Machine setup is as ancient as the manufacturing process itself. Setup temporarily stops product flow, which causes loss of production time and output, and nobody seems to like it. For most production people it is a necessary evil. For cost accounting people it is a non-productive cost that should be eventually reduced or eliminated. For business owners it is an obstacle preventing more efficient use of equipment and better use of their capital investment. Therefore, the more we lower the setup time, the better the business becomes.
Let us further explore the setup issue and its impact on the business cost. Setup occurs when you produce more than a single product on your equipment. It means stopping the machine and changing over to a different product which is competing on the same resource. It takes time to change tooling, realign the machine, check the quality of the first part and start production of the next batch.
Setup may require the use of other resources than just the machine operator. It may take a setup specialist, maintenance people, and even engineering personnel to accomplish the task. All of these people add to the setup cost. In effect, even in a dedicated line for a single product (usually found in a high volume type of product), there is setup involved. Every time the line stops, primarily due to disruptions, there is a need to reset machinery after the line failure has been fixed.
When you take the loss of time and the work involved in setup, it seems that there is a common acceptance that - although undesirable - setup is a part of the production process cost. So how do we calculate it? Cost accounting takes the amount of time spent in setup, including support-type activities, and allocates it to a single unit. The allocation is done based on the number of units produced in a batch. For example, if a total setup time is two hours for a batch of 120 units, a minute of setup time will be added to the labor cost of the unit. If only one unit is produced, the entire two hours will be added to the labor cost. In most cases, an average batch size is assumed in order to calculate the setup cost on a unit. Once the labor cost including setup time is calculated, it is used as a basis for figuring the total product cost using overhead allocation factors.
In recent years, many companies have gone through a massive effort to reduce their cost of products in order to stay competitive in a constantly more demanding marketplace. One of the areas of focus was setup time reduction. Terms like “quick-changeover,” SMED (single minute exchange of die), and “zero setup” were brought to the manufacturing community. In most cases the method for calculating the savings is the product costing technique that assumes a reduction in setup time will result in a lower cost of the product. The labor time is reduced, hence reducing total product cost accordingly. This makes sense, right? Unfortunately the reality is much different in most cases.
In order to understand why, we have to take a different view, which is based on global business perspective. What is flawed is not the setup reduction itself, but the cost accounting method of calculating its net impact. The cost accounting method is too narrow and localized. In most cases, a setup reduction does not decrease cost. It may even increase it.
Let us see what different approach must be implemented. First you have to understand the total flow process and the resources involved in it. Then you have to look at the net impact on the total business. Let’s say that on a certain machine we were able to reduce the setup time from two hours to one. The immediate reaction is that we have saved this hour for the entire system.
However, in most cases, what we have really gained is one hour of labor and machine capacity. Unless we have reduced the actual workforce (or at least some overtime), we basically did not save any labor or overhead cost. At times, the newly gained capacity (like the one hour in our example) may be used to increase machine output. Unless we are able to gain a similar capacity increase in all other machines, we may end up with excess inventory instead of additional sales.
We must remember that we need to pursue an ongoing campaign of setup reduction. However, any improvement is not an immediate cost saving but a capacity gain which will give us the potential to improve the bottom-line results when used wisely.
We must stop using cost accounting as a method for calculating benefits. Instead, we need to simultaneously look at the impact on business throughput and sales, inventories, leadtimes, material costs and real operating cost savings. This will allow us to truly calculate the net impact on the bottom line.