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Lean
Resources
China
Lean Manufacturing Academy
Europe
Jung,
Aust & Partner
Australia
Peter
J. Ellis
North
America
Sims
Consulting Group
Strategic
Impact
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Manufacturing
Strategy
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The
conventional wisdom of accounting considers excess capacity as
waste. However, reserve capacity may reduce other forms
of waste. These are strategic
issues that require considerable reflection at the highest
levels. |
The
sections below illustrate a few of the ways that variability,
capacity and Little's Law affect the development of an effective Manufacturing
Strategy. |
Finance
Capital
Investment
Many
firms require very high utilization rates before authorizing
investment for additional capacity. This is unwise if higher
utilization increases inventory more than the additional capacity
cost.
Such
policies may also work against marketing strategies that depend on
delivery performance. Before implementing high utilization
policies, management should consider not only the total investment
(including inventory) but also the effect on marketing. |
In
addition, utilization policies should distinguish between low cost
equipment that needs only low utilization rates and high cost
equipment.
 Cost
Structures
Conventional
costing systems may not accurately distribute the cost of
variability created by a wide product mix. The cost of
this variability often appears in overhead accounts that are
allocated in distorted ways. For more on this, see "Product
Costing" and "Lean
Accounting."
This
also relates to marketing strategy as noted below.
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Marketing
Customer
Needs
Since
high utilization is generally incompatible
with high variability and low inventory, priorities for
these variables should be established. The key is to clearly
identify the customer's buying decision criteria.
When
most customers buy only on price, this indicates that low-cost
production has the highest priority. Low cost production indicates
maximum utilization of capital. It might also indicate the use of
backlog to achieve steady throughput. Both
of these approaches increase throughput time and affect delivery
adversely.
When
delivery is the primary decision criteria for customers, excess
capacity, low inventory and minimal backlog is the best approach.
However, these strategies may increase cost.
"Build
It and They Will Come"
Policies
that prevent capacity investment until demand is proven often
inhibit growth. New capacity requires time to commission
and customers will rarely wait.
Companies
that build capacity in anticipation of growth usually find that
their new capacity attracts growth. Future
pages will address these issues of capacity planning and strategy. |
Product
Variety
Increasing
the product offering is a common marketing strategy. However,
additional products rarely increase sales volume in proportion
their number.
The
result is a product mix with a few high-volume products and many low
volume products. This brings further consequences, such
as:
-
The
additional variety increases overall cost, primarily in
overhead.
-
The
costing system may not accurately distribute the additional cost
and under-price the low volume items.
-
The
additional variability may increase inventory and adversely
affect delivery performance.
When
considering new products, executives should consider the effects of
such product proliferation.
Embracing
Variability As A Strategy
A
few, rare firms embrace variety as a successful business strategy.
Some offer a wide and constantly renewed product mix that
competitors cannot match. Others specialize in unusual, custom
products that command high prices.
However,
to be successful in this, firms must gear their order processing and
manufacturing to coping with such variety (see below). This is
difficult, but, when successful, highly profitable. |
Manufacturing
Strategies
for Variability
Manufacturers
can either 1) reduce variability
or 2) cope with it. Almost every
element of Lean Manufacturing aims at reduction, coping or both.
Most
variability is unnecessary, unproductive and indicative of an
underlying problem. For these reasons, variability
reduction is the first line of defense. TQM/Six Sigma is
an example of variability reduction.
Occasionally,
variability is irreducible for technical
reasons or desirable for
marketing reasons. In these cases, systems can be
designed to cope with it. CNC processing equipment is an example of
coping with variability. However, coping with variability (as
opposed to reducing it) is often expensive and may produce have
consequences.
Almost
every aspect of Lean Manufacturing involves variability.
Some elements of Lean reduce variability while others attempt to
cope with irreducible variability. For more on this, see "Variability
and Lean Manufacturing." |
Embracing
Variety and Variability
Coping
effectively with variability can lead to an effective marketing
strategy. Such strategies are quite
difficult, but, when mastered, are also quite effective.
Competitors simply cannot develop the ability to compete on this
dimension. Variability as strategy usually takes one of two forms:
-
Offering
a wide range of products often with many new and different
products.
-
Offering
to supply large orders, custom products or special projects on
short notice.
The
first approach requires high competence in product development and
product introduction as well as high flexibility in manufacturing.
The
second approach requires the maintenance of excess, idle capacity. When
an order or project arrives, manufacturing can produce it quickly.
Such idle capacity incurs cost and such strategies are only
effective when pricing and margins compensate for this additional
cost. |
Capacity,
Inventory & Variability Series
Variability Effects
Strategic Implications
Lean & Variability
Capacity & Inventory |
References
Sterman,
John D., Business Dynamics: Systems Thinking & Modeling for
a Complex World, Irwin McGraw-Hill, New York, 2000.
Hopp,
Wallace J. and Spearman, Mark L., Factory Physics, Irwin
McGraw Hill, New York, 1996.
Forrester,
Jay Wright, Industrial Dynamics, Pegasus Communications,
(1961)
Stalk,
George, Competing Against Time, Free Press, 2003.
Blackburn,
Joseph D., Time-Based Competition, Business One Irwin,
1991. |
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