Your Business Processes in Gear!
It's 7 AM and the doors swing open at Six Sigma Manufacturing. Teams of
associates head for their manufacturing work cells, anxious to pump out
lot-size-of-one, defect-free parts in short cycle times. All team members
have signed up for increasing productivity, lowering inventory and 100%
on-time delivery to the customer .... and "solving world hunger," quips
Buck Johnson, a 25 year veteran. But how is the question!
Each team has six fundamental questions that need answers by 7:01 AM:
1. How many machines do we need?
2. How many people do we need?
3. How many hours should we schedule to work?
4. What parts (or products) should we make next?
5. How many should we make?
6. When do we need to finish the parts?
These critical questions apply to every company, regardless of product
type or size of the enterprise. And external suppliers have the same questions.
If people are not given good data and good tools to correctly answer these
questions, the financial performance of the enterprise will nose dive.
Customers become unhappy campers as deliveries become long and late. Internal
issues pop up. Six Sigma Manufacturing will have costly, excess capacity
in some areas and unfinished parts that they need piled up in bottleneck
areas. They will also cost effectively make the wrong parts .... building
inventory that doesn't help the customer. Costly expediting will chew up
managers' time as they scramble to put out fires -- and spend big bucks
doing it! Unfortunately, the associates will also lose respect and confidence
in their leadership. In short, no one wins!
What is the effective way to answer these fundamental crucial questions?
The process starts by first determining which products we need to make
(or at least think we need to make, i.e. forecast) and then calculate the
required data to answer these questions. For example, think of Thanksgiving
dinner as making a "product." The need to answer the same six questions
will appear. Once you answer these questions, "How many are coming to Thanksgiving
dinner (demand forecast)? What we are serving (products to be made)? What
does it take to make all the trimmings (bill of material)? What do we already
have in the pantry (inventory record)?" the answers to the six fundamental
questions can be quickly determined. Underestimate the number of relatives
coming, forget some are vegetarians, select a turkey too big for the oven,
or leave out a few ingredients and you may have a mutiny on your hands!
Sounds simple. And it is in a business with only one or two stable products
where demand seldom varies. When the number of products explodes and the
demand is highly variable, the complexity of the job escalates. A formal
process to continuously calculate and update the information for people
to answer these six fundamental questions is needed. The first step in
the process is to determine which products to make. While searching for
an answer, you quickly get caught between two irresistible forces.
Customers are buying what they want, not what is easy to make or we have
capacity to make or are the most profitable. A set of valid operating plans
that finds the balance between these forces to drive effective actions
is an essential key to profitability, customer satisfaction and growth.
The business plan (sometimes called Annual Operating Plan) may be to increase
sales this year by 10%, maintain a 45% marketshare, improve gross margins
to 55%, earn $1.10 per share and turn inventory 3.5 times. Sounds good,
but exactly what do we have to do? Which of the 20,000 parts do we need
to make or buy, and when do we need them? And how many people do we need
in Work Centers 45, 101 and 26? The business plan is needed,but it is not
stated in enough detail to translate it to the level of detail necessary
to answer the six fundamental questions.
The process to meet this need is called the Supply/Demand process. Simply
stated, this is the process of converting the overall aggregate business
plan considering customer needs and financial expectations into the specific
detail plans that individuals will be held accountable for meeting. The
Supply/Demand process consists of a series of business activities that
should be linked together.
Sales and Operations Planning (SOP) is the chief driving gear. This is
where executive management participates. Sales, manufacturing, new product
launch and financial plans are reconciled into a single set of consensus
plans by product families or groups, usually 20 or less. This is where
the link to the Annual Operating Plan (AOP) takes place.
Master scheduling is planning specific products to be made (usually less
than 2,000 items are master scheduled) and becomes the source of requirements
for the parts and raw materials to be made or purchased. Material planning
continuously does the evaluation to insure the detailed plant floor and
supplier schedules (often for 1000 to 30,000 items) are valid, i.e. Due
dates = need dates for individual parts. The individual schedules are communicated
to the suppliers, engineering and plant floor via Kanban signals or lists
of items to be completed by a date.
Every company performs these activities. That isn't the issue. The issue
is how well they are done and integrated. Is the data accurate? Are the
proper policies, procedures, practices and performance measurements in
place and followed? Are these necessary functions integrated so that supplier,
factory and customer delivery schedules are derived from the same sheet
of music as the financial plans? Again, the issue is how good is the information
and how well these functions are performed and integrated. Keeping these
plans valid and meeting them is what turns the SOP plans into reality.
If they are not done well, the symptoms are clearly visible ... excess
inventory, excessive product costs, high cost of quality, erratic customer
deliveries, long lead times and many "surprises" on quarterly financial
statements. These poor results are usually caused by a weak process, not
What can go wrong? Lots! If a consensus sales forecast is not made, the
plans lose credibility. If the plans are not validated by demonstrated
capacity, the plans are not met and lose credibility. If the system is
open loop, i.e. not rescheduled when the plans are not executed, past due
schedules pile up and schedule credibility and thus accountability, is
lost. In short, no one believes the schedules and the company's core competency
becomes costly, ineffective workaround systems as people search for the
If the Supply/Demand business process is done well, the gears are engaged,
plans will be credible (although sometimes challenging), people will accept
accountability for meeting them. Customers get their products on time.
In short, very few, if any, financial surprises or customer complaints.
If not done well, the gears are not engaged. They spin independently. Materials
are ordered and people are hired independent of what sales is selling and
the financial projections are based upon.
MRP II is the name that has traditionally been applied the integration
of these business functions. Recently, many software vendors have renamed
MRP II to ERP (Enterprise Resource Planning). While ERP efforts usually
more fully integrate some functions such as order entry, distribution,
logistics, etc. with the manufacturing planning functions, the fundamental
concept is the same. MRP II or ERP is not a software solution. Software
is the enabler that makes thousands of calculations and communicates the
information quickly to those people who can take action.
magnitude of the improvements in business performance will be a function
of the data and the actions taken by responsible people. Call it MRP II,
ERP or anything you want .... engaging the gears requires a formal and
often very different way to run a business Those who understand the difference
succeed. Those who don't, don't!