Thursday, November 24, 2016

Total Cost Industrial Engineering - An Illustration

Total cost industrial engineering is determining  cost reduction target at the total cost level of the organization and achieving the target by using industrial engineering methods and techniques in various departments of the organization. Total productivity management is the name under which it is promoted.

The illustration is based on  Top-down Production Management: A Recent Trend in the Japanese Productivity-enhancement Movement by W. Mark Fruin and Masao Nakamura, published in



Step 1. Corporate goal setting for cost reduction.  Set  company-wide numerical goals and targets.

Step 2. Top-down explosion process. Explode the corporate-level goals and targets systematically into actions by specific departments (or by specific product lines) and select numerical goals and targets for individual departments (or specific product lines). Repeat Step 2 until goals and targets are selected or assigned to all layers of relevant organizational units and individuals with the responsibility for cost reduction (industrial engineers in engineering departments).

Step 3. Implementation and assessment.  Compare the corporate performance and departmental performances  with the originally set goals. Take control actions in the current year. Incorporate changes in the planning system for the next year.

The strategic planning decided that it is necessary to achieve a 15% reduction in the unit estimated production cost taking into consideration the improvements in the product planned in order to give a 10% reduction in the existing price. This means that the current production cost (200000 yen) must be reduced by  35000 yen. The composition of the unit production cost is: labor 30% (60000 yen), raw materi als 60% (120000)  and overhead 10% (20000).

After initial analysis by cost reduction - industrial engineering top level team,  it was decided that the cost-reduction target, 35000 yen, will be allocated between labor and raw materials as labor 14000 yen, and raw materials 21000 yen.

Labor Cost Reduction - Further Assignment

The labor cost reduction target is to be assigned to five workshops:  molding, machine, welding, assembly and inspection workshops.  Discussions of the top level CR-IE team with the shop level CR-IE team lead to the following cost reduction targets at the shop level: molding 840 yen,  machinery 4194 yen, molding 840 yen, welding 2285 yen, assembly 6000 yen, and inspection workshop 660 yen.

Assembly level cost reduction target further break up. 

 The assembly workshop has eight assembly lines A-H.   Lines B, C and E employ large labor hours, consist of similar job tasks and an improvement in one can be implemented on the lines.
(f) The numerical target for cost reduction for the assembly workshop is 6000 yen. The cost target was converted into 1676 hours reduction target. Lines B, C and E are operational 95% of the time and hence our labor input reduction effort has to be from reduction of assembly time. The opportunity to get savings from downtime is limited.

Assembly Line Level Effort

22 jobs are done on these assembly line with six stations. Each station is given 0.15 minute. The  total utilized labor time for all the stations is only 0.53 minutes.  Hence effort was made to reduce the station time or cycle time to 0.09 minutes. The output from the lines have gone up by 40% due to this productivity improvement initiative and the assembly workshop met its cost reduction target.

The simplified description shows how a corporate level cost reduction target is converted into shop level and assembly line level or work centre level cost reduction targets. The top level CR-IE team, department level CR-IE team and shop level CR-IE team interact with fix shop level cost reduction targets. The industrial engineer, in engineering departments joins with engineering managers, supervisors and operators of the shop to engage in productivity improvement project. They get the needed help from higher level CR-IE team members to complete the project.
The implementation of a top-down TPM program requires substantial inputs of a bottom-up persons of the shop. Without cooperation from the shopfloor no meaningful numerical targets could be derived and hence an effective implementation of any target would not be possible.
The main characteristics of TPM is that it deals with corporatewide goals. Another is that it deals with specific numerical targets for cost reduction.

Bottom-up approaches to productivity improvement are important for continuous improvement but may only provide sub-optimal solutions from the firm’s perspective when a corporate-wide optimal solution is required. TPM has been found to be effective for overall optimization and hence for improving firms’ overall profitability in a planned way over the typical sales and profit planning periods.

Related Article

Productivity Management

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