Changing the Production Performance Metric

Anyone who has worked with asset intensive process manufacturers knows how hard it is to change the thinking about machine capacity utilization.

For years asset utilization has been the de facto measurement where running smaller lot sizes was not an option.

My have things changed. I see many companies shifting to a more balanced approach as companies strive to become more demand driven.

You could broadly paint four phases in this cycle of moving from inside-out production to outside-in demand and market focused.

1. The historical starting point was to have plants only focused on utilization and output efficiency. In this worldview you kept the machines running and tried to minimize the number of products and changes. The world was capacity constrained and the focus was on making more stuff as efficiently as possible. The market took what was made.
2. In the second phase the focus is lifted to a supply chain level. The production efficiency is one of several measures across the supply chain including inventory and customer service and profitability. At this S&OP level asset utilization is one of the tradeoff points in the supply chain not the only consideration.
3. In the third phase those tradeoffs would be used as feedback to re-assess traditional production and asset utilization assumptions. Maybe there is a way to design the setups and changeovers more flexibly to optimize the tradeoffs. Maybe the traditionally run lot sizes aren’t cast in cement and you can coax more flexibility in volume and mix to gain margin.
4. And finally the fourth phase is to align the production accountability more meaningfully with company strategy. Are we looking to grow through innovation? Then we are going to need to manage life cycles and SKU variability into production. That is as important to the company’s future as making a million widgets per hour indefinitely.

I’ll tell a quick story to illustrate the point.

I was speaking with one of the big paper companies recently. These folks have traditionally provided master rolls of newsprint and book paper to the industry. A decade ago they invested in giant paper machines to be able to make those master rolls of basic paper as efficiently as possible.

The game has always been to invest in the big asset and keep it running 24 X 7 with as few changeovers as possible. That’s how you drive the per unit cost down and pay for the big expensive machines.

Then the market changed. People started reading newspapers and books on tablets and e-readers. While there is still demand for paper, it isn’t at the level where one requires monolithic master roles. The demand now is for specialty papers in smaller lots and more varieties.

The bad news for this company is that those big, expensive, mass production machines aren’t very good at the high mix, lower volume, flexible manufacturing required for this new market.

The good news is that the leadership understands the new reality and production is under the control of the supply chain organization, not the plant. They will shut down the machines if there is no demand. They will do short runs and changes to better map to the new demand profile. Now, they care about how much inventory they are holding.

The lesson for you is that you would be better served by proactively and strategically moving into a supply chain oriented, demand driven strategy, rather than wait for the marketplace to pull the rug out from under you.

It is, at its core, a leadership opportunity.

Have you seen the same?