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INTRODUCTION
Much of the attention to improvements in the factory goes to the
most obvious source of cost, the actual production process, which
includes manufacturing labor and purchased materials and parts.
But direct manufacturing makes up only part of total weapons sys-
tem cost. Less visible costs in the overhead, general and administra-
tive (G&A) categories are larger than direct labor costs at the prime
level, often by a factor of two or more. In this chapter, we discuss
how the lean philosophy affects the indirect costs. We present some
examples of how companies participating in this study have
attempted to cut these costs and the results they achieved. The
CCDR definitions for overhead and G&A costs can be found in
Appendix C.
103
104 The Effects of Lean Manufacturing
pany as an entity and may not be related to activity levels at only one
plant, especially in larger aircraft manufacturers. They include such
costs as the salaries of the company’s front office staff and the like.
As a percentage of labor hours, G&A costs tend to be in the 10–25
percent range of the direct factory labor rate.
ADMINISTRATIVE COSTS
Lean manufacturing includes a number of initiatives that should
help minimize administrative costs. One tool is to reduce the num-
ber of managers by having decisions made at the “lowest” possible
level, that is, by the people closest to the work being done. This also
suggests that trained workers have better insight into certain prob-
lems than do some senior manager up the chain of command.
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1 Joint Strike Fighter Program Office estimate.
Overhead, General, and Administrative Costs 105
MATERIALS OVERHEAD
As discussed previously, application of lean to procurement activities
should reduce the materials overhead costs at the prime and major
subcontractors. Materials overhead (or materials handling costs) has
a wide range of values (5–40 percent) of the price to the prime, which
vary by company, stage of development (EMD or production),
whether special handling is required, volume of the purchased
materials, and so forth. No “rule of thumb” savings can be devel-
oped for these changes, but application of the lean processes for
supplier management should reduce these costs at the prime, major
subcontractors, and supplier levels.
lean implementation because the lean model calls for rethinking the
way that factories are laid out, a process that quite often results in
reduced space requirements. There should also be less space
required for inventory storage and so forth. Furthermore, this metric
is a relatively unthreatening one for companies to report, as it does
not reveal proprietary information, as specific cost data does. In
addition, space reduction does not necessarily threaten anyone’s job.
However, reductions in space requirements only produce real sav-
ings in two situations. The first is in a greenfield situation, where a
planned production facility can be reduced in size after application
of lean principles. (Indeed, one company reported redesigning a
planned facility according to lean principles, resulting in a two-thirds
reduction in size.) In a brownfield situation, a reduction in space
requirements can result in real savings only if another revenue-gen-
erating production line can be placed into the freed-up space after
lean principles are applied. Savings claimed by freeing up space that
is then left unused but still must be environmentally conditioned
and kept secure are illusory. Such actions to reduce floor space
requirements may reduce the overhead charge to one particular pro-
gram or product, but if the overall costs remain the same, they are
merely reallocated among programs through overhead rate adjust-
ments.
In a typical nonlean plant, parts are not being worked on for as much
as 99 percent of the time they are on the factory floor. As parts move
from one batch-processing cell to another, waiting their turn to be
worked on, waste and costs increase. When one company analyzed
the flow of a major composite subcomponent through the factory,
they found that during 92 percent of the total cycle time, the part was
not being worked on, being instead in idle storage or in queue.
Transportation amounted to 1 percent of the time, and non-value-
added processing consumed 4 percent of the total time. That meant
that value-added work was being done to the component only 3 per-
cent of the time that it was on the floor.