Lean Concepts

Basic Lean Concepts:

1. Total Lead Time (also called total cycle time, process lead time, or total cycle time): The time from when a work item enters a process until it exits. e.g. - Total Lead Time of a mortgage process could be
 measured as the elapsed time from when an applicant calls until the mortgage closes (average = 33 days).

2. Things In Process(TIP) or Work In Process(WIP): Any work item that has entered the process and not yet exited. Can be anything: materials, orders, applications, emails, etc. e.g. - There were 3300 refinance applications in process at the end of the month.

3. Average Completion Rate (Exit Rate or Throughput): The output of a process over a defined period of time. e.g. - Average completion rate of the mortgage process = 100 refinance applications closed/day last month.

4. Capacity: The maximum amount of product or service (output) a process can deliver over a continuous period of time. e.g. - The capacity of the process is 120 mortgages applications/day.

5. Takt Rate (customer demand rate): The amount of service or product required by customers over a continuous period of time. Process should be timed to produce at the takt rate. Any lower and customers are disappointed, any higher and products or service is produced that cannot be used. e.g. - The takt rate for mortgage applications is 130/day.

6. Time Trap: Any process step (activity) that inserts delay time into a process. e.g. - Gathering up all mortgage applications once/day before entering them into a computer system. This causes delays for mortgages received during the day, which is a time trap.

7. Capacity Constraint: Any activity in the process that is unable to produce at the completion (exit) rate required to meet customer demand (takt rate). e.g. - Property appraisers can evaluate 120 properties/day, but customer demand is currently 130/day. Appraisers are a capacity constraint.

8. Value Add (VA) Time: Any process step or activity that transforms the form, fit, or function of the service or product for which the customer is willing to pay. e.g. - The sum of the value add times in the mortgage refinancing process is 3.2 hours.

9. Non-Value-Add (NVA) Time: Waste in a process. Customers would be willing to buy a product or service that did not have these costs if it meant a lower price. e.g. - Walking paperwork to the appraisers’ offices.

Value Add (VA) vs. Non-Value Add (NVA) Analysis:

Value Added (VA): Any activity that is essential to deliver the service or product to the customer


- Must be performed to meet customer needs
- Adds form or feature to the product/service
- Enhances quality, enables on time or more competitive delivery, or has a positive impact on cost (and therefore what the customer pays)
- Customers would be willing to pay for this work if they knew it was being done

Tip: If unclear, imagine what would happen if you did not do this step. Would customer complain, not buy the product or service? If yes, then it’s very likely value add.

Business Non-Value Added (BNVA): Activities that are required by the business to execute the VA work but add no value in the eyes of the customer

- Reduces financial risk
- Supports financial reporting requirements
- Aids in execution of VA work
- Is required by law or regulation

Tip: If you stopped doing a step and your internal customers or external regulators complained, then it’s probably a BNVA activity

Non-Value Added or Waste: Activities that add no value from the customer's perspective and are not required for financial, legal or other business reasons.

- Handling more than is minimally necessary to move the product/service along, i.e. unnecessary transportation, moving/sorting, paperwork, counting
- Rework to reduce/fix errors
- Duplicative work, supervision or monitoring
- Waiting, idle time, delays
- Overproduction
- Over processing (too many steps), exceeding customer requirements

Tip: If you stop doing the activity, would an internal or external customer notice or care? If not, then probably NVA.

Time Efficiency Metrics:

Process Cycle Efficiency (PCE)


- Best measure of overall process health
- Percentage of VA time in the process: PCE = VA Time/Total Lead Time. Total Lead Time can either be measured by measuring the total time it takes “things in process” to transit the process or use Little’s Law (next slide) to determine the average PCE.
- PCE tells how efficiently the process is converting work-in-process into exits/completions
- Low PCE processes have large NVA work and costs and therefore great opportunities for improvement. Crate a Value Stream Map to indicate these opportunities. PCE values of 10% or so are common pre-improvement.
- The only way to improve PCE is to reduce NVA work and costs.

Little’s Law

- On prior slide, defined PCE = VA Time/Total Lead Time
- Little’s Law is: Total Lead Time = # Things in Process/Av. Completion Rate
Number of things in process = TIP or WIP
Little’s Law shows the relationship between TIP or WIP and the completion (exit) rate of the process.
• To improve Total Lead Time and, in turn, PCE, either increase capacity (average completion rate) and/or reduce TIP or WIP.

Workstation Turnover Time (WTT)

• WTT highlights which process step (time trap) to work on first.
• WTT for any process step is the amount of time needed to set up and finish one complete cycle of work for all the different “things” at that step.
Calculating WTT for a Process Step
WTT = S {(Setup time) + (Process Time x Batch Size)} for each “thing” worked on at that process step
• Select high WTT’s to improve first.

Generic Pull Systems

Purpose- To place a limit or cap on the maximum number of things or work in process (TIP or WIP), so that lead times are known and predictable. Then apply improvement tools to reduce WIP/TIP by eliminating the effects of variation (traditional Six Sigma) and batch size.

When to Use It - Whenever lead times are critical to satisfy customers and when NVA cost is significant compared to VA cost.

How to do it -

Part 1: Determine WIP Cap (Maximum amount of work or things that should be in process at any one time)
Step 1: Determine Current Total Lead Time (TLT)
• Option 1: Track individual items through the process, measure lead time
• Option 2: Use Little’s Law to get an average lead time

Step 2: Determine current Process Cycle Efficiency

Step 3: Identify Target PCE
* Level at which the process should be operating based on “world class” (high end) efficiency
* If current PCE is:
<< Low end, multiply current PCE by 10 to get target PCE
< Low end, use low end figure as target PCE
= or > low end, use high end as target PCE
>> High end, move toward one step flow

Step 4: Calculate target lead time for the process.
* Lowest process cycle time with the current process
Target Lead Time = VA time for critical path/Target PCE

Step 5: Calculate WIP Cap
* Maximum WIP allowed within the process at any given time
WIP CAP = Target Lead Time x Exits
Exits = Number of completed products or service units out of the process in the time frame.

Part 2: Releasing Work into the System (Usually current WIP level is significantly greater than WIP CAP. Therefore, reduce current WIP and release work into the process to match the exit rate.)

Step 1: Count the WIP in the process

Step 2: Determine if you can release work or not:
* If the WIP > WIP CAP, do not release any more work
- If this will harm customers, options are to temporarily increase capacity to lower WIP or perform a triage (next slide) of current WIP to see if some work can be set aside to make for new work
* If WIP < WIP Cap, release enough work to get to the WIP CAP

Step 3: Identify how you will know when more work can be released into the system. CAUTION: As the PCE of a process reaches world class levels, the effects of variation are magnified. Do not reduce TIP or WIP too much without addressing issues of variability or a process could be starved for work creating a constraint

Step 4: Create a triage system for determining the order that future work is released into the system
• Option 1: First in-First Out (FIFO)
• Option 2: Triaging or working on highest potential items first. Set up criteria for rating or ranking new work requests as to their potential for your company (i.e. what’s important to you in light of VOC).
• Option 3: If there is capacity for parallel processing, shift work from overloaded process steps or adding/shifting resources

Step 5: Set up processes for maintaining the Generic Pull System
• Identify the person who will release work into the system
• Develop alerts, signals or procedures that will let this person know when WIP has fallen below CAP, e.g. flags, emails, alert cards, etc.
• Train people in the new procedures
• Develop a transition plan to cover the current high WIP state to future WIP Cap state
• Implement and monitor results; adjust as necessary

Replenishment Pull Systems

To eliminate shortages or over stocking of supplies by creating a system where items are automatically replaced as they are used up


When to Use It

When in-process or end-item products, supplies or consumables (or any item for which shortages or stock outs are not acceptable), meet the following criteria:

• Usage of the item is repetitive
• Demand for the item is inconsistent
• Stocking levels have a significant impact on service level for internal or external customers

A Replenishment Pull system should never be installed without a Generic Pull system in place

How to do it

Step 1: Determine Work Demand Rate (DMD)

• Average weekly or average daily usage
- Based of history or forecasting (backlog) or a combination
- Caution: Historical data may not reflect changes in future business needs
• Recalculate frequently
• Handling seasonality
– Resize monthly if demand changes past a hurdle rate, e.g. if demand changes > 20%
– Use historical data or forecasts to determine signals that mean a resizing is necessary
– Forecast window should be at least the average Lag Time Weighted by Volume to account for lag times between demand and order receipt
– Use historical/future demand weighting tools to smooth ramp ups/downs
* Larger up swings >> higher weighting in forecast
* Smaller upswings >> lower weighting on forecast

Step 2: Determine Replenishment Lead Time (LT) and Order Interval (OI)

• Replenishment Lead Time (LT): The time from when a part or supply has been consumed until new parts/supplies are received
- For purchased items such as supplies etc. add together: Time to generate a purchase order + Supplier lead time + Transportation time + receiving inspection/stocking time
- For manufactured items, add together: Time to generate the work order +
Total process lead time + Receiving/inspection time
• Order Interval (OI): Can be expressed as either the interval between orders or the order quantity to be purchased
- Changing OI allows for tradeoffs between transactions, capacity and inventory

Step 3: Determine Optimal Safety Stock (SS) Level

• Safety Stock (SS) can be calculated in a number of ways. This method is generally preferred. Key Assumption: The demand profile is normally distributed
Safety Stock = s service level X (LT) to the power b

Where

• S service level = desired service level (stock out coverage) = number of standard deviations, relative to the mean, carried as safety stock. For example:
- Service Level = 1 means that one standard deviation of safety stock is carried, and on average, there will be no stock outs 84% of the time
- Service Level = 2 means that two standard deviations of safety stock is carried, and on average, there will be no stock outs 98% of the time
• Lead Time (LT) = Replenishment Lead Time
• b = a standard lead time reduction factor (generally set at 0.7)

Process Balancing

To balance work across different sub processes


When to use it
When lead time is a problem

How to do it
• Minimize movement
• Stabilize lead time before trying to minimize it
• Maximize resource efficiency
• Minimize number of process steps
• Balance tasks/labor across process steps
• Maximize space utilization
• Minimize Non-Value Add activities (conveyance, standby and motion wastes)
• Minimize the need to rebalance as demand requirements change
• Minimize volume variability (combine product category demand)
• Maximize flexibility for product introductions and discontinuations

Use training and continual reinforcement to maintain gains