To better understand our approach we would recommend that you download and read the series of articles that was published in the Institute of Management Accountants’ Strategic Finance Magazine. Those articles are available below. You can access other helpful articles in our download section.
Flow Comes First
The recognition of manufacturing and supply chain as a process and system is essential to understanding how it should work. Understanding how it should work gives everyone the capability to define what the rules should be. Which rules need to stay? Which need to go? Which need to change? Which need to be added?
The essence of manufacturing (and supply chains in general) is simply the flow of materials from suppliers, through plants, through distribution channels to customers, as well as the flow of information to all parties about what is planned and required, what is happening, what has happened, and what should happen next. An appreciation of this brings us to what is known as:
The first law of manufacturing—”All benefits will be directly related to the speed of flow of information and materials.” (See George Plossl, Orlicky’s Material Requirements Planning, 2nd edition, McGraw-Hill, New York, N.Y., 1994, p. 4.)
A caveat here is that all information and materials must be relevant to the market expectation. We frequently observe organizations drowning in oceans of data with little relevant information and large stocks of irrelevant materials (i.e., too much of the wrong stuff).
“All benefits” will encompass:
1.Service. A system that flows well produces consistent and reliable results. This has implications for meeting customer expectations not only on delivery performance but also on quality. This is especially true for industries that have shelf-life issues. Do you want to dine at the restaurant that has poor flow or great flow?
2.Revenue. When service is consistently high, market share grows or, at a minimum, doesn’t erode.
3.Inventories. Raw and pack, work-in-process, and finished goods inventories will be minimized and directly proportional to the amount of time it takes to flow between stages and through the total system. The less time it takes products to flow through the system, the less the total inventory investment (Little’s Law will help you understand this point).
4.Expenses. When flow is poor, additional activities and expenses are incurred to close the gaps in flow. Examples would be expedited freight, overtime, rework, cross-shipping, and unplanned partial ships. Most of these activities directly cause cash to leave the organization and are indicative of an inefficient overall system. In many companies, these expedite-related expenses are underappreciated and undermeasured.
5.Cash. When flow is maximized, material that a company paid for is converted to cash at a relatively quick and consistent rate. This makes cash flow much easier to manage and predict. Additionally, the expedite-related expenses previously mentioned are minimized.
When revenue is maximized and protected, inventory is minimized, and additional and/or unnecessary ancillary expenses are eliminated, return on investment is favorable. Every for-profit company has a universal primary goal: maximize some form of return on shareholder equity. The best sustainable way to achieve that goal is to promote and protect flow. This is the very definition of an efficient manufacturing and distribution system. Conversely, one of the fastest ways to compromise ROI and system efficiency is to make decisions and reinforce behaviors that impede or block flow. We have to acknowledge that unit cost equations have nothing to do with measuring and/or predicting system flow.
Once everyone realizes the importance of flow, a few key principles emerge:
1.Time is the ultimate constraint. It’s also the most precious resource employed in the manufacturing process. Because of the continual shrinkage of customer tolerance times, this principle is truer today than ever before. The important time is the time that it takes to move through the system. Without this in the front of our mind, we can misuse and distort behavior around time (particularly at the resource level).
2.The system must be well-defined and understood. Clear definitions about how materials and information should move will determine whether the existing system is even capable of maximizing flow.
3.Linkages or connections between points in the system must be smooth. Relevant materials and information need to pass smoothly from one point to the other. The greater the friction at these points, the more flow is impeded, the longer the system cycle time, and the greater the working capital investment.
Putting these principles together illuminates an important point. A company’s ability to better manage time and flow from a systemic perspective will determine its success in relation to ROI. Companies that understand these three key principles adopt a strategy of flow-centric efficiency to maximize system flow to market pull.
Getting Smarter—a Basic Blueprint for Change
In the face of increasing system variability, maximizing flow in the New Normal will require change. Defining what to change and what to change into will require organizations to get smarter. Does that mean that today’s organizations aren’t smart? No. They have many talented and smart individuals, but collectively they’re failing to recognize and address the real and fundamental needs for change. The blueprint for change is something we call “the smarter way,” which has three simple steps.
Step 1: Install the Right Thoughtware in the Organization
Encourage and enable organizations to think systemically. In decades of combined experience with nearly 1,000 organizations, we’ve found that most people inside companies are prohibited from, discouraged from, and/or incapable of thinking about problems and solutions from a systemic point of view. To drive meaningful and rapid improvement, problems must be defined, and solutions must be developed from a systems-and-flow-based perspective with the New Normal in mind. Individuals and their organizations can be made capable, but organizations have huge obstacles standing in the way of re¬moving the self-imposed variability of following inappropriate and outmoded rules.
Step 2: Become Demand Driven
The push-and-promote mode of operation must change, and the old rules based on cost-centric efficiency must go. Companies must embrace the new position-and-pull mode of operation and adopt new flow-centric efficiency rules that protect and maximize the flow of relevant materials and information. They will have to find a way to better align their resources and efforts with actual market and customer requirements in the more variable, volatile, and complex environment we have today.
Step 3: Deploy Smart Metrics
At this point you may be saying, “Wait a minute! If our organizations are full of the wrong rules, what are the right rules?” An appreciation for what the rules need to be requires Steps 1 and 2. The changes to sustain competitiveness in the New Normal require new rules, and measures always follow the rules. To embrace and deploy those metrics will necessitate the removal of some very ingrained, hardcoded assumptions, metrics, and rote behavior. Smart metrics are a function of understanding the fundamental principles of system flow, the causes of system variation, and the ability to think systemically. Unless people can think systemically and design operating models to fit the New Normal, these metrics will elude us.
Rapid Results (High Service with Minimal Working Capital and Expedites)
It is common for our clients to see significant results with regard to service increases, inventory reductions and decreased expedite related expenses within weeks. These initial wins provide the confidence for teams to push forward as the scale of an implementation grows. This confidence translates to better execution and continued wins in the environment.
Despite having the same ERP product and instance, it is staggering how inconsistent planning and execution is between facilities in most large companies. While the ERP product is the system of record at all of the facilities, what really runs planning and execution (makes the decisions that commits capital and resources) is a series of highly individualized customized ad-hoc processes (e.g. spread sheets) that occur outside of the ERP product with little or no formal control. Typically these ad-hoc processes are heavily reliant on a few key individuals. Furthermore, personnel from one facility cannot effectively plan in another facility in an emergency. Our clients’ facilities speak the same language when it comes to planning and execution. They follow the same logic, use the same tools and can even plan for each other. Consistency effectively mitigates the risk associated with the reliance on the ad-hoc approaches.
Our services model is to transfer install the right Thoughtware in your team in order to become self-sustaining within a relatively short period of time. Our self-sufficiency efforts include:
• Customized Documentation and Training – As part of our engagement CMG will help to create customized documentation and training modules for the client environment.
• Internal Trainers – As part of the engagement CMG will train internal trainers to deliver the training modules.
• Internal Implementers and Technical Specialists – As part of the engagement CMG will train and mentor implementation facilitators and specialists to complete a global roll-out.
• Analytics – As part of the engagement CMG will provide a customized analytics package available to all levels of the organization in order to assess the state of the system both in real time and over time.
With results, consistency and self-sufficiency comes sustainability. Occasional audits are offered in order to make sure that the system continues to operate effectively. In some cases CMG may take an advisory role interfacing with a client’s corporate solution team.