The Hidden Factory is a term that refers to activities in an operation or standard operating procedure (SOP). A few examples of Hidden Factories are workarounds, rework, or any of the 7 wastes, which I will describe below. Most organizations have some form of a Hidden Factory and being able to “see” these hidden factories in an organization requires learning to see what waste is and understanding that waste in any operation — service or manufacturing — can be a substantial drain on the bottom line, top line, on employee morale, shareholders and, most importantly, the customer.
In fact, one very important litmus test for an activity is this: “If the customer knew the details of process x, would she be willing to pay for it?” In other words, suppose substantial rework was required to manufacture a widget and that rework cost was baked-into the cost of 1 unit of a widget, would the customer be willing to pay for the firm’s defects? Would the customer be willing to pay for the firm’s internal inefficiencies?
What is a Process?
A process is an systematic activity comprising of smaller activities that culminate in an outcome ” service or product. A process can take up time, space, and resources. All processes can be categorized into the following categories: Value-added, Non-value added but necessary, and Non-value added.
From the Customer’s Perspective:
- Value-added: This step in the process adds form, function, and value to the end product and for the customer.
- Non-Value-Added: This step does not add form, function, or assist in the finished goods manufacturing of the product.
- Non-Value-Added-But-Necessary: This step does not add value, but is a necessary step in the final value-added product.
(2) & (3) naturally create waste, of which there are 7 types:
- Over-Production: Producing more than is needed, faster than needed or before needed.
- Wait-time: Idle time that occurs when co-dependent events are not synchronized.
- Transportation: Any material movement that does not directly support immediate production.
- Processing: Redundant effort (production or communication) which adds no value to a product or service.
- Inventory: Any supply in excess of process or demand requirements.
- Motion: Any movement of people which does not contribute added value to the product or service.
- Defect: Repair or rework of a product or service to fulfill customer requirements.
It’s important to understand Value in terms of the customer. From the customer’s perspective, Value could be defined in the form of a question:
Which process steps (and associated costs) do our customers not have to bear?
It’s a revealing question ” most companies are glad that they do not have to reveal how their product or service is created, for fear of their inefficient processes and wasteful operations revealed to the customer. This stance is sometimes aptly called “not revealing how the hot dog is made”, amicably referring to the unknown contents of the hot dog.
Process Cycle Efficiency
There is a metric that helps to identify how much of a process is actually value-added. It requires a few things:
- Map the process.
- Identify the Value-added steps, non-value added steps, and the non-value added but necessary steps.
- Stratify your map according to the items in #2
- Add a time dimension to the process steps.
Once you have completed steps (1) – (4), then you can simply calculate how much is actually value-added, as a percentage. The time for the entire process ” end-to-end ” is called a cycle time. To identify the Process Cycle Efficiency, you just divide the value-added time by the cycle time for the process.
Process Cycle Efficiency = (Value-added Time / Cycle Time)
For example, take the hypothetical process below:
The process above has a cycle time of 860 seconds. So, the Process Cycle Efficiency could then be calculated by doing the following:
Process Cycle Efficiency = 182 / 860 = .21, or 21%
In other words, only 21% of the process above is considered value-added to the customer. Put another way, the customer might be bearing more than 75% of the cost associated with the waste above. Knowing this, the firm should aim to increase the Process Cycle Efficiency of the process by eliminating or reducing the waste.
Data like this can help the firm increase their value-added percent to the customer by eliminating or reducing the waste in their process. Doing this would put the customer first and allow the firm to “get their house in order.” I consider the above exercise to be simple, yet incredibly helpful for the firm to make sure that they provide maximum value to the customer; it’s a fiduciary duty to the customer.
Think about your processes? How much is really value-added to the customer?
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Richard Durnall says
I use value-stream maps and process cycle efficiency quite a lot. Mostly these days it’s through mapping the efficiency of the software delivery life-cycle in large corporates. One of the questions I often get asked is what is a good process cycle efficiency and what a good target would be. My answer is “it depends”. I’m really interested in your thoughts….
Uzi Shmilovici says
RE the value – I think you got a big mistake there.
A price of a product is what a customer is willing to pay for it (which should be lower than the value a customer expects to get).
To simplify – it I can sell you a machine that will generate $10K per month, basically – assuming no overheads you should be willing to pay $9999.99 for it.
You will be very happy to buy it for $6000 and you don’t really care if I wasted time or anything else in the process… as long as you get your ROI. You won’t mind bearing my $4000 of inefficiency.
Arrr Rwww says
You would mind if you knew, and you would choose a similar product from another manufacturer if they had already managed to shave that 4000 off the retail price, so you will eventually lose customers by sticking with the ‘they don’t really know or care’ attitude.
psabilla says
@Uzi,
Thanks for your comment.
What you are arguing is quite elementary. Yes, in basic price theory, the price (not cost) of an item is whatever the market will bear. That’s basic and most people know that.
What I am arguing is a an argument about principle. At Toyota and most firms, pricing goes like the following:
(Profit = Price-Cost)
From the firm’s perspective, it makes absolute sense to eliminate waste, reduce defects, and get the firm’s house in order. Why, well it can increase your gross margins.
From the customer’s perspective, it is almost a question of ethics to have such a crappy process or operation and shifting that to the customer.
It is simply good business to have a cleaner process and have the customer in mind. It’s good for economic profit and, perhaps more importantly, it is just plain thoughtful and nice to do. It’s just the right thing to do.
Mark Graban says
There’s also quite a “hidden workplace” in hospitals… a “hidden hospital”, if you would, where the exact same concepts apply…
Angela says
Uzi,
That is true as far as price, however, some things that are bought do not generate additional money for the customer. Such as I buy a car to get back and forth to work. Am I going to buy the least expensive car that I can that has the features I want? Yes. Does the lowest cost producer of that product get my business? Yes. Will it help you be the lowest cost producer if you get rid of waste in your process? Yes. Therefore companies who would like to stay in business better get out the muda. Such as GM and Ford. Higher labor costs than the market will bear is not value-added to the end customer and they certainly don’t see union labor insurance premiums as adding any value to their car.
Rita says
The costs of the company on waste is also connected with capacity. Less pieces being produced, means less customers served, less sales, less revenue. Just because of wasted process time. If less waste mentioned above the company could have more 3 pieces go through….