Managerial Perspective to Operational Excellence

Using Lean Ideas to Compete Against Low-Cost Countries

Atul Tripathi, Jaymalya Deb, Vikas Kumar

• Publisher: CRC Press
• Year: 2021
• ISBN:
  9781000367577
• Edition: 1
• Topic: Business
• Subtopic: Operations
• Index: Business

In the current age of manufacturing revival in the U.S. and other developed countries, companies are looking for ways to maintain or gain advantage over competitors from low-cost countries. This book presents a firsthand account of actual projects in three different industries to help leaders and middle managers structure their own turnaround or improvement projects.

The book uses a case-based approach for Lean implementation and presents a summary of lessons learned and insights on change management. It includes examples of Robotic Process Automation concepts used in manufacturing and offers several examples of analytical tools used to solve operations management problems.

The first-person, story-based approach makes this book an engaging read for operations leaders and middle management in the areas of quality management, engineering management, business management, and manufacturing, as well as postgraduate students.

1   Introduction

Challenges to Change Initiative: History and Application of Lean Concepts

The idea of entering new markets like India and China in late 20th century and then later realizing lower costs of manufacturing by making products in large volumes in countries like China, Vietnam, India, and Mexico fundamentally transformed the global manufacturing landscape. The economies of scale combined with lower operating costs in these countries not only allowed companies to increase their margins, but it also improved the overall living standards of consumers all over the world. However, it also led to a mass departure of core manufacturing activities from developed countries to low-cost countries. The original model of outsourcing manufacturing to low-cost countries has also evolved over the last couple of decades due to advancements in lean supply chain philosophies. The optimization of the global supply chain to minimize inventory along the value chain and continued pressure to keep resource utilization high have made it even more susceptible to failure in an interconnected world.

However, over the last few years, there has been an increased focus toward manufacturing revival in the United States and other developed countries. The established model of outsourcing has been challenged by many long-term and short-term factors. These include changing customer preferences toward customized solutions with minimal wait time, recent geopolitical changes as well as global pandemic like COVID-19. Many companies in the developed world are looking at ways to differentiate from the competition and be better positioned to compete with players from low-cost countries. Lean manufacturing is one such approach that could help companies achieve that objective. Over the last several decades lean manufacturing has been enriched by both results from implementation and innovations in industries as well as by research contributions from universities. However, the path to achieving a leaner organization is unique for each organization and that is not always easy.

The history of lean manufacturing is more than two centuries old, from the concept of using interchangeable parts in 1799 to standardization of work concept introduced in the Ford production system in 1913. The Ford production system combined the concept of interchangeable parts with the flow of production and standardization of work. The Ford’s approach lacked the flexibility to adjust to variations in product model or design, and this problem was ultimately addressed by Toyota after World War II through a combination of different concepts that are now commonly known as Toyota Production System. The Just-In-Time (JIT) system used by Toyota aimed at increasing efficiency by receiving parts only when they are needed at each step of the manufacturing process. This was used in conjunction with a relentless focus on mistake proofing so that quality issues combined with a lack of inventory buffer do not impact on-time delivery performance. These two core principles of JIT and mistake proofing subsequently evolved into a pull or Kanban system. The Toyota Production System introduced many concepts that are now established practices among most manufacturing companies around the world. These concepts include cellular manufacturing, Single Minute Die Exchange (SMED), defining waste and focus on its elimination, Kaizen or continuous improvement aimed at reducing waste, Poka-yoke or mistake proofing, and Kanban or pull system.

Over the last several decades, lean concepts have proliferated well within education institutions and manufacturing companies, so the new batch of managers leading the charge of process improvement in different companies also have some background in lean concept. The Lean approach highlights eliminating or reducing seven types of waste namely defects, overproduction, waiting, transportation, inventory, motion, and over-processing. Due to its origin in high-volume environment of Toyota Production System combined with the lean education background of recent managers, this approach is relatively easier to get acceptance on and implement in companies that work in high-volume, low-mix environment. Over the years, our accounting practices have also evolved to support many of the lean concepts, but the financial measurements in practice may not always align perfectly with lean philosophies. For example, measures such as unit cost or gross margin on costing side or using machine utilization and efficiency in operational expense planning side are established metrics and have become part of lingo among managers or leaders in most companies.

If these measures become the primary drivers of performance, they could be detrimental to inventory positions or to acceptance of cellular manufacturing. Let us try to elaborate a bit more on this topic. A piece price-driven approach incentivizes materials managers or buyers to either make bulk purchases to get a better discount or prefer cheaper offshore vendors at the expense of delivery lead time. Bulk purchases could lead to excess on-hand inventory resulting in cash tied to the working capital of a company. On the other hand, a longer lead time necessitates planning well ahead of time based on the forecast as well as keeping safety stocks to mitigate the risk of stockouts. The management effort of long-winded supply chains with long lead times mitigates any immediate efficiencies gained through reduction of costs. Traditional or established costing systems do not include inventory holding cost as a part of the material cost or take into consideration the total landed cost of the part. The inventory holding cost includes opportunity cost in the form of cost of capital, cost of inventory management or upkeep, property tax, and the cost of obsolescence in case of design changes. For most companies, the cost of capital makes up majority of the holding cost associated with inventory.

Managers are expected to manage costs and protect throughput. These are often at cross purposes with each other. The metric to keep machines highly utilized could incentivize shop managers to make decisions that are not always aligned with lean objectives. One way to keep machines highly utilized is to run large lot sizes so theirs is minimal setup involved from part to part. In instances where the company has to outsource machining or fabrication work due to capacity limitations, a utilization-based mindset could incentivize shop manager to outsource higher margin but complicated manufacturing or fabrication processes and keep simpler and higher volume, but much lower margin parts in-house. Making such a decision would undermine the core competency of the manufacturing organization. Furthermore, a cellular manufacturing based approach requires collocating machines to process a group of parts with similar processing requirement to provide agility to the manufacturing process. Even though efforts are made during the design of a manufacturing cell to balance the load well across different machines, a utilization-based decision making approach will incentivize managers to lean more toward a function or process-based manufacturing layout than cellular layout.

Most finance or accounting managers are trained in traditional accounting practices and metrics which combined with previously established processes at a firm make it easier to implement or continue traditional performance metrics. In a high-volume and low-mix environment, these metrics are relevant as well as easily implementable. However, changing consumer preferences, increased competition, and better integrated supply chains over the last few decades have resulted in an increase in variety of products that any company has to keep in its portfolio. This transition toward a high mix and lower volume has forced most companies to move from a make-to-stock to make-to-order or engineer-to-order environment.

In this changing operational environment, quite a few new philosophies have evolved that incorporate the basics of Just-In-Time and lean concepts, but approach continuous improvement with their own core focus. One such philosophy is Quick Response Manufacturing (QRM) that focuses on relentless reduction of lead time, which ultimately leads to reduction of all other types of wastes. Competing based on lead time is a powerful concept that not only leads to a leaner organization but also allows companies in developed countries to position themselves differently to compete with players in low-cost countries. QRM is based on the principles of time-based competition and it can be implemented in all stages of value addition from shop floor to office to suppliers.

In practice, however, most companies use concepts covered by a combination of different approaches in a way that is custom to their business needs. This happens partly because of the history of a company. Changes in business model and leadership result in subsequent tilt of the organization toward a new approach of doing things. Older the organization, longer is the list of changes implemented. Without a distinct vision or focus for the process improvement at the highest level, different divisions or departments focus on initiatives that are within their control and are endorsed by the departmental managers. When a new operations leader takes over in such a scenario, the task of implementing a companywide change is not easy.

There are several implications of moving forward with a change journey because the success depends on a combination of recognizable benefit along with the acceptance of change by employees impacted. The first project needs to be significantly big to make a positive and recognizable impact on company’s performance, but at the same time there are risks associated with making the scope too big to succeed. The process of carving out a sizeable, but well-contained project focus should therefore get the attention it deserves.

Initiating a transition also comes with the challenge of an effective change management process throughout the journey. Concerns should be addressed in an effective manner and success must be celebrated. One of the challenges business managers face is related to reorganizing responsibilities such that a smaller number of people take a wider set of responsibilities. For example, in many companies planning and purchasing are two different roles and require slightly different skillsets. Planning is an internal operation focused activity and requires skills such as good product knowledge, familiarity with manufacturing processes, and a good understanding of company’s ERP system. On the other hand, purchasing is an externally focused activity and requires skillsets such as good financial acumen, negotiations, interpersonal skill, industry, and market awareness. Material managers prefer to have these two different roles to mitigate the impact on business activities due to employee turnover. In case of a unionized workforce, there are additional challenges associated with negotiating newly defined roles that overlap with two or more existing roles. However, a manufacturing cell works best when its members take complete ownership of its performance and work as a team. A transition toward an ownership-based cell team will not only require moving away from traditionally defined roles but will also need new incentives and reward structure.

Ultimately, each change journey is a project and it may require investment in some cases. Every project needs management of the bottleneck and monitoring the critical chain of activities. Monitoring the bottleneck as all projects come into play is key to protecting the overall throughput of the organization. In some cases, there might be more than just one bottleneck. Identifying those areas and appropriately buffering those resources will achieve the intended result. When an investment decision for a project needs to be evaluated, sometimes the traditional payback period and net present value do not take into consideration the most important factor – “availability of money.” The answer on the two-dimensional problem of time and money is not an easy one to intuitively understand, since our metrics have been skewed one way or another throughout our entire work lives. Perhaps the simplest explanation we have encountered so far is –“Money is measured in dollars, investment in dollar-days” – Eli Goldratt, Critical Chain.

As a leader tries to move forward with his or her own vision for the company, it helps to have a consistent goal of operational excellence for the entire organization driven by a primary performance metric. This book is a collection of three unique projects that were initiated by leaders at these companies to bring about the change. This book aims to present a case-based approach that could help leaders and middle managers at manufacturing companies structure their turnaround or improvement projects. This book walks the readers through the firsthand experience of steps taken in actual improvement projects with three different companies in Oil and Gas, Electronics, and Furniture Production. We hope that the lessons learned from these case studies will benefit managers in manufacturing organizations to have a better understanding of the benefits and challenges of lean approach that will further assist them in making key strategic decisions to maintain their competitiveness.

2 Overview of Cases

This chapter provides an overall summary of all three cases discussed and is intended for readers who would like to get a quick overview of the book. We encourage readers to skip this chapter if they would like to work through the case on their own. Each of the three cases discussed in this book is broken down into two chapters, with the first chapter describing the business problem and the second chapter covering the analysis performed to identify areas of improvement. By reading the first half of each case, readers could try to formulate their own approach toward solving the problem and then read through the second half to compare it with actual analysis performed. Even for the readers who read through the summary in this chapter, the detailed chapters provide a much deeper insight into problem solving approach used by the teams working on those projects.

The first case discusses a contract job shop company, American Pride Manufacturing (Fictional name), located in San Angelo, TX. The company has been a supplier of sheet metal fabricated and stamped parts to the Oil and Gas industry since 1948. They had a union facility with a workforce of 45 employees, out of which 30 are shop floor operators. American Pride Manufacturing had annual sales of $7M at the time of the project.

The parts were produced using either stamping or fabrication processes primarily using carbon steel sheets. Almost 40% of total active part numbers used fabrication but constituted only 4% of the total production volume. Approximately 90% of all the fabricated or stamped parts required painting or plating operations, which were outsourced to a local vendor. The fabrication used laser cutting machine, brake press, and CNC punch while the stamping operations used punch presses. The customer orders were scheduled using an 8-week forecast and a 2-week hot list (firm orders) provided by the OEM. The 8-week forecast was also used in ordering the raw material.

American Pride Manufacturing was facing increased competition from companies located in low-cost countries who were able to supply parts at a lower price. However, they required large order volumes and quoted lead times of 10–12 weeks. The company owner, Joseph Schultz, believed that they could compete with these companies as well as increase their customer base by offering products in less than a week and in smaller volumes. He estimated a 25% increase in sales volume if the lead time for fabricated parts were reduced to 1 week. Joseph also planned to use lessons learnt from this first project as a reference for making changes in other areas of the company.

Joseph built a core team from manufacturing, maintenance, and purchasing to identify and implement improvement opportunities. After mapping the lead time for the facility, the team observed that the total lead time of 36 days for fabricated parts consisted of 21 days of raw material supply, 7 days of queue time for raw materials, and 8 days of fabrication. It was also observed that the actual touch time was less than 6% of the total lead time. By comparing the value-added time with the total lead time and identifying potential improvement opportunities, the team decided to reduce the manufacturing lead time for parts produced in the fabrication cell by at least 50% from an average of 36 days to 18 days. The scope of the project was set from the time an order is placed for raw materials to the time finished goods are shipped to the customer.

The team performed analysis in three different areas namely finished goods inventory (FGI), fabrication cell, and raw material supply and the following key insights were obtained:

• The frequent changes in design and the company’s policy of running large batches to minimize setups had resulted...