In this next instalment, we will focus on how we now need to change the way in which we measure performance in organizations running Demand Driven Flow Technology. This follows on from Part 1 of the series where we introduced Demand Driven Flow Technology (also known as Demand Flow Technology – DFT). In Part 1 we also discussed that many global world-class manufacturing companies have adopted it as a complete Business Strategy driving sustainable bottom-line results through improvements in lead time, productivity, customer service and Cost of Goods Sold (COGS).
A Total Paradigm Shift Will Be Required
One of the first conversations I have with organizations regarding Demand Driven Flow Technology (DDFT) is that it’s not a philosophy; it’s a complete business strategy. It requires an organization to be managed in a completely different manner. In fact, for some organizations, this can require a fundamental change in approach and the underlying assumptions that are used to define the strategy and design and management of its operations. In particular, when measuring employee performance, production, and the business itself, a totally different view of traditional metrics is required.
Gone are Key Performance Metrics (KPI) metrics such as Employee Efficiency and Machine Utilization that drive “silo” based production departments to over-produce. In come the new business metrics, such as Linearity, that can measure the effectiveness of a Demand Driven environment. As we introduce Demand Driven Flow Technology we need to ensure that KPI metrics that will measure performance and improvement are aligned and support this business strategy. As the old adage goes, “Be careful how you measure performance, people will do exactly as you ask them”.
Key Performance Indicators (KPIs)
Critical indicators are quantifiable measurements to gauge progress towards an intended result. KPIs provide a focus for financial, strategic and operational improvement, and create an analytical basis for decision-making, thus helping to focus attention on what matters most.
Procurement teams are often measured on their ability to reduce material cost, so they agree on supply contracts based on large batch sizes that can be considerably more inventory than is actually required. This then impacts the amount of space required to purchase large batches, as well as the cost to hold inventory, potential quality exposure to the inventory and the consumption of cash flow to pay for the inventory. It no longer surprises me when I review inventory holding at our customers and I find extreme variations; shortages in the materials that are required and excessive overstocking in materials that are not required. In some cases, I have found several years of supply. I often get told it’s due to the minimum order quantity, to which I reply “have you negotiated new unit pricing at lower quantities?” In our new Demand Driven environment we need to not only work differently we need to think differently as well.
Traditional KPIs Negatively Impact the Business
One of the common issues we find with traditional production environments is the buildup of significant levels of WIP (Work-in-Process) between departments and employees. This is partly due to performance metrics that drive individual employees and departments to work in a fashion that disconnects them from upstream and downstream processes. Each individually measured entity, whether as a department or individual, is focused on achieving its defined goal and objective, producing as much as possible in the available hours to ensure a high rate of efficiency.
Organizations are driving unbalanced production environments to overproduce, both products that are not required and larger than required batches. Subsequently, this generates high levels of WIP as well as extending overall lead times through the factory. What is the cost to the business as production departments are targeted based on their departmental output, regardless of how much product is required downstream?
Significant costs are tied up as labor and material consumed to produce excess inventory, then space is required to hold over-production and there is potential for quality exposure to holding the excess inventory. Orders that are required are also delayed due to excessive production, extending lead times and causing delayed shipments to the customer.
Machine utilization and efficiencies are other important measures in the traditional environment, especially with some machines costing hundreds of thousands of dollars. The problem with these traditional KPIs is that they encourage production environments to keep a machine running as long as possible on a single part even though it is likely that demand requirements have been met for the day, week or even the month. Often planners will raise work orders based on long-range inaccurate forecasts and arbitrary set batch sizes to facilitate production with as few setups as possible maximizing the productive hours of these machines. Traditional monthly performance meetings are a lot less stressful when we have a favorable overhead variance compared to an adverse one.
In these traditional environments that drive a build-up of WIP, we find that manufacturing operations are unable to react to daily changes in demand resulting in low levels of customer service and significantly long and highly variable lead times. In our Demand Driven environment, it is essential that the business is agile and can respond to daily changes in demand.
Agility & Adaptability
The goal for a company running Demand Driven Flow Technology is to have an agile and flexible production facility that is adaptive to changes in daily demand and one that is aligned to the entire Supply Chain. The business needs to become Demand Driven and transition itself away from business processes that force production environments to add significant costs to the business and those that consequently do not serve the customer.
In machine-intensive environments, we will look to reduce batch quantities, the complete opposite of the traditional viewpoint. With the production of smaller batches, a greater mix of products can be produced on any given day, consequently increasing flexibility and responsiveness to align more closely to actual customer demand. Furthermore, with a reduction in batch sizes that more closely match demand requirements, we will see a reduction in working capital tied up in inventory as well as reducing the level of potential exposure to quality issues.
Demand Driven Flow Technology utilizes specific mathematically-based tools to define new minimum run quantities that enable the machine(s) to produce efficiently, while still facilitating the production of a greater number of products each day. The key point is to understand the minimum number of units that need to be produced by the machine to recover time lost during setup. Reducing the batch sizes to mathematically calculated minimum run quantities then permits machine-intensive environments to become more agile and adaptive to customer response requirements. In turn, overall lead times through the factory are significantly reduced as is the working capital position of the business.
To reduce run quantities even further we will also utilize Lean techniques such as SMED (Single Minute Exchange of Die) to reduce the actual time taken for a setup. Reduced setup times will permit the further reduction in minimum run quantities enabling machine uptime to be improved as well as increasing the mix of products that can be processed on any given day. The result is an agile, flexible and responsive production facility that is adaptive to changes in daily demand driving higher levels of customer service.
In our Demand Driven flow-based world we are no longer interested in artificially maximizing the number of production hours for a machine so that we can absorb overheads. If there is no demand for a product, then the machine does not need to keep on running. Obviously, we look to maximize the output of machines in our design process but we are always led by data. We utilize the sales strategy for the business in our design model that will define the expected load on a machine. If we calculate this at 60% then based on the company’s own sales strategy this machine will not be required to run for 40% of each day, week, and month.
Demand Driven Flow-Based Metrics
DDFT production flow lines are designed to be balanced to support agility and flexibility. The potential for overproduction is eliminated, and flow is established connecting production areas together reducing overall lead times. As lead times are reduced, working capital is reduced through a reduction in WIP. Then with consistency in lead time achievement planners will become confident that they can reduce Finished Goods inventories without any detriment to customer service levels.
On a daily basis, production supervisors are provided with an hourly Flow Rate target for each flow line. This target defines the number of products to be produced on the line each hour to ensure customer demand is met on a daily basis. Each hour the output of the line and production team are measured as one, with corrective actions applied as required to ensure by the end of the day the planned daily quantity is achieved.
Business managers will utilize Linearity Rate to measure the effectiveness of the Demand Driven environment to meet the demand plan during and at the end of each month. Producing less than planned is treated in the same way as over-production; it reduces the Linearity Rate for the facility. Linearity provides a business with the ability to closely measure how effective the production environment is at meeting the plan and therefore the ability of the facility to respond to the demand requirements of the customer.
By transitioning to Demand Driven Flow Technology flow-based metrics a business can ensure that performance measurement is aligned with the goals of the organization to improve responsiveness to customer demand, working capital, and Cost of Goods Sold. Ultimately, a Demand Driven Flow Technology design and flow-based metrics will drive sustainable bottom-line results.
In Part 3, the last instalment in this series, we will focus on the benefits that Demand Driven Flow Technology to understand how DDFT will impact the health of your business. Our customers have reduced lead times by as much as 98%, improved productivity by as much as 69%, and reduction in WIP by as much as 60% while increasing levels of output and manufacturing in less space. A full review of typical customer benefits across a wide range of industry sectors can be reviewed here.
Further Information
Previous High Impact Insights:
- What is Demand Driven Flow Technology
- What is The Difference Between Lean and Demand Driven Flow Technology?
- Benefits Achieved by Our Clients
- What is DDMRP?
- MRP – Solution or Problem
- Adapt or Die – Become Demand Driven
- Supply Chain Brain: DDMRP as an Emerging Disruptive Supply Chain Capability
- What Does VUCA Mean?
Overview of High Impacts’ Demand Driven strategies that will transform your factories and supply chain network:
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Talk to us today to learn more about how we can help your organization become Demand Driven through adoption of our Demand Driven methodologies, DDMRP and Demand Driven Flow Technology.
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