Chaos to Success Series – Part 2

In Chaos to Series Part 1, we put forth the proposition that in many industries customers have an unmet need of fast and on-time delivery. In case a company is able to consistently meet this need in a way competitors cannot copy, then it can become the basis for competitive edge in the market.

A company which has a competitive edge can grow Throughput at a rate faster than Investment and OE. (T/OE and T/I will keep growing)

Why does fast and on-time delivery remain elusive?

It is definitely not for lack of effort and investment. Companies have invested significant money, effort and time in various improvement initiatives based on different methodologies and tools. Lean is the most popular methodology implemented across manufacturing plants worldwide including India.

Lean evolved from the work done by Taichi Ohno through the famous Toyota Production System (TPS). Below is a quote from Taichi Ohno.

“All we are doing is looking at the time line from the moment the customer gives us an order to the point when we collect the cash. And we are reducing that time line“

The focus is very much on Lead Time.

TPS delivered great results for Toyota but somehow other companies could not replicate the same results when they attempted Lean. Toyota shared all the knowledge.

In last 15 to 20 years, companies have invested significant money, effort and time in IT technology. ERP is the most popular technology implemented across manufacturing plants worldwide including India.

Prior to ERP, many companies also implemented Material Requirement Planning (MRP systems). Below is a quote from George W. Plossl, a great management thinker.

“All benefits are directly related to the Speed of FLOW materials and information through a system”

Again the focus is very much on Time.

Despite some successes, overall ROI on ERP/MRP investment has been less than satisfactory.

What are the reasons?

When one walks into any plant, the reasons for inability to deliver fast and on-time remain the same.

  • Customer requirements keep changing
  • Material is not available on time
  • There are worker absenteeism problems
  • People are not trained and disciplined
  • Processes are unreliable
  • Machines break down frequently
  • Significant time is spent in rework
  • Data is not readily available and is inaccurate
  • Plant is unable to decide on the policies
  • Large Variety in SKUs – Customization and Complexity is ever-increasing
  • Long lead time components – Global sourcing
  • Short product lifecycle

One can summarize the above points in terms of 3V – Variability, Variety and lack of Visibility.

In most industries this is a reality. Is there a better way to manage 3Vs?

Before we address the question of 3Vs, let us check the possibility of improvement in performance with the existing level of Variability, Variety and lack of Visibility.

What are the key characteristics of any manufacturing operation / plant?

  • A plant involves converting Raw Material (Input) to Finished Goods (output) through use of multiple resources / machines. (Refer Appendix 1* for different types of plants)
  • The capacity of any plant is determined by the resource with the least capacity (known as constraint).
  • Every plant faces issues of machine breakdowns, absenteeism, etc. Mr Murphy is active.

Thus it follows that in order to improve the plant performance it is necessary to get the most out of the constraint.

  • 1st step is to identify the constraint. (Refer Appendix 2 for guidelines to identify the constraint)
  • 2nd step is to ensure that maximum output is achieved out of the constraint, formally worded as Decide how to exploit the Constraint. Maximum output is not achieved / constraint capacity is wasted due to following reasons:
    • Unplanned downtime due to breakdowns, worker absenteeism
    • Set-ups
    • Material unavailability
    • Producing FG which cannot be converted immediately into sales
    • Working on defective items
    • Higher cycle time compared to standard

In some plants, the realization that a particular resource (constraint) determines the output, leads to taking quick actions to improve uptime during lunch hours, shift changeover, etc.

  • 3rd step is a crucial one and needs to be discussed in detail. It is important to align rest of the resources, policies so that the ‘constraint’ is exploited. This is formally worded as Subordinate everything else to the ‘Exploit’ decision taken in Step 2.

What subordination action can give us immediate and sustainable results?

(Results means reduce lead time with reduced inventory).

For this let us turn to the 2 giants in the field of manufacturing. We already referred to one of them… Taichi Ohno. The second one is Henry Ford.

Both of them had clear focus on lead time.  (Trivia – Can you guess the actual End to End Lead Time for a Ford Model T car from Iron ore mine to customer door)

Ford designed his manufacturing through assembly lines / flow lines. Space was limited. Any disruption in flow meant that the flow line had to stop. There was no place to accumulate inventory. The disruption to flow had to be immediately addressed.

Ohno took the concept and customized it to Toyota. Inventory accumulation was limited through the use of Kanban cards between work centres.

Hence preventing overproduction or in other words limiting the Work in Progress (WIP) is recognized as the first step to improve lead time.

Ford and Ohno put in place a practical mechanism to limit overproduction.

Dr Goldratt took the same concept forward and came up with an elegant solution to limit overproduction in any environment. The solution is based on:

  • Only the constraint determines the plant output.
  • In many industries the value addition time or touch time is a small fraction of the overall lead time (touch time less than 10% of total lead time)

This means that releasing the material at a rate faster than the constraint rate will not increase production and only lead to excess WIP.

Dr Goldratt called this solution Drum-Buffer-Rope.

Drum is the constraint which decides the production rate.  Buffer is the time required for the material to move from start to finish. Rope is the release mechanism which will decide when a particular order will be released to the shop floor.

Dr Goldratt suggested to cut the existing lead time to half and release the order accordingly. This ensures that the constraint resource has adequate material for processing without creating excess WIP.

The other aspect of subordination involves abolishing any local efficiency measurements which forces people to pull work ahead of time.

Dr Goldratt famously remarked “Tell me how you will measure me and I will tell you how I will behave”

If local measurements like production numbers, machine utilisation are not changed, it will put people into conflict and deteriorate the performance and the team morale.

Dear Reader, many plants have taken the initiative to balance the line or machine capacity? Does this lead to better results?

 Is unbalanced line required to improve production, i.e. all resources (other than constraint) need to have more capacity / sprint capacity?

4th step – Elevate the Constraint. After completing steps 2 and 3, conservatively

20-30% capacity is released. This gives a nice jump in production and sales.

(Assumption => there is order backlog).

Dear Reader, do calculate the impact of 30% increase in sales on the bottom-line of

       your company. Will profits increase by 30%? More than 30%? Less than 30%?

After this capacity release, it may become necessary to add capacity without which

further improvement is not possible. In some environments before making

Investment in machines, it is possible to elevate the capacity by adding extra shift,

Outsourcing, 2nd hand machine (Without compromising on quality).

5th Step – Go back to Step 1

The above are known as 5 focusing steps or Steps for Process of Ongoing Improvement.

Now let’s turn to 3Vs which we touched upon earlier.

  1. Variety – Variety means large number of FG SKUs and corresponding number of RM SKUs. Customers and sales team want more and more products in order to attract different customers. A large variety becomes difficult to manage due to MOQs, set-up times, multiple suppliers, etc.
  2. Variability– Variability comes from customer, supplier and internally. Variability leads to well defined plans going completely wrong.
  3. (lack of) Visibility –Despite significant IT investments, most managers do not have visibility of relevant information to make decisions.

We referred to MRP earlier. There is a body of knowledge known as Demand Driven MRP (DDMRP) helping companies to better manage the 3Vs.

DDMRP is based on the principle of Position, Pull and Protect rather than Forecast and Push. (Based on Dr Goldratt principles).

DDMRP recommends a 5 step methodology

  • Strategic Positioning of Inventory (Where to place Inventory)
  • Buffer Profiles and Management
  • Dynamic Buffer Management
  • Supply Order Generation
  • Collaborative Execution

The focus of DDMRP is to decouple the supply chain through inventory or stock buffers. These buffers leads to dampening of the variability coming from supplier and customer end.  The first step is to answer the question of Where to position inventory?

This question is related to how the company has decided to manage Variety and the market commitment for different SKUs. A SKU with promise of short lead time needs to have FG buffer. These SKUs are called as Make to Availability (MTA).

A SKU with little longer lead time need to have critical long lead time components in buffer so that FG can be produced at short notice. These SKUs are called as Assemble to Order (ATO)

A SKU where customer tolerance time is longer is managed on Make to Order (MTO) basis. Critical components are ordered on back to back basis.

Second step is how much inventory should be maintained? The key parameters for deciding inventory are Lead Time, Consumption, MOQ, etc.

Related to this is the third step of how to manage the buffers on a regular basis. Buffer is not a static concept. It is dynamic and will change based on changes in the input parameters. There are certain special situations like seasonal businesses, one-off promotions which require special handling of buffers.

The fourth step involves a implementing a mechanism to generate supply orders based on movement in buffers. For example when some quantity is dispatched from FG buffer, a production order equal to dispatched quantity is triggered on the plant. Similarly when RM is consumed, a Procurement request / Purchase order is triggered on the supplier.

The fifth step involves providing the right priorities and alerts to ensure that managers and supervisors get relevant information to focus their time and attention.

DDMRP concept is based on good enough planning and agile execution.

A combination of 5 Focusing steps of Theory of Constraints and 5 step DDMRP methodology can lead to significant improvements in lead time, on-time delivery and inventory.

See you in Part 3 of the Chaos to Success Series

Chaos to Success Series – Part 1

Yagna Introduction

Let it be any business

Yagna Promise is chaos to success

Focus and eliminate the excess

Grow the business with Yagna process

We will introduce Yagna Entrepreneur Success Services and then move to Part 1 of the series.

Why does Yagna Entrepreneur Success Services exist? (Yagna for short)

  • Yagna believes it possible to significantly improve productivity of any business.

What does Yagna do?

  • Yagna mission is to make SME entrepreneurs successful and by that facilitate faster transition of Indian economy from under-developed to developed

How does Yagna plan to accomplish its mission?

  • Yagna has created a results based innovative platform to attract talented resultant entrepreneurs.

In this series, we will share the method and experience of moving SME businesses from Chaos to Success in a short period of time.

The typical profile of company considered in this series is a manufacturing company in business for atleast 10 years with a proven product.

In Part 1, we will introduce a simple framework to understand any business and related terminology. In subsequent parts, we will cover different aspects of Chaos to Success journey viz.

  • Identify core cause leading to Chaos
  • Get control over Chaos by addressing the core cause
  • Capitalize once Control is in place.

Most of the concepts in this series will be drawn from body of knowledge (BoK) developed by Dr. Eliyahu Goldratt. This BoK is popularly known as Theory of Constraints (TOC).

Let us start with the basics.

First question is what is success? What is the goal of any organization? (For-profit organization)

Is it Sales, Market share, Customer satisfaction, Employee Satisfaction, Gross Merchandize Value, EyeballsJ?

It is important to agree on the goal else we will end up shooting in different directions.

Yagna considers goal of any organization to be Making More Money Now and in the future.

Isn’t this a very ‘capitalistic’ inward looking view? What about customers, employees, suppliers, society?

Isn’t the purpose more important than profit? Doesn’t making money create conflicts for managers?

In order to make money on an ongoing basis it is necessary to have satisfied customers, suppliers, employees and society at large (stakeholders). Our belief is that if one of the stakeholder is dissatisfied the goal is jeopardized. Hence satisfied customers, employees, suppliers are necessary conditions for making money. (One can put either of them as goal and making money becomes a necessary condition)

Next question is how do we measure goal of making money?

Money is generally measured in terms of Net Profit, ROI and Cash Flow.

TOC proposes 3 simple measures – Throughput (T), Investment (I), and Operating Expenses (OE). These serve as bridge between financial measures and decision making in different functions.

Throughput (T) is calculated as Sales less Truly Variable Cost (TVC). All costs other than TVC are considered as Operating Expenses (OE).

In order to make T, company needs Fixed and Current Assets. This is Investment (I).

Do you think T, I, OE connect to Net Profit, ROI and Cash Flow? If so, how? Think about it, we will discuss in Part 2.

The goal of any company is to make more money now and in future, measured through increasing absolute T and Productivity ratios of T/OE and T/I.  

Yagna believes it is possible for any company to acquire the knowledge and skills to make this happen.

Next question is where does a company focus in order to make money? Sales, TVC, OE, Inventory?

It is clear that if the company has to grow it cannot focus is on reducing cost. Growth has to come by increasing sales volume and sales quality.

In order to increase sales it is necessary to satisfy a significant need of the customer in a way that competitors cannot easily copy.

What is the significant need of the customer? Is it Quality Product, Lowest Price, After Sales service, Delivery or something else?

Our experience suggests that in most industries customers have an unmet need of fast and on-time delivery.

In case a company can build capability to deliver significantly faster and on time it can become a competitive edge. The word ‘significant’ is important, a small improvement will not work. Typically lead time needs to be least 30% lower than competitors with 95%+ on time Delivery.

How can a company develop speed and reliability?

We will address this question in Part 2. For now let us just get introduced to the term FLOW.

We look at any business as a mixture of interconnected FLOWS. The word Flow brings to mind movement, preferably with speed.

There are typically 4 Flows in any manufacturing organization.

  • Material Flow – Order Fulfilment – all the activities from the time order is received till it is dispatched / installed (if relevant)
  • Order Flow – all the activities from the time an opportunity is spotted till it is converted into an order
  • Money Flow – all the activities around collecting and paying money
  • New Products and Ideas Flow – all the activities from the time an idea is triggered till the product is launched and minimum Throughput secured / or an improvement project implemented

See you in Part 2 ….

Aniruddha.joshi@yagnaworld.com