The Diemasters

The Diemasters
Manufacture Smarter
The very short version
Continuing to do the same thing
and expecting a different outcome
Velocity =
Cycle Time
Value Added Time
The rate per unit of time at which an
object moves in a specific direction
Manufacturing Velocity compares lead time to
that time which is theoretically possible when
value-added operation/activity time is
considered.
The average time in industry ranges from
200 to 300:1
(They require 200-300 hours to add 1 hour of value)
Transformer Quote
(excerpt from an actual quote)
16-23077-01
Labor: 10 minutes
Material: $.88
year 1 price = $3.79
year 2 price = $3.51
year 3 price = $3.51
year 4 price = $3.87
16-22428-01
16-22427-01
Labor: 3.73 minutes
Material: $.93
Labor: 7.3 minutes
Material: $.45
year 1 price = $2.21
year 2 price = $2.07
year 3 price = $2.18
year 4 price = $2.29
year 1 price = $2.29
year 2 price = $2.41
year 3 price = $2.52
year 4 price = $2.65
Quoted lead time = 8 weeks
But if it takes 12 minutes ...
and the lead time is 8 weeks:
60 minutes X 8 hours X 5 days
X 8 weeks = 19,200 minutes
12 minutes
Velocity ratio = 1:1600
Process Cycle Time
Customer
Warehouse
Shipping
Distribution
Sales
Order Entry
Engineering
Scheduling
Customer Service
Acknowledgement
Backlog
Inventory check
Purchasing
Mfg. Engineering
Manufacturing
Quality
Accounts Receivable
Suppliers
Shorter Cycle Times = Cash
for Sun Microsystems, Inc.
300
14
250
12
10
200
8
150
100
50
0
'89
Cycle Time
6
Average days from
component purchase to
revenue collection
'90
'91
'92
'93
'94
4
2
'95
0
'89
Inventory Turns
Number of times inventory
is turned per year
'90
'91
'92
'93
'94
'95
Generated $700 million in cash
Business Week/June 26, 1995, p.102
(on $5.6 billion in sales)
Evaluating a Company
Yours or someone else's
Current
Average
Lean
Class
Lead Time
1. Velocity =
= 200+
Value-added Time
<10
1.5 Inventory Turns
= 3-7
>20
2. PONC
= 7-11%
<2%
= 4-6%
>10%
(% of Cost of Sales)
3. PAT (Profit After Tax)
The Price of Non-conformance (PONC):
(can be as much as 25% of the cost to produce)
Inspection
Returns to suppliers
Sorting
Remakes
Scrap
Repairs
Rework
Poor yields
Non-functional tests
Added handling
Longer lead times
Additional space
Premature failure
Material review board
Warranty work
Spare parts inventory
Administrative costs
Delayed revenue
Lost reputation
Lost sales
Prevention:
Cost of Quality
$
% Sales
QA Administration
Product Assurance
Configuration Management
DL Training
Mfg Travel
Total Prevention:
$356,059
$984,770
$111,472
$440,925
$201,464
$2,094,690
QA Engineering
Process Control
Test & Inspection Labor
SPC et al analysis by ME’s
Test & Inspection FAX Depr
Calibration
Total Appraisal:
$696,804
$272,307
$937,036
$357,911
$354,433
$ 64,000
$2,686,491
3.7%
Continuing Engineering
Failure Analysis by ME’s
Scrap & Loss
Rework DL
Rework DL on WO’s
Rework Material
Field Spares Write-Offs
Total Internal Failure:
$372,213
$281,795
$472,769
$299,630
$ 74,464
$ 39,793
$ 58,950
$1,599,613
2.0%
2.7%
Appraisal:
Internal Failure:
External Failure:
Actual Warranty Claims
Accommodation Material
Sales Credits
Cost to Chase Receivables
Cust Svc Wages & Supplies
Int’l Field Svc @ 70%
Total External Failure
Total Cost of
Quality
Harding
& Associates 2003
$700,816
$119,502
$200,000
$100,000
$923,954
$505,851
$2,450,123
$8,630,917
2.9%
11%
Cp =
Spec. Width
Process Width
k is the constant factor for
noncentered distribution
Cpk
k= Design Center (D)-X
Spec Width/2
-.005
0
+.005
-.005
0
+.005
-.005
0
+.005
-.005
0
+.005
Statistical Conversions
CP k
PPM
Defect
Quality
Yield
0.67
22,750
97.725%
0.83
6,219
99.379%
1.00
2,700
99.730%
1.17
233
99.865%
1.33
63
1.50 (6 sigma)
1.67
2.00
3
547 PPB
World Class
Quality
2 PPB
Harding & Associates 2003
99.9936627%
99.9997%
99.9999426
99.9999998%
Process Cycle Time Reduction
1. Flow chart the process
Assures a common definition of the process
Formalizes the process
Harding & Associates 2003
Process Cycle Time Reduction
2. Reduce product between operations to 15
minutes or two times the prior process.
Measure inventory in terms of time (not dollars).
Process Cycle Time Reduction
3. As material is "squeezed" off the floor,
assure that the space is not available to
inventory. Space Exclusion.
Process Cycle Time Reduction
4. Establish the value-added time for each
operation by the lowest common denominator or
product measure.
Harding & Associates 2003
Process Cycle Time Reduction
5. Move operations closer together (where
paratical) to:
facilitate communications, material movement
reduce space/inventory/lot sizes
Harding & Associates 2003
Process Cycle Time Reduction
6. Pace the flow of material or "pull" from the prior
operation as needed.
"U' Shaped Cell
Schedules
Problems
Delivery to Point of Use
Receiving
Inspection
Stockroom
Info
tion
rma
Kitting
= Count &
Transaction
Reducing WIP While
Increasing Output
Thousands
6992
4266
3195
2626
1405
1328
$852
92
$806
93
1893
1495
$516
94
Consumer Goods Manufacturer
$183
95
96
97
$618
$327
$186
$144
98
000 Units
99
$000 of WIP
Manufacturing Velocity
Cartridge Loading Process - Cycle Time
hrs.
140
120
100
80
Goal
Act
60
40
20
0
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec 1996
Chinese cunsumer goods manufacturer
The Results@@@of the changes.
Factory Average Inventory & Inventory Turns
33.9
24.2
28.7
Normalized
data
510
460
3.7 5.2
'97
'98
8.4
400
'99
12
440
320
'00
'01
270
B02
230
Sep
'02
Process Cycle Time Reduction
Days
70
Pharmaceutical Manufacturer
60
50
40
30
20
60 days
10
5 days
0
September 1998
April 1999
EOQ Formula
(circa 1914)
EOQ =
2 X Annual Use X Set-up cost
Unit Price X Cost to Carry (%)
EOQ =
Set-up Cost
Cost to Carry Inventory
The New EOQ Formula
Circa 1999
Q = d (Ol + LT) + z
(Ol + LT) - OH
Where:
d(Ol+ LT) = expected demand during an order interval plus one resupply lead time
= safety stock for a desired service level and variability of demand
OH = on hand inventory at the time of the review
Ol = length of order interval
LT = lead time to obtain resupply
d = average demand per period
= the standard deviation of the demand period
z = the number of standard deviations, from a standard normal table,
associated with the desired customer service level
APICS - The Performance Advantage, February 1999, p. 20.
Harding & Associates 2003
Annual use = 20,000 & Unit price = $5.00
Set-up cost is $400
Carrying cost is 20%
EOQ = 4000
vs.
Set-up cost is $5.00
Carrying cost is 75%
EOQ = 231
vs.
Every industry has its set-up and
change-over opportunities
Each is different and they are all the same
No Set-up in the World
Requires More Than 15 Minutes
Current set-up times are the result of:
Standards
Past performance
Hourly pay
Expectations
U.S. carmakers still lag behind their Japanese rivals in
changing over their factories to produce new models
Honda Accord
Toyota Camry
3 days
18 Days
Ford Contour/Mercury Mystique
60 Days
Chevy Lumina
87 Days
Set-up times are reduced by ...
and/or
Video tape, critique,
improve, repeat.
Multiple people per
set-up.
Acknowledge and reward
the right behavior.
Put a value on time.
Set-up reduction
Where the TIME is
Preparation
30%
Centering & Checking
15%
Trial & Adjustment
50%
Installation & Removal
5%
Relevance Lost
The Rise and Fall of Management Accounting
Conventional wisdom in U.S. business schools
and industrial engineering departments held that
inventory could be optimized, a philosophy not
unlike searching for the optimal percentage of
defects to minimize total costs.
Inventory is a form of waste and admission of
failure.
H. Thomas Johnson & Robert Kaplan
To reduce inventory,
you must reduce cycle time.
Inventory
Cycle Time
To reduce cycle time,
you must reduce inventory.
The longer the collective lead times,
the greater the investment in
inventory
Collective Lead Times
Inventory's Narcotic Effect
6
Inventory is addictive ....
more is never enough
6
The price increases to support the
habit
6
It dulls the senses to the "real
world"
6
Soon the cure becomes a larger problem than the
one it was intended to relieve
The Problem With Inventory
6 When the market or technology changes, all you have is
worthless inventory. (Nobody wants to write it down.)
6 It is expensive to hold on to - stock accuracy, cycle counting,
physical inventories, record accura cy, space consumer,
obsolescence, shelf life problems.
6 Requires support resources of people, systems, equipment,
transactions.
6 Difficult to work around in terms of tracing quality problems,
implementing ECOs.
6 It is not worth what you paid for it.
6 It can be a coping mechanism and hides the real problems.
The Cost of Carrying Inventory
Visible Costs
Interest rate of money / alternative use
Taxes
Insurance
Space, occupancy & utilities
Equipment (movement & storage)
Scrap & obsolescence
Subtotal
Additional, Less Visible Costs
Personnel (planners, analysts, warehousers)
Transactions: counting, moving, retrieving, issuing,
reconciling
Inspection, reinspection, return of defective material
Rework, handling damage
Grand Total
Approx. % per year
10%
5%
3%
4%
3%
5% (to 20%)
30%
15%
10%
10%
10%
75%
Ref: (1) Stanley, Ph.D., L.L. editor, “Purchasing Performance Evaluation,” The Purchasing Handbook, 6th ed. McGraw-Hill, sponsored by the National Association of Purchasing
Harding & Associates 2003
Management, Tempe, AZ 2000, p. 793. (2) M. Harding & M.L. Harding, Purchasing, Baron’s, 2001, 2nd. ed. P. 198. (3) Moody, P.E., “Profitable Purchasing,” Leading Manufacturing
Excellence, John Wiley & Sons, New York, 1997, p. 276.
The Hidden Cost of Inventory
The High Cost of
Carrying Inventories At
British Petroleum
Capital Costs 8.11%
Inbound Logistics 11.54%
Adm/Supervision 5.64%
Receive/Issue 8.88%
Obsolescence 3.20%
Bench Stock 1.22%
Property Tax 1.45%
Invoice Processing 5.98%
Purchasing 14.06%
Delivery 1.78%
Storage/Surplus 22.40%
EMR 1.22%
*
Total 73%
* Total adds to 85.48% but BP elects to use 73%
Catherine Williams, Business Analyst
BP Exploration (Alaska) Inc.
NAPM International Conference May 1995
Supplier Managed Inventories
OR
Supplier Managed Deliveries ?
Supplier - Managed Deliveries
Indirect and predictable direct materials
6 Identify demand
6 Produce and deliver to
that demand
6 Deliver to point of use
6 Monitor and adjust to
usage
Harding & Associates 2003
Your company is the great
shock absorber between your
customers and your suppliers
Your Customer
"I need it tomorrow"
Your Company
Your Suppliers
"8 weeks delivery"
You must have suppliers that
can match your cycle times
Your supplier
Your shipments
1. Geographical location of suppliers is critical.
2. MRP is for planning and forecasting, not
execution. Suppliers shipments = your demand.
3. Quoted lead times are for their other customers.
From Whom Would You Buy?
Supplier Price
Able Corp.
$12.25
Baker Ltd.
$12.65
Couch Inc.
$13.10
Purchase quantity = 5000
Standard Cost = $12.30
From Whom Would You Buy?
Supplier
Price Lead Time
Able Corp.
$12.25
10 weeks
Baker Ltd.
$12.65
7 weeks
Couch Inc.
$13.10
2 weeks
Purchase quantity = 5000
Standard Cost = $12.30
... When the Cost To Carry Inventory Is 1.50%/wk?
Supplier
Price X 1.5% X L/T = New Price
Able Corp.12.25 (.015 X 10)
$14.09
Baker Ltd. 12.65 (.015 X 7)
$13.98
Couch Inc.13.10 (.015 X 2)
$13.49
Purchase quantity = 5000
Standard Cost = $12.30
Reduced Supplier Lead Times
Consumer Goods Manufacturer
100
Start
60 Days
Days Lead Time
80
60
40
20
0
Chemicals
Plastics
Metals
Pack.
General
Reduced Supplier Lead Times
Consumer Goods Manufacturer
100
Start
90 days
Days Lead Time
80
60
40
20
0
Polyst. Pack. PVC Tucks Cards Alum. Env.
Disp. Disp. Paper
New Rules
• Speed replaces inventories.
• Only the end customer’s lead times
have meaning.
• Quality must offer a competitive
advantage.