Are you fully aware of everything that goes on inside your company and the effect it may have on your business overall? Do any of your customers or staff understand what it means to have a “Hidden Factory” and its impact on the products and services they provide?
Most business owners will have some awareness of tangible waste items such as excessive stock, defective products, and office over-processing. But the hidden waste within your business may not be as tangible or easily calculated. Hidden wastes may take the form of products or services requiring re-work, lost labour and machine hours, or even material scrap from up-stream processes.
Organisations should ensure their processes get everything right first time in order to eliminate costly sources of error and waste. The term Hidden Factory is used to encapsulate these costs that business operations or manufacturing processes create. It is an important consideration for any business to examine and identify where costs can be reduced, thereby increasing profitability.
What are the effects of a Hidden Factory?
A Hidden Factory ultimately effects a company’s financial costs, often as a type of compensatory measure which results in unwanted and unrewarding consequences. Businesses have to input more effort than required, leading to wasted time, resources, and essentially, money. A Hidden Factory is set apart from typical costly factors a company measures due to effects that are not immediately noticeable or tangible.
An example of this may be a situation where the machinery used in a product’s production process cannot be operated by an employee who received incomplete training. In such an example, the inability of the employee to operate the machinery will set off consequences that include lost labor and man hours, decreased product quality and poor customer relations.
The cost of another employee helping out, as well as scrapped products due to quality control will impact the company. If the company attempts to recuperate these costs by passing them onto the customer and raising the price of the final product, it is likely customers will respond badly to this. Unhappy customers may take their business elsewhere, leave bad reviews and ask for refunds. These factors impacting the bottom line of the company are another element of its hidden factory.
The cost of a defect that is not detected until the process is completed is often far more than if the defect were found at an earlier stage. Consider a sub-assembly that is missing a nut. If the sub-assembly is assembled into a finished good before the missing nut is noticed, the whole product may need to be scrapped. The cost of the missing nut is a fraction of the price a new product would be to replace the defective one.
Hidden factories do not just apply to physical products. An employee may spend an extra five minutes on their break, and after lunch. Five minutes may only be around 1% of an eight-hour workday, however, if every break is fractionally longer than expected the effect is compounded. Multiply this across a workforce in an organisation and suddenly it is clear that huge costs can be a direct result of factors that may well be hidden from initial sight.
Example of a Hidden Factory
Consider a company that sells a product for £10 to generate a desired profit margin of £5. Due to damaged raw material, machines breaking down, and inefficient processes; their manufacturing costs per product increase by £2. This additional cost reduces the profit margin of each product to £3 and affects the company’s bottom line. It is likely that raising the price of their product to reach the desired profit margin will result in less sales and a loss of customers, especially in price-sensitive markets.
Conversely, if the company managed to identify their Hidden Factory and eliminate the waste in their business and production processes, these additional manufacturing costs are reduced. The product can now be sold at £10, while retaining a £5 profit margin. This would not only help to secure the future of the company, but also keep the customers and shareholders happy.
How to deal with your Hidden Factory
In our experience, every company has a Hidden Factory. By identifying and quantifying the extent of your hidden waste, steps can be taken to eliminate as much as possible from being generated in the first place. This may be a complete company overhaul and culture change, or smaller improvements to your company’s processes.
Whatever the action or combination of actions taken, a different way of doing things which is more efficient and produces a better-quality outcome is possible. It is much easier for the business owner or director to measure success by units sold and business turnover. It is much more difficult however to measure costs in terms of failure.
After all, focusing on the negatives and highlighting failures is never a pleasant or enjoyable task but it is essential if your business is going to continue to grow and remain competitive within your industry.
Can this work for all businesses?
Our team believes that it can.
Keeping costs down whilst increasing productivity and profit is at the heart of every business. Here at Fluere we are specialists in analysing businesses to identify your Hidden Factory and drive inefficiency out of your processes.
Call us on 0113 250 6768 to find out what we can do for you and your Hidden Factory.