Background

The technology used to measure input noise creates data. Digital integration (DI) technology that links input data with equipment performance data will provide a layer of process noise management. Most importantly the data will help you to:

  • develop preventive maintenance schedules for process equipment
  • integrate actual data into annual pricing drills and financial forecasts
  • automate product costing models from real data to inform sales
  • track purchase, process and sales cycles for accurate cash-to-cash cycle analysis
  • easily convert fuel use with approved emission factors to calculate emissions
  • develop highly accurate screening models for new capital projects
  • develop cross functional key performance indicators (KPIs)

Use the project management map and the noise targeting model to estimate the rough order of magnitude of a process technology adoption project. A lesson learned from automation experts in other industries is the stress they place on the importance of communication and input across the organization is to a project’s success. Automation technology and robotics will increase the rate of production and decrease the cost of labour per unit of input only if they are running.

Workers might be laid off or repositioned when one automated line is down. The overhead absorption rate for equipment and robots is a fixed annual cost with a minimum operating requirement to meet their absorption contribution. Make sure you have a preventative maintenance plan and the appropriate foundational technologies in place so that unplanned downtime and avoidable equipment wear is avoided. When it takes two days to two months to find replacement sensors or special-order motors, the loss of production may result in lost customers.

Problem 1: modelling equipment performance for new and replacement equipment

The data generated by input controls (sub-metering, Energy Management Information Systems (EMIS), Enterprise Resource Planning (ERP) and power quality (PQ) controls) require skills and technology to manage. DI is how data can be organized in a way that minimizes the time it takes to sort through and analyze the data (manual data download and analysis has touchpoints and a cost which is also noise).

Solution

Invest in an EMIS that enables your business to plan, make decisions and take effective actions to manage:

  • energy use
  • preventive maintenance
  • support new equipment purchases using real performance data to screen investment decisions

Natural Resources Canada will support EMIS projects with up to $40,000.

Problem 2: operator behavior

Employers want skilled, engaged and motivated labour. Labour turnover and process automation may also cause cost variables. This is another type of noise.

How people work and what they do in manufacturing is a series of inter-related steps. At a very basic level, these steps are individual actions that when combined, are your cost of production. Each step is a touchpoint where skills matter. How well each step supports the next step (or how well labour performs) may affect many inputs and contributes to either productive or non-productive outputs (finished good for sale).

Making a product is more than just labour costs.  Noise occurs across different processing steps when they are not integrated with overall output costs. Performance measurement and KPIs that lack overall integration can embed noise.

Field observation

A bacon facility uses KPIs for specific work-in-progress (WIP) steps which include pickling, smoking and packaging. Each step is measured for maximum recovery. Belly pickling operations targets and achieves a high recovery rate. Brining bellies swells the product with moisture. This is considered a KPI success for pickling. However, the smoking step removes moisture. Excessive moisture adds time to the smoking process. As the smoking cycle time lengthens, energy cost in the smokehouse increases, which is a KPI failure in the smokehouse. The packaging step must trim larger than standard bellies to fit their packages. Their cost per kg for bacon is higher for labour. Trim is considered as shrinkage and increases the net ingredient cost. This is another KPI failure. Customer service fields complaints from customers and consumers about excessive drainage in a package. This is a third KPI failure.

After an investigation of the root causes for the product complaints, the facility implemented:

  • the purchasing of specified belly dimensions to minimize trim post-pickling (benefit: reduced trim meant reduced labour, packaging output increased)
  • a target KPI based upon smokehouse and packaging efficiency (benefit: salt and water use declined, and subsequent smoking cycle times improved with a gain on overage energy efficient and usable throughput)

Benefit summary:

  • Units of output increased across the connected processing steps. As dwell time in brining and smoking processes decreased and the labour intensity of the packaging line decreased due to reduced trimming, the output of finished packaged goods per unit of labour input also improved.
  • Input efficiency (energy, water, salt, labour and finished belly recovery) all improved.
  • Coordination between steps reduced the risk of packaging line shortages and overtime, which was a benefit to sales as a reduced risk of short shipments.
  • Complaints to the customer service department about water in packages ended.

An end-to-end understanding of the steps in processing is important. When people involved in individual process steps communicate their needs and understand the impact of their part of the process on subsequent steps, KPIs align across a facility’s processes bringing bottom line and environmental benefits.

In 2009, Shaw Industries (a carpet manufacturer in Georgia) received cradle-to-cradle (C2C) certification for recycling carpet. Today, Shaw’s labour force works with unusual dedication. Shaw employees, from their tow motor drivers to their CEO, can tell you how they are making the world a better place The company out-competes single-use nylon makers in North America. Their workforce makes the corporate vision work. Behavioral psychologists call this engagement. Employee engagement is a non-financial benefit that is linked to worker retention and job satisfaction.

Solutions

Invest in energy management training

Since 1972, the Canadian Industrial Program for Energy Conservation (CIPEC) has led the Canadian industry toward greater efficiency. Membership is free. There are grants, events and cost-effective training workshops for key finance, maintenance, engineering and operational staff.

Join one or more industry networking groups

CIPEC has a food industry working group, Partners in Project Green (PPG) has an Energy Leaders Consortium and the Excellence In Manufacturing Consortium (EMC) about has a national food industry networking group. These groups are where your staff learn best practices from industry peers.

Draft your KPIs using operator input

A lesson learned from behavior management of energy efficiency projects is that the people responsible for energy use (process line operators and maintenance staff) need to be actively engaged in noise reduction solutions. Their input on what a KPI measures is an important motivation. This is more than a cost measurement. Performance measurements of individual steps in a process should reflect flow-through impacts on efficiency. Where non-productive events such as unplanned downtime and organic waste generation are tracked, environmental performance matters. The fraction of utility use that is avoided and the environmental impact of non-productive input use and waste generation have greenhouse gas impacts. This information related in terms of cost and carbon provides direct feedback on behavior.

Consider using a behavior management consultant

Behavior management consultants can work with your team to build engagement. They work with your people to figure out how they can measure performance. They also work with the systems you have in place, which avoids additional capital costs. Aligning the skills and measurements of your workforce with the technology already in place has been demonstrated to improve cost recovery by 10–20%.

Problem 3: touchpoints

Touchpoints have two measurable dimensions. They can be measured as the volume of labour and cost of labour. Touchpoints can be bottlenecks where the volume of labour required to resolve the bottleneck decreases labour efficiency as well as the net cost of labour for that touchpoint. Noise related to line speed bottlenecks also includes a time-related net increase in facility utility use.

Solutions

Takt time analysis

Takt time provides the target a process line needs to achieve to meet market and revenue demands. Measure productivity in comparison to takt time as a KPI.

Audit workstations and processing lines to measure productivity, efficiency and chokepoints. Process grading and packaging lines with automated sorting followed by manually intensive workstations need to balance the flow of materials based on labour capacity. Overflow and idle labour suggest that process equipment settings need adjustment and workstation placement needs attention.

Sometimes equipment settings have been reduced due to a breakdown that was fixed using whatever was at hand (sometimes automated equipment is running without all the right parts in place). Temporary fixes have a history of being forgotten. Annual takt time studies can point maintenance to specific pieces of equipment that require service to run efficiently.

Compare vendor equipment specifications against actual output, then check your equipment. Poorly configured and unsynchronized equipment will double your labour cost per unit as well as increase the utility use for that process line because of the increased time required to make a product. Both are avoidable costs which affect your gross margin (GM).

Internal logistics

This refers to the movement of materials inside a building in a way that materials from receiving, WIP and finished goods are tracked and flow optimally. This practice will integrate ERP, blockchain, just-in-time (JIT) inventory management, product costing, quality assurance and cash-to-cash cycle management. Where this practice has been applied in the automotive and engineering sectors, variable production costs have been reduced as much as 20%.

Integrated and digitized inventory control

Inventory is measured by volume, value and time. The challenge is to manage inventory and internal logistics to minimize inventory dwell time and ensure optimal production line efficiency. This can be done using bar codes and hand-held readers that are integrated from receiving through WIP to shipping (inventory, product assembly (recipes and packaging) and shipping). The integration of bar code systems with product formulation, where recipes are programmed, provides a failsafe method of both tracking and ensuring ingredient integrity. It can also reduce the touchpoints in a process that previously relied on manual documentation. Another benefit of an integrated barcode program is that WIP, which is often invisible in an inventory tracking system, is made visible. The process enables more exact shrinkage monitoring, quality assurance, tracking and real time takt time analysis, which when integrated with product costing models is a highly flexible tool.

Activity-based costing

Activity-based costing is only as good as the data it uses. Processes change over time. Cost creep distorts estimated costs. Data used for product costing models that is based on estimates increases the margin of error for individual product costing model performance.

Product rationalization and new product development costing exercises are a challenge. Poor data leads to poorer decisions and costly outcomes. The range of discrete data requirements that ensure accuracy include:

  • the cost of inventory by ingredient, packaging, handling and storage costs
  • the cash-to-cash cycle of inventory by stock-keeping unit (SKU)
  • up-to-date processing line takt time analysis costed by touchpoint
  • metered utility use based on processing line performance
  • shrinkage of inventory, processing and distribution by SKU
  • waste generation per SKU including the cost of waste disposal for organics, wastewater and packaging which should include:
    • the touchpoint labour cost of handling waste
    • the ingredient cost of waste
    • proportional sewer surcharges
  • maintenance costs per SKU
  • sanitation labour costs per SKU
  • unplanned downtime by processing line
  • overhead absorption based on the capital investment on dedicated processing equipment plus the percentage of facility
  • the monthly cost of finance by SKU

Where these costs are calculated at 0.01% of a cent and based on real data, product rationalization exercises and margin contribution forecasting become reliable as both a financial forecasting and proactive product development tool. Accurate product costing models provide granular accuracy for productivity investment decisions.

Activity-based costing takes time and attention to detail.

Problem 4: repetitive strain injury

Labour is one of the greatest cost variables in food production. This cost includes direct wages plus statutory levies that include worker safety insurance, vacation pay, employment insurance and the administrative costs of complying with statutory costs (payroll and human resource management). Workplace injuries add to statutory costs in the form of increased Workplace Safety and Insurance Board (WSIB) rates and administrative management time. One of the most common forms of workplace injury is repetitive strain injury (RSI).

RSIs make some jobs hard to keep staffed. Rotating staff through repetitive positions on a line is a stopgap strategy for minimizing RSI. Technology in the form of robotics is a permanent solution. Stacking, bagging and boxing are all tasks in which robots can replace manual labour. The business case for robotics is more than just a straight labour reduction. WSIB rate reductions as well as re-allocating labour to other tasks should be considered in the business case for robotics. Some considerations for an RSI strategy include:

  • whether there room for reduction when assessing your WSIB rate against the standard for your sector
  • whether there unfilled positions that an internal transfer of labour can resolve
  • whether re-allocated labour would improve throughput and quality

The next step is to understand the rate of return on an investment in robotics. Robotics have come down in cost over the last decade. Standardized models are commercially available along with service contracts. In some cases, equipment can be leased rather than purchased. The remaining challenge is to understand their impact on electricity use and to ensure PQ conditions within a facility will not contribute to unscheduled downtime. PQ events wreak havoc on computerized equipment.

Install robotics in tandem with PQ upgrades to gain additional production efficiency to avoid unscheduled downtime and related maintenance costs.

Problem 5: waste avoidance and co-products versus line loss and shrinkage

Waste avoidance is addressed with lean. This exercise begins with the evaluation of production processes through observation and measurement. Read MachineMetrics’ 8 Wastes of Lean Manufacturing.

A 2019 Provision Coalition in Canada study of 50 food processors found that they generated, an average of 307 tonnes of avoidable food waste costing $750 per tonne per facility. The solutions identified in their study show that line loss and shrinkage are a process efficiency opportunity. The businesses that addressed this problem:

  • increased the yield for ingredient inputs
  • reduced carbon footprint per unit of output
  • lowered overall greenhouse gases before expansion based on utility use
  • lowered water, electricity and natural gas use
  • reduced solid waste and wastewater output volumes
  • improved labour efficiency and lowered waste management costs

In addition to cost savings, there may also be revenue increases. Efficiency effects happen on both sides of the ledger.

The first benefit is the reduction in cost of goods. The cumulative impact on output can add increased productivity with a higher margin, which adds to returns.

The second benefit is a measurable link to meeting on-time delivery and order fulfilment. There are times when every manufacturer struggles to fill an order. Unplanned downtime increases the challenge. The ability to add just ¼ of 1% to order fulfilment by avoiding unplanned downtime is an incremental increase of sales. This adds another increment to the profit side of the ledger. This fractional impact can also be achieved without an increase of inputs (energy, water, labour, packaging and operating capital). These are found sales where productivity and efficiency have an additional incremental impact on gross sales, cost of production (COP) and GM.

To estimate the combined impact of waste avoidance, you must calculate the margin improvement plus the additional margin on improved throughput by first calculating the new GM and then adding the impact of additional sales as a percentage of additional GM. The following calculations are for illustration purposes only. Actual outcomes will vary based on actual starting COP, GM and incremental sales.

Assumptions per $1,000,000 in sales:

  • baseline GM is 40% or $400,000
  • baseline COP is 60% or $600,000
  • inputs are reduced 3% in terms of costs
  • output volume increase is 0.25% or $25,000
  • baseline gross profit (GP) is 14% or $140,000

The benchmark COP then becomes:

  • 60% COP/100 × 3% COP reduction calculated as:
    COP 60% [(60% ÷ 100)  × 3%] = 60 − (0.6 × 3) = 60 (-1.8) = 58.2% COP
  • 58.2% of $1,000, = $582,000 (or $18,000 in cost savings)

The benchmark GM then becomes:

  • 100 − 58.2 = 41.8% or $1,000,000 - $582,000 = $418,000 in GM
  • This adds $418,000 (benchmark GM) − $400,000 (baseline GM) = $18,000 to GM
  • At this point, GP increases $18,000
  • $140,000 + $18,000 = $168,000 or 16.8% GP
  • This is an increase of 8.3333% (16.8 new GP ÷ 14 baseline gross profit)

The incremental impact of 0.0025% found sales have no additional COP:

  • incremental impact on COP = 58.2 − 0.25 = 57.95 COP on $1,025,000 in sales
  • incremental impact on GM = $1,025,000 − $582,000 = $443,000 GM
  • GM then becomes $443,000 ÷ $1,025,000 = 43.21951%
  • This also adds $25,000 to GP, which now becomes $168,000 + $25,000 = $193,000

Summary:

  • Incremental GP is $193,000 ÷ $1,025,000 = 18.82926%
  • Increase over baseline GP is 34.49471% (18.82926% ÷ 14% baseline GP)

Solutions

Avoiding waste is a way processors and manufacturers can generate free cash flow with their existing resources. There is investment involved, yet the fundamental processes and equipment remain largely the same. Operating controls and practices require investment, yet this is something that can be done prior to an investment in new processing lines and capital facilities. Moreover, the systems put into use are transferable. The path or roadmap seems complex. There are many moving parts that can be corralled with an intentional, sequential approach based on addressing the cause of local and continuous variables. The approach will generate free cashflow which may be used:

  • to pay for technology upgrades, training and increased wage pressure
  • to finance incremental sales with existing production capacity (this is increasingly important where access to credit for operating capital is limited)
  • to finance new capital expansion
  • to pay down existing debt
  • to increase investors’ returns