Cutting the explosive ‘growth of overhead costs tequites mastery of More than just what happens on the shop floor 2 While wees ection one RET Ea ckciduromnenr seta tla screen Semseeemasanemsre mrealy University School {mactinery) industries are quien'y waging a different Siamese Gepey tees etary wa tor of BU Man Our feseatch shows that ovechead costs rank behind Rouadiable,the spon only quality and getting new products out on schedule feetserpnieaeaforche 483 primary concemet executives. facturing Pucuzes ‘The reason for this : Project. He is the author of high manufa Sethe sdeeee ee curing ovetbead basa : Hoegl em arcctes ” protcandcompeat ee ea as ademas eect on Srmatocetg "Ss bllve themeelves ob ponrvaaeionat Sees Feasan Feary Hi) ve tent re Het EEE ine | eee et RURAL NE bare ste so of reteset dete ae Sata axe LOOSE UO or, Baan se Saretheovehecd one acalec aoe cars menredbythe"hd- INSEAD and IMEDE te ois oe anine yt canes Sele tating hae cmon: Maowvha eatin seas ends ag I gh meet ieee, woikerbodudinlepss. University Schoolofen attention wo sera ee i eee y Reta onemie mince Menectoatmer theoredom mange” ioeucta swanes cuagtnclenteosn oe as ene ee et. meen errno ere the ecot- Seoimieaiisin Taderltahicban” By Greed cow mannan itis ‘mose productfoa-based Hall) of "Planaing Your American industry and as a percentage of overall man- intone bacco etl Raqurcoene” _ Amameunindny ad rs parentage cover Seren, Gansnatha Sale Sater! mene Rae pes coal einer asa 2979) added has declined |see Exhubtt I]. Moreover, in today’s paneeies Sibetletee: environment, production managers have more direct eae cote bare eas: leverage on improving productivity through cutting Big Halemanaae: ‘overhead than they do through pruning direct labor. teaath the tor shove As Anca aressep ope toma tcnsasion beset ef automation ty ad tae the ae gat ie iio orients fit overiend co pwn perc ss orton case ioe “See San aHarvard Basiness Review September October 185 rather than oa the structural activites that determine ovechead costs. (See the insert entitled "Overhead Costs Defined) Unit ouput drives direct labor and ma. terials inputs on the acrual shop floor that we all chink (of when we envision ¢ factory But in the “hidden iac- tony! where the bulk of manufacturing overhead coses accumulates the real driving force comes from trans- actions, not physical products. Thete transactions in volve exchanges of the materials and/or information ‘necessary to move production along but do not directly result in physical products. Rather these transactions are responsible for aspects of the “augmented product” roundle of goods,” chat customers purchasesuch aspects as on-time delivery qualicy variety and im- proved design ‘Tosee clearly how the hidden factory creates overhead costs, we must identify the basic ‘ypes of transaction that are carried out there by the People whose wages and salaries account for the followingcoses: Logistieal transactions, which od execute and confirm the movernen® of materials fom ‘one location o another These transactions ae pro cessed, tracked, and analyzed by many ofthe inccect ‘works onthe shop floor as well as by people in re ceiving expedicing shipping data en:ry data process. ing, and accounting, For the slectronics industry we ‘timate that processing sach transactions accounts for 10% 020% of total manufacturing overhead. Balancing transactions, which ensuse thatthe supplies of materials labor and capacity are qual tthe demand. These result in the movement ce: ders and suthonzations that generate logistical trans ction. ‘The people involved processing such transactions include puschasing, materials planning and convol personnel who convert master schedules and customer orders into raters requirements and purchase and shop order| a well as humnan resource Staff who convert these dernands int labor requce- rents) Alsoincluded are managers who process and suthonze forecests and who tur orders into produc tion plans and master schedules, We estimate chat these transactions also account for 10% ¢020% of manufactunag overhead im electronics manufacture Qualicy transactions which extend for beyond whac we usually dhiak ofas quality control {ndiect engineering. nd procurement eo include the ‘denaineation and communication of specifications, the certification that other transactions have eaken placeas they were supposed t and the development snd recording of relevant dat. n che electroais ind try, quality wansactions add up to some 15% co 40% manufacturing overhead