Suppliers should develop manufacturing and supply chain strategies to deliver products well within the customer’s tolerance time to fully exploit market opportunities

With reliability in supply performance shooting up due to higher on time performance and with shortened lead times due to the TOC based system, it is now viable to maintain high availability of needed parts in the replacement market & to provide high reliability to OE market. This article illustrates different market needs can be accomplished by using TOC principles.

Recently we met with an auto component manufacturing company and were invited to analyse their business reality in order to improve their financial performance. While analysing their reality, we understood that the company caters to the replacement market besides supplying components to the original equipment manufacturers (OE’s). As a process, while planning for the forthcoming month’s capacity the company typically accumulates the forecasted OE demand (delivery schedules) that it has received from its customers, and assigns the rest of the capacity to cater to its replacement market requirements. We further understood that the company has a track record of maintaining a delivery performance (DDP) of close to 90 per cent to its OE customers. It is apparent that the company is serving two different markets – as a supplier supplying parts to the OEs and simultaneously distributing spare parts to the replacement market. Upon further evaluation, it was clear that the company assigns higher priority to automotive customers (OE’s) relative to the replacement market when it comes to fulfilling the demand. The sales team further revealed that their OE customers were quite unhappy about very low spares availability in the replacement market as well as lower on the supply performance (DDP). The needs of the two market segments seem distinctively different; The OE customers are willing to provide an advanced intimation for the supply of their SKU’s (and therefore willing to wait for a reasonable time to fulfill their order) but need high reliability from their suppliers, whereas the replacement market customers need instant availability of needed parts in the replacement channel. It seems that as the needs of different segments are differing, they have to be dealt with differently, and this mandates different manufacturing and supply chain strategies that would enable the company to fulfill the above valid needs of the respective market segments.

Understanding customer’s tolerance time

The above automotive industry example can also be generalised across several industry verticals. Take for instance a customer who walks into a store to buy consumer products like soap, shampoo, bread etc. He/she expects to see the product on the shelf almost instantly whereas a customer, who wishes to buy a car, will be willing to wait for few days/weeks to receive a car of his/her choice (colour/model/other configuration). Based on the above examples, it seems that customer’s across market segments have an intrinsic ‘tolerance time’ – a time that he/she is willing to wait to avail the relevant product/services. If suppliers (across the value chain) do not pay attention and fail to cater their products/services within this ‘tolerance time’ of the customer, there is a big risk that the customers may consider any available alternate product, thereby resulting in suppliers losing the business opportunity, along with market share and profit growth opportunities.

Appropriate manufacturing strategies

In majority of production environments, the manufacturer typically takes about 4 to 8 weeks to process a given custom order. The sum total of all processing times (by machines or by workers) for a given order can be technically termed as the ‘touch time’ to fulfill the order. In most situations, it can be observed that the total touch time to manufacture a given order is always a fraction (varies between 5 to 30 per cent) of the overall supply lead time. E.g. In an airport, for a passenger from entry till he reaches to the departure gate it typically takes between 20 to 40 minutes, however the actual touch time, the time he/she need to spend to get the boarding pass and pass through security check is normally just few minutes, rest of the time he/she spends waiting in the queue. Similarly, in majority of production environments for any given customer order, although the touch time is a small fraction of the overall lead time, the order spends significant amount of duration in waiting (in front of resources, waiting for decisions, waiting for matching parts etc.). Therefore, the flow of the order is impeded at several points in production. In order to improve the situation, companies tend to release customer orders much earlier (than normal) into the shop floor for processing. Instead of improving the situation, the above action worsens it by causing long queues of orders in-front of work centres, thereby causing accumulation of work in process inventory, impeding flow within the shop floor, elongating the lead time and thus resulting in low supply performance.

TOC philosophy

Intuitively it is convincing that in order to reduce the production lead time and improve on time completion of orders to customers, there must be smooth flow of products in the shop floor. In the current way of managing the supply chain (including production) there seems to be an (erroneous) assumption that requires introspection. The assumption that ‘in order to complete orders at the earliest and accomplish better on time performance, the processing of the order must start as early as possible’ seems to be damaging. Counter intuitively, the application of Theory of Constraints (TOC) philosophy (invented by Dr Goldratt) to the production environment focuses on causing smooth flow in production by minimising quantum of work released onto the shop floor and operates on the following principles:

In order to accomplish smooth flow within production, it is imperative to control the number of open orders (customer orders that requires processing within foreseeable future) within the shop floor. In order to implement the above said principle, it is required to design a process that controls (chokes) the release of work onto the shop floor and also condition that the rate of release of work is in alignment with the available capacity of the plant. The order needs to be released at a pre-defined time interval (called as time buffers) ahead of the committed due date to the customer. This procedure would ensure that only relevant customer orders are allowed to be processed within the shop floor thereby controlling the overall quantum of work (WIP) within production. Due to controlled release of work, flow of work within the shop floor would substantially improve, as there are much shorter queues in front of work centres than before, thereby resulting in shorter production lead times (due to lesser waiting times). In addition, introducing a global priority system to manage the customer orders within the shop floor would further better the flow and improve on time supply performance. When flow is enabled in production, it is feasible to respond to customers with much more agility – reliability in supply performance shoots up (to satisfy B2B customers such as the OE’s) at the same time due to shortened lead times it is feasible to maintain high availability of needed parts for the replacement market.

Globally, and in India, several manufacturing companies have re-designed their operation strategies and have implemented the above concept resulting in significant improvement to their performance in terms of accomplishing 99 per cent DDP, reducing WIP & production lead times by 50 per cent. It is important to note that, implementation of these concepts does not warrant any change in the existing plant layout and therefore requires no further investment or efforts. TOC concepts being counter intuitive to implement, however mandates that the company pay due attention to the involvement and agreement from the key stake holders within the company for successful implementation.