The Cost of Not Knowing



cost-of-not-knowing.jpgOne way The Center’s Industry 4.0 team assists businesses in identifying potential technology investments is by performing a financial analysis. Aside from looking at the general measurement of profit or loss (“winning” or “losing”), this analysis enables us to determine whether the business has a clear understanding of the connection between operational and financial performance.

As a frame for this article, consider the relationship as such:

1) Defects cause Variation 

2) Variation increases Cost

3) Cost erodes Profitability

The effect of cost on profitability is generally well understood. The higher a company’s costs, the less profitable they can be. However, while companies often know if they are (or are not) profitable, they do not always have a clear understanding as to why. Gaining a true understanding of the impact defects have on profitability is key to improving business performance.

For company leadership to see the correlation between performance and profitability, they must first possess an understanding of the word “defect.”  The definition taught in Lean Six Sigma is this: Any output from a process step that does not fully meet the requirements or stated expectations of the next recipient (the customer) in that process is a defect. This definition serves well as it applies to any process or output, whether a product or service, and includes internal and external customers by simply mentioning the needs of the “next recipient.” This means any time the process does not function as expected and an associate, operator, supervisor or manager must resort to a “Plan B,” we have a defect.

It’s obvious that if a part is made outside of specifications, it is defective. But even if the part is repaired by fixing the defects (requiring additional cost and labor), or requires additional work to resize or trim to fit, that rework also is a defect. This means that any time a worker cannot find something in its expected location, that is a defect as well. Any time leaders lack the information needed to make a timely decision, that is a defect. Reacting to defects creates workarounds in the process, and these non-standard activities result in variation.

Variation results in the loss of resources, time, materials, employee potential and creativity. In other words, it creates cost. This is what many veterans in continuous improvement refer to as the “Hidden Factory.” The Hidden Factory forms when a defect flows downstream. Once the defect is caught, a workaround is created as some alternative activity must be performed to correct the defect and return the part (or service) back into the process. Using the word “hidden” does not imply that someone is deliberately sweeping these occurrences under the rug, but rather that the costs associated with the defect are not being measured. 

Sometimes this impact goes entirely unnoticed, as is often the case with reworks in part machining, as an example. If the part is not correct, it cannot be passed on. However, while the loss and replacement of a defective part is captured in scrap, the costs of correcting the part to move it forward without scrapping it often are not. Even worse, if these deviations from the designed process occur often enough, they become the adopted norm in operations and start to be accepted as the “cost of doing business.” As previously stated, a company must be able to detect these defects in the process and measure their impact in order to properly define (and resolve) the underlying issues and restore profitability.

The question then is, How can a company most effectively acquire the real-time data needed to recognize when a defect occurs, causes variation and results in increased costs? One technology that lends itself well to this endeavor is the Manufacturing Execution System (MES).

The MES typically is used to track and document the transformation of raw materials to finished goods in manufacturing processes. This same approach can be used in a service industry where raw materials (such as orders, requests, information, etc.) are run through a process to provide a desired output to customers. In any case, the MES works to provide information that helps decision-makers detect variations and look for ways to improve or optimize the production process. The system also is cross-functional, interacting with all areas of the value stream.

This technology provides several key benefits to a business, including:

  • Performance expectations with regards to lead time and the production schedule can be pulled directly from an Enterprise Resource Planning (ERP) system or, where none exists, the MES can serve as the scheduling system for materials, machines, personnel and other resources. This provides a script to ensure that everyone is working to the same plan. Additionally, the documentation needed to perform each process step and each job can be provided through the MES, helping to ensure that the information required throughout the process is available.
  • As the product or service progresses through the process, adherence to the schedule can be monitored by the MES. Any variation from the plan is identified in real-time, allowing for immediate investigation by front-line supervision. The system also prompts the operators on the collection of important data regarding the causes of variation or delays in the process. Part of selecting an MES should be to ensure this capability if a scheduling software is not in use or does not measure scheduled attainment.
  • The MES can serve as a reporting platform, allowing business leadership to analyze the data collected and turn it into a clear view of the entire value stream. This enables the leadership team to swiftly identify and prioritize the issues on which to focus their finite resources in order to drive improvements and achieve the maximum value from their efforts.

Ignoring the Key Performance Indicators in a business may be easy, but it is not cheap. To maximize profitability, a leadership team must be able to see the Hidden Factory costs created by defects and variation in processes and procedures. The Manufacturing Execution System may be just the solution.

Whether your company is well into its Industry 4.0 journey or just getting started, The Center’s experts can help ensure you achieve the maximum return on all investments. To assist Michigan’s manufacturers with understanding and adopting Industry 4.0 technologies, The Center has partnered with the Michigan Economic Development Corporation (MEDC) and Automation Alley to drive awareness of the many uses and benefits of these innovations. From conducting an initial Technology Opportunity Assessment to identifying and applying relevant technologies, The Center guides manufacturers through technological implementations in a way that makes sense for their businesses.

Learn more about how The Center can support your company’s Industry 4.0 journey by contacting or visit


Werner_C2-web.jpgChuck Werner, Manager Operational Excellence/Lean Six Sigma Black Belt
Chuck has been a member of the team at The Center since 2016. His areas of expertise include Lean, Six Sigma and Quality. Chuck has devoted many years to practicing Six Sigma methods, ultimately earning a Six Sigma Master Black Belt in 2011. He is passionate about helping small and medium-sized manufacturers become more prosperous using a variety of tools and methods gathered from over 27 years of experience in manufacturing.




Since 1991, the Michigan Manufacturing Technology Center has assisted Michigan’s small and medium-sized businesses to successfully compete and grow. Through personalized services designed to meet the needs of clients, we develop more effective business leaders, drive product and process innovation, promote company-wide operational excellence and foster creative strategies for business growth and greater profitability. Find us at

Categories: Continuous Improvement, Industry 4.0, Lean Principles