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Material Flow Systems Are Key
to Manufacturing Turnarounds

By J.W. Henry Watson, principal, and Charles Standard, senior consultant, Caledonia Group Inc.

In early November, the Federal Reserve lowered the discount rate for the third time since September 11 and the tenth time since the economy began slowing more than a year ago. Because the first nine rate cuts failed to stem the economy's slide, can even Alan Greenspan be betting that the latest move, which puts the rate at its lowest point in 40 years, will do the trick?

    Indeed, more than most economic downturns, this one is likely to end as the result of thousands of companies turning around their operations. What will be the basis of successful turnarounds in manufacturing? To paraphrase an old adage, perhaps "what's good for Ford is good for the country."

    Under the new leadership of William Ford and the top people he's chosen, the automaker has increased its commitment to implementing the Ford Production System. This is Ford's version of the Toyota Production System, which over the last decade has become known generally as lean manufacturing or lean production.

    That Toyota has continued to thrive during the current economic slowdown, racking up higher profits and market share, is a fact that Ford and legions of other companies are unlikely to overlook. In addition, General Motors, which has had greater success in implementing lean thinking, has pulled decisively ahead of Ford in quality and productivity.

    Lean manufacturing seeks to minimize unnecessary time, materials and effort throughout the entire value chain, from raw materials to the ultimate customer. It is both a new way of thinking about production and a distinct system of production in its own right. When implemented properly, it can produce astonishing results.

    Typically, lean manufacturing reduces inventory by 30 to 50 percent, lead times by 40 to 75 percent and floor space requirements by 30 to 50 percent. At the same time, quality improves by 25 to 50 percent, and productivity increases 30 to 50 percent.

Systematic Implementation

Lean manufacturing is often characterized inaccurately as simply a collection of best practices, and countless books and articles explain how to use commonly known lean techniques. This has expanded the general awareness, practices and potential benefits of lean manufacturing, but it has also led to piecemeal application of its tools and techniques, which generally provides little or no lasting benefit.

    Lean manufacturing is not a new concept. Ford has been trying with various degrees of commitment to implement lean thinking for about 20 years. That the company has not yet succeeded suggests that while the direction is obvious, the path is less so.

    A key to finding a successful path is the systematic implementation of all aspects of a lean production system. This requires a commitment from top management down to personnel on the plant floor. However, a commitment by top management and the systematic implementation of all pertinent lean practices are often lacking, especially in turnaround situations. It is easy to slip into a "firefighting" mode, which simply does not create sustainable improvement.

    Many companies leave out critical elements of lean thinking. The most glaring omission is often lean materials management, which includes implementing pull systems, both internally and externally. External pull systems should involve both suppliers and customers, and schedules need to be stabilized.

    A study by R.R. Fullerton and C.S. McWatters that appeared earlier this year in the Journal of Operations Management (Vol. 19) attempted to determine which aspects of lean manufacturing were responsible for business performance improvement at 447 U.S. manufacturers. By analyzing the practices and performance of these companies, the study found that two unique lean practices--just-in-time (JIT) purchasing and pull system implementation--were significantly related to 10 of the 15 performance measures used in the study. Both are key to material flow and production planning.

    But corporate renewal professionals might counter that the typical company they see does not have bills of material worthy of the name. The company contends that the bills will be fixed "soon," but soon never arrives.

    The companies that turnaround professionals are called on to help often take physical inventories daily because they don't know what they've made, shipped or scrapped. They think progress on inventory accuracy is getting to 80 percent, day over day. A whole team is devoted to expediting incoming materials to address unanticipated stockouts.

    In addition, turnaround professionals often find that material and capacity planning are unreliable because everything changes by mid-morning to deal with screaming customers whose production processes are being shut down by quality spills and late deliveries. Equipment maintenance stopped months ago and uptime charts look like this year's Nasdaq index. Then there are the product launches that someone must have thought would happen magically.

    Lean material systems are not only better for supporting world-class companies, but they also yield major benefits rapidly when deployed properly in out-of-control situations--and they do not require huge capital expenditures or massive information systems implementation efforts.

Fundamental Changes

Lean material systems can generally be implemented in phases. Major improvements are soon evident, and the systems change the fundamental way a business works for the better. But where does one start?

    As a first step, schedules must be stabilized. One of the primary material management principles of lean thinking is to level schedules. Last-minute schedule changes must be prohibited, and major moves among plants or from one production line to another should not be allowed.

    Materials must flow smoothly from the supplier to the customer. Material handling should be eliminated as much as possible throughout the operation. Schedules should meet shipping plans rather than support large batches, and they should reflect proven capacity, not some illusion of capabilities. Speed of material flow is very important in such a system, and preparing a value stream map is extremely useful in implementing these changes.

    At the same time, data must be accurate. This usually means eliminating backflushing, the practice of relieving inventory through bills of material based on finished goods production. Backflushing is often at the root of inventory accuracy problems.

    Tracking of work-in-process (WIP) inventory on corporate information systems should be eliminated. In its place a system that uses pull signals to replenish raw materials should be instituted. This should be done in the context of simple blanket purchase orders, and the practice of triple-matching purchase orders, receivers and invoices should be eliminated. Payment should be triggered by receipt of the receiver.

    Problem solving teams comprised of people from the floor who actually make the transactions should be established. Every possible step in their usual activities should be eliminated to streamline processes, and the root causes of repeated mistakes should be identified and eliminated.

    This floor-based effort usually uncovers numerous setup errors in the information system. The idea that transactions are cheap because they are computer-based must be banished. The probability of success declines exponentially as transaction volume rises--high transaction volumes create an impenetrable information fog.

    A company should move aggressively to relieve inventory directly, based on pull system signals, or it should issue materials from controlled stock-keeping locations. Typically this effort reduces the number of transactions on the information system by more than an order of magnitude--by more than 90 percent. Stockouts will be eliminated as discipline is imposed on a much simpler system.

    Doing all of this does not create a simpler system; it creates a fundamentally different system. Traditional material resource planning (MRP), or push materials systems, manage production based on forecasts of production capability and demand, as well as on orders. Production is initiated by the forecast or order and is independent of the situation in the plant. As a result, inventory--and especially WIP--can fluctuate wildly as both production throughput and demand deviate from planned levels.

    WIP and finished goods inventories build up in specific areas as a result of forecast errors and production bottlenecks. At the same time, there are spot shortages of WIP in many operations and missed customer deliveries. Equipment is alternatively over loaded and starved, driving costs through the roof.

    This is how that all-too-common paradox of inventory bloat accompanied by production problems and declining shipments comes about. This bleak scenario happens whenever there is variability in demand, productive capability or lead time. If one does not get you, another will. Any system that builds to forecast rather than to demand is a system that will fail.

Controlling Inventory

Pull systems are designed to hold raw material, WIP and finished goods inventory stable by adjusting throughput. If the next machine in a process is broken, production should be stopped when a predetermined level of WIP is reached. Reserve capacity should be maintained to support recoveries and to deal with unanticipated downtime or temporary demand increases.

    WIP levels should be set to protect against disruptions that occur in manufacturing plants. Some maintain that inventory should be lowered so that weaknesses in the system can be exposed more easily. But with a passel of furious customers screaming at the door, this approach has limited appeal.

    Instead, the flow through the system should be stabilized, the weaknesses identified and eliminated, and then inventory should be lowered. But there is a paradox in this. Inventory falls, often dramatically, as a result of implementing lean materials management, despite the provision of significant inventory to protect against process interruptions. This results from controlling inventory rather than allowing it to be determined by an unstable system.

    Because of the stabilizing effects on production flow and other benefits, pull production control is an integral part of an overall lean manufacturing system. It may seem reasonable, therefore, to expect pull systems to be used frequently and implemented early in a lean manufacturing transformation or turnaround situations. However, empirical evidence does not support this.

    Pull systems are often among the last lean practices implemented. The authors have encountered more resistance to pull implementations than to any other aspect of lean turnaround efforts. Furthermore, even after pull systems are implemented and create major benefits, most management teams stubbornly attribute the gains to other causes.

    A study by B.B. Flynn, S. Sakakibara and R.G. Schroeder, which was published in the Academy of Management Journal (Vol. 38, No. 5, 1995), found that pull systems were the least frequently used of 12 essential lean practices. A 1997 study conducted by J.A. Brox and C. Fader and published in the Journal of Operations Management (Vol. 15) found that pull systems were used only occasionally, ranking number 14 out of 17 selected lean practices.

    A 1999 study by RE. White, J.N. Pearson and J.R. Wilson, which was published in Management Science (Vol. 45, No. 1), found that pull system implementation ranked number eight out of 10 common lean practices. A 2000 study by J.L. Callen, C. Fader and I. Krinsky, which was published in the International Journal of Production Economics (Vol. 63), found that pull systems were used less than half the time, even among companies that claimed to have implemented lean practices on a global basis.

Resistance to Pull Systems

Perhaps one reason manufacturing managers are reluctant to implement pull systems is that they lack a good conceptual understanding of what such a system is. Fundamentally, a pull system is a consumption-based replenishment system.

    Consider an automatic icemaker, which operates as a pull system. In its steady state, the icemaker has a finite buffer of ice cubes waiting in a tray. Eventually, as ice cubes are consumed, the quantity in the buffer falls below a threshold, a mechanical sensing arm detects this change and more ice cubes are produced to replenish the buffer.

    An icemaker that operated on a push principle would work from a forecast that predicted when and how many ice cubes would be consumed throughout the day. The icemaker would then be set up to produce ice cubes according to this schedule. In theory this should work well, but in practice, the system would be inherently inflexible. If ice cube consumption deviated from the predicted pattern for any reason--dinner guests or cold weather, for example--the push system might experience a stockout or an overabundance of ice cubes.

    This occurs with some types of enterprise resource planning (ERP) systems in manufacturing companies. The push approach to production control allows stockouts of critical items and production overruns of other items, which disrupt workflows and cause congestion in the factory. Often, highly capable materials managers and production supervisors are forced to develop off-line (pull-type) procedures to work around these dysfunctional systems.

    Recently, executives at two of America's largest private equity funds said that failed ERP implementation is the primary reason for poor performance in their portfolio manufacturing companies. Such systems can support pull scheduling and can be major value enhancers when they do so. How to achieve this is beyond the scope of this article.

    Another reason for the lack of pull system implementation is that it requires managers to conceive of their operations in a totally new way. The profitability of the overall operation must take precedence over the profitability of individual departments or processes.

    For example, if a downstream process produced parts more slowly than normal, perhaps due to a maintenance problem, it would not consume components at the anticipated rate. This means that replenishment signals would arrive at an upstream process less frequently than expected. Fewer replenishment signals would lower production output requirements at the upstream process. This, in turn, would mean less absorbed overhead for the upstream department, and temporary layoffs or underutilized hourly labor would result.

    If the upstream process were operating under a push system, it would continue to produce parts at the normal rate, without regard for disruptions in the downstream operation. This would allow the upstream department to achieve its production and financial targets at the expense of increased congestion, excessive accumulation of WIP and longer cycle times. These factors increase production costs.

    Adopting pull production control requires managers to look beyond the efficiency of a single process or department and make decisions that are more profitable for the operation as a whole.

    Another important reason for the resistance to implementing pull systems in the American manufacturing community is that there is widespread conflicting information about when, how, and even if such systems should be implemented. For example, some researchers provide a litany of requisite improvements that must be in place before a pull system can be attempted: elimination of waste, improved process design, standardized operations, level production schedules, short setup times, short lead times, a smooth production schedule, small-lot production, low inventory, excellent quality, and a host of others.

    These "prerequisites" are excellent general recommendations for operations improvement, and many offer significant benefits in their own right. Nevertheless, there is nothing about any of these improvements that uniquely prepares a factory for pull system implementation. Those who insist on these as precursors to such a system are discouraging manufacturing managers from pursuing pull systems at all.

    One benefit from implementing a well-designed pull system is the sharp reduction in stockouts. Without stockouts, production flows are much smoother, and inventory and lead times can be reduced accordingly. These instantaneous benefits of pull system implementation are realized regardless of other operational issues that would otherwise hinder performance.

    One of the greatest strengths of pull production control is its robustness and insensitivity to implementation errors and unsatisfied assumptions. Pull systems work well in the presence of variability and uncertainty, and they provide many of the same benefits that are associated with other more general operational improvements. Implementing pull production control can help a manufacturer to realize those benefits while other improvements are pursued at the same time.


There is nearly universal recognition that lean thinking is a requirement for long-term competitive survival in manufacturing. Indeed, for many companies, skill at lean manufacturing is becoming the one enduring and sustainable competitive advantage. As a result, any operational turnaround plan that does not make systematic implementation of lean manufacturing a core element is unlikely to succeed in creating stakeholder value.

    A successful turnaround begins with a plan for systematic implementation of lean manufacturing across all aspects of operations. The turnaround plan must put immediate emphasis on lean materials flow, including such factors as pull systems, leveling of schedules, and accurate control of inventory, including WIP. A company that follows this plan will see immediate operating improvements.

J.W. Henry (Harry) Watson is the managing principal of Caledonia Group Inc., a Detroit-based management consulting firm that specializes in lean assessments, implementing lean systems, and operating turnarounds.
Charles Standard is a senior consultant at Caledonia Group and the author of Running Today's Factory: A Proven Strategy for Lean Manufacturing, which won the Shingo Foundation Prize for excellence in manufacturing research in 2000.
December 2001
  Copyright 2011 - Caledonia Group Inc.