The Hidden Factory

The Hidden Factory

The Hidden Factory is a term that refers to activities in an operation or standard operating procedure (SOP).  A few examples of Hidden Factories are workarounds, rework, or any of the 7 wastes, which I will describe below.  Most organizations have some form of a Hidden Factory and being able to “see” these hidden factories in an organization requires learning to see what waste is and understanding that waste in any operation — service or manufacturing — can be a substantial drain on the bottom line, top line, on employee morale, shareholders and, most importantly, the customer.

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In fact, one very important litmus test for an activity is this: “If the customer knew the details of process x, would she be willing to pay for it?”  In other words, suppose substantial rework was required to manufacture a widget and that rework cost was baked-into the cost of 1 unit of a widget, would the customer be willing to pay for the firm’s defects?  Would the customer be willing to pay for the firm’s internal inefficiencies?

What is a Process?

A process is an systematic activity comprising of smaller activities that culminate in an outcome — service or product. A process can take up time, space, and resources. All processes can be categorized into the following categories: Value-added, Non-value added but necessary, and Non-value added.

From the Customer’s Perspective:

1.      Value-added: This step in the process adds form, function, and value to the end product and for the customer.

2.     Non-Value-Added: This step does not add form, function, or assist in the finished goods manufacturing of the product.

3.     Non-Value-Added-But-Necessary: This step does not add value, but is a necessary step in the final value-added product.

(2) & (3) naturally create waste, of which there are 7 types:

1.      Over-Production: Producing more than is needed, faster than needed or before needed.

2.     Wait-time: Idle time that occurs when co-dependent events are not synchronized.

3.     Transportation: Any material movement that does not directly support immediate production.

4.     Processing: Redundant effort (production or communication) which adds no value to a product or service.

5.     Inventory: Any supply in excess of process or demand requirements.

6.     Motion: Any movement of people which does not contribute added value to the product or service.

7.     Defect: Repair or rework of a product or service to fulfill customer requirements.

It’s important to understand “Value” in terms of the customer.  From the customer’s perspective, “Value” could be defined in the form of a question:

Which process steps (and associated costs) do our customers not have to bear?

It’s a revealing question — most companies are glad that they do not have to reveal how their product or service is created, for fear of their inefficient processes and wasteful operations revealed to the customer.  This stance is sometimes aptly called “not revealing how the hot dog is made”, amicably referring to the unknown contents of the hot dog.

Process Cycle Efficiency

There is a metric that helps to identify how much of a process is actually value-added.  It requires a few things:

1.      Map the process.

2.    Identify the Value-added steps, non-value added steps, and the non-value added but necessary steps.

3.     Stratify your map according to the items in #2

4.     Add a time dimension to the process steps.

Once you have completed steps (1) – (4), then you can simply calculate how much is actually value-added, as a percentage.  The time for the entire process — end-to-end — is called a cycle time.  To identify the Process Cycle Efficiency, you just divide the value-added time by the cycle time for the process.

Process Cycle Efficiency = (Value-added Time / Cycle Time)

Process Cycle Efficiency = 182 / 860 = .21, or 21%

In other words, only 21% of the process above is considered value-added to the customer.  Put another way, the customer might be bearing more than 75% of the cost associated with the waste above.  Knowing this, the firm should aim to increase the Process Cycle Efficiency of the process by eliminating or reducing the waste.

Data like this can help the firm increase their value-added percent to the customer by eliminating or reducing the waste in their process.  Doing this would put the customer first and allow the firm to “get their house in order.”  I consider the above exercise to be simple, yet incredibly helpful for the firm to make sure that they provide maximum value to the customer; it’s a fiduciary duty to the customer.

Think about your processes?  How much is really value-added to the customer?