IMPROVEMENT OF A MANUFACTURING PROCESS FOR COST REDUCTION: A CASE STUDY

Abstract

The labor cost variance in the case study company used in this study has been trending increasingly on the negative side in the last four years. In a bid to protect the identity of the case study organization while ensuring no divulgence of confidential data and information accessed during the course of this research to competitors as stipulated in the non-disclosure agreements; a pseudonym of “ABC” would be adopted to describe the company referred to in this research. The aim of this study was to investigate the main causes for the persistent increase in negative labor cost variance. In particular, the packaging process at ABC was studied using the concept of lean manufacturing. Lean manufacturing was a philosophy developed by the Japanese auto giant Toyota. The philosophy is a systemic approach to identifying and reducing non-value added activity and eliminating wastes. The motivation for this study was to understand how non-value added activity (NVA) may impact the negative labor cost variance in a pharmaceutical industry. Hence, the objectives of this study were defined as: (1) Develop an understanding of the impact of NVA on negative labor cost variances; (2) Determine the correlation between NVA and increased negative labor cost variances; (3) Propose recommendations on how to reduce or eliminate negative labor cost variances. Process activities captured over a period of eight months revealed that employees were waiting for one reason or the other for almost five hours in sixteen daily operation hours (two shifts running at eight hours each), a cumulative 32% of the total productive time. This waiting is a type of waste in manufacturing or service business. The research revealed that eliminating the waiting time accounts for 83% of all identified wastes. The main contributions of this thesis are in the field of general design theory, methodology and manufacturing (pharmaceuticals and fast-moving goods manufacturing). In the examined existing literatures, there is a gap that NVA are not captured by ascribing cost to each component of the NVA. This thesis provides a methodological framework to ascribe costs to NVA and quantify losses due to NVA. Also, this thesis provides a well proven argument for looking beyond changing of standard costing model by the finance department in order to write-off negative labor cost variances. Manufacturing organizations with similar challenges as ABC can now investigate business processes to identify opportunities in the form of NVA that can be improved to neutralize negative labor cost variances and better position the business for profitability. This research has been able to establish that the high manufacturing cost (negative labor cost variance included) can be linked to high NVA activities investigated using different waste’s types entrenched in the theoretical framework.