ENGINEERED PRODUCTS
A CASE 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.  (See an example here.)

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 (thicknesses), 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.

• 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.

• 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.  

Read the Article in the July 2005 Issue of the Speed to Market Newsletter
Deconstructing A Myth: What Do consultants Really Do?

Could This Be You?
I am really glad to see that Delta Dynamics is moving forward.  I feel very strongly that many companies can really benefit from your expertise and guidance.  I did push one of my clients to get in touch with you. They had many problems. Unfortunately they tried to fix the problems themselves and .... closed their doors !! 
M. Nawar, Former Chief Engineer, Robert Mitchell Company

 
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Delta Dynamics Incorporated
P.O. Box 912 Bloomfield Hills, Michigan 48303
Phone 248-333-0482        Fax 248-333-1916      e-mail ddilink@aol.com