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Part I
Understanding of the MCPD System
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1
Let’s Start by Really Tackling Improvement of the Current Level of Manufacturing Profit through Productivity Improvement
Manufacturing companies survive and thrive by manufacturing and selling profitable goods. The manner in which goods are made and making profit differs from one company to another and/or within a company from one period to another. These fluctuations depend on the health of the structure of each manufacturing company for a certain period of time or, more precisely, on their ability to generate a continuous profit, even if there are larger or smaller changes in the internal environment and, especially, the external environment in which they carry out their activity. Often the financial reality is more readily understandable by managers than the reality of manufacturing flow processes. In this respect, it is necessary to disclose directly the health of the manufacturing flow or, more precisely, the current and future level of non-productivity in the company’s financial statements (pro-forma and for a completed period).
In this first chapter, we will present the role of productivity in supporting multiannual and annual manufacturing target profit (Sections 1.1, 1.2, 1.3, and 1.4) and the basics of the MCPD system (Section 1.5). In this context, Section 1.1 presents the directions of consistent growth of manufacturing profit and productivity role. Section 1.2 addresses the need for productivity-centered thinking to achieve multiannual manufacturing target profit by manufacturing companies. In Section 1.3, productivity support is shown to achieve multiannual manufacturing target profit by increasing the volume of products manufactured (continuous improvement/capacity increase; effectiveness) and of products sold (continuous improvement/increasing delivery speed; efficiency) and reducing costs associated with the production and delivery of goods. Section 1.4 describes how to support manufacturing profit through productivity while increasing or decreasing sales volumes. Subsequently, Section 1.5 defines the MCPD concept and presents the basics of the MCPD system to support the annual and multiannual manufacturing target profit by achieving manufacturing cost improvement (MCI) targets and means or, in other words, by management of MCI targets and means, or management of MCI policy for consistent productivity management. Section 1.6 sets out the conclusions of this first chapter.
1.1 Directions for Manufacturing Profit Growth and Productivity Role
Manufacturing companies are under continuous strategic transformation to fulfill their vision and to be able to continuously adapt to the challenges of the internal and especially the external environment. Often the vision of the manufacturing companies is strategic positioning in the market or, more precisely, competitiveness through product volumes destined for specific markets, and viable and consistent profitability in the medium and long term. Therefore, profitability and gaining a certain percentage of the market for the next 5–10 years or more are the core concerns of top managers in manufacturing companies.
In this respect, ensuring the acceptable health of the manufacturing companies structure determines the continuous definition, monitoring, and understanding of the key elements that contribute to the definition and achievement of the multiannual manufacturing profit plan and of the associated target product volumes, respectively:
• to the company’s external elements: (1) the price and (2) the number of products actually or potentially requested by customers throughout their life cycle and on each market; and
• to internal elements: (1) acceptable levels of product unit manufacturing cost; (2) acceptable productivity levels of current and future capacity; (3) production regimes (continuous, batch, repeated lot, manual, one-off) and delivery speeds; (4) environmental protection and innovation; (5) increasing quality product ratio and (6) employee motivation–safety and health at work, morale, and lifelong learning.
Starting from the current state of these external and internal multiannual elements, top managers often set strategic goals or managerial expectations of the manufacturing system for these elements (increases or decreases) and future critical directions to be achieved by setting annual targets and means (policy) (Akao, 1991, p. 5) for these detailed elements up to the product family and/or individual product process levels.
The continuous redesign of the vision of manufacturing companies and, furthermore, of the need to strategically transform the flows of the product families and their main processes has as a starting point the definition and realization of the multiannual profit plan and, especially, of the manufacturing profit.
The usual or possible profit growth directions are focused on:
1. increase of the sales price;
2. increase in sales volumes; and
3. unit cost decrease (especially of the product unit manufacturing cost for current and future products).
The simplest way to increase profit by increasing revenue is to increase the sales price. However, for most industries, the sales price is often influenced decisively by the market and, in particular, by the prices of competitors, and it is difficult to obtain profit from successive increases in sales prices without reducing the number of products sold (accepted by customers), at least for certain markets or periods.
Increasing sales volumes could create the potential for greater profit through increased revenue and product unit manufacturing cost reduction by volume, but without a company continually designing and launching profitable new products of acceptable quality, that are unique and possibly revolutionary, it is unlikely that sales volumes would maintain their growth trend in the medium and long term for each target market, as competitors will bring their rival products to the market. Often, before the effective production of new products, new products determine the need for new processes and new technologies that need to be prepared as well as possible, if not perfectly, to limit or eliminate possible future variations in processes, losses variations (not effectively used input) and waste (excess amount of input). Moreover, improving the mix of existing products, even in the context of market globalization, is limited by the number of current and/or potential customers.
Moving forward, ensuring an acceptable and consistently decreasing level of unit cost (especially product unit manufacturing cost) and, implicitly, pricing, is the third way to achieve multiannual profit plan. But the costs and the variation of their targeted reductions depend on how the finished products are made, namely the current methods used in the work processes where the resource inputs are transformed into finished products, at a quality level and delivery time acceptable to customers. Generally, in a “natural” manner, at least in the medium and long term, without focused managerial interventions, most of the costs tend to increase (especially the indirect variables—such as utility costs, costs of raw materials, components and auxiliary materials, some capital costs, costs associated with non-value-added processes, etc.). Some managers may consider these increases as “normal” with many objective justifications. The unit cost reduction targets the reduction of research and development (R&D) costs, marketing costs, general and administrative (G&A) costs, and manufacturing costs. The purpose of this book is to address product unit cost of manufacturing or, more precisely, manufacturing cost improvement by reducing or eliminating unnecessary costs in manufacturing processes.
Therefore, by looking more closely at the current mode of transformation of resource inputs into finished product outputs, it is possible to identify the consumption which is more or less useful, but which can be reduced or eliminated for all categories of inputs: (1) stocks and consumption of raw materials, components, and auxiliary materials; (2) times of work of people and equipment; and (3) utilities that are consumed more or less usefully. Reducing the product unit cost of manufacturing represents the reduction of each cost item in the structure of each product and is achieved by continuously and consistently improving the effectiveness and efficiency of each resource inputted in the company and for each transformation process at the man, machine, method, and material (4 Ms) level, fulfilling exactly the quality level and timely delivery required by customers. By continually and consistently improving effectiveness and efficiency at the level of each manufacturing flow and the main processes associated with them, continuous manufacturing cost improvement (MCI) is sought through both manufacturing costs and initial design costs.
In this respect, in 1963 Peter F. Drucker stated:
What is the major problem? It is fundamentally the confusion...
