The link between lean manufacturing and better insurance

The less risk a business has, the more insurable it is. Implemented and sustained in the right way, lean manufacturing reduces risk substantially. Getty Images

As a manufacturing specialist, Michael Schlagenhaufer is a self-proclaimed “lean believer” who continually tours plants and points out areas for improvement—some 5S here, opportunities for standard work there, a potential for a value stream and cellular work flow here and there. But he doesn’t work for a consultancy or a manufacturer, nor is he a sole proprietor. He works for Acuity, an insurer based in Sheboygan, Wis.

Most if not all manufacturers, including metal fabricators, need some insurance products like property and workers’ compensation as well as product liability. Some operations might qualify for other products, like errors and omissions policies and even insurance products covering equipment breakdowns. And as more manufacturers adopt businesswide software systems and connected machinery (Industry 4.0), they might also consider cybersecurity insurance.

“Today I would recommend some type of cybersecurity insurance to any manufacturer with connected systems,” Schlagenhaufer said.

Schlagenhaufer isn’t what he calls an “insurance guy,” however. He instead works with underwriters and other insurance experts, describing the risks and benefits behind various attributes of a manufacturing plant, including some of the most advanced lights-out manufacturing systems.

For lights-out manufacturing in particular, considering the insurance implications can help make that unattended manufacturing sustainable and profitable over the long term. “If you install a lights-out system and eliminate the need for labor on third shift, your workers’ comp rates might go down,” he said, “but to avoid product liability problems, you need good inspection and quality systems in place too.” Statistical process control (SPC), Six Sigma, and other documented inspection practices that come with ISO and other certifications all can help a company’s insurance situation.

In this advisory role, Schlagenhaufer preaches the benefits of lean manufacturing and preventive and predictive maintenance. “If you can’t find your tools, and you don’t work to a standard, and you run your equipment to failure, how can you deliver products on time?”

His consulting work reveals the link between insurance and a fabricator’s performance over the long term. The less risk a fabricator has, the more insurable it is, and in many cases, the more competitive it can be.

Product Liability

To illustrate how insurance premiums relate to operational performance, Schlagenhaufer described a hypothetical custom fabricator with product liability insurance. Yes, it’s a job shop, so it doesn’t sell products. But its parts still end up in larger assemblies, and the product liability insurance protects the shop should it be dragged into court by companies or consumers down the supply chain.

The company has used this insurance too—multiple times. These cases involved faulty products that could be traced back to one of the parts the fabricator supplied. Sometimes these cases are deemed out of the fabricator’s control, but not always. In some cases lawyers pointed to certain part attributes that, being fabrication experts, engineers and managers at the fabricator should have known to be faulty. This might be a point of contention, but the fabricator has a problem: It lacks a clear paper trail and documented processes to prove otherwise. Ultimately, the insurer pays for the case’s expenses—that’s what the insurance is for—but it also charges the fabricator a higher premium.

“Today, with the American legal system, you can be dragged into almost anything, even if you work by procedures documented to ISO or SAE standards,” Schlagenhaufer said, adding that documentation and being certified to those standards certainly reduce risk and can have a positive effect on insurability. “Regardless, you might be working to a print, but what if there’s a problem down the supply chain? If you have product liability insurance, your insurance carrier has the duty to defend you.”

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Schlagenhaufer emphasized again that his expertise lies in manufacturing, not the intricacies of insurance products and premiums, and whether a fabricator needs or qualifies for a specific insurance product can depend on a host of factors. But the fact remains that high-performance operations, complete with documented, polished processes, usually have less inherent risk.

Training and Technology

Going lights-out can affect a company’s insurance needs and rates, but how it affects those rates depends on how the automation is integrated.

To illustrate, Schlagenhaufer described a hypothetical lights-out operation that seems to run like clockwork—that is, until the laser breaks and it turns out that the only people who can service it are a half a world away. The operation sits idle for a week, and the shop scrambles to meet demand. So much for reducing risk.

He also described an instance in which a laser runs lights-out all night, yet the customer ends up producing parts that are returned for quality problems. Even worse, some parts make it into the end product, snowballing a part quality problem into even greater liabilities. Again, so much for reducing risk.

As Schlagenhaufer explained, good training builds the foundation for lowering risk. What if workers went once or twice a year to the machine vendor for training and testing, and documented the results of that training? “Training shouldn’t just be for the programmer and operator, but also maintenance personnel. The more machinery expertise you have on the floor, the less risk you have of unexpected equipment breakdowns. Yes, we all make mistakes, so the risk is there, but the risk is low.”

A fabricator (and insurance underwriter, for that matter) can’t eliminate the possibility of a detrimental equipment breakdown, but with trained people on staff, the risk is lower. With that knowledge, employees become true technicians who understand the equipment and know how to build and document a robust preventive maintenance program.

Technicians train others, including both maintenance techs and machine operators. When operators see a puddle of oil gathering by a hydraulic press brake, they don’t just throw kitty litter on it and go on with their day. They say something and document the problem. If they can’t fix it themselves, they reach out to someone who can. They don’t simply run equipment until it breaks. Considering all this, risk plummets.

“This is another basic tenet of lean manufacturing,” Schlagenhaufer said. “If you see something, say something.”

Should the equipment break down, it shouldn’t take forever for the operation to recover. Sure, there’s always a risk of an oddball part failing and a replacement having to be shipped from the other side of the world—but if the automation has a robust local support network, the chance of that happening is low. The risk goes down again.

The machines also happen to include real-time sensors that measure operational performance and in many cases can predict a failure. This predictive maintenance technology connects to the cloud and, through machine learning and artificial intelligence, becomes better at forecasting the chance of failure, allowing the shop to further optimize its machine maintenance program. Once again, the inherent risk falls.

Finally, at the laser’s part offload station, the company has installed a vision system that can detect certain part attributes. It’s not foolproof; certain metals are very reflective, and kerfs cut with the fiber laser are narrow. And it’s not designed to perform detailed part inspections. But the vision system, combined with repeated and documented operator training, makes it very unlikely a bad part will actually make it to the customer. The inherent risk plummets even further, and so do certain insurance premiums.

Lean and Very Insurable

Schlagenhaufer described a walk-through of an extremely lean manufacturing plant and pointed out how each element might affect a company’s insurance situation in a positive way. For example, the premiums would be extremely low or the shop might qualify for certain insurance products, like equipment breakdown insurance that other operations can’t qualify for because the risk is too high.

Imagine you walk into a plant and see a receiving dock and virtually no raw material that isn’t live—that is, in an automated tower destined for one of several laser cutting machines. Next to this is a small section of raw tube stock, all secured on an unusual roller rack that allows operators to easily push stock onto roller tables leading to nearby band saws.

The plant does have room for more raw stock should the need arise, like for oddball material for a certain job that needs to be ordered in volume. But by and large, the company’s service center “drip feeds” material as the shop needs it. The good ergonomics benefits workers’ comp, while the lack of raw inventory might benefit property insurance.

The plant has the traditional U-shaped layout, so adjacent to the loading dock is the shipping dock, with a packaging department and an area for a very limited amount of finished-goods inventory. To level-load certain aspects of the operation, the plant sometimes stocks ahead several months. Managers don’t like the excess inventory, but the risk of obsolete inventory is far lower than the complications and operational risks that come from hiring a host of temp workers during the busy season.

To reduce risk further, the shop has product replacement insurance. Should a fire or other disaster destroy the finished goods, the insurance will pay not only what it cost to make the goods, but also what the customer would have paid had the inventory been sold. But again, because the operation is sound and the finished-goods inventory is limited, premiums are low.

Walk farther into the plant and you’d see a clean, bright place with shiny floors and good lighting. Earplug dispensers are strategically placed throughout the plant, as are receptacles for eye protection. Machines are guarded properly, either with hard guarding or optoelectronic devices like cameras and light curtains. Look up above the turret punch press and you see a foam panel, strategically oriented to absorb sound. People can speak in a normal voice even with the punch running.

Punch tools are labeled and organized, placed in cabinets with foam backing cutouts that help errorproof tool placement and images of the actual tools on the drawers. If an operator places a punch in the wrong place, the tool simply won’t fit. The tools themselves have clear labels, and job packets have actual images of the tools on the setup sheets.

Visual work and maintenance instructions are by every machine, next to a preventive maintenance schedule and checkoff sheet. Because support personnel stage materials and tools, operators have time to check tools, clean the area, and make sure every setup comes as close as possible to producing a good part on the first try, even on some of the company’s oldest press brakes using old but still well-maintained tools.

The company even has gotten into uptime tracking and comprehensive process monitoring. Software tracks planned uptime and planned maintenance, versus unplanned downtime and maintenance. The company’s lights-out automation system has sensors on it that can detect wear and tear before it happens, allowing the shop to perform predictive maintenance. Before a problem arises, techs receive an alert on their phones, and a problem is averted.

The system records these incidents and relates this data with job data, then communicates job performance to cloud-based systems. Artificial intelligence and machine learning, combined with vision systems that inspect work as it flows off the system, actually allow the entire automated system to become better over time.

With all this, the company invests in equipment breakdown insurance, which is reasonably priced, considering all the preventive and predictive maintenance, and the fact that technical and parts support is nearby, not halfway around the world. Depending on the policy details, equipment breakdown insurance pays the value of parts the equipment would have produced after a certain period after the equipment fails. As with any other insurance product, the less risk there is, the more reasonable the premiums are.

“Equipment breakdown insurance isn’t common, especially if shops don’t have a good, documented preventive maintenance program,” Schlagenhaufer said.

The company also has invested in cybersecurity insurance, which protects against system failures due to outside hacking. It’s a small price to pay for the benefits of Industry 4.0, but it’s a price that managers feel the company needs to pay. Connected machines have raised the productivity bar, and insuring against failure just makes business sense.

In the assembly area, shadow boards are everywhere, and every tool is within easy reach. Work instructions are visual, clear, and live, updated on tablets connected to the scheduling system.

Like in upstream departments, everyone practices quality-at-the-source and performs basic inspections of workpieces staged at their workstations. If something’s amiss, it’s caught early before it snowballs. Moreover, parts are designed with errorproofing in mind, so it’s easy to catch problems. Parts go together only in certain ways. Hardware issues (like the wrong hardware in the wrong hole) are engineered out of the part when possible.

To reduce risk even further, the company has an errors and omissions policy, which complements product liability and protects against operator mistakes. Everyone makes mistakes sometimes—that’s why there’s insurance—but the risk of those errors occurring is so low, the cost of insurance is reasonable.

The Insurance Metric

Schlagenhaufer’s job links improvement with risk, which in turn changes a fabricator’s insurance situation. He cautioned that the link isn’t always direct; insurance premiums can change depending on a host of factors.

But the link shouldn’t be ignored. If workers’ comp claims increase and premiums rise, a shop can tackle the root causes, install lifts and other ergonomic assists, and institute more comprehensive training in safety and ergonomics. If workers’ comp premiums plummet, something good is happening.

The bottom line: If a shop can purchase insurance at a very competitive rate, chances are the assets being insured, and the processes and machinery behind them, are rock-solid.