Stability of Supply Chains

Recently I had some interesting discussions with executives from numerous companies who are at different stages of moving forward in their Lean journey. The business drivers for most of these clients are how to reduce cost and the manufacturing lead times.

After meeting with several clients and doing a bit of research it seems that if there is one metric that companies should focus on is the lead time reduction. Lead time is the core metric that influences the health of the operations. People familiar with “Little’s Law” would quickly grasp that there is a direct correlation between Lead time and WIP in the system. As the WIP is steadily increased in the system the Lead time does not change. This indicates that some level of WIP is good for the supply chain, and the operations can keep running with the same level of operational performance. But at the inflexion point, any increase in WIP will adversely affect the Lead time. What it indicates that some level of WIP is definitely good but in excess it is the cause of the increase in the cost of operation. Excess WIP, requires more handling cost, loss of material, increased material movement, more quality problems due to handling and an overall increase in the complex decision making for scheduling.

Where is your operation with respect to the inflexion point? A typical company never reaches the efficiency as dictated by Little’s Law. It is a theoretical limit and gives perspective for companies to compare their operations to the theoretical limit. The typical reasons for a company to deviate from the limits are a) Increase in product mix, b) batching requirement are each operation, c) volatility of the supply and demand, d) setups and e) not producing parts/components based on customer requirement.

In this highly variable environment, what can companies do to run effectively? Notice – I mention effective and not efficient. Companies can run their operations efficiently by producing material at the resource capacity. This does not mean that the products they are producing are based on customer needs. The end customer can be the next operation, distribution centers, channel customers or end customers. Running effective operations indicate good business practice and produce the right mix of material that can run their operations efficiently as well as meet the customer demand.

The main crux of the manufacturing effectiveness is the 3rd principle of Lean as defined by “James Womach” in his book “Lean Thinking,” which is making the material flow through the system. These concepts are not new, we see this in real life with fluids dynamics. The only way to reduce the residence time of the fluid is to make it flow, thus reducing the stagnation points as defined as “Sinks”. The same thought process can be applied in Manufacturing – we want to avoid “Sink” or material stagnation points. I am not preaching that the sinks should not be there, it is necessary to have these sinks to manage product portfolio, variability in supply and demand, or the manufacturing scheduling constraints e.g. calendar mismatch, rate of production, required mix of production etc. It is however a good process to determine the size of these “sinks” and manage them so that we do not loose control.

This gets us to a new point – how do you compensate or measure the operations managers to run “effective” operations. Do you measure them based on the deviation from the predicted “sinks” or inventory buffer target or do you measure them on resource utilization?

Efficiency at the Cost of Flexibility

During my discussions with clients in the past the focus was primarily efficiency rather than flexibility. I have to admit most of the clients that I worked with belonged to an asset intensive industry where millions of dollars were invested to install the asset. The focus of the operation was to keep these expensive asset running to reduce the unit cost (based on utilization) but sometimes at the cost of loosing control over unwanted inventory buildup.

We had a unique experience the other day at McDonald. Dallas was unusually cold during the holidays and we planned to take the kids to the neighborhood McDonalds to burn some calories (sounds like an oxymoron) – in the indoor play area. We had a bunch of 4 boys who wanted to play tag. The play area at a McDonalds is a colorful group of slides, walk-in pipes, climbing nets and steps combined together to form a pleasing area to play. The two 11 year olds formed a tag team and the two 6 year olds formed the other team.

At first thought it seemed that it was a slam dunk where the 11 year olds would win easily. They were stronger, faster and bigger. They could climb up easily, take bigger steps and could overpower their brethrens to surrender easily. What we did not realize that the walk-in pipes had a limited diameter. It was easy for the 6 year olds to run through them while the 11 year old had a tougher time and their movement was at best very sluggish. It was soon proven that the 6 year olds won the tag as a team – while being physically weaker of the two teams.

It is a good example where it was evident that flexibility is a key enabler to speed up the operation. Manufacturing philosophies have changed since Frederick Taylor promulgated the art of improving efficiency through mass production in his research on “Scientific Management”. Henry Ford and Andrew Carnegie were early adopters who took advantage of the philosophies building standardized massive installation to build the high efficacy machines. The role of manufacturing was based on push production and was thrived on low mix and less global competition. Ford could keep on building efficiently their black Model-T’s in dedicated lines, and still be able to sell them in the market. But in today’s market the role of customers have taken the center stage. Customers dictate the product requirement and the attributes. Customers have become accustomed to better customer service and have consistently challenged the producers to shorten their lead times. The discussion to shorten the lead times in a high product mix environment is itself a topic of discussion.

Flexibility is a virtue that manufacturers have learnt to adopt in the new developing global economy. There are several ways to improve flexibility in operations. One of the ways is installing several smaller machines instead of a single large machine. It might cost more during investment but will increase the flexibility. If the organization is based on a smaller machine environment, some of the machines will always be up while the others are being maintained. Flexibility aids producing several different kinds of products simultaneously through it manufacturing lines. Flexibility also improves if you are planning to your rated capacity based on past reliability records of the equipments. Plan based on the effective capacity instead of the rated capacity. The rule of thumb used by planners is to plan around 85% of capacity leaving some room to accommodate unreliability of machines and labor, machine setups due to product mix changes and customer order expedites.

Based on the observation, I think I would rather have the two 6 year olds in my team rather than the two eleven year olds. They are smaller and more agile in the given environment. One could argue that if the walk-in pipes bigger the results would be different – well “that” is the market demand – we have to learn to be flexible and adjust to it.