Calculating and Cutting

Changeover's High Cost

PackExpo2005
© 2005 by John R Henry, All rights reserved

Las Vegas
John R Henry CPP
Changeover.com
Johnhenry@changeover.com
787/863-9134
 Downtime defined

• Downtime – Any time the line should be running but is not, sometimes called
“unplanned downtime”

-Primary causes of downtime-

© 2005 by John R Henry, All rights reserved

• Changeover
• Operational problems such as jams, breakdown, need for adjustment, high
reject levels
• Maintenance (often does not cause enough downtime)
• Lack of materials
• Lack of trained personnel
 Changeover defined

• Changeover - The total process of converting a line from running one product
to another.

-The 3 Ups-

– Clean-up - The removal of all previous materials, components and product

© 2005 by John R Henry, All rights reserved

from the line.

– Set-up - The adjustment or changeout of the line in preparation for the
succeeding product.
– Start-up - The period of time after the line has restarted but before it is
running at normal speed and efficiency.

• Lean changeover - Changeover in which there is no wasted material, labor or

time.
 Changeover time defined

• Changeover time - The total elapsed time from the last unit of good
product at normal speed and efficiency to the first unit of good
product at normal speed and efficiency.
© 2005 by John R Henry, All rights reserved
 The problem with changeover?
© 2005 by John R Henry, All rights reserved

Its all about the Benjamins

 Types of changeover costs

• Tangible costs - Costs for which a reasonably accurate dollar value

may be calculated.

• Intangible costs - Costs which are difficult or impossible to

quantify.
© 2005 by John R Henry, All rights reserved

The fact that a cost cannot be dollarized

does not mean it is not expensive!
Tangible Costs
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 Lost Production

The most visible cost of changeover is lost production.

Line speed = 250PPM

Contribution = $0.50/Package
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Average changeover time = 60 minutes

Cost per changeover = 250 X 60 X .50 = $7,500 ($125/minute)

Annual cost = 240 X $7,500 = $1,800,000

 Lost Capacity

Lengthy changeovers reduce the available plant capacity

Assume:
Line speed = 250PPM
One shift operation (8 hours)
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1 hour/day of changeover

Theoretical capacity = 120,000PPD

Actual capacity = 105,000PPD

Annual capacity loss = 15,000 X 240 = 3,600,000 Pkgs.

If contribution per package = $0.50, cost of lost capacity is $1,800,000
Lost capacity is lost production from a different point of view
 Direct labor costs

Assume:

2 mechanics @ $25/hr
3 operators @ $15/hr
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Labor costs/changeover = (2 X 25) + (3 X 15) =$95/hr

Total annual labor cost = 240 X 85 = $22,800

There will also be inspection, material handling,

supervision and other indirect labor costs.
 Effect of lot size on inventory

500M

400M

LOT 300M
SIZE
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250M
200M Average
inventory
100M levels
50M

M T W T F
DAYS
 Impact on inventory

Assume value/unit = $4.00

Assume 30% carrying cost

Assume reduction in average inventory from 250,000 to 50,000

© 2005 by John R Henry, All rights reserved

Annual inventory savings = 200,000 X 4.00 X .30 = $240,000

Additional savings may attain from reductions in raw materials inventories.

 Rejected product and material

• In setup
– Packaging components and product are often used in setting up
machinery and need to be discarded.

• In startup
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– Startup is characterized by higher than normal reject levels. This

rejected product represents either a total loss if discarded or a
partial loss if reworked.
– During startup product may be produced which is acceptable but
not perfect. This variation may be perceived by the end customer
with negative effects.
Intangible Costs
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 Customer response

• Lengthy changeovers will reduce the plant’s ability to respond to customer

demand in a timely manner.

• This is not usually an issue in normal operation when everything is going to

schedule. Few plants have the luxury of “normal” operations.
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• Improved customer response will be a significant competitive advantage when

a customer has an unscheduled need.

• Contract packagers particularly need to make rapid customer response a core

strategy
 Reduced market share

• Reduced production output may result not only in reduced sales but
also in reduced market share. This will have long term strategic
implications.
© 2005 by John R Henry, All rights reserved
 Stress

• When changeover times are long, there will be increased pressure to

get lines up and running again. This causes increased stress:

– On people-As people are pushed harder, they become more prone

to error as well as cutting corners.
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– On machines-Excessive changeover time will result in machines

being run harder and longer with less time for proper repairs and,
most importantly, for preventive maintenance.
 IBM Ad
Innovation
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 Importance of knowing costs

• Justification of expenditure
– Operating expenses for machine upgrades
– Capital expenses for machine replacement
– Direct and indirect expenses for training
– Lost production while modifying machinery
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• Comparing the time gained from changeover improvement to the

expenses incurred is comparing apples to oranges.

• Costs and benefits must both be expressed in dollars for useful

decision making

• Downtime from changeover is a significant cost that is often

unrecognized
 Accounting must be involved

• Changeover costs must be determined by finance/accounting to

develop and “official” number that will be accepted by management

• Cost data developed by engineering or production are not always

believed
© 2005 by John R Henry, All rights reserved
 Real life examples

• OTC pharmaceutical tablet plant- @$25,000/hour

• Prescription pharmaceutical tablet plant @$16,500/hr

• Distilled spirits bottler @$22,000/hr

© 2005 by John R Henry, All rights reserved

• Skin care products @$11,000/hr

 Two paths to lean changeover

• Mechanical
– Focuses on improvement to machinery to make it faster and easier
to change in a repeatable manner.

• Operational
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– Focuses on people, processes and procedures to eliminate wasted

efforts and time from changeover

Lean changeover requires total involvement!!

 Three tasks of changeover

• Eliminate all unnecessary tasks.

• Externalize to the maximum extent possible any tasks that cannot be

eliminate.
© 2005 by John R Henry, All rights reserved

• Simplify whatever tasks remain

MEASURE, MEASURE, MEASURE!

© 2005 by John R Henry, All rights reserved