The Conversion Cycle:World-Class Companies and Lean Manufacturing

World-Class Companies and Lean Manufacturing

The traditional conversion cycle described in the previous section represents how many manufacturing firms operate today. Over the past three decades, however, rapid swings in consumer demands, shorter product life cycles, and global competition have radically changed the rules of the marketplace. In an attempt to cope with these changes, manufacturers have begun to conduct business in a dramatically different way. The term world-class defines this modern era of business. The pursuit of world-class status is a journey without destination because it requires continuous innovation and continuous improvement. A recent survey of corporate executives revealed that 80 percent claim to be pursuing principles that will lead their companies to world-class status. Skeptics argue, however, that as few as 10 or 20 percent of these firms are truly on the right path.

WHAT IS A WORLD-CLASS COMPANY?

The following features characterize the world-class company:

• World-class companies must maintain strategic agility and be able to turn on a dime. Top management must be intimately aware of customer needs and not become rigid and resistant to paradigm change.

• World-class companies motivate and treat employees like appreciating assets. To activate the talents of everyone, decisions are pushed to the lowest level in the organization. The result is a flat and responsive organizational structure.

• A world-class company profitably meets the needs of its customers. Its goal is not simply to satisfy customers, but to positively delight them. This is not something that can be done once and then forgot- ten. With competitors aggressively seeking new ways to increase market share, a world-class firm must continue to delight its customers.

• The philosophy of customer satisfaction permeates the world-class firm. All of its activities, from the acquisition of raw materials to selling the finished product, form a chain of customers. Each activity is dedicated to serving its customer, which is the next activity in the process. The final paying customer is the last in the chain.

• Finally, manufacturing firms that achieve world-class status do so by following a philosophy of lean manufacturing. This involves doing more with less, eliminating waste, and reducing production cycle time.

The following section reviews the principles of lean manufacturing. The remainder of the chapter examines the techniques, technologies, accounting procedures, and information systems that enable it.

PRINCIPLES OF LEAN MANUFACTURING

Lean manufacturing evolved from the Toyota Production System (TPS), which is based on the just-in- time (JIT) production model. This manufacturing approach is in direct opposition to traditional manufacturing, which is typified by high inventory levels, large production lot sizes, process inefficiencies, and waste. The goal of lean production is improved efficiency and effectiveness in every area, including product design, supplier interaction, factory operations, employee management, and customer relations. Lean involves getting the right products to the right place, at the right time, in the right quantity while minimizing waste and remaining flexible. Success depends, in great part, on employees understanding and embracing lean manufacturing principles. Indeed, the cultural aspects of this philosophy are as important as the machines and methodologies it employs. The following principles characterize lean manufacturing.

PULL PROCESSING. As the name implies, pull processing involves pulling products from the consumer end (demand), rather than pushing them from the production end (supply). Under the lean approach, inventories arrive in small quantities from vendors several times per day, just in time to go into production. They are pulled into production as capacity downstream becomes available. Unlike the traditional push process, this approach avoids the creation of batches of semifinished inventories at bottlenecks.

PERFECT QUALITY. Success of the pull processing model requires zero defects in RM, WIP, and FG inventory. Poor quality is very expensive to a firm. Consider the cost of scrap, reworking, scheduling delays, and extra inventories to compensate for defective parts, warranty claims, and field service. In the traditional manufacturing environment, these costs can represent between 25 and 35 percent of total product cost. Also, quality is a basis on which world-class manufacturers compete. Quality has ceased to be a trade-off against price. Consumers demand quality and seek the lowest-priced quality product.

WASTE MINIMIZATION. All activities that do not add value and maximize the use of scarce re- sources must be eliminated. Waste involves financial, human, inventory, and fixed assets. The following are examples of waste in traditional environments, which lean manufacturing seeks to minimize.

• Overproduction of products, which includes making more than needed and/or producing earlier than needed.

• Transportation of products farther than is minimally necessary.

• Bottlenecks of products waiting to move to the next production step.

• Idle workers waiting for work to do as production bottlenecks clear.

• Inefficient motion of workers who must walk more than necessary in the completion of their assigned tasks.

• Islands of technology created by stand-alone processes that are not linked to upstream or downstream processes.

• Production defects that require unnecessary effort to inspect and/or correct.

• Safety hazards that cause injuries and lost work hours and associated expenses.

INVENTORY REDUCTION. The hallmark of lean manufacturing firms is their success in inventory reduction. Such firms often experience annual inventory turnovers of 100 times per year. While other firms carry weeks and even months of inventories, lean firms have only a few days or sometimes even a few hours of inventory on hand. The three common problems outlined below explain why inventory reduction is important.

1. Inventories cost money. They are an investment in materials, labor, and overhead that cannot be realized until sold. Inventories also contain hidden costs. They must be transported throughout the factory. They must be handled, stored, and counted. In addition, inventories lose value through obsolescence.

2. Inventories camouflage production problems. Bottlenecks and capacity imbalances in the manufacturing process cause WIP inventory to build up at the choke points. Inventories also build up when customer orders and production are out of sync.

3. Willingness to maintain inventories can precipitate overproduction. Because of setup cost constraints, firms tend to overproduce inventories in large batches to absorb the allocated costs and create the image of improved efficiency. The true cost of this dysfunctional activity is hidden in the excess inventories.

PRODUCTION FLEXIBILITY. Long machine setup procedures cause delays in production and encourage overproduction. Lean companies strive to reduce setup time to a minimum, which allows them to produce a greater diversity of products quickly, without sacrificing efficiency at lower volumes of production.

ESTABLISHED SUPPLIER RELATIONS. A lean manufacturing firm must have established and co- operative relationships with vendors. Late deliveries, defective raw materials, or incorrect orders will shut down production immediately because this production model allows no inventory reserves to draw upon.

TEAM ATTITUDE. Lean manufacturing relies heavily on the team attitude of all employees involved in the process. This includes those in purchasing, receiving, manufacturing, shipping—everyone. Each employee must be vigilant of problems that threaten the continuous flow operation of the production line.

Lean requires a constant state of quality control along with the authority to take immediate action. When Toyota first introduced TPS, its production employees had the authority to shut down the line when defects were discovered. In the early days, the line was often shut down to bring attention to a problem. Whether caused by a defective part from a vendor or a faulty machine in a cell, the problem was properly addressed so that it did not recur. After an adjustment period, the process stabilized.