CTR improves business performance, Solutions!, Online Exclusives, February 2003

CTR IMPROVES BUSINESS PERFORMANCE

Fred N. Horning, President, Horning & Associates
John P. McCann, CPA, MST, McCrory & McDowell LLC

The following scenarios of lost productivity should be familiar to anyone with even a little experience managing manufacturing operations.

• The company can’t meet delivery dates, no matter how much it tinkers with lead times.
• Operators always have a backlog, regardless of the production schedule.
• One rush order from a major customer throws the whole week’s production schedule out of kilter.
• The finished product warehouse is bulging, in part with items customers no longer want.

Each of these scenarios takes a bite out of a company’s productivity. The sum of these productivity losses adds up to a major waste of resources that could otherwise be used to improve customer service, increase revenues or enhance the company’s competitiveness.

One management tool that has proven successful at eliminating waste and improving performance at small and mid-sized manufacturers is Cycle Time Reduction (CTR). CTR consists of speeding up a company’s order-to-delivery time to get product into the customer’s hands as quickly as possible, at the lowest possible cost. It’s a way of looking critically at a company’s business processes—from order entry to cheduling to inventory management and shipping—to find opportunities to squeeze more efficiency out of them.

Successful CTR typically produces manufacturing improvements that can easily be quantified. Some of the results in CTR projects that the authors have been involved in are:

• 60 - 90 percent reduction in lead time
• 30 - 50 percent reduction in manufacturing floor space
• 40 - 80 percent reduction in total quality cost
• 50 - 90 percent reduction in setup times and lot sizes
• 95 - 100 percent of promises met on every shift.

Probable Cause
There may be several causes of a manufacturer’s long order-to-delivery cycle. Often a problem early in the cycle triggers other problems down the line, snowballing into days of delay. Here are four common factors that can stretch the order-to-delivery cycle:

1. Too many non-value-added activities. At most companies, the time an order is actually being worked on averages less than five percent of the order-to-delivery cycle. Inventory thus spends 95 percent of the time between order entry and shipment waiting for the next step in the process. Complicated paperwork and long waits during the work process can add days to the cycle, but no value to the product.
2. Measuring the wrong parameters. Often companies measure their performance against criteria such as equipment utilization, productivity or order completion date and think they’re doing fine if they get high scores. But a company can excel by these criteria and still lose out to the competition if it can’t get its product to the customer when it promised. Employees perform to what’s being measured.
3. Capacity management. The balancing of customer demand and available capacity is essential to success. This is not to say a company should refuse orders, but rather that it realizes it must meet delivery commitments that satisfy customers.
4. Corporate culture. Employee attitudes toward work can have an adverse effect on performance. At one manufacturer, for example, some shop floor personnel developed the habit of never emptying their bins by the end of day. No matter how much time they were given, they were consistently behind. They confessed that having work waiting for them the next morning increased their sense of job security. Not only was the manufacturer doing a sloppy job of managing production, it also failed to communicate corporate values and objectives.

The way a manufacturer manages its inventory can be a key indicator of its efficiency and a prime target for analysis to uncover the factors that contribute to poor delivery performance. At many manufacturers, inventory-whether raw material, work in process or finished goods-is a buffer against inefficient planning, long setup times, poor product quality and inability to deliver on time. Companies keep inventory around "just in case." Yet excess inventory indicates that the company is not doing a good job of matching production to current customer demand. Also, it ties up cash. Reducing inventory is an effective way to expose hidden production management problems.

Principles of CTR
There is no one-size-fits-all answer to the problem of long cycle times. A company has to identify the bottlenecks specific to its operations, devise solutions, set realistic goals, and develop a plan to achieve them. There are, however, some fundamental principles underlying successful CTR:

Make only what the customer wants when the customer wants it. That means letting orders drive the manufacturing schedule. To take it to an extreme, what a company shipped yesterday is what it should make today, because that’s what its customers want. Lot sizes will shrink, because a company won’t be ganging jobs or stockpiling for future orders.

Reduce inventory throughout the cycle-especially work in process and finished goods inventories. That means that your suppliers must be able to meet your on-time delivery requirements so that you have just enough of what you need when you need it. You have to schedule production to work to capacity without permitting backlogs.

Set goals and measure performance against benchmarks that matter to the customer-for instance, on-time delivery, number of returns, price compared to the competition. The goals should be based not on your company’s past performance, but on what the best companies in the industry are achieving, because those are your competitors.

CTR gives a manufacturer a way to identify and eliminate the causes of the scenarios mentioned earlier by giving it a framework for:

• Balancing orders with capacity, so it doesn’t promise what it can’t deliver
• Eliminating backlogs in work in process, so that every order can be processed expeditiously
• Basing production on current demand, so product doesn’t pile up in the warehouse waiting for orders
• Creating an environment where management and employees work toward common objectives.

An objective, outside analysis by a consultant experienced in manufacturing management can ensure the success of a CTR initiative. The consultant can work with management to analyze the company’s processes and develop goals and a plan. Equally important, the consultant can work with employees to listen to their suggestions, communicate them to management and identify and allay employees’ concerns over change.

Small and mid-sized manufacturer in the current competitive—and increasingly global—marketplace are seeking ways to differentiate themselves from their competitors. CTR is an effective, proven way to give a manufacturer a competitive edge in price, quality, lead time and on-time delivery.

CTR is an on-going process that takes a strong management commitment. Change can be difficult, but a manufacturer that keeps doing the same things will keep getting the same results. S!

About the authors:
Fred N. Horning is president of Horning & Associates, a management consulting company. Fred has more than 25 years experience in manufacturing, including more than 10 years as an external consultant for Hewlett Packard focused on world-class manufacturing. Telephone: 719-488-8090.

John P. McCann has been an accounting professional for over 30 years. John’s background includes five years as the chief financial officer of a $100 million manufacturing company and 25 years with a national accounting firm, where he served as the Director of Tax for the Entrepreneurial Services Group. Telephone: 412-281-9690.