MAKE, DELIVER, AND RETURN

A similar story unfolds as we look at the other key processes, as they move from
level 1 to level 2. In each case, we see the traditional isolation of functional
organization, driven by local performance measurement, giving way to activities
planned and executed in the full recognition of the impact they have on the
rest of the enterprise. This often benefits the traditional function more than
people would admit, as they are asked to give up what they often see as the
�right way to do things� or �the way it�s always been done.�
One of the most powerful measures in manufacturing has been utilization
� whether manpower or machine. It has taken decades and the concerted
efforts of many leading thinkers to replace this metric with more effective
measures such as schedule adherence. Of course, many now see the fallacy of
working assets even when there is no demand for their output � it just results
in inventory sitting in the system. But the old logic is still seductive!
Take the example of a U.K.-based automotive components manufacturer. It
had installed a new material requirements planning (MRP) system and processes
to provide sales forecasts for procurement and production. Success was
monitored by the level of finished goods inventory and on-time dispatches.
Unfortunately, inventory was higher than it had ever been, and the dispatch
success rate was falling behind dramatically. What went wrong? Analysis soon
revealed that the business had two distinct components � one that provided a
service to in-country customers, with regular, relatively small orders, and another
that provided infrequent, large replenishment orders to overseas agents.
As these order streams were for the same products, the sales forecasts, provided
in good faith by the sales department, always overestimated the regular demand
� causing stock levels to rise. But, of course, there was never enough stock
to cover one of the larger orders � so stock-outs resulted, the regular customers
were starved of stock, and the overseas order was late.
The underlying cause of the problem was level 1 thinking � sales providing
the forecast it thought manufacturing wanted, manufacturing trying to secondguess
the actual demand and playing catch-up to sort out the delivery shortages
at the last minute, and the warehouse showing poor dispatch performance at the
end of the internal supply chain.
Moving the whole situation to level 2 produced the right results and required
changes in the way processes worked across the three functions involved. The
company carried out a detailed root cause analysis of stock, the pattern of recent
sales, and the processes employed. The two separate demand patterns were
recognized through a reclassification of products and customer service goals.
Manufacturing lead times and minimum batch sizes were rebalanced to suit the
market demands that were now recognized. Most importantly, the business
processes for forecasting, production planning, and dispatch were redesigned
and the effects reflected in a reimplementation of the MRP planning tools. The
company realized an increase in product availability in one of its two major
product groups from 62% to 96% with no increase in stock and in the second
an increase from 86% to 96% while reducing stock by 34%. This situation
provides one more impressive result for a change in thinking from level 1 to
level 2.