©2005 by John R

Henry, A

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Calculating and Cutting Calculating and Cutting Changeover's High CostChangeover's High Cost

PackExpo2005 Las Vegas

John R Henry CPPChangeover.com

Johnhenry@changeover.com787/863-9134

©2005 by John R

Henry, A

ll rights reserved

Downtime definedDowntime defined

• Downtime – Any time the line should be running but is not, sometimes called“unplanned downtime”

-Primary causes of downtime-

• Changeover• Operational problems such as jams, breakdown, need for adjustment, high

reject levels • Maintenance (often does not cause enough downtime)• Lack of materials• Lack of trained personnel

©2005 by John R

Henry, A

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Changeover definedChangeover defined

• Changeover - The total process of converting a line from running one productto another.

-The 3 Ups-

– Clean-up - The removal of all previous materials, components and product from the line.

– Set-up - The adjustment or changeout of the line in preparation for the succeeding product.

– Start-up - The period of time after the line has restarted but before it is running at normal speed and efficiency.

• Lean changeover - Changeover in which there is no wasted material, labor or time.

©2005 by John R

Henry, A

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Changeover time definedChangeover time defined

• Changeover time - The total elapsed time from the last unit of good product at normal speed and efficiency to the first unit of goodproduct at normal speed and efficiency.

©2005 by John R

Henry, A

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The problem with changeover?The problem with changeover?

Its all about the Benjamins

©2005 by John R

Henry, A

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Types of changeover costsTypes of changeover costs

• Tangible costs - Costs for which a reasonably accurate dollar value may be calculated.

• Intangible costs - Costs which are difficult or impossible to quantify.

The fact that a cost cannot be dollarizeddoes not mean it is not expensive!

©2005 by John R

Henry, A

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Tangible CostsTangible Costs

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Lost ProductionLost Production

The most visible cost of changeover is lost production.

Line speed = 250PPM

Contribution = $0.50/Package

Average changeover time = 60 minutes

Cost per changeover = 250 X 60 X .50 = $7,500 ($125/minute)

Annual cost = 240 X $7,500 = $1,800,000

©2005 by John R

Henry, A

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Lost CapacityLost Capacity

Lengthy changeovers reduce the available plant capacity

Assume:Line speed = 250PPMOne shift operation (8 hours)1 hour/day of changeover

Theoretical capacity = 120,000PPDActual capacity = 105,000PPD

Annual capacity loss = 15,000 X 240 = 3,600,000 Pkgs.If contribution per package = $0.50, cost of lost capacity is $1,800,000Lost capacity is lost production from a different point of view

©2005 by John R

Henry, A

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Direct labor costsDirect labor costs

Assume:

2 mechanics @ $25/hr3 operators @ $15/hr

Labor costs/changeover = (2 X 25) + (3 X 15) =$95/hr

Total annual labor cost = 240 X 85 = $22,800

There will also be inspection, material handling, supervision and other indirect labor costs.

©2005 by John R

Henry, A

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Effect of lot size on inventoryEffect of lot size on inventory

Averageinventorylevels100M

500M

400M

300M

200M

M T FTW

250M

50M

LOTSIZE

DAYS

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Henry, A

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Impact on inventoryImpact on inventory

Assume value/unit = $4.00

Assume 30% carrying cost

Assume reduction in average inventory from 250,000 to 50,000

Annual inventory savings = 200,000 X 4.00 X .30 = $240,000

Additional savings may attain from reductions in raw materials inventories.

©2005 by John R

Henry, A

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Rejected product and materialRejected product and material

• In setup– Packaging components and product are often used in setting up

machinery and need to be discarded.

• In startup– Startup is characterized by higher than normal reject levels. This

rejected product represents either a total loss if discarded or a partial loss if reworked.

– During startup product may be produced which is acceptable but not perfect. This variation may be perceived by the end customerwith negative effects.

©2005 by John R

Henry, A

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Intangible CostsIntangible Costs

©2005 by John R

Henry, A

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Customer responseCustomer response

• Lengthy changeovers will reduce the plant’s ability to respond to customer demand in a timely manner.

• This is not usually an issue in normal operation when everything is going to schedule. Few plants have the luxury of “normal” operations.

• Improved customer response will be a significant competitive advantage when a customer has an unscheduled need.

• Contract packagers particularly need to make rapid customer response a core strategy

©2005 by John R

Henry, A

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Reduced market shareReduced market share

• Reduced production output may result not only in reduced sales but also in reduced market share. This will have long term strategicimplications.

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Henry, A

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StressStress

• When changeover times are long, there will be increased pressure to get lines up and running again. This causes increased stress:

– On people-As people are pushed harder, they become more prone to error as well as cutting corners.

– On machines-Excessive changeover time will result in machines being run harder and longer with less time for proper repairs and, most importantly, for preventive maintenance.

©2005 by John R

Henry, A

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InnovationInnovation

IBM Ad

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Henry, A

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Importance of knowing costsImportance of knowing costs

• Justification of expenditure– Operating expenses for machine upgrades– Capital expenses for machine replacement– Direct and indirect expenses for training– Lost production while modifying machinery

• Comparing the time gained from changeover improvement to the expenses incurred is comparing apples to oranges.

• Costs and benefits must both be expressed in dollars for useful decision making

• Downtime from changeover is a significant cost that is often unrecognized

©2005 by John R

Henry, A

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Accounting must be involvedAccounting must be involved

• Changeover costs must be determined by finance/accounting to develop and “official” number that will be accepted by management

• Cost data developed by engineering or production are not always believed

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Henry, A

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Real life examplesReal life examples

• OTC pharmaceutical tablet plant- @$25,000/hour

• Prescription pharmaceutical tablet plant @$16,500/hr

• Distilled spirits bottler @$22,000/hr

• Skin care products @$11,000/hr

©2005 by John R

Henry, A

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Two paths to lean changeoverTwo paths to lean changeover

• Mechanical– Focuses on improvement to machinery to make it faster and easier

to change in a repeatable manner.

• Operational– Focuses on people, processes and procedures to eliminate wasted

efforts and time from changeover

Lean changeover requires total involvement!!

©2005 by John R

Henry, A

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Three tasks of changeoverThree tasks of changeover

• Eliminate all unnecessary tasks.

• Externalize to the maximum extent possible any tasks that cannot be eliminate.

• Simplify whatever tasks remain

MEASURE, MEASURE, MEASURE!

©2005 by John R

Henry, A

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