CIA of Operation Management

Well since I have your attention and you may be wondering what CIA has to do with operations. CIA was the termed coined by one of my clients as “Central Item Allocation” during an enterprise transformational project. Large manufacturing companies face three prominent challenges that are rated very highly in customer surveys. The top three challenges are resistance due to cultural challenges, managing proliferation of IT systems and coping with Mergers and Acquisitions.

This article discusses the third challenge of merger and acquisition, particularly with respect to operational efficiency. In the last 10 years there has been a proliferation of companies going global. The reasons are varied and range from 1) access to low cost resources, 2) access to new markets and 3) a way to hedge the market by diversifying. However these acquisitions have created a monster of a problem to the COO and the CIO. Millions of dollars are being spent on building a common standard business processes across cross cultural and national boundaries. One of the key decisions that come up during due diligence efforts is whether to build a single instance or a distributed set of systems across the enterprise. Single instance is beneficial from a TCO (Total Cost of Ownership) point of view, but causes two problems. It takes the ability from the individual sites to manage their manufacturing. It takes the individuality away from the plants which have unique characteristics and strengths. The best people to manage the operation are usually the people at the plant who breathe and live the production on a daily basis. With the single standard across the enterprise, they have to comply with the corporate standards. The second problem is a situation where the company may decide to divest a manufacturing unit; it becomes a highly complex process to separate the IT infrastructure.

Integration of the acquisition is a nightmare and has to be managed diligently. The challenge faced by the COO is to determine the best way to utilize the distributed capacity “effectively” to serve the variable market demand. CIA was coined to develop a common order taking process that would consider the demand characteristics and allocate the orders intelligently to the individual manufacturing sites.

Some of the key factors that were considered during the design phase were 1) How to create a level capacity loading, 2) How to promise profitability, 3) How to promise based on logistics costs, 4) How to accommodate customer preferences and 5) Can the small lot orders be aggregated in bigger lots before promising. Overall the CIA function can become very complex if all the decisions have to be considered during order promising. The challenges are to accommodate all the logic within a short interval of time to ensure that customers and sales representatives do not have to wait for an inordinate amount of time to get a promise date. To make this happen, some basic fundamentals have to be in place, to develop this solution in a multi plant environment. This cannot be done without the standardization of products and processes – thus the single instance of an enterprise application plays a critical part.

A comprehensive successful implementation of CIA will help in better utilization of the capacity across multiple plants, balanced production and load leveling, reduction in delays and shortened cycle times, aggregation of small lot orders and improved customer service.

Promising in Finer Time Buckets

Depending on the industry vertical and the “lead time” of manufacturing or services, the promising of orders are in days, weeks or months. The aerospace industry will promise the next airplane delivery in months, the steel industry in weeks, the auto parts industry in days and the IT project implementation in months. The question that the VP of operations often poses is how to promise better in finer time buckets.

During one of my stints in Asia, the CIO who came from a manufacturing background wanted a solution/strategy to promise his customers in days instead of the usual way of operating which was weeks. The benefits of promising and delivering in days was very simple – it would take away a week of inventory from the supply chain which would reduce the lead times and also leave extra cash of the table that can be put to more productive use rather than being tied in inventory.

Though the reasons for promising delivery is finer buckets is very simple – but the task of achieving it is pretty complex. During further investigation on why the company was promising in weekly buckets we found that there were basically 3 main reasons. The first reason was that the extra buffer of time was to cover the unreliability of the operations, the second reason was that each operation in the manufacturing chain was scheduled to maximize the utilization of the resource thus sometimes resulting in the production of unwanted material or producing material before hand and the third reason was that they wanted to ship in large quantities aggregating to reduce the shipping cost.

The first task at hand is to investigate the root causes of reliability. The reason can be varied, ranging from quality problems, machine uptime, poor planning and demand variability. The key to eliminate reliability is to systematically eliminate all the root causes. The other way to manage reliability issues is by creating a buffer of safety stock that can sustain the variability. Although safety stock is additional capital tied up in inventory – it does enable creating a flow of material through the manufacturing chain. The key to any manufacturer is to decide on the safety stock level and not just any stock – but a predetermined amount for a mix of stock. Safety stock is definitely not the panacea to eliminate reliability, but it does help bringing stability and consistency to the production. As further actions are taken to eliminate reliability, the safety stock can be reduced and the capital released to be used elsewhere.

The second factor is the fascination about utilization, of machines and people, by operations manager. The relentless focus on utilization reduces the focus on flexibility. No operation is perfect in the imperfect world. Creating a plan for 100% utilization increases the risk for unplanned disruptions. A small hiccup in the operation can lead to a ripple effect which can last a significant amount of time with loss of customer service, escalation of orders, complex decision making for available capacity and overall stress on the people and machines. All of this results in nervousness in the supply chain and results in the increase in inventory. In the imperfect world the advantages of running an operation at 85-90% capacity far supersedes the benefits of running at 100% capacity. It provides flexibility to take care of unforeseen interruptions and allows the goal of providing excellent customer services at a lower cost. The concept of process design and line design by industrial engineers take into account the variability in demand before setting up the manufacturing process. The premise of the design is to enable flow of material through the line thus reducing the latency within the production line. However, the rate of change in the business climate has increased several folds over the years. The original typewriter had a lifecycle of over 30 years – while the current technologies have a much shorter lifecycle. Business processes and manufacturing lines have to be reconfigured to align to the new business climate every so often to keep itself tunes to the new dance. Running an operation at less than 100% capacity provides the ability to react and accommodate incremental changes in the business while maintaining excellent customer service.

The third factor as explained was the consolidation of shipment into large batches. This is again a counterintuitive approach to improve efficiency. Larger batches do help reduce the cost per unit. But there are inherent costs associated with accumulating goods to reduce shipping costs. Material have a tendency of not adhering to the planned timeline and a delay to a portion of the shipments will delay the entire shipment. Keeping goods in the warehouse, while waiting for the batch to be complete, increases the risk of goods being stolen, lost or damaged. Increase in goods as resident increases overall material handling costs – tracking and tracing, inventory management data entries, not finding the right material and others. A smaller shipment can keep the customer operating, while waiting for a large batch before shipping increases the risk for the customer. An unplanned event during the shipment can derail the entire shipment while if shipped in smaller batches can reduce the overall risk for the customer.

The benefits for promising in finer time buckets are great, but require discipline in bringing stability, consistency, repeatability and sustainability to manufacturing. Operations Manager should systematically address and eliminate the root causes of reliability, run the operation smoothly and below 100% capacity and ship in smaller batches.

I would love to hear from you about your experiences.