Answer to my last question
At the conclusion of my last posting I asked you a question. In our example we concluded that the constraint was external to the company (the market was the constraint), I asked you to tell me what you would do if this was the case in your company? He are the four choices and the results:
- Cut the price to generate more sales (15.5%)
- Analyze and possibly improve the competitive edge factors like lead time, quality, on-time-delivery, etc. (54.55%)
- Hire more sales people (9.09%)
- None of the above (21.21%)
The answer to this question is choice number 2. What you’re trying to do is generate more sales, so if you could take advantage of what I call your competitive edge factors, there’s a good chance you’ll generate more sales. If you have the best quality in your industry and you can consistently deliver product in the shortest amount of time, there is a high probability that sales will increase. As far as choice number 1 goes, I don’t recommend cutting prices as the first option simply because it’s not a good idea to start a price war. And hiring more sales people (i.e. choice number 3) will not necessarily result in more sales. The bottom line is, this company had a significant amount of unused capacity and they needed to go after more sales. And now let’s get back to Blog Posting 4.
Key questions and observations from Blog Posting 4
In Blog Posting 4 I told you we would discuss the dangers in running all process steps at full capacity and then look at how fast the process steps should be running. In the recent video I did for ECi M1, I asked you to make observations about your company’s processes. Just to refresh your memory, here are the observations I asked you to make about your company:
- Is your process “clogged” with excessive work-in-process inventory?
- Are you using manpower efficiency or equipment utilization to monitor your process?
- Is your on-time delivery less than 90%?
- Is your company’s bottom line anemic and/or stagnated?
- If you could sell more of your product, do you have enough capacity to produce it?
Slowing down in order to speed up
One of the things I pointed out to you in my last posting is the effects on your process if you ran each step to its full capacity. The figure below illustrates this (The figure shows the WIP after step 1 in the process has been producing for 8.5 hours). The longer you ran each step to full capacity the more clogged your process would be, resulting in excessive WIP. We concluded that because Step 3 took the longest to complete, it controlled the throughput for this process. We referred to Step 3 as the constraint within this process. So if we wanted to avoid this explosion in WIP, just how fast should the other steps be running.
Efficiency and utilization
It should be obvious to you that if you are running Steps 1 and 2 at a rate faster than one part every four hours (i.e. Step 3’s capacity), the WIP will continue to collect within the process. So to avoid the accumulation of WIP, shouldn’t the non-constraint steps in the process be running at the same speed as the constraint? You’re probably saying to yourself “if we did that, wouldn’t our efficiency and utilization numbers deteriorate?” The answer is, yes they would! In order to increase the throughput rate of this process, we must slow down the faster process steps.
Herein lays the problem with these two performance metrics. If we attempt to drive either manpower efficiency or equipment utilization higher, then we will clog our processes with excessive amounts of inventory. And when this happens, our on-time delivery rates also suffer because inventory just sits and waits its turn to be processed through the constraint. So where in the process should we use these metrics for tracking? If you said within the constraint, you would be right. In fact, driving efficiency and utilization to higher levels in the constraint translates into increased levels of throughput.
So this posting answers at least three of the questions I asked you and it does so through cause and effect. That is, if you are using manpower efficiency or equipment utilization to monitor your process, and trying to drive either one of them higher and higher, then your process will, in fact, be “clogged” with excess levels of work-in-process inventory. And if your process has excess WIP, then your on-time delivery rates will be low.
How’s your bottom line?
So what about the fourth question I asked you—“Is your company’s bottom line anemic and/or stagnated?” If your processes have excessive WIP in them and your on-time delivery is weak, what happens to your company’s bottom line? Excessive WIP in your process costs your company money because there is a holding cost associated with it, which negatively impacts your bottom line. You might as well have un-useable cash sitting on the shop floor!
Therefore to summarize, if you are using efficiency or utilization, then you have excessive WIP. And if you have excessive WIP, your on-time delivery is not good. If your on-time delivery rate is not good, then your company’s bottom line is probably anemic and/or stagnant.
So what about the last question I asked you: If you could sell more of your product, do you have enough capacity to produce it? I think the answers to the first four questions gave you the answer to this question. The correct answer to this question is absolutely yes, you do have the capacity to produce it!! In my next series of postings, I’m going to show you what you have to do to have the capacity to produce more products.
Don't miss out!
Stay on top of the latest business acumen by subscribing to the Manufacturing Breakthrough blog.