today I am going to share with you the most effective and possibly the simplest technique to improve your process. Use this tool properly and you could increase capacity, decrease costs and improve plant performance instantaneously. You probably have this tool at your fingertips and all you need is to do is learn how to use it.
The humble 8 1/2″ x 11″ sheet of paper (or 11″ x 17″ for those of you with big processes) is perhaps the simplest, most powerful and most versatile tool known to man. Using nothing more than a blank piece of paper and a writing implement we can quickly analyze any process and identify multiple opportunities for improving the process. Stick with me for a few minutes and I’ll guarantee that you will see results.
The Black Box Technique
Here is what I would like you to do
- Arrange the blank sheet of paper landscape on your desk and draw a large box in the middle of the sheet. Inside the box, identify the process. The process can be defined any way you desire and it can be a single operation in the plant or the entire plant – your choice.
- Label the sides of the box as follows:
- Left Side – Raw Materials
- Right Side – Product
- Top – Processing Inputs
- Bottom – Waste Outputs
- Calculate the Ideal Process Efficiency
- Begin with the Right Side – Product. Draw a single arrow leaving the box and identify it as the product. It is important to carefully identify the quantity of product produced in whatever measure you desire. Typical could be pounds, liters, 1000 cubic feet, tons, etc. Convert this quantity into a dollar value by multiplying the product quantity by the sale price. Caution – the sale price is not Work in Process (WIP), it is the actual price you would receive if you sold the finished product. Vfp
- Move to the Left Side – Raw Materials. Draw an arrow entering the box for each raw material. It is very important to consider only the materials that eventually become the product and not materials that are part of the process. For each raw material, identify the quantity required to produce the identified product quantity. Convert each quantity into a dollar value by multiplying the product quantity by the purchase price (delivered to site including any taxes). Add all of the raw material costs together. Vrm
- Subtract the raw materials sum from the finished product value. Divide this value by the finished product value and multiply by 100% to obtain the Ideal Process Efficiency. IPE = ((Vfp – Vrm)/Vfp))* 100%. This would be the expected efficiency expressed as profit per dollar of sales. This assumes no transaction costs, no process costs, no energy costs, no waste costs, no financing costs, no transportation costs, no taxes, no labor costs, no permits, no fees, no facility costs, no equipment costs, no maintenance costs, no spoilage costs, not storage costs and no sales costs. The Ideal Process Efficiency is affected by only two factors, the cost of raw materials and the price of the finished product.
- Now let’s consider the Processing Inputs. You’ll need several arrows for these and if you write large you will probably run our of space. Please note that the way I define the categories is probably different that the way your cost accounting team would do it. The typical unit-costing methodology used by many companies has some serious flaws that go well beyond the scope of this method.
- Equipment Costs – If we assume that the equipment exists and that if this process is not performed on the equipment then the equipment would be idle, then the only equipment costs that can be attributed to this process are the routine maintenance and cleaning costs to return the equipment to the same condition after the process as it was before the process. These are true “variable costs” for equipment usage. Veq
- Labor Costs – Likewise, if employees are going to be paid regardless of the status of this process then this labor cost cannot be attributed to the product. If additional labor costs are incurred or if overtime needs to be paid, then these costs are “variable costs” for labor usage. Vlab
- Energy and Utility Costs – These costs should be captured as “variable costs” for utilities. Utilities include electricity, steam, heating and cooling streams, compressed air, vacuum and incremental ventilation. Veu
- Processing costs – This includes the costs of disposable filters, cleaning chemicals, wash water, testing chemicals, reagents, solvents, catalysts, disposable Personnel Protective Equipment, purging gases, bags, boxes, etc. Also include any costs for moving WIP through the plant. Vpr
- Financing costs – This would be the interest paid on the cost of the raw materials for the duration between payment for the raw materials and collection of payment for the product. Vint
- The total Processing Inputs equals PI = Veq + Vlab + Veu + Vpr + Vint
- Finally, let’s consider the waste outputs. There are a number of wastes that are found in most processes. Each of these wastes can have significant costs.
- Feed Impurities. The quality of the raw materials is very important. Raw materials with high impurities will result in products that have more waste. Vfi
- Processing Equipment Waste. This is the waste that adheres to the process equipment when the process is complete and needs to be removed via the cleaning process. This is lost revenue and can actually add profit if some way can be found to recover this lost product. Vpew
- Off-Quality Waste. These are the rejected batches, the batches that cannot be recycled or cannot be used for some other purpose. Again, reduction in the Off-Quality Waste can directly improve the efficiency of the process. Voqw
- Waste Treatment. This is the cost for treatment of the waste (air/water/solid). Vwt
- The total Waste Outputs equals WO= Vfi + Vpew + Voqw + Vwt
- The Actual Process Efficiency APE is the APE = ((Vfp – Vrm – PI – WO)/Vfp))* 100%
This is a straightforward and very simple way to identify some of the key opportunities to improve efficiency. There are two key assumptions that make this so powerful:
- We eliminate the cost for equipment. While some may consider this as inappropriate, the value of the equipment and the equipment loading has absolutely nothing to do with the cost of the product. For example, similarly performing equipment could be new or could be 100% depreciated.