Lean Manufacturing and Theory of Constraints can go hand in hand

Lean Manufacturing and Theory of Constraints can go hand in hand:

Lean Manufacturing tries to separate value streams so that they use dedicated resources for the same capacity i.e. it makes value flow through the factory. TOC takes this idea further by finding out critical constraints or bottlenecks, it works in such a way that it figure out which are the most overloaded resources that determine maximum flow rate of production, and making value flow through these constraints. In order to meet market demand manufacturers can optimize production through their critical constraint.

Because of these reasons, a TOC production planning solution might be appropriate for manufacturers with make-to-order (MTO) environments, where different product lines take same resources, hence results into bottlenecks. Thus by offering daily production planning, TOC enables business performance improvements in such environments by increasing throughput and sales, cycle time or lead time reductions, service level improvements, and inventory level reductions.

Hence, where lean planning focuses on the flow and the takt (maximum time allowed to produce a product in order to meet demand) of the flow through the factory, TOC optimizes the flow through the factory by focusing on planning the takt of the flow through the bottleneck.

Similarities between TOC and Lean Management:

1) TOC throughput: In TOC lingo, throughput is the rate at which the system generates money through sales, i.e. sales generated by system which converted into money will be counted, hence building inventory is not throughput in TOC terms.

Lean Manufacturing: In this focus is on the customer and customer value adding activities.

2) TOC inventory: In TOC terms Inventory is all the money that the system has invested in purchasing things which it intends to sell such as finished goods, raw materials, work-in-process (WIP) Hence inventory is a liability and not an asset.

Lean Manufacturing: Above statement is consistent with lean manufacturing's focus on eliminating waste.

3) TOC operational: All the money the system spends in order to turn inventory into throughput, such as depreciation, employee time etc., thus increasing throughput, while reducing inventory and lowering operational expenses.

Lean Manufacturing: The TOC accounting system is somewhat similar to activity-based costing (ABC). And as TOC costing is closer to a cash flow concept of income, TOC accounting provides more accurate form of direct costing, subtracting true variable costs.

Hence exploiting constraints to make more money for the firm.

So Avenir helps to maximize throughput on the bottleneck, which is equal to the profit, as we think “an hour lost on the bottleneck is lost forever and an hour saved on a non-bottleneck is a mirage.”

Watch this space for more!!!!

Visit us at: www.avenirco.com

Impact of measuring efficiencies

The belief prevalent in almost all companies is that "a resource standing idle is a waste" and managements strive to utilize all their resources to the maximum possible extent and in doing that they themselves create the undesirable effects (UDEs) which they are grappling with.

You dont believe that this is possible, right.

Well, read on to find how

The major undesirable effects (UDEs) that a lot of companies suffer from
1. Long lead times
2. High inventories in the warehouses
3. Poor due date performance
4. Bad human relationships

Now lets look at how this happens

Since, management is focused on efficiency and hence wants to keep the utilization of its resources in the high 90s (and even 100% if possible), the prevalent syndrome is that "A worker standing idle is a crime and if a worker is found standing idle, find him something to do"

In such a scenario, the prime measurement of people (operators, supervisors, managers, etc) is efficiency, it somebody meets achieves that, nothing else matters. A typical way of measuring efficiency is the no. of parts mfg / per hour.

lets look at what is the impact of this measurement:

The supervisor cannot allow his efficiency numbers to decline, so whenever he faces a dearth of orders, he pulls orders ahead and produces to forecasts (e.g. marketing gave a forecast that they will consume 1500 pcs in the next 3-4 months, so lets produce them now itself since we have capacity, etc) and this ensures that his resource utilization levels don't come down.

Now, in a plant there are setups to be performed, hence, one way of keeping utilization levels high and producing a larger no. of parts per hour is to minimize the no. of setups and as a consequence batch sizes are inflated to that extent.

Having larger batches leads to significant increase in the time a part spends waiting either to be processed or for the other remaining parts in that batch.
In fact, in such traditionally run plants, the actual processing time is less than 1/10 th of the total mfg lead time, hence 90% of the time is spent waiting.

Now, will you agree that having efficiency measurements is the reason for long lead times?

Will explain how efficiency measurements lead to the other UDEs in the next blog.

Keep watching this space for more.

Visit us at www.avenirco.com

Don’t let ripples from market invade your shop-floor

It's URGENT!!!!.....Its  very URGENT!!!.......It's most URGENT!!! 

These are typical phrases that float in shop-floor. I am amazed at priority setting - priority over a priority. I am unable to differentiate between urgent and very urgent.  In any case, need is immediate. Any delay will lead to late delivery. However, this clearly demonstrates chaos that is prevalent on a shop floor. This is generated due to faulty functioning in both operations and sales. However none of members from these functions will agree to the  faulty functioning. For them it's the way business done. 

I want a sales/operations guy to ask to his customer, what is delivery/due date performance(DDP) of company. The obvious argument is why to bother a customer,  we  know it is around 90%. My assessment of DDP is on the basis of first committed date of delivery and not on the last negotiated delivery date. That is why I am asking to ask from customer, who will always surface out the problem of negotiating/extending delivery dates.

Now I want marketing/operations team to take sales data of last one year or more, and analyze %age of total SKUs/items accounting for around 80% sales by volume. It will always be around 20% of total SKUs/items produced during that period. This is nothing but famous Pareto principle. The variation in both the %ages might be in range of 10% (30% of total SKUs might be accounting for 70%of sales volume) but not more than that.  Let us call these 20% SKUs that account for 80% of sales, as fast moving items. 

At last, I  want sales/operations team to visit their finished goods repository and analyze the inventory lying there. Logically if 20% of total SKUs (fast moving items) account for 80%of sales, then 80% of finished goods inventory should be of fast moving items. However, this will never be the case. In all of the cases (exceptions discounted), 80% of finished goods inventory will be of slow moving items.

Theory of Constraints(TOC), understands these problems but with a different paradigm.  There two main reasons for above mentioned problems. 

One reason is coupling effect between operations and  distribution channel. Typically companies work on forecast of orders. Even if orders are firm; when a order is booked, it is sent to planning/operations department. The planning/operations department then collates all sales orders and schedules production orders, while optimizing capacity available simultaneously. Any abrupt change in real-time demand, order or order quantity creates ripples that disturbs the entire production process. Some productions orders are held in mid of process, some jump the Que, and some wait for parts to come. When such a situation happens on shop floor, everything turns out to be URGENT on some day or the other. 

Theory of Constraints(TOC), suggests to create a buffer between operations and distribution that can take care of these ripples/variation. The buffer decouples the operations from distribution channel. If fast moving items account for around 80% of sales, we can create a buffer in form of finished goods inventory (based on calculation - Maximum consumption within given replenishment time, taking into account unreliability of supply) for each of fast moving items at Plant Warehouse.  

Once buffer is put in place, there is no forecast based order for such items. Any dispatch of material from buffer, will trigger a production order. These production orders will not be batched or jump the que. They will follow a simple priority based on buffer management. We divide the buffer in three parts and assign them color to denote buffer penetration - Red (when finished goods inventory is less than 1/3 of buffer level), Yellow (when finished goods inventory is between 2/3 and 1/3 of buffer level) and Green (when finished goods inventory is greater than 2/3 of buffer level) . The production order (for fast moving items) on the shop floor is assigned a color that correspond to buffer penetration at Plant Warehouse.  This entire system of functioning is known as Made to Availability (MTA) in parlance of TOC. At any given point in time, Red orders will be highest on priority and green orders will be lowest on priority. Everyone on the shop floor follows this principle and works Red order first.

The other reason of chos on shop-floor is due to tendency to release as many MTO orders (Made to Order: Production to happen only when firm order is received by customer) on shop floor, as possible. The slow moving items have to be produced only after receipt of firm order; however we need not release them on the shop floor as soon as we receive them.  We need to set a priority system for such orders. We take existing lead time of MTO orders (from time sales orders enters the system to time it is dispached) and cut it by half.  This is the buffer for MTO orders. We do not assign separate buffers for each SKU. We can assign different buffers to different class of SKUs and if difference between the buffers is 2-3 days, we assign a common buffer. The time of release of production order for MTO orders is decided as Delivery Date - Buffer. The order is not released on shop floor before the derived release date. The is known as Choke the Release in TOC parlance.  To put priority system, we divide buffer in three parts  and assign them color to denote buffer penetration - Red (when difference between delivery date and actual date is less than 1/3 of buffer), Yellow (when difference between delivery date and actual date is between 1/3 and 2/3 of buffer) and Green (when difference between delivery date and actual date is greater than 2/3 of buffer). The MTO production order on the shop floor is assigned a color that correspond to buffer penetration.  At any given point in time, Red orders will be highest on priority and green orders will be lowest on priority. Everyone on the shop floor follows this principle and works Red order first. 

If you follow above steps, I assure you that you will be able to insulate your shop-floor from market ripples.

Visit us at www.avenirco.com