SURVEY: MANUFACTURING

No factory is an island
Jun 18th 1998
From The Economist print edition

Multi-coloured widgets to go—now!, says the market

MANUFACTURING used to be pretty simple. The factory manager or
the production director rarely had to think about suppliers or
customers. All he did was to make sure that his machinery was
producing widgets at the maximum hourly rate. Once he had
worked out how to stick to that “standard rate” of production, he
could sit back and relax. Customer needs? Delivery times? Efficient
purchasing? That was what the purchasing department and the
sales department were there for. Piles of inventory lying around,
both raw materials and finished goods? Not his problem.

Now it is. The 1980s were the decade of lean production and
right-first-time quality management. In the 1990s the game has
grown even tougher. Customers are more and more demanding.
They increasingly want the basic product to be enhanced by some
individual variation, or some special service. Companies sweat to
keep up with their demands, in terms both of the actual products
and of the way they are delivered. A world-wide survey of over
900 manufacturing companies by Deloitte Consulting has found
that, though the companies’ products seemed better than ever
before, customer dissatisfaction has kept on growing.

The solution lies in “mass customisation”. This means making
basically similar products in hundreds, even thousands, of
variations to suit specific customers’ needs. Some customers want
deliveries in small lots at short order. Others will take bigger
deliveries less frequently. Either way, of course, they want it at
mass-production low prices. The only way to have any chance of
satisfying them is to spread lean-production techniques
throughout the whole company, not just the factory.

The factory no longer stands aloof from the grubby business of
haggling with suppliers and customers. “About 15 years ago,”
recalls Dale Marco, a senior consultant at A.T. Kearney, a Chicago
firm that specialises in manufacturing practice, “we began to see
you couldn’t really separate physical distribution and
manufacturing. From there came the recognition that you had to
see them both as part of a supply chain.”

The new way of doing things connects the factory to its suppliers
upstream and its customers downstream. Daniel Jones and James
Womack, two of the authors of “The Machine that Changed the
World”, returned two years ago to lean techniques in a second
book, called “Lean Thinking” (Simon & Schuster, £16.99 or $26),
which applies the idea to the whole company. They examined, for
instance, the various processes required to put a can of coke on
the shelf of Tesco, a British supermarket group: the “value chain”,
as they called it.

A team of researchers from Cardiff Business School found that the
chain of actions required to make the can—starting at the bauxite
mine in Australia, and passing through the various smelting and
rolling processes to the manufacture of the can itself, printing its
label, filling it with the cola drink and getting it into somebody’s
refrigerator—took no less than 319 days. Making the can took far
longer than making the coke. But, even so, only three hours of
that time was spent in doing something that actually added value.
The rest was spent in storage and transport; as many as 14
storage lots and warehouses were involved.

The blame for this apparently wasteful way of doing things lies
with the huge and inflexible machinery needed for long production
runs, in order to capture the economies of scale. This is the
so-called “batch and queue” system common to most forms of
manufacturing. Unfortunately, it requires the piling up of large
buffer stocks of raw materials and component parts to make sure
the machinery can be continuously fed. Each of the seven main
links in the cola-bottling chain naturally seeks to maximise its own
return on capital.

The aim of the Tesco analysis was to see whether some of these
economies of scale, at one or another of those seven links, was
outweighed by the waste involved in all the handling and storing
required. Since the book came out, Mr Jones says that Tesco has
made some progress in reorganising its shipments so as to cut out
wasted time. “The way to do this”, he says, “is not to start at the
raw-material end but to work your way up the chain from the
store.” In time, he suggests, some of the suppliers may use smaller
and cheaper machines, in themselves less economical than
mass-production ones, which may nevertheless cut the cost of
the total operation.

The magic offered by software

As companies tear down the walls between the different parts of
their work, they are realising that the various parts need to share
the same flow of information. Hence the explosion in manufacturing
software programs which let them integrate their financial data
with payrolls, manufacturing and inventory records, purchasing
information and the rest of it. This is known as Enterprise Resource
Planning, ERP: the magic tool-kit needed to spread lean thinking
throughout a company. Would-be lean companies, from Toyota to
the latest recruit, are scrambling to have ERPs installed on their
personal-computer systems. The software comes from companies
such as SAP, the German leader in the field, Baan, PeopleSoft and
Oracle.

An ERP is supposed to take into account all sorts of numbers, so
that a company can know how efficiently it is using its various
resources—people, money, machines—to satisfy its customers. If
all aspects of the company are recorded in the same software, it
is easier to keep the whole manufacturing operation in balance and
to keep work flowing smoothly through the factory. Bottlenecks
and imbalances show up quickly, and can be put right.

Needless to say, for every dollar a company spends with a
software company to buy its ERP program, it finds itself paying
another six to a management consultancy to adapt the program
for its factories. No wonder these consultancies speak of ERP in
reverent tones. But putting all the company’s information into one
giant software program is not without risks. “It’s like pouring
concrete over your business plan,” says one now-sceptical expert,
David Upton of Harvard Business School.

ERPs may or may not be the answer for companies that want to
become leaner and nimbler. But there are other means of improving
the way they buy their components and their raw materials. The
Internet is giving a huge boost to the process. By using the
Internet, or various private extranet systems based on it,
companies can deal more directly with their suppliers to improve
deliveries, stock levels, designs and lead times. Even better, they
can use the networks to get lower prices by holding electronic
auctions for the supply of basic components.

Leading the way is a system known as Automotive Network
Exchange, which America’s Big Three car companies started as a
pilot scheme in January and are due to put into operation with
most of their suppliers this summer. Next year they plan to extend
it to Europe. Any company wishing to sell to the Big Three will
then have to get online, and be ready to settle down to some
serious electronic bargaining. Other industries have happily taken
up the idea. Boeing already runs its spares business through an
extranet. General Electric has one of the biggest systems in the
whole of manufacturing for dealing with its suppliers.

All this should produce huge benefits. It will make it easier and
swifter for the assembly-line companies and their suppliers to work
in partnership. Engineering designs on the web will save time and
money by cutting out a whole series of meetings and
consultations. By turning many car parts into commodities that
can be bought and sold at auction, the web will make the market
more open, competition keener and prices lower. The old ways of
buying and selling were time-consuming and expensive. The new
way opens the door to the “mass customisation” that lean
producers now dream of.

None of this will make a byte’s worth of difference, of course,
unless manufacturers are nimble enough to seize the opportunities
technology is offering them. After years of downsizing, rightsizing
and all the rest of it, this might seem just another pointless
redrawing of organisational charts. Not at all, Mr Schonberger
vigorously replies.

He maintains that the essential thing is for everybody in a
company to understand how a business runs itself successfully.
Out, he says, with management by edict and by procedures: that
is just a way for bosses to tell everyone below them what to do.
In the new century, Mr Schonberger wants manufacturing to be a
process in which the only objective is to meet the customers’
needs, in which all the assorted kinds of workers feel involved in
the task, and in which they are able to make use of an array of
facts and data supplied on electronic platters.

So how does a company get this way? By organising production
around customers, not the other way round. Sometimes this can
mean moving halfway across the world. Not only do companies
have to chase cheap labour for the simpler parts of their new
global supply chains; they also have to bow to the customers’
demand that they provide product and service on the customers’
doorsteps. The next two articles look at what this is likely to mean
in the next stage of the manufacturing story.