It's About Time
By Rajan Suri
For makers of custom and low-volume products, Lean and traditional cost-based improvement
methods may not be the best fit. Instead, an approach that optimizes agility and dramatically
reduces lead times across the enterprise is the way to go.
True or false: U.S. manufacturing jobs will continue to be lost to China and other lower-cost
countries because we simply can't compete with their labor costs. False. Typically, only 7% of
the final price of your made-in-the-USA product is due to direct labor. So, what accounts for the
remaining 93%? Your organization, or more precisely the organization of your entire enterprise
and your supply chain. For certain types of companies and markets, an agile organization that
responds quickly to orders, changes, and other events will not only satisfy customers with short
lead times but also take a huge chunk out of the remaining 93% of costs. The result is both
quick response to customer demand and the ability to compete with any factory, making
products anywhere in the world.
For low-volume or custom-engineered products, neither traditional management methods nor
the newer Lean approaches provide the best cost-reduction strategy. Traditional, cost-based
methods optimize for economies of scale. But these methods also result in long lead times in
the supply chain and factory. These lead times result in added costs of planning, forecasting,
expediting, work-in-process, and finished-goods inventories; lost sales; obsolescence; and
more.
Similarly, because Lean methods were designed for high-volume, repetitive manufacturing
environments, many Lean tools break down when applied to low-volume or custom
manufacturing.
The Center for Quick Response Manufacturing, along with more than 200 partner companies,
has developed during the past 15 years an alternative strategy for reducing lead times and
costs, particularly for manufacturers of low-volume and custom products. Using the principles of
what we call Quick Response Manufacturing (QRM), our partner companies have reduced lead
times by more than 80%. At the same time, they have realized cost reductions of 15%-25%,
outweighing the labor-cost advantages of low-wage countries.
Thinking Beyond Lean and Six Sigma
The core tools in Lean such as takt time and level scheduling are designed to eliminate
variability in operations. Six Sigma also targets reduction of variability. While this sounds good,
the trouble with these approaches—and why we need to think beyond them—is that
management literature has not clarified the issue of variability in a manufacturing business. In
fact, there are two types of variability:
> Dysfunctional variability, caused by errors and poor systems. Examples are re work,
machine breakdowns, and constantly changing priorities.
> Strategic variability, introduced by a company to maintain its competitive edge. Examples
are serving markets with unpredictable demand, offering a high variety of options, and
customizing products for individual customers.
Like Lean and Six Sigma, QRM aims to eliminate dysfunctional variability. However, you don't
want to eliminate strategic variability if it is the basis of your competitive advantage. So, in QRM
you do not eliminate strategic variability, you exploit it.
In fact, exploiting strategic variability is becoming increasingly important. The future of
manufacturing in advanced nations such as the U.S. lies in “mass customization"—providing
individually tailored products in short lead times.
A truly agile organization, in my view, is one that is able to exploit strategic variability and
respond to demands for myriad products without becoming overwhelmed by complexity. QRM
provides an enterprise-wide framework that allows manufacturing companies to exploit strategic
variability and still operate effectively, often more effectively than before. QRM achieves this
through four core concepts that can help manufacturers significantly reduce lead times by
changing traditional practices:
1 Realizing the Power of Time
2 Rethinking Organizational Structure
3 Exploiting System Dynamics
4 Implementing a Unified Strategy Enterprise-Wide
Core Concept #1: Realizing the Power of Time
What if your company's lead times were 90% shorter? What activities and tasks could be
eliminated? What investments in materials or resources could be reduced? Also, what new
opportunities would be available to your company? To help cement my point, take a few
minutes to list a few items in each of these categories (see sidebar for examples).
This list should help you realize that these items are truly waste in your enterprise. They are
vestiges of your long lead times. This is an eye-opener for executives as they see that there is
more waste due to lead times than they thought.
Note that hardly any of these lead-time-related costs involve direct labor. Most of them are
indirect costs. Even purchased material costs, which can be a significant portion of a product's
final cost, can be reduced by shortening lead times. By implementing QRM in their supply
chains, companies have reduced costs at suppliers’ factories as well as their internal lead-timerelated waste.
But the beauty of this approach is that at the same time, companies have achieved lead-time
reductions of 80%-90% and huge improvements in on-time delivery and quality. Combined,
these cost, quality, and lead-time improvements have given them tremendous competitive
advantage.
Why aren't managers more aware of the enormous impact of long lead times? Accounting
systems miss the connection. Costs of indirect activities such as those on your list and in the
sidebar are usually placed in an overhead pool that is applied across all products and
disconnected from root causes.
In summary, this first core concept shows managers why reducing lead times is so beneficial
and why they should make it a primary goal.
Core Concept #2: Rethinking Organizational Structure
To reduce lead times, you need to rethink the structure of your organization. Figure 1 (see next
page) shows data for orders processed at a Midwest manufacturing company (the numbers are
averages from actual orders). A typical order goes through four departments, generating a total
lead time of 34 days. The gray spaces in Figure 1 show the “touch time” in each department, the
time when someone is actually working on the order. This gray space accounts for less than 20
hours. The rest, the white space in the figure, is time when nothing is happening to the order.
Based on hundreds of lead-time-reduction projects, I can state that touch time usually accounts
for less than 5% of lead time, and in many cases less than 1 %.
Despite this statistic, traditional efficiency programs focus on reducing touch time such as the
labor time required to assemble a product, or the machining time on a lathe. This is further
emphasized by accounting systems that assume product cost is driven by direct labor and/or
machine times. To see the shallow-ness of such approaches, note that even a 20% reduction in
touch time in the example above would amount to four hours, which would barely impact the 34day lead time.
To reduce lead times, companies need to shift from cost-based to time-based thinking. Seeking
efficiency, most businesses divide themselves into many specialized departments, each
focusing on one aspect of the job. Cost pressures force managers to minimize resources, so
people and machines are highly utilized and there are backlogs in each department. Combined
with the handoffs between departments, the result is long lead times and waste.
Instead of focusing on touch time, manufacturers should concentrate on reducing total lead
time, not just touch time. To reduce lead time while also creating an effective structure to deal
with strategic variability, QRM makes four changes to traditional organizations:
> From functional to cellular: Functional departments are transformed into QRM Cells. Unlike
many cells implemented today, QRM Cells do not require linear flow; they accommodate a
variety of jobs with different routings. Not only are QRM Cells flexible, they are more holistic in
their implementation, and can also be applied inside and outside the shop floor.
> From top-down control to team ownership: In place of supervisors, QRM Cell teams
manage themselves and have owner ship of all processes within their cell.
> From narrowly focused workers to a cross-trained workforce: Instead of relying on highly
specialized workers, people are trained to perform multiple tasks. Significant increases in quality
and productivity result from combining cell structure with cross-training and ownership.
> From cost-based goals to lead time reduction: Traditional goals of efficiency and utilization
are replaced with a relentless focus on lead-time reduction. We find that these organizational
changes and the focus on lead- time reduction also result in significant quality and on-time
delivery improvements.
National Oilwell Varco (NOV), headquartered in Houston, has significantly reduced lead times
using QRM Cells. NOV is the world's largest manufacturer of automated oil- and gas-well drilling
and pipe-handling equipment, with annual sales of around $10 billion. NOV's factory in Orange,
CA, illustrates strategic variability. The facility makes 60,000 different parts annually, most in low
quantities. But NOV was experiencing increasingly long lead times and late deliveries.
Management at the factory felt that Lean was not suited to NOV's customized, low-volume
business. Instead, they decided to implement a QRM Cell for a set of customized products.
Within two years, the lead time of these products was slashed from 75 to four days.
In addition, as a result of the cell team's improvements and the benefits from reducing indirect
costs such as supervisors, expediting, material handling, and floor space, the cost of these
products was reduced by more than 30%. NOV's Vice President of Global Manufacturing
Strategy, Greg Renfro, is now rolling out QRM to all of NOV's factories.
Core Concept #3: Exploiting System Dynamics
When a factory manager spends $2 million on a new machine, he or she typically thinks, “We
have to make sure this machine is busy making parts all the time.” But the fact is, you might
actually make more profit if the machine is completely idle for 15% of its normal working time.
Most managers would respond, “But we are wasting capacity, and our costs will be higher than
those of our competitors who use fewer resources.” However, system dynamics theory tells us
that lead times increase enormously as resource utilization approaches 100%. I explain this to
managers via a simple graphic I call “The Magnifying Effect of Utilization” (see Figure 2).
We have experienced this effect in many aspects of our lives. You get to a major airport in the
middle of the day and you are able to pass through security in a matter of minutes. But arrive at
the same airport around 5 pm, and it could take more than an hour. That's because suddenly,
there's too much demand on already maximized resources.
It's the same in manufacturing. In a perfect world, you could operate your factory at 100%
capacity with a plan that worked like clockwork. But in the real world, orders don't arrive as
planned, jobs can take longer, tools can break, parts must be scrapped, and so on. If you load
up your factory based on high utilization of resources, even small disruptions cause large
backlogs because you don't have enough slack capacity to catch up. The interesting point is
that only a little spare capacity goes a long way (see Figure 2, “The Miraculous Effect of Spare
Capacity").
Executives immediately worry about the cost of this spare capacity. But, with shorter lead times,
the reductions in system-wide costs outweigh the investments in additional resources, plus
there is an increase in sales. Companies implementing QRM have found that their investment in
spare capacity is paid back handsomely.
Phoenix Products, a Milwaukee-based high-mix, low-volume manufacturer of industrial lighting
products, began implementing QRM five years ago. If you thought maintaining 15% idle time
was crazy, listen to this: Phoenix routinely plans for 25% excess capacity. The company has
seen that the cost is paid back several times over through reductions in indirect labor,
expediting, urgent shipments, and overtime. Revenue per worker has increased substantially,
and lead time for a typical light fixture has dropped from eight weeks to two.
Core Concept #4: Implementing a Unified Strategy Enterprise-Wide
But this time-based mindset is not just about the shop floor. The same lead-time-reduction
principles can be used enterprise-wide, including office operations, supply management, and
production control policies.
QRM provides a cell concept tailored for the office environment, called a Quick Response Office
Cell, or Q-ROC. Activities like quoting, engineering, and order processing can significantly
extend lead times and increase indirect expenses. Q-ROCs have been effective in reducing
office lead times by up to 90%, as well as providing other benefits.
As manufacturing executives become more aware of the impact of lead times, they often begin
to include time as well as cost as a supply chain metric. As a result, QRM produces
fundamental changes: It uses lead-time reduction as a focus of supplier improvement programs,
and it impacts the way sourcing decisions are made. For example, for certain parts QRM
encourages the use of local suppliers with shorter lead times rather than low-cost overseas
suppliers that may have lead times of many months.
QRM also offers a new tool for production control in low-volume environments. Kanban systems
are an important part of the Lean toolkit. Kanban works well with higher-volume manufacturing.
But if a part has low annual usage, Kanban encourages you to carry inventory, which spends
most of its time sitting around. And if you need to make a custom-engineered part, Kanban
makes it difficult for you to have stock of that part ahead of time.
In low-volume environments, we encourage the use of POLCA, which stands for Paired-Cell
Overlapping Loops of Cards with Authorization. POLCA connects pairs of cells with circulating
cards like Kanban. However, while a Kanban card is an inventory signal, a POLCA card is a
capacity signal, indicating capacity at the downstream cell. POLCA signals ensure that
upstream cells work on jobs that will go somewhere instead of working on jobs that will end up
sitting at other bottlenecks. Thus, POLCA makes more effective use of your capacity and keeps
jobs moving. Areas that are bottlenecked get avoided, and work is sent to other areas that can
use it.
Located in Milwaukee, P&H Mining Equipment manufactures large custom equipment such as
mining shovels and draglines. P&H had been implementing QRM Cells for several years before
it decided to connect them with POLCA. During the first year it implemented POLCA, P&H
reduced its WIP by $3 million—even in the face of increasing production targets.
Securing Your Company's Future
The arena in which manufacturers compete is morphing rapidly. Manufacturers in emerging
countries are rising as competitors. Technology is enabling increased product variety and
customization. The Internet is changing the way customers interact with companies. In this fastchanging world, agile organizations will come out on top. QRM offers an enterprise-wide
strategy and detailed principles to enable companies to become more agile and effective.
Renew Aire is a Madison, WI, manufacturer of energy recovery ventilation systems. It tailors
each system to individual customer needs, resulting in tens of thousands of product variants.
Through QRM, Renew Aire reduced product lead times by more than 80%. As a result, this tiny
company gobbled up market share from larger competitors and increased its revenue by 140%
in five years. It also saw a significant productivity improvement, requiring only 73% growth in
employees for that increase in revenue.
Factory workers in the U.S. live in daily fear of their jobs being outsourced to low-wage
countries. The fact is, labor accounts for very little of the end-product price. By focusing on
reducing lead times and applying other principles of QRM to reduce enterprise-wide costs, you
can wipe out the labor-cost advantage of low-wage countries. Also, for customized products that
cannot be stocked, overseas competitors need extra time for shipping, so your low price
combined with short response times will make it impossible for them to compete with you.
Enterprise-Wide Waste Due to Long Lead Times
Examples of activities and costs that would shrink or be eliminated if lead times were
reduced:
• Expediting of hot jobs
• Production meetings to update priorities
• Overtime costs caused by the need to speed up late jobs
• Time spent by sales, planning, scheduling, purchasing, and other departments to develop
forecasts and frequently update them
• WIP and finished-goods holding costs, handling activities, and space usage
• Obsolescence of parts made to forecast
• Quality problems not detected till later, causing rework or scrap
• Sales time for expediting jobs and explaining delays to customers
• Complex computer and organizational systems to run this environment
Examples of lost opportunities because of long lead times:
• Opportunity to increase sales of current products
• Opportunity to gain market share through rapid introduction of new products