Back to the future – myth or reality?
Some Myths of Manufacturing to be busted too?
Myth: Machines only make money when they’re running. Keep them going whatever it takes!
Reality: While machines don’t make money when they’re stopped, they only really make money when what they produce is sold (in the quantities ordered – at a profit) not delivered into stock.
Risk: Ideally each machine would be dedicated to produce vast quantities of one part number only without ever stopping to change over to another. In reality there are many more components than there are machines, so we produce batches of different components on the same machines.
A traditional batch quantity is therefore a compromise between an infinite number produced on the same machine and a mix of much smaller quantities that are due for completion on specific days. These traditional batch quantities can significantly exceed customer order quantities. The components remaining from the batch, that are not needed today, go into stock tying up cash unnecessarily in Working Capital when it could be used for other things.
There are usually many more components than machines to make them on, so the machines have to be stopped quite frequently to change over from one part to the next. The age-old dilemma of efficiency versus inventory and lead-time is as follows:
- The bigger the batch of any one component produced between changeovers, the fewer the changeovers, the less machine downtime, the more “efficient” the machine usage and the lower the unit cost for that component.
- However, while a machine is producing a batch of one component for one finished product it’s not producing other components that are likely to be needed at the same time for the same product. This not only delays its completion, it builds inventory of components ahead of the time they’re needed, and/or product completion is delayed.
- This can also lead to the cash invested in partially completed product laying around – Working Capital that isn’t working. Work on finished products therefore tends to begin before all the components needed have been produced and stops when there are shortages – still more cash is embedded as inventory in Working Capital.
- Rarely if ever are these sources of waste off-set against Overall Equipment Efficiency (OEE.)
Proposition: Not that batch quantities be reduced to daily customer order quantities. But, set-up and run-times are aggregated with average daily demand at capacity for each component. From the resulting constant Takt time for each machine, we calculate the number of components needed to recover the time lost to set up, i.e. a minimum run-to-recovery quantity.
More components are run faster and more frequently in smaller quantities that correspond more closely to customer demand. In this way OEE is no longer maximised, but optimised for faster delivery of customer orders, better on time and in full (OTIF) performance for earlier payment.
Less cash is needlessly invested in In-Progress and Finished inventories. Once sold at full market rates, the cash proceeds need not be reinvested in inventory but elsewhere in the business to fund growth, innovation, exports and other good things.
OEE itself can be recalculated using only parts associated with real customer demand while continuing to reduce change-over times, of course.
Unit costs are likely to increase, but Working Capital is reduced so the accountants need to be brought on board with this myth-buster.