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Systems
William L. Berry to Strategy
Ohio State University, USA, and
Terry Hill
London Business School, UK 3
Received September 1991
Many firms make large investments in processes and manufacturing Revised February 1992
infrastructure, such as control systems, without an adequate understanding of
their markets. Few appreciate the need for the link to be made. They see
manufacturing investments and agreements on markets to be independent sets
of decisions. However, as these investments are both large in terms of costs
and time-scales, getting it right is critical to the short- and long-term prosperity
of a business. Many companies make costly mistakes owing principally to the
fact that their manufacturing strategies have not been developed to reflect key
differences in their markets. Without a strategy, investments in manufacturing
lack context and subsequent coherence. The result is a reactive response by
manufacturing which typically fails to alert firms to the trade-offs involved and
the binding nature of the decisions being made.
Company D
Company D, a UK aerospace company manufacturing a wide range of products
for both the original equipment and spares markets, decided to invest in a
comprehensive, MRP system with standard computer software for both
requirements. This included master production scheduling, time-phased material
planning, capacity requirements system planning, and shopfloor control. Given
the complexity of the data base, training and system running-time requirements
and support, the investment exceeded £5m, with an installation time of 2112
years, and significant overall running costs. After installation, subsequent analysis
recognized that large parts of the system were not required to plan and control
the spare parts business. Sixty per cent of the original database investment
and a large part of current running costs were attributable to this part of the
company's activity, but were not necessary or appropriate for its effective control.
What was required for this make-to-order, low volume, intermittent business
was simplified master scheduling, material planning and shopfloor control
modules without a requirement for the order tracking, queue control, and priority
despatching features essential for the OEM part of the business.
Production/operations strategy
1 2 3 4 5
Corporate Marketing How do Process Infrastructure
objectives strategy products/ choice
services win
orders in the
market-place?
Batch 7
82 -c-------------
Continuous
processing
Whereas most companies recognize the levels involved, what is not appreciated
is that the principal functions within each level need to be designed to meet
the requirements of individual businesses. Only in this way can companies select
the particular functions they need and then design the relevant parts of the
system in a way which supports the manufacturing process and, in tum, enables
manufacturing to support better key differences in its markets.
As illustrated earlier, the failure to appreciate this leads companies to make
inappropriate investments in systems (e.g. Companies A and D) or to miss
opportunities for sound investments under changing market conditions or to
support process reinvestments (e.g. Companies B and C).
Inappropriate Investment
An underlying theme throughout has been the need to recognize that whereas
an MPC function may be sound in itself, it may not be relevant to the needs
of a business. As an example the investment in the shopfloor control system
in Company A would actually impair overall performance.
Overall
business
direction
8 Master
production
schedule
IMPS)
Detailed Material
capacity 1-------.i requirements
planning planning
IMRPI
Detailed
material and
capacity
planning
Material and
capacity plans
Figure 2.
A Simplified Review of Shopfloor
Purchasing Execution
control
the Manufacturing systems systems
systems
Planning and Control
System Functions
~/ MPC
9
systems
To do this, companies need to use the concepts explained in Table I and Figures
1 and 2 and not rely on the easy but inappropriate option of applying standard
solutions. This final section builds on these earlier concepts, provides the
principles on which effective systems need to be built, and illustrates their use
through company examples.
• make-to-stock products;
• delivery speed supported by finished goods;
• low product variety; and
• high production volume;
Table II provides the conceptual basis for understanding how different types
of MPS systems can be designed to reflect the particular needs of a business.
In this case the company moved from a make-to-stock (MTS) master production
scheduling system to a two-type MPS system to meet both the Make-to-Stock
and the Make-to-Order (MTO) characteristics of the existing and the new
markets now supplied.
Manufacturing:
Process choice Jobbing/low -- High volume
volume batch batch/line
Managing changes in sales and mix Through order Through \VIP Through FG
backlog or FG inventory
inventory
Table II. Meeting delivery speed Through Reduces Eliminates
Linking Manufacturing requirements rescheduling process lead process lead
Strategy to the Design requirements time time
of the MPS
have been selected to represent the way in which this can be accomplished.
To help in the explanation, both companies in these examples represent "pure"
forms of both process and systems design.
Company G manufactures customized hydraulic products in low volume on
a make-to-order basis. The appropriate manufacturing process choice is batch
with long manufacturing lead times, complex routeings, the sharing of processes
and the need to manage capacity. In this company, the material planning approach
is based on a time-phased MRP system as shown in Table IV.
Company H, on the other hand, produces a narrow range of motorcycles,
in high volume, with limited product change or enhancements. The relevant
process choice is high volume batch and line processes, and the opportunity
to reduce both set-up times and batch sizes. For this situation, the relevant
material planning design comprised a rate-based material planning system as
shown in Table IV.
These two examples represent companies with different markets, production
processes and system designs which have been appropriately developed to
provide a coherent approach to each business. Table IV illustrates the concepts
underlying this critical linkage and demonstrates design alternatives each
appropriate to different business conditions.
Manufacturing:
Process choice 3 Batch Line
Table IV. Source of cost reduction: overhead No Yes
Linking Manufacturing inventory No Yes
Strategy to the Design
of the Material a In jobbing, shopfloor control is handled by the operator
Planning Approach
Where this is so, the key to resolving the complexity typical of most organizations
is for a company to simplify the control task by identifying differences required
by the market, and then reflect these in the process and infrastructure investment
which it makes.
Company I, a materials-handling equipment manufacturer, was confronted by
a changing market where price sensitivity and product customization were both
increasing. The first step was to reflect these market requirements in the design
of the manufacturing process. The next was to feature these within its MPC
systems design.
One characteristic of Company I was similar to Company G's markets and,
therefore, its process and system responses needed to be developed in the same
way. As the company's markets required a broader range of optional features
to be produced in low volume, the company reorientated its MPC system to
provide assemble-to-order master production scheduling, time-phased materials
planning, and a push type of shopfloor control system for one portion of the plant.
The other principal market requirement was for lower prices. To reduce costs
the company needed to standardize as much of its product as possible thus creating
high volume in its component manufacturing with the attendant opportunity to
achieve low costs. To support this aspect of the market requirements, the company
installed manufacturing cells to produce high volume, standard components and
supported this process with a rate-based material planning and a pull type of
shopfloor control system. This part of its business was, therefore, similar to
Company H. Figure 3 provides a way of illustrating this and shows the relative
parts of its processes that correspond to Companies G and H.
13
Push Pull
--CompanyG Figure 3.
=Company H Linking Business
-company I Characteristics to the
Other feasible combinations Design of MPC
Systems
Conclusion
Why don't panaceas work? Solutions presuppose that market requirements and
hence corporate characteristics are the same. What you can be sure about in
business today is that nothing is further from the truth. This article illustrates
the critical need to link markets and manufacturing strategy. In tum,
manufacturing strategy comprises a coherent set of responses in terms of
process and infrastructure investment which essentially need to reflect the
characteristics of a company's markets both today and tomorrow. The critical
interrelationship of these aspects is clearly demonstrated by Table AI which
provides an overview of the market-process infrastructure linkage. This
framework is illustrated by Companies G and H and offers a comprehensive
way to review a company's response and allows it to identify the necessary
changes in order for its MPC system (as one part of manufacturing strategy)
to support the business better.
References
1. Schroder, R.G., Marerial Requirements Plan11ing: A Study of Implementation and Pradice,
American Production and Inventory Control Society, Falls Church, VA, 1981.
2. Hill, TJ., Ma11ufacturing Strategy: Text and Cases, Richard D. Irwin, Homewood, IL, 1989.
3. Hill, T.J., Manufacturing Strategy: The Strategic Management of the Ma1111facturing
Functio11, 2nd ed., Macmillan, Basingstoke, UK, (in press).
4. Vollmann, T.E., Berry, W.L. and Whybark, D.C., Manufacturing Pla1111ing and Control
Systems, 3nd ed., Richard D. Irwin, Homewood, IL, 1992.
Manufacturing strategy
Company Market Order winners Task Features Master production Material planning Shop-floor control
characteristics and qualifiers scheduling
Company G Customized Design capability Reducing Batch Make-to-order Time-phased Push system
products Delivery speed process lead manufactunng assemble-to-Order material Priority
Wide product time Long process Customer planning scheduling of
Delivery
range reliability-Q,Q To manufacture routeings orders Material is shop orders
Low volume to engineering High precision Anticipated particular to
Quahty-Q System
per product specifications work orders customer orders supported by
Price-Q and quality Forecast High despatching and
Make-to-order standards Accommodate orders
delivery and obsolescence production
Initial vs repeat Delivery Used for rough risk controller
orders design changes
reliability is with reliable cut capacity personnel
Extra materials
Future order critical deliveries planning due to needed for Capacity
call-offs long lead time requirements
Labour cost scrapped items
impact on
equals 60 per Trade-off: planning by
delivery
cent shorter lead work centre
Customer order Order tracking
Control of actual time vs raw
promising
costs against material and status
budget inventory information
Scrap and rework
order priorities:
first orders,
normal scrap
allowance
Company H Narrow product Price To provide a low High volume batch Make to stock Rate-based material Pull system
range Delivery speed cost and line planning
Manufacture to Kanban containers
Standard products (through manufacturing production forecast
support process JIT flow of material
finished goods Level production
High volume per capability Low raw material,
product inventory in Short set-up times
distribution To support the Three month frozen component and
Seasonal demand Small batch sizes planning horizon WIP inventory
divisions) marketing
Sales from finished Quality - Q activity with Low cost Manufacture to
goods inventory high delivery manufacturing replenish
Delivery reliability speed through
at distributors Low labour cost distribution
-Q finished goods
Introduction of new High material cost inventories
Basic design and inventory
products Inventory reduction
peripheral
Changing product design changes (raw material,
mix -Q components and
\VIP)
Overhead reduction
(low MPC
costs)
Note: Q denotes a qualifier, i.e. a capability required for the company to enter and remain in its market. Q,Q denotes an order-losing sensitive qualifier, i.e. a capab1hty
which if not supported leads to a rapid loss of business.