Swiss Business Under Threat V

One Swiss Franc is currently worth more than one Dollar. The Euro has also significantly weakened vs. the Franc. The Swiss economy is dependent on exports that must now be under threat due to the high price of Swiss goods. If Swiss industry does not find a good solution the strong economy there will suffer greatly. How quickly can Swiss industry react successfully? Since I started this series the Swiss Franc has strengthened making the job even more difficult! (Fortunately imported materials don't increase in price the same way. The short article below counters common practice - the solution to cost problems is to work harder and reduce cost (lay off people).

Be Smart, Don’t Work so Hard!

Swiss industry should refrain from an attempt to cause everyone to work harder. As we will see below, that cannot work. Most of the organisation must be idle some of the time in order to get the most from the constraining or limiting factor. The opportunity for Swiss industry is most factories around the World act as though a resource standing idleis a major waste. The consequence for them is more WIP, slower processes, lost capacity and compromised reliability. The opportunity for Swiss industry is to understand their production system and act to get the most from it in the most effective (short reliable lead times) way.
Managers may be tempted to cause all their resources to work as hard as they can. “A resource standing idle is a major waste!” An earlier post discussed the need to NOT waste the limiting factors capacity. We saw that it is essential to et the most out of the limiting factor by helping it perform to its capacity – even if this means other resources must sub-optimize. It also means other resources should not produce more than the capacity of the constraint. Producing more than the limiting factor can handle leads to more and more work in process and lead-times that continually increase. The factory can jam up with inventory.
Someone might come up with the idea we should reduce capacities of all other resources (those that are currently not limiting) to be as close as possible to the constraints capacity. In this way capacities are balanced and we can produce to the maximum of the constraint at the lowest possible cost. This seems to make sense, but is it wise?
Balance capacity is difficult to achieve – generally every machine in a production line has a different capacity. However, factories can ‘improve’ by allocating manpower to approach a balanced capacity situation. Lets assume our factory has been able to balance their production line – every resource in the process has the same capacity. Will this be a winning formula?
A question: Is the capacity of a machine (resource) 100? You know that the capability of a machine or resource is not constant. All sorts of things can happen to cause it to produce more or less than its rated capacity. Fluctuations in capability will happen at every stage of the production process. These fluctuations are not coordinated – they are more or less randomly distributed through time and across machines. Machine set-ups are dependent events, but they happen in sequence. To produce as much as possible such a system (all units have the same capacity) must have a considerable amount of work in process – otherwise capacity will be lost. A resource cannot produce without material.
A capacity balanced line must not only have inventory in the process, but it also needs the right inventory in order to produce what the market needs. Such a balanced line is a high risk for reliability, and because it needs inventory in front of every machine it contains a lot of WIP – or it loses capacity when necessary materials are missing. The more WIP in the system, the longer is lead-time, the less the higher is risk of lost capacity. A balanced capacity line is not really viable.
Lets look at it in a different way. Imagine a simple production line with six production steps. Every unit of these six has the same capacity. We will, in a thought process, attempt to produce at 100% of capacity at unit 4. If we are able to do that we can then try to do the same for the complete line.

We want to make sure unit 4 can produce all the time. As long as units 1, 2 and 3 supply unit 4 everything is OK. But, now there is a problem at unit 2 – the machine is defective and must be repaired. As soon as it is stopped unit 4 must also stop – it has no material to work on. *remember, every unit has the same capacity – so at a constant production rate no inventory buffer can be built.
It is apparent that we must provide some inventory buffer for unit 4 so that it can continue to work while machine 2 (or 3, or 1) is down. So lets give it an inventory buffer to use in such situations.
The buffer is in place and all is working smoothly – until this time unit 1 breaks down. Not a problem – machine 4 consumes from its buffer until machine 1 is repaired. The repair is complete and all is running smoothly again.
BUT, now the buffer needs to be replenished. We are stuck. Since all capacities are equal the buffer cannot be rebuilt ever. We need excess capacity at units 1,2 and 3 to be able to rebuild the buffer. Clearly a balanced line cannot work – capacity will be lost if a line is balanced.
The solution is simple – all other units need some excess capacity to replenish the buffer in front of the chosen machine. But how much excess is needed? If we have 5% excess at all other machines, then a 1-hour breakdown requires 20 hours to refill the buffer. The question you need to answer is the length of time of breakdowns you want to protect and the frequency with which they occur. 5% protective capacity is probably too little.
Tactics that common practice forbids can very often achieve a competitive advantage. What was described above is definitely not common practice. Many senior managers want to make sure their people are always working 100% - waste must be avoided. Workers think in exactly the same way – an idle worker is likely to be laid off. Many times workers of factory supervisors go looking for work if it looks like they will run out.
The combination ensures that most factories waste their limiting factor’s capacity and cause long lead-times and unreliability through excessive WIP. This is the common practice and it is extremely difficult to change because its part of culture. Those that do change gain a significant advantage that will last as long as the common practice lasts.
A last question for managers. Imagine you are a worker in your company (not a manager). The company, to try to compete, might lay you off. What will be your reaction? Will you be fully engaged and help the company win - despite the currency problems? Or will you do things to protect your position - make yourself indispensable? I suspect that a company that lays off creates a less effective workforce - one that is always looking over its shoulder. Maybe the solution must be in greater effectiveness - in production, new product development, sales etc.