SMED vs EOQ-The Customer Makes The Difference

A number of customers of the precision machining industry have started telling their suppliers (Us!) that we need to adopt SMED (Single Minute Exchange of Dies) Techniques so that we can reduce costs. We make it a rule never to prescribe solutions when we haven’t first diagnosed the problem…

No prescription till you diagnose the REAL PROBLEM.

Reducing setup time is important, but if that is not the constraint that is limiting your ability to serve your customer, why would you address that first?

The real issue that the customer has not brought to the table is lot size, economic order quantity (EOQ).  Given an order quantity of 100 parts, if changeover time is 8 hours  on a part with a one minute cycle time

  •  to make his parts originally takes 480 minutes of set up time.
  • Plus 100 minutes (100 parts at one minute per part) to produce;
  •  Total 580 minutes or 5.8 minutes time per part.

The setup time is 480% of the actual process  time to make the parts. 480/100= 480%

Reducing the set up to 4 hours set up, its now 240 minutes set up time plus 100 minutes to produce total 340 minutes or 3.4 minutes time per part. The setup time is now just 240% of the actual process (Cutting) time. The customer is saying that you should do this.  And as far as you can, he is right.

 But lets look at what the customer’s order quantity does to affect this.

 Increasing  just the lot size from 100 to 1000 pieces 

  • Results in the time per piece on the 8 hour setup being 480 minutes for set up plus 1000 minutes, or 1.480 minutes total time per part. 
  • The ratio of setup time to total time is now just 48%of the process time.

THATS A TEN FOLD REDUCTION!!! This is where the Bang for the BUCK is! If you could get your setup down to four hours, you’d be at 24% ratio of setup to total time.

 On 10,000 pieces it becomes,   at 8 hour set up, 480 minutes setup plus 10000 minutes process time; or about 1.048 total time per part;  4.8% is the ratio of set up to the process time.

WE CAN SEE that while reducing set up time is important and something that you can control, It is the increase in the lot size that is the most powerful determinant of the amortization of cost of setup.  And your customer holds those reins.

 ECONOMIC ORDER QUANTITY is in your customer’s control and ultimately delivers drives far greater savings than your  cutting set up time in half, and in half again as we have just shown.

 What he wants to ignore is that you have to set up the machine regardless of his lot size and he has to pay for it. So he wants you to reduce that set up as much as possible. However, there is no free lunch, there is always a law of diminishing returns, and he has to give you an order quantity that makes it profitable for you to set up your machine and produce the number of parts required.

Reducing setup time is important, but if that is not the constraint that is limiting your ability to serve your customer, why would you address that first?

Just cause that medicine sounds good to you Mr. Customer, doesn’t mean that it is the magic cure for everything.  Increasing your Order Quantity may actually drive substantially larger savings.

Size (of order) Matters.

Sometimes, more is better.

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8 Responses to SMED vs EOQ-The Customer Makes The Difference

  1. carol says:

    excellent blog (as usual), but i have to take exception with your image. i’m guessing you are not a proponent of the new food pyramid?

    you realize (i hope) that many of your blogs, while directed at manufacturing, teach a larger lesson that i have successfully applied in my own non-manufacturing environment. i continue to learn from you even though we aren’t in class together anymore. an outstanding arrangement and i am appreciative!

    • speakingofprecision says:

      Food pyramid? Not even on my radar screen…
      Thanks for the feedback, we are glad that you find value behind ‘manufacturing’ in our posts!
      Miles

  2. Dan Vermeesch says:

    Miles, Miles, Miles… tomorrow when I see you we have sooo much to discuss, over a libation, I hope. Everything you said is true as long as your customer dances to the tune you are playing… and sugarplum fairies and gumdrops fall from the sky. What set up reduction does, that occasionally convincing your customer to increase an order or so won’t do, is this – pemanently reduce cost. You may be fortunate to have a part or two, or real lucky to have a customer or two, to happily increase order size, which increases their inventor or yours, by the way. But the likelihood that you would be able to do this across the board diminishes daily. Once you crack the code of set up reduction, however, it’s forever and it’s on every part of every customer – assuming you sustain the change, but it’s in your control, not your customer.

    For what it’s worth, my friend.

  3. Dan Fleming says:

    Your kidding right! The problem is thinking Supplier first and NOT Customer first. Set up time is the root of all evil in a machine shop. It’s leads to bad behavior (overproducting, grouping by type) and wrong thinking (arguing EOQ and incenting customers to take more inventory). It’s traditional manufacturing philosophy that will lead to long lead-times, higher costs, poor flexibility, increased inventory of all types and quality problems. And finally, you may lose your customer. So how can we decrease lot sizes and NOT increase costs? Reduce set up time! It’s that simple. Reducing set up time is not meant to drive suppliers crazy or to increase costs. It’s for the purpose of becoming more customer focused and less supplier focused. Stop the insanity of arguing for EOQ and larger lots and put the energy into the real problem – long set up times. And set the goal for reducing set up times to 59/60ths. That is 1 hour to 1 minute. 50% reduction is NOT good enough. Finally, I don’t think your article was serious. I think it was was written to solicit this type of respone. Nice job!

    • speakingofprecision says:

      Actually, we are a fascist about reducing fixed costs, and we have championed setup reduction throughout our career.

      We were using what are now called spaghetti diagrams (we counted footsteps or crane travel) to minimize loss of production in our mill in Georgia for drawbench and medart setups, scrap handling, and optimizing raw material storage based on takt time. That was in 1992.

      Since I came on board at PMPA in 2003, we have produced three separate setup reduction programs at our National Technical Conference and facilitated one of our members creating a DVD on the subject. Another member produced a white paper on Set Up Reduction outside the machine… (This member actually won a Shingo prize…)

      BUT: I also realize that BUYERS have a part to play in this and insisting that someone run a 100 piece lot on a cam automatic because that s how it was PPAP’d when even the best setup (I’ve seen under an hour for a full changeover Bar side and tool side on six spindle Acmes and New Britains…) takes longer than the time to produce…

      I am not one who believes that the answer to two diametrically opposed questions lies in the middle. But in this case, I think that set up reduction to get to profitability on a lot size of 1 (or 100) on equipment designed and optimized for multiple thousands) is death by a thousand cuts of a dull knife. Lean is an important tool for all of us, but Economies of Scale are an equally valid key to the profitability conundrum. AND never considered by the “lean practitioners” who insist that setup reduction is the only medicine that is needed.

      My intent was to get folks to realize that Setup Reduction is not the only determinant of profitability. Allowing our customers to bully us into producing unprofitable lot sizes is no more sustainable than was caving in to their constant whine for 5% price reductions whenever the wind blew. We saw how that worked out as a sustainable model.

  4. Jill Jusko says:

    Hi. I’ve not been to your site before, but in looking around, I’m certain it’s not my last visit.

    I’m not entirely clear about what the take-away of this post is: Is it that you should try to convince your customer to order larger quantities because that is more profitable for you? That doesn’t sound like a likely scenario on the part of the customer.

    I do recognize that one take-away is that a focus on set-up reduction doesn’t make sense if that isn’t your constraint. That said, using your example above, wouldn’t it be better for your business overall to reduce set-up times? Might it not open up time that would not otherwise be available to take on another customer?

    And one last question: Are formal PPAPs pretty typically used, regardless of industry sector you are producing for?

    • speakingofprecision says:

      I’m certain it’s not my last visit. Thanks Jill! We’re Glad you found us.

      I’m not entirely clear about what the take-away of this post is: Is it that you should try to convince your customer to order larger quantities because that is more profitable for you? That doesn’t sound like a likely scenario on the part of the customer.

      Jill Our customers ask us to bid on parts lets say over a years time. They want the best price, and so they give us an inflated or fictional volume, to get us to give our best possible quoted price, using our most automated equipment.

      Then the releases come, and the volumes NO LONGER JUSTIFY THE USE OF THAT EQUIPMENT.
      The customer complains about the market, and tells us to work on reducing our costs, Like set up, While ignoring the impact of the assumptions of the quote. Its bait and switch, and meanwhile all the lean disciples form a Greek chorus and sing “OOOH reduce set up costs.”

      Set up costs are a red herring, the issue is pricing based on volumes’promised’ (ahem.)
      We agree with the wisdom of reducing set up costs. and any other waste. But we are frustrated that evryone gives the customers who Baits and switches and refuses to accept the financial consequences of their diminished oreder quantities. All the lean gurus in the world can’t save us down to zero … at some point we have to recover our costs- based on the ‘good faith’ assumptions of the RFQ
      .

      I do recognize that one take-away is that a focus on set-up reduction doesn’t make sense if that isn’t your constraint. That said, using your example above, wouldn’t it be better for your business overall to reduce set-up times?
      Yes, but even better would be for the customer to run say two releases together, (GASP!) from a real dollar point of view.

      Might it not open up time that would not otherwise be available to take on another customer?
      If we were full, yes, but we’re not, and so operating our machines longer, not setting up machines faster is the key to cash. That’s why I used the visual of the girl refusing the prescription- if the constraint isn’t setup why take the wrong medicine? Let”s recognize and treat the real boo boo, “order size not as promised?” But that is a sales issue, and we seldom expect our sales people to hold customers to their end of the bargain...

      And one last question: Are formal PPAPs pretty typically used, regardless of industry sector you are producing for?
      Yes, and that means the customer generally won’t approve an alternate production method, even if it is better suited to his new volumes. “We agreed on the process we PPAP’d!” Yes, and also on volumes…” So the supplier keeps getting scolded to cut their setup times, when the problem isn’t set up time, it is customer failure to live up to his commitment, or adjust lot sizes based on the new reality to get mutual benefits with his supplier. The lean boys all ignore the proven economics of scale. JUst save more! Eliminate waste! We heard plenty of that from the Old GM and Chrysler. We’re gonna take a pass on Lean as “the only way.”

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