The Ultimate Guide to Hidden Factory: Expose Unseen Waste and Realize the Full Potential of Your Manufacturing Business

Manufacturing has evolved by leaps and bounds over the last few decades in the hidden factory. Advances such as process adjustments, continuous improvement initiatives, and programs such as Lean and Six Sigma have radically transformed the way operators, production managers, and shop floors function.

Operators, line supervisors, and senior managers can successfully implement these methodologies to improve efficiency, reduce waste, increase quality, and lower costs. 

However, most companies continue to struggle with eliminating unseen forms of waste due to a lack of visibility into shop floor performance and processes.

Many organizations claim their processes are functioning at very high levels of yield. But are they accurately measuring and reporting their yield levels? Not if they aren’t considering the hidden factory. 

To better understand the concept of a “hidden factoryâ€, take the analogy of an iceberg. Above the waterline, you see the traditional and captured costs of poor quality, such as rejects, warranty costs, inspection, scrap, and rework. 

Below the waterline are the hidden costs, which are typically not captured and accounted for such as lost sales, late delivery, excess inventory, long cycle times, and more.

According to Armand V. Feigenbaum, an American quality control expert who devised the concept of Total Quality Control, the hidden factory can account for anywhere from 20% to 40% of an organization’s total capacity. 

With lean programs and a continuous improvement mindset, managers can tirelessly discover where many of their problems exist. 

But, to truly exploit the hidden capacity on a shop floor, managers need accurate production data that can reveal the Hidden Factory.

Before understanding how you can overcome the problems associated with hidden factory and the resulting benefits that you stand to gain, let us first understand what the term hidden factory signifies and the costs linked to it!

What is the hidden factory?

The Hidden Factory is a concept that refers to the unseen, or hidden, parts of a manufacturing process that result in quality issues or decrease the efficiency of the operation.

What’s causing this? It depends on the operation at hand, but typically it is due to the difficulty of measuring and accounting for costs associated with certain parts of a process.

For example, it may be easy to track the number of parts created, but it may be more difficult and less accurate to track cycle times. This could result in poor estimates, reduced production, and ultimately unseen waste.

First coined in the 1970s, the concept of a hidden factory initially focused on quality. Manufacturers realized that hidden costs were often found in the reworking of parts by operators or a lack of reporting quality data. Thus, the concept of the hidden factory was born.

Over the years, the term has come to encompass more than just quality control within the manufacturing environment. 

Today, the hidden factory concept focuses on losses that cover several categories: schedule loss, availability loss, performance loss, and quality loss.

Manufacturers can unlock capacity, productivity, and efficiency gains by understanding how automation, data collection, and analysis can be deployed to reveal this “hidden factory†within your operation.

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The True Costs of the Hidden Factory: How it hinders your business potential

First, let us explore the drawbacks associated with the hidden factory:

1. Feedback loop 

Since the activities of the hidden factory are not obvious, there is no immediate feedback loop for correcting process deficiencies.

2. True cost is unknown 

If an operator has to work overtime because they had to rework something, the cost of overtime may not be directly attributable to the reworked item. 

3. Silo mentality 

The hidden factory could be a result of your organization’s silo mentality. How often do your senior finance people visit the factory floor and question excessive inventory levels, process cycle times, process constraints, etc.?  

Do your manufacturing managers question their departments’ performance if they are within budget? 

Ultimately, these drawbacks can lead to additional costs for a manufacturing business. The costs of the hidden factory show up in many different places, including traditional quality costs such as:

• Scrap and rework: According to the American Productivity & Quality Centre (APQC), the cost of scrap and rework alone totals up to 2.2% of sales for organizations today.
• Customer complaints and warranty costs: While product design failures are typically more expensive than production defects, either can lead to a recall resulting in millions (or more) in costs.
• Corrective action costs: If the customer has to stop the line while you bring in people to sort parts, you could be looking at $10,000 a minute.

Although these are the more obvious costs, there are many more that are less easily measured. Examples include the cost of inefficiency, as well as the cost of not being able to capitalize on new opportunities due to time and resource constraints.

According to the American Society for Quality (ASQ), the hidden factory can also result in misleading numbers, increasing metrics like work in progress, cycle time, and setup time. 

Not accounting for error rates can also lead to flawed productivity metrics, making it appear that the plant is running well—when in reality hidden problems are getting worse.

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In a Nutshell

The costs of the hidden factory run wide and deep in manufacturing organizations today, which may total billions of dollars just for the largest automotive and aerospace suppliers before we consider other manufacturers. 

Rooting out these processes take time, and there are no easy answers. Digital transformation tools are helping companies uncover and correct inefficiencies in the process, increasing awareness of the source of defects while fostering communication and sharing of ideas.

Industry 4.0 technologies in particular are helping companies make huge leaps in efficiency and reliability with advanced tools like artificial intelligence (AI) and the internet of things (IoT).

In the second and final article of this two-part guide, we’ll cover the benefits of uncovering the hidden factory and how you can tackle it to unleash the true potential of your manufacturing business. 

Stay tuned to find out more!