In my first post on this topic, I gave you the formula.  (Here it is again so you don't have to leave and look at the other post.)

Value Added Per Labor Hour = Sales - Cost of Materials (and other necessary stuff)
                                                                                                          Total Labor Hours

In my second post, I broke down the elements of the formula.  Here it is again.

Sales is the money we got for product we actually sold.  Not product we intended to sell.  Not product we wish we had sold. Not product we forecast.  Product we sold and got actual cash dollars for.  That's important to remember.

Cost of Material is the money we spent on:

1. What we sold and got actual cash money for,
2. Scrap that we made,
3. What we made but didn't sell to anybody, so now it sits in Finished Inventory,
4. Materials we bought but didn't make into anything and it still sits in Raw Material Inventory,
5. Materials we have partly made into something so now it still sits in Work In Process Inventory.

Total Labor Hours includes:

1. Hours spent making stuff that actually got delivered to the customer (i.e., Sales)
2. Hours spent making stuff that is still sitting in Finished Inventory because it hasn't been delivered to a customer,
3. Hours spent making stuff that is sitting on the shop floor (or worse, lost) as Work In Process,
4. Hours spent making scrap,
5. Hours spent changing over tooling and equipment,
6. Hours spent reworking bad product so we can deliver it (or re-sorting, or re-counting, or re-packaging, or re-anything because it didn't get done right to begin with),
7. Hours spent looking for things,
8. Hours spent waiting for things,
9. Extra  hours spent because the tooling, tools, equipment, material, information that the employees had to work with was inadequate,
10. Extra hours spent because problems are allowed to continue that delay, stop, impede, slow, or otherwise generally muck up good flow of product and information,
11. And on,
12. And on,
13. And on.

It should be clear to even the least astute manufacturing manager (and, believe me, I've known some manufacturing managers that were severely astute-impaired) that an initiative (agile, lean, or otherwise) that was effective in reducing #2 and above under Cost of Materials and Total Labor Hours is going to improve productivity even if #1 stays the same in either case.

(In fact, #1 could go up in either case (to a point) and we could come out ahead if  #2 and above went down sufficiently.   But why would we want even #1 under either element to go up?  Maybe to buy better materials?  Maybe to get  better service?  Maybe to assure a better/smoother flow of product?  Or maybe we could add in some training, problem solving, continuous improvement hours?   But I digress a bit....)

Looking at our formula, we come up with the principles of agile manufacturing.

Reduce the Cost of Materials

1. Make only what you are being asked to deliver.
2. Don't buy anything that you're not going to turn into something you can deliver right away.  Don't buy material for stuff that you're going to turn into product later just because you can get it cheap.  Buy in as small lots as you can.  Have as little material in the supply chain as you can.  That means, don't accept long lead times.
3. Don't make scrap.  Scrap is the enemy. 
4. Have as little finished inventory as you can manage.  Increase agility so that you can increase finished inventory turns.  If they don't want it delivered now, don't make it now.  That means run smaller lots.
   
5. Reduce Work In Process.  Improve processes so raw material gets made into a finished product and shipped quickly.  Don't let anything sit around.  Know how long stuff sits around.  

More in my next post.