Are Your Losses Putting Your Company at Risk?
Few organizations truly understand the risks they face—risks that could potentially cause the company to suffer severe setbacks or even fail. The first thoughts of business-related risk usually revolve around catastrophic failures or events such as explosions, fires or floods. These risks are obviously quite serious, but can be covered by insurance policies that will at least ensure continued operations should an event occur. Equally significant are the risks that cannot be covered by insurance and often go hidden or ignored until it is far too late.
Expense-related risks generally fall into three categories: direct material cost increases, scrap and rework, and energy consumption.
Direct materials cost increases are often cited as a reason for financial loss. Few organizations recognize that these costs are controllable and should not pose a risk to the company. The problem is that no one is really trying to control materials costs within the operation. Instead all of the focus is on controlling the procurement cost. For example, a dairy products plant unknowingly permitted habitual substitution of more expensive ingredients in recipes; used cleaning methods that led to millions of dollars in contamination losses; incurred losses of entire batches of product because of scheduling problems; and consistently produced over-weight products. The net result of these losses increases cost of goods sold by more than 50%. Direct materials losses resulting from poor practices, lack of supervision, and a failing work culture contribute heavily to the rising costs in far too many organizations, and often go unnoticed.
Scrap, reclaim and rework represent another significant risk that, while recognized, goes uncontrolled in most organizations. The amazing part of this category of loss, or risk, is that few people acknowledge this as a true loss even when confronted with the fact that about one-third of a typical manufacturing or production facility’s footprint, workforce and costs are consumed by this work classification. The loss of revenue, combined with the potential loss of market share caused by both quality and delivery issues, creates a significant risk – one that is absolutely controllable.
Energy consumption and its associated cost represent another significant risk. Studies conducted by a variety of industry-specific organizations state that energy consumption is 10% to 20% higher than necessary. Most of these losses are attributed to operating and maintenance methods. For example, one refinery wasted $6.3MM annually to operate its slurry pumps. Instead of limiting the control range of the pumps, the operators constantly varied output from full-open to full-closed, doubling the required horsepower to operate the pumps. Compounding the unnecessary increase in power, this mode of operation added $4.0MM in annual pump repair costs.
Employee-related risks must also be considered. Operating mistakes resulting in catastrophic failures or measureable downtime are generally acknowledged as potential risks, but few people recognize that many, if not most, of these are caused by training, morale and procedures deficiencies that are the true risks. Unless these underlying risks are recognized and effectively resolved, the potential for serious risk will always be present.
Organizations also put themselves at risk by operating manufacturing or production systems at less than their designed rate. Unchecked, operators sometimes elect to arbitrarily change an asset, line or system’s operating “sweet spot.” This can, and often does, reduce throughput by 50% or more. Expand this failure to follow procedures to the entire operating spectrum, e.g. startup, speed transients, changeovers and shutdowns, and employee-related risks can easily make the difference between profitability and bankruptcy. Few organizations fully understand the absolute necessity for universal adherence to value-added standard work and business activities. Instead, they live with, and often encourage, employee freedom to use variation in the way work is executed and decisions are made—not recognizing how the resultant variability and associated losses put their businesses at risk.
Not everyone perceives the correlation between these limiting factors and risk but it is clearly there. The waste and losses described result in a market position that is at risk to competitors who have recognized and resolved them. In a global market where high-quality, low-cost products are immediately available to consumers, inefficiency is a death knell manifest as lost market share, revenue, operating profit and ultimately business continuation.
Are your losses putting your company at risk? Operations that acknowledge the risks of wastes and losses I’ve described, and take positive actions to correct them, can substantially improve their market position and operating profits.
Keith Mobley has earned an international reputation as one of the premier consultants in the fields of plant performance optimization, reliability engineering, predictive maintenance and effective management. He has more than 35 years of direct experience in corporate management, process design and troubleshooting. For the past 16 years, he has helped hundreds of clients worldwide achieve and sustain world-class performance. Keith can be reached at kmobley@LCE.com.
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