Category Archives: Lean

Is It Really APS If It Uses EOQ?

While I’m not an expert in MPS, I am an expert in optimization, so, needless to say I was taken aback by a statement in this recent TEC bog post on Sorting Through the ERP, Lean MFG, APS, and MES Clutter that quoted experts as saying that ERP and APS systems force companies to make runners in EOQs. Now, while I am quite sure that your average ERP will apply EOQ to production scheduling, even though it’s often dead wrong to do so, I would think that a true APS would not be so foolish.

      For those of you who aren’t manufacturing experts, here’s a brief guide to the terminology:

  • APS: Advanced Planning and Scheduling – a system or methodology designed to plan plant floor operations to maximize throughput and resource utilization
  • EOQ: Economic Order Quantity – the inventory level expected to minimize total inventory holding and ordering costs
  • ERP: Enterprise Resource Planning – a system used to coordinate all planning and production processes
  • Lean MFG: Lean Manufacturing – a production practice that attempts to eliminate all waste from the production process
  • MES: Manufacturing Execution Systems – a set of systems used to control the manufacturing process on the shop floor
  • MPS: Manufacturing Planning Systems – a set of systems used to plan the manufacturing process with the intent of creating a manageable schedule
  • runner: a product that accounts for the majority of manufacturing workload; on average, 6% of products create 50% of the work
  • WIP: Work in Process – refers to all (raw material) inventory that is currently in the production process
     

Given that so few products account for so much workload, you would think that these systems would recognize that

  • it’s a must that each production run produce enough of a runner product to meet the total demand for the production period, but
  • producing more runner product adds no relevant value unless enough product is produced to cover the next set of orders (as the line would need to be set up again anyway and it takes time to set up and tear down a production line) and
  • EOQ, which is a measure designed for buyers, is not guaranteed to produce a number anywhere close to an appropriate value, even when order costs are replaced with production-line set-up costs.

As the article states, runners must be produced in optimal order quantities, as this is the only way to maximize the amount of time free to produce the remaining 94% of product. Other products can be scheduled based on a modified EOQ, as order quantities in any given period might not be sufficient to guarantee a profitable run otherwise, but runners and other high-volume runs must be treated differently. And if an “APS” system cannot differentiate between the two types of products, and optimize the run for each type appropriately, I’d argue it’s not an APS at all!

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Lean: Do You Know What it Means?

Now, I thought that the definition of lean was relatively well understood among lean practitioners while the implementation was not, but after reading this recent piece in Industry Week on Lean Confusion, I’m wondering if it’s not the other way around?

According to the author, people are confused — both about what defines lean and how to implement lean. As an example, she uses the reaction to an article that the Wall Street Journal published in July that outlined component shortages and Nissan Motor which concluded, that, in part “the drawbacks of lean manufacturing methods” were to blame, augmented by an overstretched global supply chain. It’s a good example — Apple’s not about lean and, as one proponent countered, it’s obviously yet another example of shoddy reporting from the WSJ where the supply chain is concerned.

So what is lean? Simply put, it’s maximizing customer value while minimizing waste. It’s not any particular set of processes, methodologies, or technologies — those are just tools of the trade. Lean is not just the tactical implementation of a new system or process, it’s the strategic redesign of your operation to maximize value while minimizing waste. That might involve new systems and processes, but that’s not lean. Lean is a strategic mindset, not a tactical exercise.

It’s a good article that makes a good point. Check it out.

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Resource Allocation Processes Have to Change

The March edition of the Harvard Business Review had one of the best articles on strategy and restructuring (in response to the recent downturn) that I’ve read in a long time. In finding your strategy in the new landscape*1, the author notes that for much of the next decade, we can reasonably expect to see weak global growth, pressures from overcapacity, persistently high unemployment, volatility in the financial markets, costlier capital, a greatly expanded role for governments, a much larger burden of regulation and taxation for all, and maybe even increased protectionism. Essentially, a global marketplace that is pretty common when you consider not the last 5 years, but instead look back through the last 500 years (and the last 50-60 years in particular as there is lots of detailed economic data available post WWII).

Up until the invention of the standard shipping container in the 1950s, global trade, and global growth, was very slow. Up until the exuberance of the IT boom, and the virtual wealth it created, capacity was limited, as demand was, more or less, steady and predictable most of the time. Even in the developed world, unemployment has been traditionally much higher than it was between 1997 and 2000 and 2005 and 2009 for most of the last few centuries which saw a lot of poverty, war, and suppression of the rights of women (who were encouraged to stay home). There have been booms and busts in the markets for hundreds of years. After all, the IT bust wasn’t the first great bust — at the very least it was preceded by the crash in the Dutch Tulip Market in the late 1630’s where, at the peak of Tulip Mania in February 1637, some single tulip bulbs sold for more than 10 times the annual income of a skilled craftsman! Capital has traditionally been much costlier than it has been in recent years — as recently as 1981, the Bank of Canada interest rate exceeded 20% (and from 1976 to 1992, it averaged significantly more than 10%). Throughout most of history, it was the governments, and not the global corporations, that held most of the reigns, regulation was the reaction to every problem, and when cheap imports threatened an industry, tariffs were slapped down faster than a bell clapper in a goose’s ass*2.

The author, Pankaj Ghemawat, then goes on to state that managers cannot afford to ignore the risks of pursuing a global strategy in the uncertain years ahead and that they must change their strategic approach in several dimensions. In particular, companies whose strategies currently emphasize smoothing differences and achieving economies of scale across national boundaries may need to shift toward adapting to local conditions and their resource allocation processes will have to change, too. And the changes will have to take place on the sell side and the buy side. Not only will the one-product fits all strategy be unlikely to work, but so will the one location produces for all. When you consider steadily rising shipping costs, increasing labor costs in “low cost countries”, and the costs of a single factory having to regularly shut-down and retool a line for different products (or variants), outsourcing sometimes becomes more expensive than near-sourcing or even home-sourcing. That’s why a strategic shift will need to be made across the board.

Furthermore, in addition to rethinking the scope of off-shoring, companies also have to:

  • simplify supply chains,
  • import process innovations from emerging countries, and
  • move R&D to where the (best) researchers and market growth are.

Your supply chain is too complicated.

You have two many products that use too many different raw materials coming from too many suppliers and travelling down too many lanes in too many shipments because you’ve never optimized and consolidated your suppliers, SKUs, and lanes. While you need redundancy to avoid risk, there’s a difference between using 3 suppliers and using 13-30 suppliers, which is what the average company who hasn’t fully analyzed the category (and the end-to-end supply chain behind it) is doing. (And since less than 10% of the market is using SSDO regularly, opportunity abounds!)

When you have to do more with less, that’s when you innovate or die.

When you have no money, you tend to think different than when you have more than you can spend. This often leads to completely different kinds of innovation than what we produce in the western world. And that’s likely the kind of innovation you need to tap an emerging market where the middle class makes 1/10th to 1/8th of what the middle class makes in the USA.

The best researchers know the market.

If you’re trying to innovate a new product for a market, you need people who understand what the market will like. Those kind of people are native. Maybe they’re not your people, but maybe that’s a good thing. Not only will they innovate for their market, but they’ll bring you new ideas, and some of these ideas might improve your global operations.

In other words, the elastic that holds the global market together is trying to snap back, and you’re going to have to be agile and adapt if you’re going to hold on.

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*1 I was thrilled that, unlike just about every other publication out there, the author did not use the all-too-common, and all-too-stupid, “new normal” terminology which drives me nuts because anyone with half a brain that either (a) studied her history or (b) lived through it knows that it’s just the old normal coming back with a vengeance, and doing it on a global scale.

*2 Ask a Texan.

It’s Not Lean If You Haven’t Engaged the Maintenance Department

Industry Week recently ran a great article on how Culture Counts and how maintenance is deeply involved in any true lean initiative. Fundamentally, lean is about finding and removing waste — and who knows more about waste than anyone else in the organization? The people who watch it go down the drain. The people who watch it get hauled away. The people who shovel it into the incinerator. In essence, the maintenance department.

A true lean initiative never reduces headcount in the maintenance department. (In fact, it might actually increase headcount in maintenance.) A true lean initiative involves maintenance from day one and gets their insight on where the most waste is produced and what methods could be used to reduce or recycle it. In true lean initiatives, the maintenance department is a strategic player who not only finds a way to reduce waste, and associated costs, but to profit off of it. Just like food waste can often be recycled into animal feed, industrial waste can often be recycled into raw materials usable in another product or industry. (And if maintenance can identify a unique recycling process that can produce secondary products that can be resold, the size of the maintenance department might actually increase as you add people to support a profitable waste recovery and recycling initiative.) And that’s why it’s not lean if you don’t engage maintenance, as you could miss the strategic opportunities without their help.

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The Impact of Poor Quality on Cost

Every since the Toyota Production System (TPS) made Toyota famous for efficiency, there’s been a lot of talk about six sigma, lean, and TPS for a reason — because efficiency is good, and quality (which can be obtained when the systems are implemented properly, like they are in Asia, and not like Toyota chose to implement them in the US and Europe) is even better. But do you know how much better quality is?

More specifically, when you buy an inferior product, do you know how much this costs your organization? Chances are, poor quality products cost your organization three times as much as you think they do. In other words, for every dollar you spend on a poor quality product, your organization is losing three. An AMR study demonstrated that two thirds of poor supplier quality costs are non-material. For example, if there aren’t enough quality parts to keep the production line moving at 100%, this will incur additional overhead costs and labor costs in addition to return (processing) costs.

So what can you do to increase quality? According to this recent article in Industry Week on how managing hidden supplier quality challenges can save millions of dollars, which contained a case study on Graham Packaging, you start with BI. When you can find the quality-related problems with each supplier, determine which ones are a significant cost to the organization, and quickly get to the root of the issues, you can generate quick savings which, in Grahams case, amounted to millions of dollars a year.

And if you already have a modern, powerful, spend analysis system that allows you to build cubes (and reports) on any data set you please, you can crunch all of the performance related data in the corporate ERP system, create roll-up scorecard reports that capture all of the performance metrics, create comparison reports that indicate which performance metrics are below average and unacceptable, drill down to find the reasons, calculate the projected savings by improving the performance metric and, if the savings outweigh the costs associated with implementing any required improvements, take the reports to the supplier and start working on a fix to stop the leaks. It’s that easy.

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