Archive for December, 2009

Our thoughts on the D’Addario Video

December 28, 2009 by Setpoint

D’Addario, a company from Long Island New York, is in the business of making guitar strings and straps. Under the direction of their CEO, Jim D’Addario, they have seen a lot of changes in the last two years.  They have embraced lean by cutting inventory, stream lining the factory operations, implementing new technology, and saving jobs.  The company has installed automation equipment to help keep the jobs in New York rather than China.  They were featured on CNN, you can view the lean automation video here.

Their lean model is based on Toyota’s waste reduction strategy.  Toyota is known for leading the example in Lean.  The video mentions that “lean relies heavily on automation.”  The terms “lean” and “automation” do not rely on each other.  Lean is known as the practice of reducing waste. Automation may be a choice made by a company to try and become lean, but it’s not required. Automation equipment can be very costly and not as flexible as an organization might hope for. Automation equipment can be justified if the same part is made over and over thousands of times. D’Addario is certainly heading in a good direction if they are seeing progress in reducing their costs, saving the jobs, and creating a more satisfying place to work.  They are able to train someone to do something else as the machine takes their previous role.  Let the machines take the simplistic jobs and allow people to take on more challenging work.

D’Addario’s guitar strap division has managed to keep their business here in Long Island, New York. Under the threat of the current economy and the temptation to send cheap product overseas, D’Addario is working hard to maintain their business.  Peter Morici, an economist from Univ. of Maryland, mentioned in the video that “more can be done in the U.S.”  He is right.  In order to strengthen the dollar and create a strong economy, the American people need to produce more and consume less.  Almost every product you pick up in the store has the Made In China stamp.  We need to be working on getting our products to say Made In the U.S.A.  Every business ought to be looking at their products made in China and work on solutions to bring it back home.  Many companies decide to go with China, because it’s “easier” than automating.  We need to be creative and find solutions to keep the jobs here.  We have plenty of capable American people who are willing to put their minds at work to add real dollars to our economy.  Many companies are doing what they can by becoming leaner without cutting their work force.

D’Addario is on track to continue making progress.  As a company begins the journey of defining their lean system they begin to understand what lean really means and how it’s not just about reducing costs.  Lean is really about creating a better place for people to work.  Employees who feel satisfied and happy about their contributions begin to engage themselves in the success of the company and the quality of its products.  Once an organization understands what lean is, they will come to realize their journey has just begun.

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Project Cash Flow Forecasting

December 16, 2009 by Machel

Bidding on large projects is bittersweet.  If you have an opportunity to bid on a project that could be either a blessing or a burden, it is important to manage the cash flow.  Because cash is King, it has the ability to put you in a castle or a shack.  What kind of living quarters you live in can be decided by cash flow.  A significant number of companies go out of business because of lack of cash, not a lack of great ideas.

When bidding on large projects there are a few questions that need to be addressed.  First, when are the costs of the project due?  Second, when will the majority of the labor be needed?  Third, what size of a down payment do I need?  When do I need progress payments?  Most companies think the down payment question should be answered first, but that is not always the case.  It is necessary to know when your costs are going out so you know what size your down payment needs to be and when your progress payments need to come in.

Let’s assume some facts for our example:

  1. Revenue on the project is $3,000,000
  2. Cost of Goods Sold (COGS) are $1,500,000
  3. Operating Expenses are $10,000 for the first 4 months, then gradually less as the project closes

 

Cash Flow Forecast Tables

 

Following the tables listed above, if you change the down payment from a 30% down payment to a 50% down payment, you go from needing $480,000 to not needing any additional cash at all during the entire project.  This is assuming a progress payment is scheduled four months into the project.

A spreadsheet like this does not take very much time to set up.  By putting in that extra time your company can go from living high on the hog to searching the couch cushions for change.

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5 S Process in an Assembly Shop

December 10, 2009 by Kara

Recently we talked about the 5 S process developed from the Toyota Production System.  Some believe that the 5 S process can only be implemented in a manufacturing environment and do not see the benefits of using this process to improve their work environment.  Here at Setpoint we have our design engineers in an office environment and our assembly technicians in a shop environment with both areas using the 5 S process.

We made a video and put it out on YouTube to walk through our shop and show how the 5 S Process can be implemented in an assembly environment where we build one machine and ship it, then build a completely different machine.

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Return on Investment (ROI) Calculator

December 3, 2009 by Joe Knight

The ROI (Return on Investment) calculator is a new tool added to Setpoint System’s web site.  This tool allows you to measure the viability of a potential automation project that Setpoint Systems could provide.  The tool requires the following information. 

First, you need to provide and estimate of the total cost of the automation project.  This cost is more than just the cost of the equipment.  It should include items like installation and support. 

Second, the ROI tool requires your best estimate of the annual savings the automation will provide.  These savings could include added profit from increased volumes, labor cost savings, lower scrap rates, floor space savings, and higher consistency in the output. 

Third, you will provide the number of years the annual savings will be realized. 

Fourth, you will provide the minimum annual interest rate return required for the automation equipment.  This rate is often provided by your finance organization.  It is a measure of the return that the money invested in your business should get.  Some call this the hurdle rate or the cost of invested capital in your business if you want to use finance jargon.

Once you have entered these inputs into the ROI Tool, you will get an output report.  This report will provide three ROI metrics that your finance guru will love.  They are NPV (Net Present Value), Payback, and IRR (Internal Rate of Return). 

NPV measures the amount of money the project returns in today’s dollars when compared to the initial investment.  A NPV below 0 means you are better off rejecting the investment because the benefits of the automation in today’s dollars do not cover the initial costs.  On the other hand, a positive NPV tells you that this investment beats your initial required rate of return in using current dollars. 

Payback simply tells you how long it will take to get your initial investment back – clearly the shorter the payback the better.  Payback is a simple tool that is used for a reality check.  Since it does not consider the investment to the return in current dollars, it is considered inferior to NPV and IRR. 

IRR measures the rate of return that the project pays out based on the initial investment and the return information.  If the IRR is higher than the minimum annual interest rate, then you are getting a better return than the minimum.  IRR method is a terrific way to present a project to management.  If your IRR is 25% on a project and your minimum required rate is 12%, you can say that this investment beats your required rate by 13%.  You would be crazy not to proceed with this project.

So have fun with this exciting tool.  I know a lot of you working on automation are technical.  I hope that you realize that this tool can be as exciting as running calculations on your old HP 11C calculator.  It can also help your company make more money.

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