I’m finally beginning the IdeaParachute initiative.
As my first case I have randomly chosen a Valve Manufacturer company. The relevant information about this company, gathered from public information (i.e. website, google), is the following:
[RELEVANT COMPANY INFO]
- Manufacture specialty engineered valves, for multiple industries
- Valves come in multiple sizes, types, materials, meaning the possible combinations of end items are probably in the thousands
- Their products are for critical service operations, meaning downtime is a big deal for their customers in terms of cost and downtime time
- Their valves are easy to maintain, meaning customers minimize downtime and cost
- Operations are similar to a Job Shop, which manufactures parts that are later assembled, which is a usual process flow for valve manufacturers
- They likely stock some common items, but also custom manufacture specialty items, meaning their operations are both make to stock and make to order
[5 SUGGESTED IDEAS FOR THE COMPANY]
Below are several ideas that I am proposing:
1. Choke The Release of Plant Orders
Regardless of the type of manufacturing operation, choking the release almost always has an immediate positive effect on a plant’s performance. Choking the release means releasing plant orders only when they it is really needed.
Most of the time, orders are released with ample time in advance, just for the sake of keeping machinery and labor busy. This behavior is induced by traditional cost accounting measures, as maximizing efficiency will minimize cost of goods sold. However, aiming for efficiency everywhere in a manufacturing plant leads to high work in process, long lead times, lower due date performance and less effective capacity.
Running a very efficient plant, in all work centers, is often the case for sub par plant performance. Controlling the release of orders improves the situation significantly.
For more information about how this is implemented, explore the S-DBR methodology
2. Use Replenishment Times in Target Inventory Levels
Companies often determine inventory levels based using a target levels of weekly or monthly sales. For example, an Operations Manager might say that he defines target finished goods inventories at a maximum of 6 weeks of average demand, plus some safety stock of 2 weeks.
However, what is often not considered in setting these levels is replenishment time, or the time that elapses since an item is sold until it is replaced. Replenishment time is composed of order lead time and resupply lead time. Order lead time is the frequency with which orders are placed and resupply time is the time it takes to resupply that item, which often includes manufacturing time and/or transit time.
If the total replenishment time for a company is composed of 1 week of order lead time (i.e. orders are placed every week) and 1 week of resupply time, then perhaps having 8 weeks of total finished goods inventory might be too much. This concept applies to all stock items, including raw materials, intermediate components or finished goods.
For more information about how to use replenishment times in inventory levels definitions, see the DDMRP buffers model.
3. Operational Excellence as a Decisive Competitive Edge
Michael Porter famously said two decades ago that there is a big difference between strategy and operational effectiveness. Strategy is about deciding what business a company is in (i.e. what does it stand for) and operational operational excellence is all about execution. Porter suggested that when it comes to execution, there is convergence, meaning all companies will achieve the same level of operational excellence over time.
But is this really the case? How many companies do you know that consistently deliver their product and/or service on time, all the time?
I happen to believe that operational excellence can be the source of creating a decisive decisive competitive edge, or something that exceeds customers needs and that competitors cannot imitate easily.
If you want to read more about how operational excellence can be used to create a decisive competitive edge, you might be interested in the concept of Ever Flourishing organizations.
4. Sell Products Below Cost and Still Make Money
Traditional cost accounting shows us how we should calculate the cost of products. The cost of the product includes raw material, and direct labor and manufacturing overhead. Cost accounting helps allocate or assign overall company costs to the different product families, by using allocation factors such as direct labor.
The problem with allocation, is that it often leads to distortions. When the product cost concept was invented, companies had much more variable than fixed costs. Today, the majority of costs are fixed, and cannot be adjusted when sales volumes change.
In addition, cost accounting ignores real capacity of manufacturing plants. If a plant has capacity, and you can sell at a price that covers are your real variable costs (i.e. such as raw material), you will be bringing in additional margin to cover your fixed expenses.
Yes, GAAP requires us to calculate product costs, but we don’t have to use these same calculations for our decision making. A company’s primary concern should be to generate enough gross margin to cover operating expenses, not to sell at prices that are above product costs calculated with cost accounting measures.
So should you accept this new deal, at a price below your usual cost accounting cost? Perhaps you should.
If you are interested in the alternatives to using product costs in decision making, you can read about the Throughput Accounting concepts.
5. Hold Stand Up Meetings
Meetings take too much of our time. What would happen if we followed the rule of only holding stand up meetings?
Stand up meetings are just that: meetings where no one sits down. An agenda is defined, only those required are invited, and the meeting is short and sweet. These types of meetings are common in the software development world, and several manufacturing companies do them too.
How much time can we save if we hold these types of meetings more often?
For more info about stand up meetings, see how this company is doing them effectively.
[For more information about the IdeaParachute initiative, visit www.IdeaParachute.com]
**The ideas suggested here are proposed to ignite additional ideas to those who are reading. It is likely that additional contextual information is required to implement them successfully.