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Industrial Engineer

Focusing on time, not cost, can sa ve yo ur c om pa

ny
e undl ab
by rajan suri

A core mission of the industrial engineering profession is to develop and promote application of techniques for productivity improvement. To support this mission, we train industrial engineers to apply the tools best suited to each circumstance. Although lean manufacturing has been very successful, lean tools may not work everywhere. The Center for Quick Response Manufacturing has dealt with more than 200 partner companies during the past 15 years. The following issues surfaced repeatedly: The origins of lean are in the Toyota Production System with high-volume production. Companies today offer an increasing variety of product options and even custom-engineered products. Our partners could not see how to apply lean methods in such cases. Lean tools eliminate variability. For strategic reasons, some of our industrial partners did not want to eliminate certain types of variability. Executives wondered what their competitive edge was if everyone was implementing the same lean strategies. As researchers, we were thinking that the Toyota system was designed more than 40 years ago. How can we forge new ground for the IE profession if we focus only on refining and implementing 40-year-old methods? These considerations led us to develop quick response manufacturing (QRM), a companywide strategy to reduce leadtimes. Externally, this involves rapidly designing and manufacturing products for specific customer needs. The internal aspect focuses on reducing lead-times for tasks within the enterprise, such as the time to approve an engineering change. Implementations have shown that reducing external and internal leadtimes results not only in quick response,

but improved quality and lower cost. Using QRM, companies with high-variety and custom products have reduced lead-times by 80 percent to 90 percent. Lead-time and cost reductions enabled companies to compete against low-wage countries. If you already invested in strategies such as Six Sigma or kaizen, QRM does not require that you dismiss them. Instead, QRM builds on and unifies these strategies under one overarching goal reducing lead-time. If you are implementing lean, QRM will enhance your lean program. Core lean tools such as takt times, standard work and level scheduling stem from repetitive production and eliminate operational variability. To examine this approach, two types of variability are defined: Dysfunctional variability caused by errors and poor systems. Examples are rework, machine breakdowns and constantly changing priorities. Strategic variability introduced by a company to maintain its competitive edge. Examples are serving markets with unpredictable demand, offering a high variety of options and custom products for customers. The QRM approach is aligned with lean in getting rid of dysfunctional variability. However, you may not want to eliminate strategic variability if it is your competitive advantage. In QRM you do not eliminate strategic variability; you exploit it. Hence, QRM takes lean strategy to the next level (See Figure 1), increasingly appropriate for todays markets.

Challenges to reducing lead-time

Companies understand the need for quick response. But there are misconceptions about how to reduce lead-times. QRM is based on the following four core
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going beyond lean

concepts: realizing the power of time, rethinking organizational structure, understanding and exploiting system dynamics, and implementing a unified strategy enterprisewide. Applying these concepts significantly changes traditional policies. Even though lean thinking already has challenged existing policies, QRM results in additional changes beyond lean. productivity improvement while increasing its work force by only 73 percent. Indeed, as companies reduce leadtimes, costs plummet, often 25 percent or more. Employees in the U.S. and other developed countries fear being outsourced to low-wage countries. But for a typical product in a developed nation, direct labor accounts for only 10 percent of cost. If QRM methods reduce cost by 25 percent, you wipe out the labor-cost advantage of low-wage countries. Overseas competitors need extra time for shipping, so short response times make it impossible for them to compete with you on the same terms. So why is lead-time more significant than managers realize? Ponder this question: What is the waste in your enterprise due to long lead-times? Imagine a blue sky situation in which your companys lead-times were 90 percent shorter. What activities and tasks could be reduced or eliminated? What investments in materials or resources could be reduced or eliminated? These items truly are waste in your enterprise. They are only there because of your long leadtimes. Think about these questions and make a list of waste due to long leadtimes for your enterprise. The sidebar shows items listed by attendees at QRM workshops. Managers find this exercise to be an eye-opener, realizing that long lead-times waste more than they thought. Few of the costs involve direct labor most fall into overhead and other indirect costs. In a typical U.S. factory, overhead accounts for 40 percent of the cost of goods sold, and purchased items account for around 50 percent. The remaining 10 percent is direct labor. In addition, indirect costs such as selling, general and administrative (SG&A) expenses and research and development (R&D) expenses are accounted for separately from cost of goods sold and can add another 30 percent. For companies making low-volume and custom products, QRM has cut all these costs significantly. They have lowered overhead and SG&A expenses. Using QRM in the supply chain has reduced material costs. The QRM organization has improved office and shop floor productivity and even R&D operations. The net result has been reduced costs of 25 percent or more. At the same time, companies have reduced leadtimes by 80 percent to 90 percent and improved on-time delivery and quality. Managers arent aware of the huge impact of lead-time because accounting systems do not link lead-time and various activities. Instead, costs of indirect activities go into an overhead pool where they are commingled with other costs and disconnected from root causes. This overhead pool is applied across all products. SG&A and R&D expenses are

1. the power of time

Everyone knows time is money, but time is a lot more money than most managers realize. Chuck Gates, president of RenewAire, realized this after using QRM principles to reduce product lead-times by more than 80 percent. As a result, the Madison, Wis., manufacturer of customized energy recovery ventilation systems gobbled up market share. This tiny company competing with giants increased its revenue by 140 percent from 2003 to 2008. It also saw significant

moving on up
Choice of strategy

Exploit

Eliminate lean dysfunctional Strategic type of variability

Figure 1. QRm takes lean strategy to the next level.

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QR m

separately reported and not connected with root causes. Since most decisions are based on cost, managers also miss the connection. And companies dont do a good job of measuring lead-time, especially for internal activities. Metrics are another focus of the IE profession, and QRM theory provides a precise lead-time metric called manufacturing critical-path time (MCT). In summary, the first core concept shows managers the enormous impact of time and why measuring and reducing lead-time is so beneficial. To support this, the driver in QRM is eliminating lead-time (defined precisely through MCT). This contrasts with lean, where the driver is eliminating waste.

2. Restructure the organization

Reducing lead-time requires rethinking organizational structure. Consider how enterprises are organized. Figure 2 shows an order going through a Midwest manufacturing company. An average order goes through the order entry, fabrication, assembly, and pack and ship departments, taking five, 12, nine and eight days respectively in each, for a total lead-time of 34 days. Figure 2 also shows the touch time (the gray space) when someone is working on the job. Based on an eight-hour day, the touch time adds up to less than 2.5 days. The rest is the white space, where nothing happens to the job. This ratio is not unusual; touch time often accounts for less than 5 percent of lead-time, and in some cases less than 1 percent. Traditional efficiency programs reduce touch time. This is promoted by costing systems, which assume that product cost is driven by direct labor and/or machine times. Taking the company in Figure 2, management might target the largest cost driver: 12 hours of labor in fabrication. Improvements reduce this to nine

hours a 25 percent cut in labor time, a success by traditional measures. But the three-hour reduction barely makes a dent in the lead-time of 34 days. To reduce lead-time, companies need to shift from cost-based to time-based thinking. The cost-based approach divides jobs into many small tasks. Work on each task is done by people who specialize in that task. This creates many functional departments with lots of handoffs to process each job. Under pressure for cost reduction, managers minimize the number of resources in their department, so people and machines end up highly utilized. This creates large backlogs of work in each department. When combined with all the handoffs, the result is long lead-times. Now all the factors mount, resulting in poor quality and high costs as well. In contrast, the QRM approach focuses on reducing the total lead-time. To reduce lead-time in an environment of unpredictable demand and low-volume or custom products, you need to make four changes to your organizational structure: From functional to cellular. You transform the organization of functional departments into one comprising QRM cells. QRM cells are flexible, more holistic in their implementation and can be applied outside the shop floor. From top-down control to team ownership. Instead of managers or supervisors controlling departments, QRM teams manage themselves and own the entire process within their cell. From narrowly focused workers to a cross-trained work force. In contrast with the approach of each person doing one task efficiently, people are trained to perform multiple tasks. Significant increases in quality

What a Waste
Attendees at QRM workshops listed the following items of waste due to long lead-times. Examples of activities and costs incurred that would shrink or be eliminated if lead-times were reduced: Expediting hot jobs or late orders requires systems, air freight, management and staff time Production meetings to update priorities and change targets Overtime costs for trying to speed up late jobs Time spent by sales, planning, scheduling, purchasing and other departments to develop forecasts and frequently update them Work in process and finished goods holding costs and space Resources used to store and retrieve parts during the long lead-time, damage to parts due to repeated handling Obsolescence of parts made to forecast Quality problems not detected until much later, resulting in large amounts of rework or scrap Customer keeps changing specifications during the long lead-time, consuming personnel time to deal with changes in delivery dates, quantities and options Examples of lost opportunities because of long lead-times: Opportunity for increased sales due to shorter lead-times for current products Opportunity to beat the competition to market and gain market share through rapid introduction of new products
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and productivity result from combining cell structure with cross-training and ownership. From efficiency/utilization goals to lead-time reduction. You must replace traditional cost-based goals of efficiency and utilization with QRMs relentless focus on reducing lead-time. Unlike many cells implemented today, QRM cells do not require linear flow; they accommodate a variety of jobs with different routings, and the team manages flows within the cell. The power of QRM cells is illustrated in the following case study. Headquartered in Houston, National Oilwell Varco (NOV) is the worlds largest manufacturer of automated oil and gas well drilling and pipe handling equipment, with annual sales of around $10 billion. A few years ago, an NOV factory in Orange, Calif., faced increasing demand, but long lead-times and late deliveries dissatisfied customers and opened the door to competitors. Management at NOV-Orange thought that lean was not suited to its customized and low-volume business: They made 60,000 different parts annually, most in low quantities. NOV managers learned about QRM and experimented with a QRM cell for a set of customized products. Over the next two years, the cell team reduced the lead-time of these products from 75 to four days. And the teams improvements and benefits from reducing indirect costs reduced the products cost by more than 30 percent. Results from NOVs first QRM cell were so impressive that management approved capital for a dozen more cells at NOV-Orange. The additional results convinced NOVs vice president of global manufacturing strategy, Greg Renfro, to roll out QRM to NOV facilities worldwide. QRM and the management of time

touch time vs. leaD-time

Cost-based focus

$$$

Touch time 3 hrs Order entry 5 days Component fab 12 days 12 hrs 2.5 hrs 2 hrs

Assembly 9 days

Pack and ship 8 days

Elapsed time

Total lead-time: 34 days

Time-based (QRM) focus

Figure 2. touch time often accounts for 5 percent or less of a companys lead-time.

have been central to our ability to meet the demands of our market. As market dynamics change, it will continue to be an integral part of reducing product costs, improving quality and shortening lead-times, Renfro said. The structure using QRM cells is a key part of QRM; however, it alone will not ensure success. The structure must be complemented with other policies described in the next two concepts.

3. understand and exploit system dynamics principles

The need for this concept is illustrated by a common misconception: We must keep our machines and people busy all the time. The QRM principle based on system dynamics is quite different: Strategically plan for spare capacity the planned loading of your resources should be under 85 percent, or even under 75 percent, in very high-variability environments. Most managers react to this with We cant afford to do that. Our costs will be much higher than our competitors who use fewer resources. QRM tackles

this using a branch of system dynamics known as queuing theory, which tells us that lead-times increase as resource utilizations approach 100 percent. Worse, any disturbances such as hot jobs or machine breakdowns cause an enormous increase in lead-times. But what about the cost of this spare capacity? Here, the first core concept of realizing the power of time comes back into play. While it costs more to operate with more labor or equipment, reductions in systemwide costs from shorter lead-times can outweigh the cost of additional resources. Add the increase in sales revenue, and companies have found that investing in spare capacity is paid back many times over. Incorporating system dynamics into its core concepts is a key aspect of QRM. Other approaches base system designs on simpler assumptions. Lean uses the concept of takt time: the interval within which a resource must complete each job. Takt time is calculated solely from production targets. It is easy to understand, and it works well for repetitive production with low variability. But in

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QRM you design your system to cope with, not eliminate, variability. QRM shows that capacity planning decisions must include not only production targets but lead-time targets and variability measures.

4. A unified strategy
QRM goes beyond optimizing the shop floor. It improves the entire organization. The same time-based mindset and QRM principles extend to the following areas: Office operations. Quoting, engineering and order processing tend to be neglected as a source of improvement in manufacturing companies. Yet they can significantly extend your lead-time and increase your overhead and SG&A expenses. QRM provides an extension of the cell concept tailored for the office environment. Material requirements planning (MRP) system. QRM shows how the planning logic in a traditional MRP system results in a spiral of increasing lead-times. QRM restructures the system, simplifying it to support the cellular organization and overcome the lead-time spiral. Supply management. By including time instead of just cost as a metric in the supply chain and making executives aware of the cost of lead-times, QRM makes two fundamental changes to supply management: It uses leadtime reduction as a focus of supplier improvement programs, and it affects sourcing decisions. For example, for certain parts QRM encourages the use of local suppliers rather than low-cost overseas suppliers. Despite the shift from cost to time, companies have found that QRM helps reduce overall supply chain costs by 10 percent to 15 percent. One equipment manufacturer reduced lead-times by an average of 78 percent across its supply chain, which

reduced supplier quality defects and late deliveries fivefold. New product introduction (NPI). With todays fast-paced changes in technology and markets, new products are the lifeblood of a business. There are proven IE techniques for NPI, such as concurrent engineering and quality function deployment. However, QRM further improves the NPI process. The key again is awareness of the impact of NPI lead-time on your business. For example, QRMs time-based approach results in new trade-offs during prototype construction and new ways of thinking about product options during design. The impact can be substantial. By training its NPI teams in QRM, a manufacturer of medical instruments reduced its NPI time from two and a half years to less than six months. Shop floor control. Kanban systems have the benefits of simplicity, visual management and tight inventory control, but kanban requires containers for each part at various stages of your operation and supply chain. If a part has low annual usage, with kanban you carry a lot of inventory that spends most of its time sitting around. Further, if you need to make a custom-engineered part, you cant stock that part ahead of time. Instead, QRM uses POLCA, designed to work with the structure of cells and highlevel material requirements planning. POLCA stands for paired-cell overlapping loops of cards with authorization. It connects pairs of cells with circulating cards like kanban, but with two key differences: First, while a kanban card is an inventory signal (replenish these parts), a POLCA card is a capacity signal, indicating capacity at the downstream cell. Second, POLCA builds on the schedules from your existing MRP

system through the high-level MRP logic and does not have problems with low-volume or custom parts. P&H Mining Equipment in Milwaukee manufactures large custom equipment such as mining shovels and draglines, with annual sales of more than $1 billion. P&H had been implementing QRM cells for several years, and in 2006 it decided to connect a dozen shop floor cells and facilities using POLCA. During the first year, P&H reduced its works in process by $3 million, and this occurred in the face of increasing production.

implementing QRm
QRM helps managers justify replacing cost-based decisions with time-based decisions in a number of ways. It provides methods to predict the cost impact of lead-time; it shows how to move from cost-based to time-based justification of projects; and it provides ways to adjust your accounting system. QRM does not require that you change to new accounting practices such as lean accounting. With growing global competition, outsourcing of jobs and difficult economic conditions, companies need to re-examine their competitive strategy. Technology is increasing product variety and how companies interact with customers. You need a strategy that will take advantage of the resulting market shift. QRM is designed to do just that. d Rajan Suri is founding director of the Center for Quick Response Manufacturing and professor emeritus of industrial engineering at the University of Wisconsin. He received his bachelors degree from Cambridge University (England), and his M.S. and Ph.D. degrees from Harvard University. He has consulted for leading companies around the world and is the author of Quick Response Manufacturing and Its About Time.
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