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Going Beyond Lean

Going Beyond Lean

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Industrial Engineer

Focusing on time, not cost, can sa ve yo ur c om pa
e undl ab
by rajan suri

• As researchers. but improved quality and lower cost. Examples are rework. If you are implementing lean. you may not want to eliminate strategic variability if it is your competitive advantage. In QRM you do not eliminate strategic variability. If you already invested in strategies such as Six Sigma or kaizen. To support this mission. offering a high variety of options and custom products for customers. To examine this approach. increasingly appropriate for today’s markets. The QRM approach is aligned with lean in getting rid of dysfunctional variability. QRM builds on and unifies these strategies under one overarching goal — reducing lead-time. The internal aspect focuses on reducing lead-times for tasks within the enterprise. companies with high-variety and custom products have reduced lead-times by 80 percent to 90 percent. we train industrial engineers to apply the tools best suited to each circumstance. Instead. But there are misconceptions about how to reduce lead-times. How can we forge new ground for the IE profession if we focus only on refining and implementing 40-year-old methods? These considerations led us to develop quick response manufacturing (QRM). QRM takes lean strategy to the next level (See Figure 1). two types of variability are defined: • Dysfunctional variability caused by errors and poor systems. • Executives wondered what their competitive edge was if everyone was implementing the same lean strategies. Core lean tools such as takt times. lean tools may not work everywhere. we were thinking that the Toyota system was designed more than 40 years ago. Challenges to reducing lead-time Companies understand the need for quick response. Externally. The Center for Quick Response Manufacturing has dealt with more than 200 partner companies during the past 15 years. Although lean manufacturing has been very successful. QRM does not require that you dismiss them. you exploit it. • Strategic variability introduced by a company to maintain its competitive edge. QRM will enhance your lean program. Our partners could not see how to apply lean methods in such cases. machine breakdowns and constantly changing priorities. QRM is based on the following four core April 2010 31 . However. this involves rapidly designing and manufacturing products for specific customer needs. • Lean tools eliminate variability. Implementations have shown that reducing external and internal leadtimes results not only in quick response. Companies today offer an increasing variety of product options and even custom-engineered products. For strategic reasons. Lead-time and cost reductions enabled companies to compete against low-wage countries. some of our industrial partners did not want to eliminate certain types of variability. Hence.A core mission of the industrial engineering profession is to develop and promote application of techniques for productivity improvement. Examples are serving markets with unpredictable demand. Using QRM. a companywide strategy to reduce leadtimes. The following issues surfaced repeatedly: • The origins of lean are in the Toyota Production System with high-volume production. standard work and level scheduling stem from repetitive production and eliminate operational variability. such as the time to approve an engineering change.

costs of indirect activities go into an overhead pool where they are commingled with other costs and disconnected from root causes. Employees in the U. What activities and tasks could be reduced or eliminated? What investments in materials or resources could be reduced or eliminated? These items truly are waste in your enterprise. QRM results in additional changes beyond lean. They have lowered overhead and SG&A expenses. you wipe out the labor-cost advantage of low-wage countries. This overhead pool is applied across all products. costs plummet. the power of time Everyone knows “time is money. At the same time. so short response times make it impossible for them to compete with you on the same terms. Indeed. president of RenewAire. But for a typical product in a developed nation. The remaining 10 percent is direct labor. and purchased items account for around 50 percent. Managers find this exercise to be an eye-opener. For companies making low-volume and custom products. The sidebar shows items listed by attendees at QRM workshops. They are only there because of your long leadtimes. and implementing a unified strategy enterprisewide. Even though lean thinking already has challenged existing policies. This tiny company competing with giants increased its revenue by 140 percent from 2003 to 2008. If QRM methods reduce cost by 25 percent. Chuck Gates. productivity improvement while increasing its work force by only 73 percent. The QRM organization has improved office and shop floor productivity and even R&D operations. Using QRM in the supply chain has reduced material costs. realizing that long lead-times waste more than they thought. general and administrative (SG&A) expenses and research and development (R&D) expenses are accounted for separately from cost of goods sold and can add another 30 percent. QRm takes lean strategy to the next level. Think about these questions and make a list of “waste due to long leadtimes” for your enterprise. So why is lead-time more significant than managers realize? Ponder this question: What is the waste in your enterprise due to long lead-times? Imagine a “blue sky” situation in which your company’s lead-times were 90 percent shorter. SG&A and R&D expenses are 1.going beyond lean concepts: realizing the power of time. QRM has cut all these costs significantly.S. Managers aren’t aware of the huge impact of lead-time because accounting systems do not link lead-time and various activities. In addition. the Madison.” but time is a lot more money than most managers realize. direct labor accounts for only 10 percent of cost. Wis. realized this after using QRM principles to reduce product lead-times by more than 80 percent. In a typical U.S. rethinking organizational structure. indirect costs such as selling. The net result has been reduced costs of 25 percent or more. Applying these concepts significantly changes traditional policies. understanding and exploiting system dynamics. Instead. and other developed countries fear being outsourced to low-wage countries. As a result. factory. manufacturer of customized energy recovery ventilation systems gobbled up market share. Overseas competitors need extra time for shipping. 32 Industrial Engineer QR m . Few of the costs involve direct labor— most fall into overhead and other indirect costs. as companies reduce leadtimes. companies have reduced leadtimes by 80 percent to 90 percent and improved on-time delivery and quality. It also saw significant moving on up Choice of strategy Exploit Eliminate lean dysfunctional Strategic type of variability Figure 1. often 25 percent or more. overhead accounts for 40 percent of the cost of goods sold..

the first core concept shows managers the enormous impact of time and why measuring and reducing lead-time is so beneficial. especially for internal activities. fabrication. you need to make four changes to your organizational structure: • From functional to cellular. And companies don’t do a good job of measuring lead-time. Figure 2 also shows the “touch time” (the gray space) when someone is working on the job. taking five. and pack and ship departments. the driver in QRM is eliminating lead-time (defined precisely through MCT). touch time often accounts for less than 5 percent of lead-time. Now all the factors mount. purchasing and other departments to develop forecasts and frequently update them • Work in process and finished goods holding costs and space • Resources used to store and retrieve parts during the long lead-time. QRM teams manage themselves and own the entire process within their cell. This creates many functional departments with lots of handoffs to process each job.separately reported and not connected with root causes. quantities and options Examples of lost opportunities because of long lead-times: • Opportunity for increased sales due to shorter lead-times for current products • Opportunity to beat the competition to market and gain market share through rapid introduction of new products April 2010 33 . In summary. management might target the largest cost driver: 12 hours of labor in fabrication. Consider how enterprises are organized. An average order goes through the order entry. resulting in poor quality and high costs as well. This contrasts with lean. The rest is the white space. the result is long lead-times. and in some cases less than 1 percent. • From top-down control to team ownership. scheduling. This ratio is not unusual. nine and eight days respectively in each.” Examples of activities and costs incurred that would shrink or be eliminated if lead-times were reduced: • Expediting hot jobs or late orders requires systems. and QRM theory provides a precise lead-time metric called manufacturing critical-path time (MCT). Work on each task is done by people who specialize in that task. Restructure the organization Reducing lead-time requires rethinking organizational structure. To reduce lead-time. You transform the organization of functional departments into one comprising QRM cells. managers minimize the number of resources in their department. Taking the company in Figure 2. In contrast. air freight. This is promoted by costing systems. planning. resulting in large amounts of rework or scrap • Customer keeps changing specifications during the long lead-time. Figure 2 shows an order going through a Midwest manufacturing company.5 days. managers also miss the connection. • From narrowly focused workers to a cross-trained work force. for a total lead-time of 34 days. When combined with all the handoffs. To support this. 2. Under pressure for cost reduction. the QRM approach focuses on reducing the total lead-time. which assume that product cost is driven by direct labor and/or machine times. But the three-hour reduction barely makes a dent in the lead-time of 34 days. Instead of managers or supervisors controlling departments. more holistic in their implementation and can be applied outside the shop floor. Metrics are another focus of the IE profession. assembly. In contrast with the approach of each person doing one task efficiently. consuming personnel time to deal with changes in delivery dates. where the driver is eliminating waste. a success by traditional measures. Since most decisions are based on cost. where nothing happens to the job. To reduce lead-time in an environment of unpredictable demand and low-volume or custom products. so people and machines end up highly utilized. Improvements reduce this to nine hours — a 25 percent cut in labor time. companies need to shift from cost-based to time-based thinking. damage to parts due to repeated handling • Obsolescence of parts made to forecast • Quality problems not detected until much later. Based on an eight-hour day. the touch time adds up to less than 2. 12. This creates large backlogs of work in each department. The cost-based approach divides jobs into many small tasks. Significant increases in quality What a Waste Attendees at QRM workshops listed the following items of “waste due to long lead-times. people are trained to perform multiple tasks. management and staff time • Production meetings to update priorities and change targets • Overtime costs for trying to speed up late jobs • Time spent by sales. QRM cells are flexible. Traditional efficiency programs reduce touch time.

” QRM tackles this using a branch of system dynamics known as queuing theory. which tells us that lead-times increase as resource utilizations approach 100 percent. And the team’s improvements and benefits from reducing indirect costs reduced the products’ cost by more than 30 percent. Greg Renfro. While it costs more to operate with more labor or equipment. with annual sales of around $10 billion. Other approaches base system designs on simpler assumptions. Over the next two years. it alone will not ensure success. have been central to our ability to meet the demands of our market. It is easy to understand. faced increasing demand. Unlike many cells implemented today.5 hrs 2 hrs Assembly 9 days Pack and ship 8 days Elapsed time Total lead-time: 34 days Time-based (QRM) focus Figure 2. NOV managers learned about QRM and experimented with a QRM cell for a set of customized products. improving quality and shortening lead-times. and companies have found that investing in spare capacity is paid back many times over.000 different parts annually. any disturbances such as hot jobs or machine breakdowns cause an enormous increase in lead-times. Add the increase in sales revenue. The structure must be complemented with other policies described in the next two concepts. but long lead-times and late deliveries dissatisfied customers and opened the door to competitors. • From efficiency/utilization goals to lead-time reduction. or even under 75 percent. the cell team reduced the lead-time of these products from 75 to four days. and it works well for repetitive production with low variability.going beyond lean and productivity result from combining cell structure with cross-training and ownership. The additional results convinced NOV’s vice president of global manufacturing strategy. The power of QRM cells is illustrated in the following case study. But what about the cost of this spare capacity? Here.” Renfro said. the first core concept of realizing the power of time comes back into play. understand and exploit system dynamics principles The need for this concept is illustrated by a common misconception: “We must keep our machines and people busy all the time. You must replace traditional cost-based goals of efficiency and utilization with QRM’s relentless focus on reducing lead-time. 3. however. Worse. As market dynamics change. Our costs will be much higher than our competitors who use fewer resources. Calif. Results from NOV’s first QRM cell were so impressive that management approved capital for a dozen more cells at NOV-Orange. Incorporating system dynamics into its core concepts is a key aspect of QRM. touch time often accounts for 5 percent or less of a company’s lead-time. and the team manages flows within the cell. Most managers react to this with “We can’t afford to do that. National Oilwell Varco (NOV) is the world’s largest manufacturer of automated oil and gas well drilling and pipe handling equipment. But in 34 Industrial Engineer . Headquartered in Houston. Takt time is calculated solely from production targets.. it will continue to be an integral part of reducing product costs. leaD-time Cost-based focus $$$ Touch time 3 hrs Order entry 5 days Component fab 12 days 12 hrs 2.” The QRM principle based on system dynamics is quite different: Strategically plan for spare capacity — the planned loading of your resources should be under 85 percent. most in low quantities. reductions in systemwide costs from shorter lead-times can outweigh the cost of additional resources. Lean uses the concept of takt time: the interval within which a resource must complete each job. an NOV factory in Orange. A few years ago. The structure using QRM cells is a key part of QRM. to roll out QRM to NOV facilities worldwide. “QRM and the management of time touch time vs. they accommodate a variety of jobs with different routings. QRM cells do not require linear flow. Management at NOV-Orange thought that lean was not suited to its customized and low-volume business: They made 60. in very high-variability environments.

• Shop floor control. but kanban requires containers for each part at various stages of your operation and supply chain. and it provides ways to adjust your accounting system. With growing global competition. POLCA builds on the schedules from your existing MRP system — through the high-level MRP logic — and does not have problems with low-volume or custom parts. it shows how to move from cost-based to time-based justification of projects. while a kanban card is an inventory signal (“replenish these parts”). P&H reduced its works in process by $3 million. There are proven IE techniques for NPI. It provides methods to predict the cost impact of lead-time. With today’s fast-paced changes in technology and markets. By training its NPI teams in QRM. a POLCA card is a capacity signal. However. you can’t stock that part ahead of time. QRM shows how the planning logic in a traditional MRP system results in a spiral of increasing lead-times. visual management and tight inventory control. companies need to re-examine their competitive strategy. 4. P&H Mining Equipment in Milwaukee manufactures large custom equipment such as mining shovels and draglines. and Ph. Yet they can significantly extend your lead-time and increase your overhead and SG&A expenses. companies have found that QRM helps reduce overall supply chain costs by 10 percent to 15 percent. Technology is increasing product variety and how companies interact with customers. It improves the entire organization. and in 2006 it decided to connect a dozen shop floor cells and facilities using POLCA. Further. Kanban systems have the benefits of simplicity. • Supply management. QRM uses POLCA. By including time instead of just cost as a metric in the supply chain and making executives aware of the cost of lead-times. variability. new products are the lifeblood of a business. QRM provides an extension of the cell concept tailored for the office environment.QRM you design your system to cope with. For example. During the first year. QRM restructures the system. A unified strategy QRM goes beyond optimizing the shop floor. implementing QRm QRM helps managers justify replacing cost-based decisions with time-based decisions in a number of ways. not eliminate. outsourcing of jobs and difficult economic conditions. It connects pairs of cells with circulating cards like kanban. If a part has low annual usage. Second.D. designed to work with the structure of cells and highlevel material requirements planning. April 2010 35 . Despite the shift from cost to time. with kanban you carry a lot of inventory that spends most of its time sitting around. simplifying it to support the cellular organization and overcome the lead-time spiral. QRM does not require that you change to new accounting practices such as lean accounting. if you need to make a custom-engineered part. d Rajan Suri is founding director of the Center for Quick Response Manufacturing and professor emeritus of industrial engineering at the University of Wisconsin. such as concurrent engineering and quality function deployment.S. • New product introduction (NPI). The same time-based mindset and QRM principles extend to the following areas: • Office operations. a manufacturer of medical instruments reduced its NPI time from two and a half years to less than six months. Quoting. QRM further improves the NPI process. One equipment manufacturer reduced lead-times by an average of 78 percent across its supply chain. You need a strategy that will take advantage of the resulting market shift. and this occurred in the face of increasing production. Instead. indicating capacity at the downstream cell. degrees from Harvard University. For example. • Material requirements planning (MRP) system. QRM shows that capacity planning decisions must include not only production targets but lead-time targets and variability measures. He received his bachelor’s degree from Cambridge University (England). QRM is designed to do just that. POLCA stands for paired-cell overlapping loops of cards with authorization. and it affects sourcing decisions. The key again is awareness of the impact of NPI lead-time on your business. QRM makes two fundamental changes to supply management: It uses leadtime reduction as a focus of supplier improvement programs. and his M. which reduced supplier quality defects and late deliveries fivefold. He has consulted for leading companies around the world and is the author of Quick Response Manufacturing and It’s About Time. The impact can be substantial. P&H had been implementing QRM cells for several years. with annual sales of more than $1 billion. engineering and order processing tend to be neglected as a source of improvement in manufacturing companies. for certain parts QRM encourages the use of local suppliers rather than low-cost overseas suppliers. QRM’s time-based approach results in new trade-offs during prototype construction and new ways of thinking about product options during design. but with two key differences: First.

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