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Measuring and Assessing the Cost of Manufacturing Cells and Lines

Dynamo’s Dilemma
Dale Dynamo, owner of Dale’s Miraculous Medical Devices (DMMD), was confused. He had made the decision to adopt lean thinking in the manufacture of his company’s products. As a first step, he wanted to combine the three independent manufacturing processes required to produce his company’s highest volume product into a single manufacturing cell. Intuitively, he understood that DMMD would reap many benefits from cellular manufacturing, but his Controller, Marvin Myopia, provided him with an analysis that appeared to prove otherwise. According to Myopia’s analysis, the cellularization of this product’s manufacture would increase, not decrease, the product’s cost.

Using the company’s direct labor-based costing system, Myopia’s analysis, showed that cellularizing these three processes would increase the manufacturing cost of the part by 25 percent, from $25.50 to $32.00. (See Exhibit 1.) The problem with cellularization, according to Myopia, was the fact that all processes in a cell have the same throughput rate—the cell only operates as fast as its slowest operation. Since Process #1 can only produce six parts per hour, Process #2 will slow down from ten to six parts per hour and Process #3 from eight to six parts per hour. As Myopia saw it, this less-efficient use of manpower and equipment would result in a higher product cost.

Hicks Exhibit_1

Based on these “facts,” Dynamo began having second thoughts about his plans to create manufacturing cells. Was his intuition faulty, or was there actually something wrong with Myopia’s analysis?

To get a better understanding of the situation, Dynamo decided to create comparative graphics showing the product’s manufacturing flow as it currently stands and as it would be if a manufacturing cell existed. His comparison is shown in Exhibit 2. What he noticed first were the four in-process movements that would be eliminated, as well as the need to store in-process inventory twice. Eliminating the movements would reduce material handling activities by two-thirds and over time cut the cost of indirect labor and benefits, fuel, lift truck maintenance and other costs related to this non-value adding work. Without the need for storage, floor space would be freed up for more productive use and in-process inventory (which he cannot use as collateral for his working capital line of credit), as well as the overall cycle time required to produce the product, were reduced by ten days. Why, he wondered, don’t any of these savings appear in Myopia’s analysis? Could there be something amiss with the way his company costs its products and processes?

Hicks Exhibit_2