PARADIGMS THAT DRIVE COSTS IN MANUFACTURING. The whole purpose of a business enterprise is pretty simple to make a profit by selling

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1 PARADIGMS THAT DRIVE COSTS IN MANUFACTURING The whole purpose of a business enterprise is pretty simple to make a profit by selling products or services to persons who desire those particular goods or services. For manufacturers, profit is made by purchasing raw materials and then adding value to those raw materials by applying machine or labor resources to convert them into a product that satisfies customer demand. Then, by selling the manufactured product at a price greater than the costs required to produce the product, a profit is made that can be shared with stakeholders. The same is true for service and administrative functions. The business proposition for a manufacturer is also simple to provide the resources (people, machines, workstations, and inventory) necessary to convert raw materials into finished products that customers are willing to buy while efficiently utilizing those manufacturing resources to maximize profit. Over the years, manufacturers have created three distinct operating paradigms for meeting the simple business proposition of satisfying customer demand: Grouping resources by function Routing products through departments in batches Using level production schedules These paradigms were developed over the last century, beginning with early manufacturing pioneers such as Alfred P. Sloan, Henry Ford, and Fredrick Winslow. Even today, these manufacturing concepts continue to guide how manufacturers meet customer demand and produce products. They rely on self-imposed manufacturing systems that have evolved into standard operating methodologies for facilitating the conversion process for manufacturing products. Over time the concepts became supported by cost accounting systems and performance indicators that measure the efficiency of manufacturing operations. Maintaining an allegiance to these paradigms is the source of much of the non-value-added work generated in factories today

2 and the primary cause of most of the seven wastes created by traditional manufacturing processes. Ask any manufacturing manager, engineer, scheduler, or factory designer to describe how demand is processed through their manufacturing facility or why the factory is configured the way it is and they will loosely describe how these three paradigms operate without actually referring to them specifically. Don t be surprised if some managers are unable to acknowledge, describe, or even explain why or how these operating paradigms came to be. Many might be hard pressed to even describe how their departments affect the entire system or how all the individual parts from their departments are linked together to make a product. They don t know why they do what they do they re just responsible for the efficiency of their department! If a response is offered, it will be likely be along the lines of that s how it s always been done or that s how I was taught in school or that s how the certification exam requires it to be done. Most often the response will be that s how my predecessor taught me to do it. Manufacturing methodology is never challenged, it is just perpetuated, generation after generation! TRADITIONAL PLANNING SYSTEMS ENABLE THE THREE MANUFACTURING PARADIGMS During the early 1970s, a few manufacturers began to implement a new technology, MRP (material requirements planning), that promised to help balance and satisfy the requirements for introducing and managing customer demand on the manufacturing shop floor, to provide future visibility into material requirements for suppliers, and to track manufacturing performance. Since those early days, both Western as well as global manufacturers have implemented an MRP system to manage customer demand, raw materials, and inventories. With the advent of cheaper computing power, the era of computer-based MRP planning systems has arrived. (The net

3 requirements MRP planning model is used in emerging market countries, but use of computerized planning systems is less widespread.) MRP systems have improved greatly over the years. Many branded systems are now available. Each has special differentiating features. The debate about which system a company should choose is considerable. Regardless of the numerous features of competing MRP systems, all systems use the same basic formula to determine the net requirements to satisfy customer demand: Forecast + open customer orders (on-hand inventory + released production orders) = net requirements Even non-computer-based planning systems solve the same basic netting formula for scheduling a manufacturing facility. Once an MRP system completes calculation of the formula for every SKU and bill of material item, the output is reported as a suggested recommendation. If the materials being planned are purchased items, the resulting order action report is directed to the attention of a buyer in the purchasing department. If the materials being planned are manufactured items, the order action report is sent to a planner/scheduler in the production and inventory control section. Due and start dates are calculated by the planning system for every level in the indented BOM. At this point, the output of the planning system is only a suggestion based on input information. Although planners and buyers have the responsibility to accept or reject the MRP recommendation for the suggested expenditure of resources to respond to customer demand, suggested order requirements from the planning system are usually accepted and purchase orders for raw materials are placed with suppliers while shop packets containing the suggested production orders and routing files are released to the shop floor and used to construct a production schedule.

4 MRP systems became the new gold standard for operating manufacturing facilities. In the 40+ years since MRP systems were first introduced, they have been warmly embraced by manufacturers throughout the world. These computer-based MRP systems were revolutionary for schedulers and planners who had increasing needs to convert ever-changing customer demand into schedules complete with start and due dates for all production orders sent to the individual manufacturing departments as well as to prioritize customer demand,. Once released, the shop floor control and inventory reporting modules kept track of the released production orders, provided for inventory transactions, and followed customer demand moving through the manufacturing facility. MRP systems were also revolutionary for managing the requirements of customers, cost accounting, sales, quality control, manufacturing, distribution, purchasing, engineering, and other functional units in the organization needing knowledge about activities on the shop floor. F o r e c a s t M a s t e r S c h e d u l e A F G H J K CUSTOMER ORDER BACKLOG B C D E F G H I K L M E D C B A FGI S QTY D S QTY D S QTY D S QTY D S QTY D LEAD TIME F o r e c a s t P r o j e c t i o n = P l a n n i n g H L e a d T i m e o r i z o n MRP systems and embedded waste. MRP system designers and programmers had no reason to question the why of traditional operating systems so they just continued to write code that embedded the three paradigms of manufacturing and followed the specifications given to them

5 by users. (If programmers had stopped to challenge the prevailing wisdom at the time, early MRP products might never have left the design laboratory!) Planner and scheduler jobs in many companies are often entry-level positions, so the planner and schedulers using the MRP systems have little time to consider how their systems work. In the drive to do a good job and be successful, planners and schedulers are usually very task-oriented. They focus more on doing the job than taking time to ponder the logic of the work itself. Even today, planners and schedulers are recent university graduates or individuals having little historical reference for why most systems work the way they do. Since the introduction and subsequent use of MRP systems, two and sometimes three generations of manufacturing and materials management professionals have used an MRP system for some portion of their careers. When they recall their experiences, most say they never questioned why the MRP system required them to do what they did to operate it. They just came to work and performed as they were instructed by their predecessor. When confronted with the learning curve for operating the systems, their first challenge was just to master the technology. Without question, the next generations of practitioners continued to institutionalize those learned methodologies into the long held, legacy, policies and procedures used for operating their manufacturing plants today. Even though newer planning systems are more efficient and include many new planning parameters to satisfy their manufacturing clients special needs, very few system users ever question why their respective factories are organized into departments, why products are routed through the factory, or why the schedules don t reflect actual customer demand. They don t challenge the issuance of orders in batch-size quantities. (It s just the way the system works. This is the way my predecessor taught me and there s nothing to be done about it. It s the same way I ll teach my successor. On and on it goes, generation after generation.)

6 The next time you hear the common lament, the system won t let me do it, just remember: it s not the computer system that won t permit something. MRP programs are just a series of ones and zeroes that reflect the defined management parameters given to them. The real villains behind the statement are the operating policies and procedures written to assure compliance to the three manufacturing paradigms that are hard-coded into the MRP operating system. As part of its operating system, the MRP system simply facilitates these paradigms. TRADITIONAL MANUFACTURING SYSTEMS PERPETUATE THE THREE PARADIGMS LEGACY With the considerable knowledge we have about the seven wastes of manufacturing, why is it so difficult for manufacturers to make significant progress toward reducing or eliminating them? The answer: the three manufacturing paradigms. The root cause of each of the seven wastes can be traced back to an allegiance to one or all of these paradigms. Understanding how the three manufacturing paradigms are embedded into traditional planning systems will provide manufacturers considering implementing a Lean operating system with a view of the challenges that will be encountered when changing the current operating system of their MRP-driven manufacturing facilities. Only by challenging and eventually changing these long-held, almost sacred paradigms, can a manufacturer become part of the 3% of manufacturers who claim success with their Lean implementation projects. 1 Processing customer demand into saleable products uses a series of different manufacturing resources. A review of how the MRP system authorizes the utilization of manufacturing resources to meet customer demand is worth a closer look. The explosion process. MRP is an order-based system. A calculation is performed at both the master schedule level and the material requirements planning level. The MPS (master production schedule) and the MRP system then determine the start dates, due dates, and quantities by time-

7 phasing the requirements based on the lead times documented in the BOM. This process is performed as a computer routine used by the MRP system and is commonly known as an explosion of requirements based on planning guidelines for a fixed snapshot in time. The net requirements determined by the explosion process are recorded as an order in the MRP system: Gross requirements (forecast + customer orders) inventory (on-hand inventory + open customer orders) = net requirements MPS explosion activity is performed for all end item products and for all the parts in the BOM s. Subsequent MRP explosions (time-phasing requirements quantities on the BOM) are performed on a regularly scheduled basis. Make or buy the requirements? The output of an MRP explosion is a series of recommended order actions for materials. Based on information in the item master, these materials can either be purchased from suppliers or manufactured in house. The net requirements output will then be separated into recommendations for materials to be purchased and orders to be manufactured: = Net Requirements Purchased Purchasing Buyer --PO Manufactured Planner/Scheduler -- Production Schedule Make or buy designations are the result of an extensive decision-making process. Purchased items are the responsibility of a buyer. Manufactured items are the responsibility of a planner. Orders are presented on a part-by-part basis to the planner or buyer in the form of a recommended action. The planner or buyer then responds to the recommended action: agreeing with the recommendation suggested by the planning system or changing the order by moving the recommended due date in or out; increasing or decreasing the quantity; or simply canceling a requirement. Prioritizing released orders. Traditional manufacturers group similar resources together into departments and then route production orders from one department to the next in batch

8 quantities. Each department manager is responsible for determining the priority of all released production orders issued to them: which production order should be processed first? One of the great strengths of traditional planning systems is their ability to establish due and start dates for the production orders they issue. To accomplish this, the MRP system requires three pieces of critical information: Departmental sequence: how the products are scheduled to move through manufacturing Lead time: the lead time required in each department to complete the work Due date: the date requested by the customer for the end product or the date required for forecasted demand A device called an indented bill of material is used to communicate how products are processed in a manufacturing facility to the planning system. A BOM lists the component parts for each SKU product. BOM s also use a technique known as indenting (an indented BOM) to document the manufacturing sequence and the lead time required in each department where work is required. Each level recorded in an indented BOM mirrors the sequential routing of an end item through the manufacturing departments. The lead time information necessary for establishing due and start dates in each department is also recorded on the indented BOM. How an indented BOM works. In addition to the parts required to produce a product, an indented BOM begins by identifying the gateway department where work is performed at its lowest level. As the work is completed in the gateway department, the next department where work is required becomes the next level on the bill of material. This sequence continues on and on until all departments where work is required have been recorded as an individual level of the BOM. Each product has its own unique indented BOM. Each sequence (or level) in the BOM also has a lead time that records the time required to complete the work in a department. A subassembly part number is assigned to every level in the BOM. Subassembly part numbers are necessary to identify the work that was completed by each department on the BOM. Once issued,

9 subassembly orders are tracked through the individual manufacturing departments to record labor and inventory usage and to monitor progress through manufacturing until the order is closed as it is completed. The sum of the value of incomplete or partially completed products plus the raw material components determines the amount of WIP and the amount of working capital investment required to produce customer demand. Once an indented BOM is available, establishing the due and start dates at all departments throughout the manufacturing facility is straightforward. Only one level of an indented BOM does not have its due date established by the planning system the very top level, the end-item level (or SKU). The end-item level is the parent part number a finished unit that has been assembled or fabricated from one or more components. A B C D E F G H I K L M DEPARTMENT LEAD TIME + DEPARTMENT LEAD TIME + DEPARTMENT LEAD TIME Customer Quoted Lead Time Typically, the master schedule, is the output of the master production schedule (MPS) process which establishes the due date for the end-item level. Once this date is established and using the lead times recorded on the BOM, start and dues dates for each level in the indented BOM can be established.

10 The MPS master scheduler function. Based on the customer s requested delivery date and any requirements in the manufacturing facility for a level schedule, the master schedule function establishes a due date for each product (SKU) making up the customer demand. Beginning with this due date and the lead times recorded on the indented BOM, due and start dates at each level of the BOM are established for each department by scheduling backward in time, down through each level of the indented BOM, subtracting the lead time for each level from the due date set by the master scheduler, until the due and start dates have been established at each level of the BOM down to the gateway department. CQLT is established based on the following offset cumulative BOM lead time. DUE DATE START DATE Sched L/T = 10 Wait Queue Move W/C M a c h i n i n g DUE / START L/T = 10 Sched Wait Queue Move W/C S u b - A s s e m b l y DUE / START L/T = 5 Sched Wait Queue Move W/C F i n a l A s s e m b l y Determining customer-quoted lead time. The sum of the lead times through each level in an indented BOM becomes the customer-quoted lead time (CQLT) for a product. Each parent product in the product catalog has its own CQLT. (Even though individual lead times at each level on the BOM may be inflated to accommodate the three paradigms, the resulting CQLT will still be the stated minimum amount of time required to produce the product through all of the departments in the manufacturing facility.) Rarely is the manufacturing department ever challenged on a stated lead time established at the departmental level. Usually, a lead time offered by manufacturing is just accepted at face value and recognized as a sacred value. If not challenged, the lead time goes straight to the indented BOM and is recorded for posterity. Yet

11 when a CQLT is unacceptable to a customer, the first approach to resolving the gap between the CQLT and manufacturing s response time is to buffer the amount of WIP and FGI inventories to compensate for the gap. (Rather than challenging the lead times, they just get expedited!) CQLT establishes the inventory policy for an entire company, which can have a significant impact on inventory investment. Even though right under their noses, only a few companies see the relationship between CQLT, department lead time on the BOM, and inventory investment! Establishing the planning horizon. The lead times on the indented BOM also establish the minimum planning horizon necessary for the master scheduler function to level the production schedule by planning customer demand fulfillment using MRP logic. The planning horizon states how far into the future the master scheduler must establish due dates for production orders released to the manufacturing department to allow sufficient lead time for manufacturing them, beginning with the start date of the first level on the BOM (Figure 1.7). The longer the lead time, the longer the planning horizon must be and the more production orders that must be issued to the shop floor. Lead times, the length of the planning horizon, the quantity of production orders, and the resulting inventory become parts of a vicious cycle of longer lead times and increased working capital investment feeding on one another. How many of the seven wastes of manufacturing result because of need to satisfy the three traditional paradigms of planning systems? Even using the advanced planning systems currently available, as long as resources are grouped by function, products are produced in batches, and level schedules are sought, is it a surprise that manufacturers still have these wastes in their factories? ARE LEAN AND MRP COMPATIBLE? Both Lean manufacturing and MRP have the goal of satisfying customer demand while also achieving optimum utilization of resources. Each system has a different approach to achieving optimum utilization. MRP systems institutionalize existing manufacturing paradigms by

12 launching scheduled production orders in batch quantities to the shop floor that are sized to achieve maximum utilization of resources. A Lean operating system, on the other hand, uses only the minimum amount of resources needed to meet actual customer demand. Achieving full utilization is a secondary goal for the Lean system. Lean techniques challenge manufacturers to reevaluate their existing paradigms, operating policies, and procedures that support full utilization of resources against a simple idea matching resources with customer demand by using only the resources necessary to meet that demand. The same re-evaluation process can be used by small- to medium-sized manufacturers who do not use computer-based planning systems, but still remain loyal to full utilization by following the three paradigms and their manual planning routines. The question is not, is MRP compatible with Lean? Instead, the question is can an existing operating system be modified from its goal of full utilization to the goal of meeting customer demand using only the minimum number of resources necessary to produce it? MRP systems are completely flexible. MRP systems can be operated under any set of rules established by the user. If a manufacturer is not willing to challenge the traditional paradigms that drive the current operating system, simply changing the parameters in the MRP system to reflect a Lean wish list will serve no purpose. Change must also occur on the shop floor in how demand is managed, performance is measured, and in how policies and procedures guide the operating system. Most MRP systems in use today have been designed to support the three traditional planning paradigms driving resources to achieve 100% utilization. Electronic or not, if planning routines continue to embrace these three paradigms, the questions about Lean compatibility and MRP will never go away. As long as a manufacturer is content to live with the consequences of achieving maximum utilization of resources at all costs rather than receiving the benefits of using minimum resources to meet customer demand, a Lean business transformation will never get beyond a philosophical

13 conversation. If, however, a manufacturer is committed to achieving the benefits of a Lean operating and willing to challenge the concept of full utilization as the ideal factory performance metric, then accepting that the 7 wastes of manufacturing are embedded in the planning paradigms of your manufacturing processes is a good place to start.

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