Zero is a specific amount

Modern Machine Shop, July, 1991 by Ken Gettelman

Zero Is A Specific Amount

Many capital equipment justification methods, often cast in stone by tradition, allow managers to use only those items where a clear cost savings can be sharply documented and quantified. These usually center on direct labor savings with factors such as a reduction in scrap rates or faster setup managing to work their way in.

The usual rationale for this approach centers on the argument that anything that can't be precisely measured doesn't belong in the justification process. This made some sense when direct labor itself constituted seventy-five percent of the total manufacturing costs.

Today, when direct labor often accounts for no more than ten percent, a value of zero placed on all other factors makes about as much sense as measuring the total productivity of a plant by timing the floor-to-floor cycle time of a single machine.

In the narrow justification approach, factors such as improved quality for better market place acceptance, better flexibility for improved customer service, faster plant throughput, improved worker morale, smaller lot sizes, and the impact on reducing indirect costs, never enter the equation. Actually they have entered the equation. By keeping them out, a quantity of zero, in itself a definite and precise mathematical amount, has been placed on the indirect factors. The very act of refusing to consider them automatically assigns to them a value of zero. Ignoring them does not change that fundamental truth.

More than twenty years ago, keen managers were noting that as much as ninety percent of the impact created by numerical control machine tools fell outside the direct cost areas. NC only minimally reduced direct labor. However, when properly operated in a well designed process to take advantage of what NC had to offer, it could make a powerful impact on many indirect cost areas by reducing fixturing needs, eliminating a lot of inspection effort, developing a much better quality picture, providing a measurable improvement in production flexibility that in turn greatly aided the marketing effort, and even gave the product designers a new freedom by extending the range of what economically could be produced. These are just a few implications of NC machine tools. Computers and other manufacturing technology resources have created their own opportunities, and most of them fall outside the direct cost saving realm.

Today's new technology provides ways of radically changing the entire manufacturing environment. This becomes very heady stuff and offers the opportunity to completely restructure the competitive stature of any business. In a sense, it also can be very frightening because it ventures off the familiar path into the unknown with its pitfalls as well as opportunities.

Even though new manufacturing technology is difficult to quantify for its indirect value, every manager knows it is real. When asked to come up with figures, a good estimate is the best that can be done. Unfortunately, tradition says you don't buy equipment on nebulous estimated savings or indirect advantages.

There is but one problem. Leading manufacturing plants around the world do place estimated values on the indirect advantages offered by advanced technology. It is all part of their strategic planning to win customers and gain markets. The numbers may be imprecise, but they do say that the ability of advanced equipment to change the very operating strategy of a business does have a significant value that cannot be ignored.

The chosen numbers may, in the final analysis, be substantially off the mark. However, they almost certainly will be closer to the ultimate real value than zero.

Zero is a real number and the worst that could be selected. Remember, ignoring indirect advantages automatically assigns them a zero value.