By Bill Duncan, KPMG
Several years ago, while I was Director of Materials Management for a major aircraft manufacturing company, I began investigating the root cause of our part shortages in production. I discovered that part shortages cost an enormous amount of indirect labor time and expediting charges, and were devastating to the morale of many of our best operations people.
The verbal abuse that went with cleaning up shortages was almost always directed at the Materials Management team (Production Control and Purchasing), and the solution offered by our Production leader was to haul all of the Manufacturing Superintendents and Materials Managers into a meeting at 6:00 a.m. every day and grill them on the specific status and expected receipt date of every single shortage. It was excruciating for everyone, divisive to the team, and most importantly, unsuccessful.
After studying our part shortages over a period of several weeks I discovered that 44 percent of the shortages were caused by one simple fact: accepting orders for finished aircraft with a promised delivery date well inside lead time. In other words, we promised to deliver product in less time than we had historically demonstrated. When I documented this, I took my story directly to the top.
I’ll never forget that day. My presentation was crisp, my facts were both accurate and compelling, and the conclusions were absolutely solid. At the end of the presentation, our company President turned to the Vice President of Commercial Aircraft (who was directly responsible for making these commitments) and demanded a response. “Well,” he said, “it’s like this: I can either accept those sales orders inside lead time, or I won’t have any orders for aircraft. What do you want me to do?”
You could have heard a pin drop. The right response from the President would have been, “Find ways to compress the order-to-delivery cycle time.” That never seemed to occur to him, or he just thought it was impossible to get there from where we were, and the situation continued. The failure was not a failure of execution, but a failure of planning.
Whether it is formal or informal every company operates with underlying processes that are the primary factor for profitability. The up-front processes always make the most difference, and the downstream ones always have to absorb the impact of poor upstream process performance – whether in Sales or Engineering. It is widely recognized, for example, that 80 percent of the cost to manufacture a typical part is determined by its design. So why, if these processes are so critical, are they often so poorly executed? And what can be done to correct the situation? A couple of decades of experience in manufacturing has shown me that several practices can mitigate this situation and improve profits. Here are a few of them:
Start with the process – the PLANNING process! Look at the acceptance of sales orders as a starting point. Your systems should be able to interrogate existing inventory levels and work in process (WIP) in real-time, enabling sales people to make intelligent commitments rather than blind promises. Such computer software and hardware is widely available today. Software suppliers and systems integrators like KPMG Consulting are assisting businesses implementing this capability around the world. The most advanced practitioners are even extending this visibility upstream through their supply chains, considering total supply chain capacity and WIP in their decision making. Extend your process analysis through the order entry activity and production. Identify the time and cost drivers such as cycle time and indirect labor cost involved in processing credit requests, invoices and the other paperwork surrounding a sales order.
Consider the Demand Solutions™ tool set, featuring a 41-month history and producing a forecast for manufactured products through 36 months. It offers a spectrum of 20 formulas to produce forecast options and identifies the “best fit” forecast automatically. Getting this kind of accurate, robust forecast data into your upstream supply chain can make all the difference in collapsing raw material acquisition cycle times and crushing cycle-to-market. The information flow needs to run both ways in your supply chain: not only does your sales information need to flow in to produce and validate sales forecasts, but information about inventory availability and special promotions needs to flow out to the sales force and supply chain as well.
Second, use your company’s intranet (internal network) to process the information coming in from the salesperson in the field via a remote internet connection, thereby eliminating duplication in information gathering and data entry. Extend that information to an internal knowledge management system that analyses sales trends and provides valuable input to your sales forecasting system to improve your planning of finished goods, spares, warranty claims, and customer training and support.
Critical shortfalls and excesses in capacity and essential resources can be projected and averted, when underlying information is kept accurate and process disciplines are maintained. Production plans can be monitored and adjusted to maximize monthly shipping revenues, or account for special promotions. Gap analyses can be produced to simulate the effects of unplanned events should they materialize.
Then keep that process streamlining engine rocketing ahead into the design and production processes. For example, press toward more modular designs that allow “generic” products to be produced in a fairly homogenous stream, with the options and variations configured in modules that can be added close to the end of the production cycle, as close to final product delivery as possible. Don’t forget as you begin that journey to establish a baseline measure of your existing environment. This will be important for two reasons:
The steps involved here are pretty straight-forward, and surprisingly, seldom executed adequately. They are:
When you improve the order-to-delivery cycle time by a day, what does that save? Only an unbiased, before-you-start analysis has any real credibility. Baselining the indirect labor cost and evaluating the opportunity cost of unrealized sales are important elements of this strategy.
Demand Solutions offers tools with significant capabilities that even provide the ability to monitor ongoing performance at aggregated levels against annual business plans and discrete budgets. This brings us to some important points:
Don’t rely on obsolete information. There is no excuse for using information that is more than 24 hours old these days. The information systems and telecommunications technology costs involved in simulation based test marketing, real-time product availability analysis, and distributed logistics management make it very practical to use real-time information in most of your decision making.
Don’t rely on obsolete forecasting tools. Capable software ties entire supply chains together for planning and forecasting purposes and evaluate historical data, existing order backlogs and current projections and develop their own forecasts for sales levels. These packages will also allow you to override their forecasts with your own “tweaks” and track performance of both their forecasts and yours to demonstrate which is most accurate.
Don’t rely on obsolete planning tools. Once forecasts and sales orders are entered, sophisticated Advanced Planning Systems (APS) functionality and Enterprise Requirements Planning (ERP) capabilities are available to optimize the use of both existing inventory and procured goods. Failing to use these tools gives your competitors a crucial advantage. The evidence is clear in industry after industry – both make-to-order and make-to-stock – that the appropriate application of these tools can yield impressive bottom-line financial performance. We have seen impressive improvements in cycle time reduction, inventory turns, labor cost reductions (both direct and indirect) and Return On Net Assets (RONA) again and again when these tools are applied judiciously and energetically.
Finally, make DOWNSTREAM results the performance measures of UPSTREAM process owners! Metrics such as Order-to-Delivery Cycle Time, Percent of Orders Accepted Inside Lead Time, and even Part Shortage Levels should be used to measure the performance of those who lead the up-front processes and make the decisions that determine the bulk of downstream business performance. Imagine what would have happened if the Vice President of Commercial Aircraft described earlier was given these three measures, evenly weighted with sales revenue or backlog, as the criteria on which his next year’s salary or bonus would hinge! Tools available today in software like Demand Solutions enable companies to tie discrete manufacturing activity directly to company profitability by harnessing supply-chain-wide information.
When you review the cost of a manufactured product, it is typically comprised largely (usually well over 50 percent) of material cost, secondarily of overhead (typically about 25 percent), and to a far lesser extent of direct labor cost (often around 10 percent). The reduction of order-to-delivery cycle time directly reduces material cost by driving inventory turns up and carrying costs down. It further reduces overhead costs by eliminating the expediting, shortage chasing, statusing, and other non-value-added effort surrounding part shortages. For these reasons, investments in the up-front planning process and operations planning processes yield dramatic returns in material cost reduction and move directly to the company’s bottom line.
* Bill Duncan is a Director in KPMG’s High-Tech Management Consulting Practice. He has been involved in manufacturing more than 20 years, and until 2001 he was an executive at McDonnell Douglas (later the Boeing Company), where he was most recently the Director of Manufacturing and Quality Systems at the company’s Aircraft & Missile Systems in St. Louis. Bill also spent ten years at John Deere and five years in management consulting at Ernst & Young. He is the author of three books, and is certified by both the American Production and Inventory Control Society (APICS) and the National Association of Purchasing Management (NAPM).