For manufacturers, supply chain management is continuing to change at a very rapid rate. The significant innovations in supply chain management are quickly moving away from interfacing with customers and suppliers to integrating with customers and suppliers. This continually changing supply chain model is of no minor consequence. The very foundation on which demand and supply business relationships were established are rapidly disappearing in favor of more effective supply chain management methods. Of course, good product, quality and price will always be important, but the added dimensions of rapid response to customer requests and absolute dependability in meeting your commitments necessitates more and more flexibility in how quickly material flows can change. In other words, the old long established approaches to information and material flows that result in long lead times are no longer acceptable to achieving high performance supply chain management, which is essential for future business success. This fact is inescapable.
Today, some industries are more affected than others by the increased emphasis on responsiveness and dependability, and there is no doubt that this increased emphasis will inevitably cross all industries. For top management, the rapidly changing business model is challenging, especially when coupled with the immediacy of the never ending issues and complexities of how to increase profits and market share.
The seemingly endless myriad of operating problems such as poor on-time delivery, too much tied-up in working capital, slow response, and high costs, among other problems, are often identified as the culprits that scuttle the best of strategic intents. Yet, these are only symptomatic of more serious underlying problems in information and material flows, which are often the result of poorly designed processes even after the implementation of the most modern and comprehensive of ERP systems.
In practice, the processes which govern the flows of information and material are typically not issues that are focused on by the corner office, even though they should be very high priorities up, down and across the organization. Ultimately, the complex challenge of increasing revenue, profits, and marketshare comes down to an inescapable key question:
What is the right competitive strategy for us to follow?
One area of particular significance in formulating competitive strategy is a company's ability to implement effective processes that provide for superior information and material flows in manufacturing and throughout the entire supply chain.
Mindsets vs. The Rules
Companies have made large investments in ERP to improve business performance, but a common complaint about these investments is that promised ROI was never achieved. To a large extent, the promised and hoped for results were not achieved because the focus was on the wrong issues. Part of the problem resides in how we think a manufacturing company should be run. This thinking centers around long accepted management endorsed rules and operating logic that people follow on a day-to-day basis, which can easily defeat the effective implementation of a flow strategy.
Many executives from discrete manufacturing environments often react to the possibility of adopting flow manufacturing in their companies with "it won't work here" type of response. For them, flow clearly defies the logic of their discrete lot oriented operating rules used in their factories. What executives need to do is to challenge the traditional rules and therefore production and supply chain processes and operating methods. Understanding and accepting that the old agreed upon operating logic with its agreed upon but poor rules is, in fact, outmoded operating logic is a big step. The difficulty in changing mindsets, at all levels of the organization, is a very difficult task, but mindsets and therefore the rules, must be changed or you will not succeed with flow.
Introducing the technology of flow, while challenging, will be easily superseded in the challenge to change the old mindset. Long established value and belief systems are going to be "upset" as long endorsed rules and operating logic are challenged to be unfit and "scheduled" to be discarded. This is the critical point in the flow adoption cycle where only management's leadership and dogged persistence will assure that flow actually happens.
The long accepted traditional rules allow the flow of information and material to be interrupted numerous times in the flow path which takes up time – cycle time. Even with computers that can process data at the speed of light, most of a company's information and material flow processes are loaded with the worst kind of time – waiting time. It's not at all unusual to find information and material waiting in queues more than 90% of the time. When you pause and think that central to effective competitive strategy are responsiveness and dependability, then cycle time reduction in the flow of information and material throughout the supply chains becomes of paramount importance. The needed flexibility is impossible without these two high speed flows.
Is It Worth It?
Developing the most responsive, dependable and flexible supply chain can be the difference between winning or losing. This, by itself, should be enough to at least initiate a thorough investigation of a flow strategy. A number of companies, large and small, representing many different industries have very successfully adopted Demand-based Flow Manufacturing as a business strategy with incredibly astounding results. Developing a business case for flow manufacturing usually results in projected improvements that are so dazzling that it's beyond incredible. For example,
- Costs down 20-50%
- On-time performance of 99%
- Lead-time decreased by 50-90%
- Cost of quality reduced by 60%
- Overall cycle time decreased 60%+
- Floor space reduced 30-70%
- Inventory down 50% or more
- Material costs down 5-10%
Certainly, improvements such as: 99 percent-plus on-time performance, a 50 percent-plus reduction in work-in-process and lead time, and a 10 percent-plus increase in throughput would be more than enough for any top management team to adopt flow as one of the most worthwhile of strategic objectives.
Think for a moment about the potential of just a 10 percent-plus increase in throughput. If overhead is fully absorbed at the current rate of output, then usually the only significant additional cost to manufacture is direct material. With cycle times reduced by 60% or more and on-time delivery exceeding 99%, most sales executives should agree that a market share increase will occur. If the increased output is truly saleable, then 30-60 percent of every additional sales dollar is increased profit because the only additional cost is direct material. The effect of a saleable throughput increase could be as much as a 5% profit on sales or $500,000 of profit increase for every $10 million of sales. As one client company president once told me, "I will be happy with half that," and understandably so.
There are numerous other valid justification viewpoints to examine, as well. For example, a substantial amount of overhead activity costs are a direct result of a company's inflexibility to dependably respond to inevitable changes to actual customer needs. The amount and degree of schedule misses and changes can create an exponential overhead activity cost behavior as the organization ineffectively scrambles in an ineffective effort to meet unexpected customer requirements. Without the capability to easily flex to meet customer requested schedules then overhead costs are usually much higher than necessary to compensate for the organization's inability to meet plans and schedules. Most cost accounting systems have these costs buried in a category labeled "overhead," the fact is these costs do exist in excess and they are unnecessary.
A large part of these unnecessary costs are often the true and unknown cost of expediting, an overhead activity with a ripple effect that ultimately impacts the income statement and balance sheet. How? Think of the resources consumed, missed shipments, lost sales, higher production costs, quality problems and sales expense among other things.
The question "Is it worth it?" is, in the vast majority of cases, easy to answer with an overwhelming yes. Adopting flow as a business strategy is so compelling that flow should become a high priority strategic objective.
Assess Your Potential
As executives learn more and more about flow as a cornerstone of competitive strategy, understanding and acceptance of the improvement potential from flow evolves very rapidly. Consequently, management will want to determine and understand how well their company could really perform if the old agreed upon operating logic was changed to a flow strategy. At that time, management should consider an expert-guided focused assessment of the "as-is" condition versus what will be required to achieve a "could-be" state of flow manufacturing. This focused assessment should have the objective of quickly evaluating what improvements are needed when and what is the potential impact on overall business performance. The end product of this assessment should be a game plan that specifies the improvement actions and measurable performance improvements. Certainly, nothing drives the adopting of a new and better way of doing business than very compelling performance improvement potential.
R. Michael Donovan