Case
Study
AN EXAMPLE OF PERFORMANCE IMPROVEMENT IN A CUSTOM MANUFACTURING
ENVIRONMENT
Introduction: Engineered Products (EP) is a unit of a
family-owned and
operated business that manufactures hand tools for professional tradesmen
(primarily in painting, drywall, flooring, tile, carpet and related trades), and
do-it-yourselfers. EP manufactures
machine blades and related items for industrial customers. Engineered products are manufactured to meet OEM (original equipment
manufacturers) specifications, and are produced on an order-by-order basis.
Industries served include textiles, food processing, paper, leather, rubber and
plastic, medical, and others.
The manufacturing process entails stamping and laser
cutting, heat treating, precision grinding, and polishing. EP shares a portion of its manufacturing processes (forming and heat
treating) with Tools. However, after heat treating, hand tools and machine blades
are routed and processed differently. Sales
are secured through a bidding process in response to RFQ’s (requests for
quotations). EP bids on
approximately 1700 RFQ’s per year and wins some 30%. Half of these orders are for less than 50 pieces.
Presenting
Problem: Management had been frustrated with the performance of EP for many years
and had tried different improvement programs with little or no success. It was important for EP to perform at a substantially higher level
because it represented the opportunity for future growth. (Tools operates in a mature market.)
Delta Dynamics was engaged to assist management in
developing the Engineered Products business. Specific goals of the project included:
-
Position
EP to maximize growth and profits
-
Achieve
double digit operating margins
-
Provide
“real time” business training for staff
-
Establish
an agreed upon philosophy for the future
-
Establish
business targets, strategy, and coherence at the executive level
Solution
Approach: It quickly became apparent that one of the primary problems was that EP
was seen as a department, not a separate business. Fundamental business differences between Tools and EP were not being
recognized and managed. For
example, Tools operates on a build to stock model. Orders are filled from finished goods inventories which are replenished
through an MRP (materials requirements planning) system. EP, on the other hand, is a make-to-order business where products are
manufactured to exacting customer specifications and shipped immediately upon
completion. These are radically
different organization “architectures” and business processes.
The organization structure did not distinguish
between the two businesses and managerial responsibilities were muddled.
EP was “intertwined” with the larger tools business and basically
dominated by it. One of our initial
findings was the widely-held, (erroneous) belief that management systems and
performance measures were applicable to Tools and EP alike. These two manufacturing systems are illustrated in the following diagram:
First Steps:
It was clear that EP and Tools operated on two distinctly
different business models. However,
because these differences (and their managerial implications) were not widely
recognized within the larger organization, it was essential to identify and
illustrate the specific differences between them.
This was done with a differentiation matrix, a tool for comparing and contrasting the two
businesses on critical characteristics and operating dimensions. Everyone involved had an opportunity to provide their input regarding
what they perceived to be important differences. Thirty-eight specific areas were identified in product
characteristics, materials, sales and marketing, manufacturing, and general
business characteristics.
One example of a fundamental difference between Tools
and EP involved materials management. Tools
uses standard carbon steel which was readily available and purchased in large
quantities. Conversely, EP uses a
large number specialty steels in a variety of gauges (thickness), much of it
purchased from foreign suppliers.
Managing raw materials for EP is “mission
critical” and significantly more difficult than managing tool steel supplies.
Specialty steel usage has to be forecast and inventories carefully
managed in order for EP to reduce lead times and meet customers’ demands for
quick service. Without the right
quantities and mix of steels on hand, it would be impossible for EP to compete
effectively in its markets where short lead times are essential.
Each of these 38 differences was reviewed and
analyzed. At the conclusion of this
review, executives, managers and employees had a much better understanding of
these two business and what was required to manage each rationally. It was
evident that EP lacked the infrastructure needed to manage it effectively.
EP was not organized properly, was stuck in a partially implemented team
concept, lacked the planning and control systems to manage its throughput
process coherently, lacked necessary operational and financial reports, and
suffered from ill-defined organizational responsibilities.
Team Approach:
The task of building the infrastructure fell to those members
of the organization who were directly and indirectly responsible for EP. These individuals met daily with the Delta Dynamics consultant and worked
as a group to design and implement the systems and new procedures the EP
business required. This met one of
the primary project objectives—to provide “real time” business training
for staff. There is no better
training for managing a business than building it.
The “Dream Team” as the group came to be known
included 8 core members representing the major EP functions (marketing, sales,
estimating, materials management, production scheduling, manufacturing,
manufacturing engineering, and accounting) and a Delta Dynamic consultant who
provided guidance and hands-on support. Others
were brought in on an as-needed basis (i.e., industrial engineering, human
resources, purchasing, MIS, quality assurance). The Dream Team began its work by defining the entire EP business process
starting with marketing and sales through estimating and bidding, manufacturing,
shipping, and payment of accounts receivable.
Once this process was made explicit, the next step
was to analyze it for weaknesses, gaps, problems, opportunities for improvement,
etc. This analysis resulted in a
lengthy list of “to do’s” which were prioritized and organized in the form
of a project schedule and action plan.
Preliminary
Results:
After three months of solid effort, a workable infrastructure was in place
(along with a separate P&L), and the EP business was beginning to show
measurable improvement. Although EP
had not yet attained the project goal of double digit operating margins, it was
clearly operating at a much higher level of performance and was steadily
improving. The team’s focus on
reducing “cycle time” from RFQ through the entire business process was key
to this improvement.
Some examples of infrastructure development achieved
by the team included:
-
The
existing MRP system was used to forecast steel requirements and manage
inventories. This reduced lead
times significantly, reduced manufacturing costs, and improved on-time delivery
performance.
-
The
estimating and bidding process was enhanced by improving the accuracy and
information available to estimators.
-
Specific
production and quality goals by product type were established. Feedback on goal attainment was provided to the shop floor to promote
continuous improvement.
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An
ongoing standards review program was implemented that resulted in more accurate
production rates and costs. Over
300 standards were reviewed and adjusted during this period with some 75%
“tightened.”
-
An
order-by-order comparative report was implemented that enabled discrepancies
between estimates and actual costs to be identified. “Closing the loop” enabled differences between planned
(estimated) and actual order costs to be analyzed (e.g., was the estimate
inaccurate or were labor costs or materials usage excessive). This information was also used to promote continuous improvement.
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Scrap and
rework reporting was improved and provided another source of information for
continuous improvement.
-
Many
manufacturing engineering changes and improvements were tested and implemented
as appropriate. Techniques for
reducing changeover and set-up times were developed on the floor.
-
New data
collection routines were established (e.g., a redesigned shop floor
“traveler”, on-time delivery reports, bar coding).
-
A bid
data base was designed and installed that enabled more accurate tracking and
follow-up of outstanding bids, “hit rates” by product category and customer,
time from bid to receipt of orders, and more. This information was critical for improving marketing and sales
performance.
Phase II.
At this point project emphasis shifted from the
development of the operational infrastructure to the goal of establishing
business targets, strategy, and coherence at the executive level. Although EP was now differentiated reasonably well with a
sound business process, organizational relationships and responsibilities
remained tangled and no one person had overall responsibility for profitability.
The next step was to establish EP as a truly separate
business (although it still shared a portion of its manufacturing process with
Tools) with it’s own general manager, business targets, strategy and
established philosophy for the future. This
took another three months to accomplish and involved expanding the project scope
to include redesigning the Tools organization. This
required a number of organization changes and job redefinitions. Although these organization needs were clear conceptually, actually
implementing new responsibilities, reporting relationships, and job titles was
potentially threatening for some people and so had to be carefully worked
through.
The new organization that emerged from this
process established EP and Tools as two separate businesses, each with its own
management and distinct organization.
Examples of specific changes included:
-
The
former president was promoted to CEO and Chairman of the Board to reflect a
broader range of responsibilities for other family-owned businesses. A new position, President and Chief Operating Officer, was established to
provide day-to-day business leadership.
-
The Tools
organization was realigned to reflect changes in its marketplace (the growth of
large volume home centers, mass merchants and coop buying groups in place of
regional distribution to small customers).
-
A new
reward system was introduced with performance bonuses based on a leveraged
combination of sales growth and margin improvements.
-
Responsibility
for new product development was shifted to the VP of manufacturing and new
project management software was implemented to ensure timely completion of these
types of projects.
-
A
“Manufacturing Support Group” was established to integrate and coordinate
quality assurance, manufacturing engineering, and industrial engineering
functions on the floor.
Engineered
Products Today: As of this writing, EP has
more than achieved its goal of double digit net operating income. In addition, sales are up 13.5 percent
over the same period last year. Management
continues to improve its organization and processes, and EP is effectively
positioned to continue to grow profitably for the foreseeable future.
Ask us how we can help your organization become more
competitive and profitable.
Delta Dynamics Incorporated
P.O. Box 912 Bloomfield Hills, Michigan 48303
Phone 248-333-0482 Fax
248-333-1916 e-mail ddilink@aol.com
    
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