t need a list to tell you what to do. You’re going to refill Kanban; you’re going to use your pull systems to tell you exactly what to build, all the way down to the vendor.” This is a cascading effect. If you’re running around with pieces of paper with hot lists, and all this stuff that has become American manufacturing, that’s all about being a boss and being a bully. “I need this right away! No, stop what you’re doing, do this instead!” The worker thinks you’re an idiot, because you keep stopping him and starting him. Instead of working for the customer, now he’s working for what he thinks is your whim. There’s a lot of distrust and a lot of rolling their eyes whenever the boss comes around with his last piece of hot sheet, his latest piece of paper. They’re not stupid. These people have families, they have lives, and they make the same decisions on a daily basis as you and I. You shouldn’t belittle them; you should put them on a pedestal.

Joe:  What you’re saying is common sense, which Lean is basically, common sense..

Paul:  It’s not that common, it’s not that common, buddy.

Joe:  Yes, right, but it’s not that common. Why not?

Paul:  Well, it goes back to, OK, to where we started the conversation. Middle management got there by being the best operators or the best at doing it the way it was, and they cling to that out of fear. They’re good at it, they always came up with a solution where they were able to meet that deadline or save that order, and so that’s your man. Your relationships, and you have your go‑to guys, and your go‑to methods, and that’s generally how it works. Labor has worked it out, and they’re good with that. Until people see the vision of what can be, until they see anything different, why should they change? Just saying it’s going to change from top management doesn’t change it. You need to show them that it’s different. Who’s going to do that but middle managers? It’s not done in the classroom; it’s done on the shop floor or in an office.

You know, I had a situation…I didn’t realize what was going on but this is, again, common sense. When I first joined the same company, Dimension One, the receptionist kept coming back…I had the first aid cabinet right by my desk, and the receptionist kept coming back and getting aspirin all the time. I mean, it was like a ritual.

I walked up to see her once at the front, and what happened is, she was handling the door and also on the phone, and on the computer. We had her multitasking, and this lady had a headache. OK, why? Well, she was cradling the phone on her neck, and she was looking at a computer that was down low and she was all scrunching.

Her desk was totally not set up for work. All I did was, I got a couple of books, I put them underneath her monitor and it lifted them up. And I ordered her a headset, at the time it was $50 or $70. All of a sudden her headaches went away, and she was feeling a lot better. She came back a couple days later, a week later or so and said, “Man, thanks a lot. That really makes a big difference.”

I thought, “Wow. It wasn’t any big deal.” I didn’t think anything of it at the time, but that’s an example of looking at your operators who are not set up to be successful. Here she was in pain all the time and really didn’t feel empowered or didn’t know how to improve her situation. She didn’t work for me, by the way. She was the receptionist; I was just helping her out.

Joe:  What I find common, though, is when someone else looks at something and from a distance, they see the obvious.

Paul:  Oh, yes. Her boss walked by her every day. “How are you doing today?” “Oh, I’m great.” “All right, well good. Good to see you.” She’s not going to complain unless you ask questions. OK, now if the same boss could ask the question, “What can I do to improve your situation? How are you doing? Are you comfortable? Does that chair work out? I see that you’re kind of on the phone a lot, but would it help if I got you a headset?” I mean, her boss could’ve done the same thing, but her boss wasn’t asking those questions.

Joe:  When does Lean not work? When would you say management or the structure of an organization would prevent you from starting?

Paul:  I can tell you, because I tried it another company, and that’s how I became a consultant, I resigned from another company where I couldn’t get it to do one. Here’s the difference. If you have a culture of fear, it will not work. The culture of fear, what I’m speaking to is, you have to be allowed to experiment, and you have to be allowed to make mistakes. Like my old boss at Dimension One where I was very successful, if I made a mistake…And I made plenty of mistakes, believe me, I make enough decisions in a day, probably several of them are wrong every day. Some of them were big wrongs. Some of them were expensive wrongs.

But anyway, Bob, what he said to me is, “What did you learn?” I mean, if you’re going to make a mistake, the reason to make it is to learn from it. There’s no other reason to make it. Otherwise, it is just bad. Let’s at least salvage something out of it, let’s learn. Let’s not make the same mistake over and over again. Sometimes you could make it twice, even. But let’s not make it over and over again. You have to be allowed to make the mistakes.

One of the best things I did was, when I first joined Dimension One, I had this idea, “I know, let’s make these carts.” We had plumbing hoses on the ground, and I thought it was making the product dirty, and I thought it was important that we not do that. We didn’t have very many maintenance resources, and I really put it on a high priority to make these little carts for me and so forth.

We put the hose on the carts, and I went out on the floor, after we had these carts, I was all proud and stuff. They were using the carts, and everyone was trying to be happy about it and smiling and stuff. A week later, I went out there, and I could see that they were kind of struggling with the carts. They just weren’t working very well.

I went to the supervisor and I said, “Well, these carts are not working out very well, are they?” And he kind of looked at me and he goes, “No, not really.” I said, “Well, let’s get rid of them then.” He goes, “Oh really?” I said, “Yes, that was a stupid idea.” They dumped the carts right then and there, and everyone was relieved. It was because I was able to say, “Hey, I made a mistake. It’s OK.”

Your boss has to allow you to make mistakes. That’s the support you need. You don’t need a lot of money, but they have to be patient and, in order to do that, in order to get that, you need to communicate with your boss; you need to share your manufacturing vision with them.

They need to know that you have a plan. If you have a plan and you are moving forward, even if you misstep somewhat, you’re OK. You need to manage your boss. The first thing you do when you are managing your boss is you make sure that if they look good, then you know that you look good. So you take care of their agenda first. You find out what they need and you give it to them.

Then you are allowed to shape the agenda. After you take care of their needs, you can start taking care of yours. If you report on a weekly basis, for instance to your boss, you say, “OK, here are the four projects you asked about. Here is the status, and I am also doing project number five and six.” You have now got tacit approval to work on projects five and six, and those might be your lean transformations and you put them in easy to understand language.

What will happen is, every week they hear now project five and six has moved up a little bit. Why, because you are taking care of their agenda. They’ll let you know if they don’t want you working on something. As long as you have that communication and you keep on working on it, “We finished project five, we did this five best in the plumbing department or in the order entry area and I would love for you to come out and see it sometime,” it’s likely he’ll show up, or she will show up.

You have an opportunity to shape the agenda by your own communication as a middle manager, to develop a reporting system and do it weekly and start managing up. If you manage up, you can get the support. If you have the support, you can make the transformation. That’s really what it boils down to.

Joe:  I think that’s great advice because people sometimes forget that you got to make your boss look good, that’s part of it, OK.

Paul:  Oh yeah, and never say anything bad about him. You need to build it up. You need to clearly be part of the team. You can’t say bad things about other people too. OK, in order to be effective in an organization, as a middle manager yourself or a senior manager, you have to be a positive force. You have to add something to the mix. You need to work on your own skills first. You need to work, and make sure that you know something about Lean, if you are going to use Lean as your vehicle. You need to have business literacy, you need to understand how your company makes money and speak to that. You need to help other people, especially if you are looking at working across the organization. If you want engineering to help you, you’ve got to help them. So I look at it as team effort. If you are in a relay race and you are handing off the baton, if it falls on the ground, you both lose.

I always go above and beyond what I need to help my fellow managers. I make sure all my people do it as well. Often times they complain, “Oh they are always this, and they are never that.” It doesn’t matter. You always help the other people, because it does come around. By always helping the other people, be it in engineering or quality or administration, sales– whatever it is, what will happen is when you do need support, those guys are there for you.

You will eventually need their support, because remember you are not the boss. You are not the CEO. You are not the owner. So why would these people cooperate with you if you don’t help them? They don’t see what’s in it for them. To be an effective middle manager is way more than just doing your own agenda. It’s helping others fulfill their agendas, and it’s making sure above and beyond that your own boss has their agenda filled, and that you communicate with them on a regular basis.

What will happen is, eventually you’ll get the nod, like in the case where the operations VP left, the CEO comes down and says, “Hey I want you to take this over,” and bam! We were ready to go. We turned that thing around in no time. It wasn’t like, “Well, what do I do now?” I knew what to do. I just couldn’t get the other guy to do it.

Joe:  Hey it’s great. I can go on and on Paul, OK. This is a great conversation. But is there something you would like to leave everyone with, to kind of sum up things a little bit here?

Paul:  What I would say is, treat people with respect at all levels and understand that the middle managers, they are trying to do their job. If you can show them the way, you will change lives. Every time you walk on the floor, people will smile at you. They know the difference. You don’t have to win the Shingo prize to feel the success. I have never been more proud in that organization, that I really was instrumental in lifting those people up where they were empowered to improve their own workplace. They loved it. They were more comfortable and more productive than ever. You could argue that that company would have never made it had they not gone Lean. This recession has been tough on everybody.

What we are really talking about is improving the workforce and the workplace. When you improve the workplace, you will improve the bottom line. There is no question about it. You just have to make sure that you handle your boss’s agenda, that you help your other managers at your own level and that you have a plan moving forward to develop your organization, develop your people and they’ll do you right. I don’t have any doubt about that.

Joe:  What’s the best way for someone to get a hold of you?

Paul:  They could check out my website, or just pick up the phone and call me at 760-500-6006.  I love to share ideas with people, talk with people, and work for people. Let me know how I can help them out, you bet.

Joe:  OK.

Paul:  Thank you so much.

Joe:  OK. Well, I appreciate it very much, Paul. It’s a very great conversation. This podcast will be available on the Business901 blog site and the Business901 iTunes store. So thanks again, Paul.

Paul:  Well thanks very much for your service. I have checked out a couple of your podcasts. Your podcasts, they’re really great, a great resource on the Web. Thank you very much.

copyright Paul Yandell and Joe Dager


Fail Fast

We have all heard the expression “eat your peas”.  Simply stated, it means to do the tough tasks first, and then enjoy the rest of the process.   This applies to business as well.  Doing difficult tasks first eliminates uncertainty and clears the way for easy success later.  Cutting your losses early has the same effect, freeing up time and resources for other important tasks.

Cumulative effect of failure

Most people feel pretty good about performing at the 98% level – 2 failures per 100 attempts.  For an office worker processing 20 orders a week, that would be 2 errors for the entire week.  Not bad, right?  Probably not, if viewed by itself.  Now imagine the order processing is a 9 step process, involving 9 different workers or departments, each with the same 98% accuracy rate.  The table below shows the cumulative effect of a 2% failure over the 9 steps.  The cumulative effect is 83% acceptance rate, or a 17% failure!

Table 1:  cumulative effect of failure % good 98%           $/step $100
Process step 1 2 3 4 5 6 7 8 9
Acceptable parts 98.00 96.04 94.12 92.24 90.39 88.58 86.81 85.08 83.37
cumulative cost $100 $200 $300 $400 $500 $600 $700 $800 $900
cumulative cost of failures (out of 100) $200 $792 $1,764 $3,105 $4,804 $6,849 $9,231 $11,939 $14,963

Even worse, if each step costs $100 and each the errors are not caught until “final inspection” at the end of the process, the rejected processes cost of each of the failures is $900, or a total of $14,963 for 100 orders processed.   An effective “Check Do Check” program, where each process auto-inspects and errors are not passed forward for further processing, keeps failure costs at a modest $1,800.

Defect rates as low as 2% or higher are not uncommon in business, especially in office environments and processes with high variation.  Years ago silicon wafer fabrication had failure rates 30% or higher (I only hope it has improved)!  Long processes with such high losses force companies to build extra product, or “just in case” inventory, with all the associated costs of both time and money.  So of course all efforts must be made to control processes and eliminate failures (using both Lean and Six Sigma methods).  But some processes remain problematic, either due to difficult materials or a lack of process control.  What then?

The Importance of Failing Fast

Let’s consider a very difficult stage in the process, with low success rates.  Often the most difficult task, the one with the highest opportunity for failure, is performed last, the thinking being this gives us the best opportunity for success “having done everything else correctly”.  The problem with this thinking is that, though comforting, failing at the tail end of a long process is far more expensive, as measured in both time and money.  To illustrate this, Table 2 below shows the same success rates for processes 1-8, but step 9 has a success rate of only 60%.  At process step 9, 40% of products fail, at a cost of $900 each.  Cumulative failure goes from 17% in the above example to 49% as a result, and cost of failures jumps to $44,059.  Cumulative costs of “Check Do Check” are somewhat under control at $5,600.  Where should we perform this difficult task?

Table 2:  Hardest process last % good 98%   critical process (step 9) 60% $/step $100
Process step 1 2 3 4 5 6 7 8 9
Acceptable parts 98.00 96.04 94.12 92.24 90.39 88.58 86.81 85.08 51.05
cumulative cost $100 $200 $300 $400 $500 $600 $700 $800 $900
cumulative cost of failures (out of 100) $200 $792 $1,764 $3,105 $4,804 $6,849 $9,231 $11,939 $44,059

The Process shown in Table 3 has the critical, high failure process first.  The failure rates are the same, and, unchecked, the cumulative cost of failure remains $44,059.    However, if the product is inspected after step 1, cumulative losses can be controlled to total $8,830, saving a whopping $35,229 or 80% the cost of failure!

Table 3: Fail Fast – hardest first % good 98%   critical process (step 1) 60% $/step $100
Process step 1 2 3 4 5 6 7 8 9
Acceptable parts 60.00 58.80 57.62 56.47 55.34 54.24 53.15 52.09 51.05
cumulative cost $100 $200 $300 $400 $500 $600 $700 $800 $900
cumulative cost with inspection at step 1 $4,000 $4,240 $4,593 $5,054 $5,619 $6,283 $7,042 $7,892 $8,830

How is this possible?  This is due to the fact that we add value to each processed part, be is good or bad.   Doing the most problematic process early and inspecting parts at that time ensures we cut our losses early and don’t throw good money after bad by further processing reject parts.  An added benefit of cutting losses early is an improved ability to plan for time and resources – the relatively higher reliability of remaining processes helps control “just in case” inventory and the associated costs.

Lean is all about speed.  Deming’s PDCA pushes experimentation (and its associated failures) to the lowest level possible.  Toyota Kata is based on rapid experimentation and failing fast.  I’ve just put some numbers to it.  Fail Fast.  Eat your peas first!

Copyright 2013 Paul Yandell.  All rights reserved.


Business Literacy

Everyone in the company must know how the company makes money and what their role is in it.  As logical as this sounds, I am amazed at how few people see financials of their organization, let alone truly understand them.  With the exception of payroll, I believe a company should share financial results to increases stakeholder awareness and interest in the success of the company.  Any payroll information other than in general terms or accumulated data only hurts relationships.  Granted, a production operator doesn’t have the same information needs as a department supervisor, and a Warehouse Manager doesn’t need to know much about the way the company is financed, but giving them basic financial information on the company and how their efforts help the bottom line empowers employees to look for ways to improve the company.  For many companies, this will require some basic training (which can be tied into the budgetary process) on financials.  If you do have access to your company’s financials, do your best to understand them.  Accounting is the language of business and should be studied, at least the basics.

Financial reports can be confusing at best.  Many small companies jealously guard their financials, for fear people won’t understand the need for reinvestment and clamor for raises rather than building the business.  Most large companies “roll up” their results to the point the numbers are unrecognizable.  At the division level, one of the goals may be to maximize inventory turns (and thus return on assets); while at the corporate level the same company would report large inventories as a good thing, explaining how high inventories are maintained in order to help “quickly meet customer demand”.  Don’t laugh, I’ve seen it.

Key process indicators (KPI’s) are those numbers which tell the quick pulse of the company, such as daily sales and invoicing, inventory turns, or average day’s accounts receivable.  These help top managers make sure the flow of the business is good, and should be checked weekly, if not daily.  Some managers want to wait until month end to see the numbers, but I maintain that the longer you wait, the more difficult it is to make timely corrections as the business traverses choppy waters.  On the other hand, most variances smooth out over time.  Having a strong reaction to daily fluctuations can really be dysfunctional.  Just as the company may have 5-6 KPI’s Top Managers watch, each department should have its own set of KPI’s.  They should be charted over time, and include corrective actions for those areas that are falling short.

The Power of Sharing Numbers

Imagine that a company manufactures plastic extrusions at 96”.  Normal operating procedure is to cut the extrusion at 97” and then re-cuts the piece “exactly” at 96”.  Waste is just over 1%.  If material costs 50% and profits are 10%, then trim waste is .5% of sales, and 5% of profits.  In a $10MM (sales) company with $1MM profits, waste is $50K/year.  The operator has no sense of this.  She is following her standard procedures and has no clue she is throwing away more than her salary every year – how could she?

Now let’s take it further.  Share these numbers with the operator and she will be horrified.   Share this number with a middle manager and she will look at her shoes and talk about “fixing it” – all the while feeling defensive and that she is following the procedure she was given.  Share this number with an owner and she will be angry and look for someone to blame.  What is the appropriate response?  Sharing the numbers gets employees at all levels thinking about the waste and how they might reduce it – with the winner being the entire company.

Accounting Primer

There are two main financial reports:  the Balance Sheet and the Income Statement.  The Balance sheet is a snapshot of the company’s health on a certain date.  Key components are assets (things of value, such as plant and equipment, inventories, cash, and receivables), liabilities (money owed others, including banks and vendors) and shareholder’s equity (net value of the company).  Assets = Liabilities + Shareholder Equity.

Working Capital is the key to liquidity.  Working Capital is calculated as Current Assets (cash, short term accounts receivable, and inventory) minus Current Liabilities (short term accounts payable, accruals, taxes payable, and bank debt).  Working capital grows as more money is invested in the company or earnings are retained.  So long as a company has enough working capital it is in good shape to pay its bills.  Hence the saying Cash is King.

As its name suggests, the Income Statement compares revenues and costs, ultimately showing net gain (or loss) for a given period of time.  First item listed is revenues, followed by variable costs (cost of goods sold or COGS) and fixed (overhead) costs.  Here is a cost structure for typical Manufacturing, Retail, and Airlines businesses (in terms of % sales):

Typical Costs
Mfg Retail (WalMart) Airline (Southwest)
Variable costs
Direct Labor 10%
Materials 53% 76% 39%
Fixed and Overhead
Indirect Labor 10% 10% 26%
R&D, Rent, Utilities 20% 9% 31%
Profit 7% 5% 4%
total 100% 100% 100%

Gross margin is calculated by the formula (revenues – variable costs)/revenues. Gross margins for the above manufacturing example are calculated as (100-(53+10))/100 = 37%.   That means 37% of each dollar sold goes to covering fixed costs.  Once fixed costs are covered, 37% of each dollar sold goes to profit.  Breakeven sales quantity is the $ sales value where all fixed costs are covered, given by the formula $sales x gross margin = fixed costs. Gross margins vary widely – typically higher for specialty manufacturers and service providers and low for high volume industries.

The overall health of the company is measured by the relationship between the income statement and the balance sheet, typically by what is known as ROA.  ROA is the relationship between Return and Investment given by the equation ROA = profitability/ (working capital + net fixed assets).  ROA is tempered by risk- an uncertain future discounts any investment’s potential.   If return on assets, adjusted for risk, is lower than other investments, the company will have trouble raising equity.  Depending on the investment climate, ROA of 4-8% or better may be considered a good investment.

No company has ever gone bankrupt for losing money.  Bankruptcy only happens when a company cannot pay its bills.  So long as someone will loan the company money (Liability) or invest in the company (for a piece of Shareholder Equity).  Start-up companies such as and biotech startup companies can operate for years without making a profit because of their ability to raise equity on the capital markets to pay their bills.  On the other hand a profitable company (income > costs) that cannot collect cash enough may not be able to pay its bills and literally grow itself into bankruptcy if creditors demand payment.

How to view the financials

All expenses should be viewed as both the actual $ amount and as %Sales – this smoothes out much of the seasonality and other variations as production and consumption vary.  The best way to look at financials is with a reference – preferably the previous year’s results.  Comparing year to year helps put the numbers in perspective.  As with most indicators, the most important thing when viewing financial information is to truly understand what is driving changes in the numbers.  If materials expense has risen from 52% of sales to 54% of sales – that is a clear indicator of problems in the supply chain and must be addressed. If KPI’s are changing, such as # days reason outstanding increasing from 30 to 40, there must be a reason.  Understanding that the rise is due to an increase in export orders, which have a longer line of credit than domestic orders, for instance, tempers the response.  Rather than focus on someone not doing a good job in collectibles, the task becomes one of how to change terms for exports or get bank help carrying the note.

The sales volume (express as units sold) at which the company breaks even is called the break-even point.  Profits are $0 at the breakeven point.  The breakeven point is calculated by the following formula: Break Even Point = Fixed Costs / (selling price-variable costs).  I understand “Black Friday” – the day after Thanksgiving known for huge early Christmas deals – got its name from being around the breakeven point for most retailers.  Until Thanksgiving, all sales merely covered costs.  Profits for those retailers were a function of sales after Thanksgiving.

Financial Analysis

Financial analysis needs to happen company-wide.  Sophisticated financial analysis should be the province of a few, but everyone in the appropriate department should be plugged in to the key issues:

  • How many salespeople know which accounts are most profitable for the company? Least profitable?  A careful analysis will show a number of “good” accounts are barely profitable – in part due to “special handling”, discounts, and freebies over the years that may or may not be merited.  We often go overboard to satisfy the squeaky wheel – at what cost?  Most commissions are structured around gross sales, not net profit.  Perhaps it is time to fire a few customers.
  • Which product lines are growing? Shrinking?  Why?
  • Which product line is most profitable? Why?  New products, often the life blood of companies, often start with higher overhead and launching costs.   At what point does it make sense to keep investing in some of the older, standard products?
  • Which territories are growing? Shrinking?  Why?  What are we doing to change the trend?
  • Which products are the easiest/cheapest to make? Why? How can we leverage these?
  • Where do we have the most scrap and how can we reduce it? Same for defects.

Now that you are familiar with the basics we can turn to Targeted Cost Reductions (see separate blog).

Copyright 2013 by Paul Yandell.  All Rights Reserved.