Solutions to address the crisis of increasing cost for companies. Particular focus given on small and medium enterprises in Malaysia

1. The Cost Crisis
“drive cost down or be driven out by increasing cost”
The challenge for Malaysian Small & Medium Enterprises
J. Ramesh Victor
Sr.Consultant and Director, Advanced Manufacturing Consultancy Sdn. Bhd.
1. Introduction
Business owners in Malaysia are now facing a major challenge as operational costs keep rising and customer
expectations are getting more and more stringent in terms of price, delivery and quality standards. Heavy
competition from new-comers into the industry also poses new threats of loss of market share. This has
particularly put the small and medium industry sector in a much more vulnerable position. Recent increase in
fuel and energy price in the country has made the cost concern a matter of serious consideration. For the
business which has cost not-well-managed due to inherent waste in the system, it is a matter of drive cost
down or be driven out by the increasing cost.
2. The Options
Several options are available to address the issue. The more obvious ones are:
1. Increase price of product: Not favored by customer and can lead to loss of market share
2. Increase volume of sales and market share: Needs competitive advantage; especially of price,
delivery reliability and ability to meet lead time reduction as needed by customers
3. Reduce operational cost: Needs focused effort on identifying and elimination inherent operational
waste
4. Abandon the business and look for alternative industries to invest: Risky, requires capital and usually
ends up in similar challenges to be addressed
While the most logical direction to take is option 2 and 3, these need certain basic elements to be fulfilled.
Firstly there has to be a mindset shift which is strongly held by the business owner. This mindset shift of
improvement despite rising costs is illustrated in Fig.1
Fig.1
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2. 3. Operational Excellence through Waste elimination
Once the mindset shift is established it becomes a matter of execution towards operational excellence.
Improving operational excellence by eliminating waste within the system is not only within the control of the
SMI owner but also has proven record of being able to help companies:
1. Maintain price, increase at a lower rate compared to competitor or in some cases even reduce price
2. Improve delivery cycle time and reliability which can lead to improved market share
3. Avoid capital investments when there is a need to increase production volumes
Operational waste is like a killer virus which affects the health of a business from the inside. Though it is easily
addressable it is the least focused on initiative in the SMI environment. The bigger enterprises have somehow
come to realize the potentials of waste elimination and have started to spend much effort, time, resource and
investment into waste elimination initiatives. Some companies have been able to turn around their entire
business survival status and profitability by these initiatives. Toyota, Seagate Technologies, Dell & General
Electric are only a few of those giants to name who have had a huge business impact due to waste elimination.
In the local scenario Air Asia is one such achiever.
As for small and medium businesses the game is not much different. In my years of travel around the world I
have visited hundred over factories out of which about 50% are small and medium industries supplying to
bigger giants. These companies are now starting to realize the importance of waste elimination but the rate at
which they are moving, especially in Malaysia, is still quite slow.
The SMI owner has no control over the rising Fuel, Energy, Labor and Raw Material Cost. However once
these resources are already purchased they are very often misused or wasted which results in a compound
effect over the rising operational cost. Raw Material which is purchased at a high price may not be optimally
managed in the operations. High Inventory, High scraps, rework, and over-produced parts can contribute to a
major chunk in operational cost
The average waste I have observed in a typical small factory is close to about 70% of its entire operational
activities and spending. This is illustrated in Fig. 2
Value & Waste
Excess Inventory
Value Adding
Proceeses
Overproduction
Rework & Scraps
Queuing &
Waiting
Motion waste
Unutilized Human
Resources Excessive
Overprocessing Transportation
Fig. 2
While the above scenario is very common most of the small companies I have seen embarking on a serious
waste elimination program have been able to bring the value level up to about 60%. This will result in
tremendous improvement in speed, flexibility and productivity which can then be turned into products they sell
at a higher profit margin. If 150 employees and annual sales of not more than 25 million the right definition of
an SMI, then I have seen companies in such categories achieve savings such as:
solutions towards increased revenue

3. 1. 50% reduction in Inventory Holding
2. 40% improvement in Cycle Time
3. 30%-35% space saving
4. 30% increase in bottleneck machine capacity without adding any investment
5. 15%-20% savings in productivity with same human resources
One medium size business owner who I am working with in Perak has already reduced more than 7 days in
their product Lead Time within 3 months which will become a big competitive advantage for them. They are
now working on reducing their raw material inventory holding by 50% within the next few months.
4. The Solution Tools
There are many solutions and options which big companies use in their journey of waste elimination. However
the SMI owner has to take solutions which are more pragmatic, immediate-result oriented and affordable in
this journey. Some of the proven tools in achieving this end within a short period of time include:
1. Value Stream Mapping: This is a diagnostic tool which is very easily learnt and used within a 2-3
days period. Using this diagnostic tool a company will be able assess the amount of wasteful
processes, inventory and activities that exist in the whole factory. The tool also identifies the location
and quantum of waste so that improvement can be focused on those areas.
2. Inventory Control: Tools that enable controlled buying and using of inventory in Raw and in the
shop-floor are batch size reduction and Kanban Systems. These tools help a system to allow to
purchase and use only the right quantity of parts that is needed for the actual demand. Thus it helps
avoid Excess Inventory and Overproduction.
3. Quick Changeover: Machine changeover which are very long and complex are the cause of high
inventory batches and rigidity in responsiveness to customer demands. The Quick Changeover tool
helps to identify easy ways to reduce the setup or changeover time by about 50%. This is done by
studying the set up work elements, reorganizing them and streamlining them.
4. Total Productive Maintenance (Equipment Improvement): Most equipment which are not well
maintained in terms of technical servicing and in terms of utilization can cause drastic productivity loss.
Total Productive Maintenance or shortly known as TPM is a methodology of restoring, maintaining
and utilizing the machine so that it is producing defect free parts with optimum efficiency. Usually a
TPM metric known as Overall Equipment Effectiveness (OEE) is used to measure the compound
effectiveness of Availability Rate, Performance Rate & Quality Rate of the machine. The world class
OEE achievement standard is 85% and TPM helps achieve this on machines.
5. Error Proofing: Quality is a basic requirement which cannot be avoided by any manufacturer or
service provider. Very often mistakes and errors happening along the processes (whether or not
caused by machines) lead to scraps, defects or rework which eats into operational cost. Error
Proofing tool is a structured method of identifying common causes of errors as well as specific root
causes using methods such as Red Flagging, Fish Bone analysis, Why-Why analysis and in some
cases statistical analysis. Once the root cause is identified either human or mechanical solutions are
put into place to prevent the error which causes the defect from happening.
6. Visual Systems & 5S: A basic requirement of any waste free manufacturing factory is methods of
keeping the place always organized, clean and to have sufficient visual signals which attract anyone’s
attention to what is happening in the factory and what action needs to be taken. 5S is a workplace
discipline tool which defines a place to keep anything at all and to ensure that it is always kept in that
place. It is also a tool of discipline among workers to own their workspace, whether it is in the office
area or the shop floor. Visual System is the creation of effective signals, controls and displays in the
shop floor and office to make management work easier
7. Standardized Work: Standardizing and documenting right procedures ensures repeatability of job
and also consistent performance in any environment. This tool analyses and defines the rules of
establishing good standardized work. The basis rule of standardized work is illustrated in Fig 3
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4. The Right Way Of
Doing Things
The Documented Way The Way Work Is
Of Doing Things Actually Done
The Right way must be the same as the Documented way and the way work is Actually Done
Fig. 3
The tools mentioned earlier are easily learnt and used in any environment. They are proven to be effective in
eliminating waste and showing results in big as well as small companies and service organizations. However
proper learning and application of the tools will ensure the right amount of savings and also capabilities of
maintaining the improvements achieved.
5. Where to Start
The starting point of the war against operational waste will be doing a Value Stream Mapping exercise to
identify and quantify the waste in their plant. The skill to do a value stream mapping and skills on the various
tools are also needed. These may be obtained in one of several ways; by doing it themselves based on self
acquired knowledge from experienced staff, getting external help, going for public learning forums, e-learning
or hiring an appropriately experienced expert. Various monetary aids are also available from PSMB, SMIDEC
and HRDF to help fund or subsidize external training
Establishing a roadmap based on the Value Stream Map will be the next step which will have to have the
management’s full sponsorship and support to ensure that the planned activities are religiously carried out
until results are obvious.
In summary it can be concluded that there are various tested tools available to handle inefficiencies and waste
created right inside a business. This can often amount to a large portion of the total operational cost.
Identifying and eliminating these waste helps SMI’s to have a better control over increasing costs and
competition.
Advanced Manufacturing Consultancy Sdn. Bhd. is a consultancy firm specialising in:
Helping clients in cost saving & productivity improvement programs
Consulting and Training in Theory of Constraints
Consulting and Training in Lean Manufacturing
Lean Sigma development
Certification programmes in Lean & LEANSIGMA
Factory audits and assessments
www.amckaizen.com
solutions towards increased revenue