How to Tailor Production to Demand

January 9, 2008

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In tweaking production to optimize demand-driven manufacturing, you minimize suffering from excessive inventory costs. When you're responding to the market demands as accurately and precisely as possible, you'll worry less about potential disruptions that could be heading our way.

Even after years in business, manufacturers are still trying to match supply to demand more effectively. After all, there always seems to be room for improvement. To that end, a recent Aberdeen Group study, entitled Demand Driven Manufacturing, focuses on synchronizing demand with production.

Demand-driven manufacturing (DDM) involves a synchronized, closed loop between customer orders, production scheduling and manufacturing execution — "all while simultaneously coordinating the flow of materials across the supply chain," as report author Matthew Littlefield puts it.

After considering information from 300 manufacturing professionals, Aberdeen analysts found that manufacturers considered "best-in-class" (BIC) were characterized by three key performance indicators (KPIs):

On-time delivery rate of 97 percent, compared with 75 percent for laggards; Four days of safety stock in finished goods inventory, compared with 32 days for laggards; and Nine days of lead time, compared with 75 days for laggards.

Laggards are those companies populating the group with the bottom 30 percent of the considered KPIs.

Aberdeen's analysis notes that the difference between the BIC group and the laggards is not so much a question of what the manufacturers are doing but how they are doing it. This is apparent by comparing additional process characteristics.

For instance, 62 percent of the BIC group standardizes inventory replenishment across the enterprise; only 31 percent (half) of the laggards do so. About 48 percent of the BIC group is available to make process promises across the enterprise. In contrast, only 25 percent of laggards can do this.

The difference is more marked when considering the capability to make process promises. Here, we see that only 41 percent reported that they have the ability or are capable of making the process promise across the enterprise, but only 10 percent of the laggards can do so.

Moreover, 37 percent of the BIC respondents use advanced planning and scheduling (APS) software across the enterprise. Only 15 percent of the laggards employ this software.

Whereas some 42 percent of the BIC group prioritizes customers and uses "tiering" processes across the enterprise, only 26 percent of the laggards operate this way.

Interestingly, there were no differences among any of the manufacturers when asked about integrating and using manufacturing process and customer order data as actionable intelligence. However, in 41 percent of BIC group, the respondents said they have automated gathering of manufacturing performance data. Only 32 percent of the laggards do so.

As for organizational differences, Aberdeen's research shows that 68 percent of executives sponsor DDM initiatives, yet only 37 percent of laggards make this effort. And nearly two-thirds (63 percent) of the BIC companies have established cross-functional teams to improve DDM, whereas only 41 percent of the laggards rely on such teams.

When it comes to investment in technology enablers, we see that 28 percent of the BIC group relies on lean manufacturing software but only 9 percent of the laggards have and use this software.

The BIC group was far and away more likely to use lean manufacturing technology enablers such as these:

Heijunka, a system of production smoothing designed to achieve a more even and consistent flow of work; Takt time, the maximum time allowed to produce a product in to meet demand; Work-in-progress-limiting tools; and Lot sizing.

So, to achieve BIC performance in demand-driven manufacturing, companies must do the following:

Aggregate automatically collected data from suppliers, customers and the shop floor and utilize as actionable intelligence; Leverage production planning and scheduling solutions that consider real-time constraints, including bottlenecks, materials and labor, among other things; and Integrate enterprise resource planning (ERP), manufacturing execution systems (MES) and the supply chain by layering advanced planning and scheduling (APS) and lean manufacturing to synchronize production with demand while streamlining material flow.

As Littlefield puts it, "Creating such a network very often requires mature Lean initiatives, interoperating across disparate business processes and technologies, and, not surprisingly, the daring of visionary executives."

Resources

Demand Driven Manufacturing by Matthew Littlefield The Aberdeen Group, November 2007

The Power of Demand Driven Manufacturing in a Down Economy FactoryLogic, June 2003

Start with Demand by John Goff CFO Magazine, Jan. 11, 2005

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