Capacity hunt program reveals huge hidden capacity

Copyrights©2013CVMark.AllRightsReserved.
Capacity Hunt Program
Reveals Huge Hidden Capacity
Aug 2013
Version 2.0

Reference
• This presentation is a sequel to following
presentations and is recommended to be read
after one has gone through them.
– What is Operations?
– Take the Capacity Hunt Challenge
24-08-2013 2

The Challenge
• Identify hidden capacity in less than 30 hours
• Reveal Hidden Capacity in less than a Lead
Time
• Directly Link Operational Improvement to
Revenues
24-08-2013 3

Ambience
• First Phone Call mentions that the Organization is
struggling to be Operationally Profit
• Age of Organization: 30 years
• It had undertaken several improvement programs
but did not get desired results.
• It also spent millions of dollars into capital
investment, the ROI for which could never be
justified.
24-08-2013 4

Symptoms
High
Inventory &
WIP
Firefighting
and Chaos
Heavy
Overtime
Poor On Time
Deliveries
Poor
Operational
Profit
Loosing
Market Share
High Cost
Base
Poor
Productivity
Poor Yield
Breakdowns
Poor
Utilization of
Machines
24-08-2013 5

Methodology
• The team presents operational performance
• Sales team confirms that indeed demand for
some products is higher than supply
• The team
– Follows the trail inside the factory to Identify the ‘one
thing’ that Limits the Capacity
– Identifies and Calibrates the Hidden Capacity
– Draws up action plan to Activate the Hidden capacity
– Agrees on a mechanism to harness Hidden capacity
All in less than 30 hours24-08-2013 6

First Observation
• Monthly Throughput = 130 (normalized units)
• Throughput as per plan= 110
• Throughput actually sold < 100
24-08-2013 7

Step1- Prune the Long Tail
1% 100%10% 50%
# Products
Opportunity
A
B
Long Tail
Sales
24-08-2013 8

Step1- Prune the Long Tail
• Overall 1000 SKUs
• The list has not been revised for over 20 years
• Reduced target SKUs to 700
• Results:
– Lower Inventory + WIP (Work in Progress)
– Less Change-overs (setups)
– Uncluttered warehouse and shopfloor
– Increase in Throughput (Capacity) = 15%
– Increase in Revenue for the month = 12%
24-08-2013 9

Step-2 Reclassification of SKUs
• Old Practice: SKUs which were infrequently
supplied or suppliers were willing to wait
longer, were stocked (Made to Stock),
although there was no need to stock them.
• Old Practice: SKUs which were in regular
demand and had benefit of aggregation were
made to order (MTO) resulting in
changeovers, delays and expediting
24-08-2013 10

Step-2 Demand Based Classification
MTO
MTS
Volume
DemandVariability
High
High
Low
24-08-2013 11

Step-2 Reclassification of SKUs
• A large number of MTS converted into MTO
and Some MTOs converted into MTS
– Reduced Inventory
– Released Money
– Reduced Clutter
– Increased Service Quality where matters
• Increase in Throughput (Capacity) = 10%
• Increase in Revenue = 8%
24-08-2013 12

Step-3 Stop Overproduction
• Old Practice: In order to keep all the staff always
engaged and keep utilization of plant high, several
batches where produced even when they were not
required in near term
• Now: Strict Disciplines imposed and batches were
produced only as per consumption from stocks (MTS)
and confirmed sales order (MTO). No other system was
allowed to create orders for production.
– WIP and Inventory Reduced
– Lead time reduced by 20%
– Increase in Throughput (Capacity) by 12%
– Increase in Revenue by 8%
24-08-2013 13

Made to Stock Products
SKU A
FG StockWIP in shop floor (Plant)
Supply to the
next node
from Stock
Replenishment order to
fill the stock
RM
24-08-2013 14

Made to Order Products
7 56 6
WIP in shop floor (Plant)
45
Confirmed
Orders with
Due Date 98
RM
Customer Order Due Date
Order 9A12-004 20-Apr-2012
Order 9A12-005 30 Apr-2012
Order 9A12-006 02-May-2012
Order 9A12-007 08-May-2012
Order 9A12-008 15-May-2012
Order 9A12-009 30-May-2012
Market (Customers)
Customer
Order List
24-08-2013 15

Step-4 Follow Single Priority System
• Too many urgencies from too many directions
confuse the staff in the plant with too many
priority changes
• Effect:
– Chaos, firefighting, uncontrolled operations, 24x7
operations, overtime, high expediting,
obsolescence
– People work on orders that are not required now
delaying orders that are required now.
24-08-2013 16

Poor Priorities cause Mismatches
RM Stock WIP in shop floor
A
B B BA
A
A
A
A
D
D
D D
C C
C
C
B
Stock Situation in Ware House
SKU B
SKU C
SKU D
SKU A
Wastage of Capacity: Items already
full stocked in warehouse are being
produced
Late Deliveries: Items (A, C) needed
urgently queue behind those (B,
D) not required NOW.
24-08-2013 17

FG StockWIP in shop floor (Plant)RM
Waiting for
packing material,
120days
Waiting for
change parts,
70days
Waiting for repair
of coating
machine, 70 days
Waiting for
License, 210 days
Waiting for
retest, 275 days
Waiting for
clearance from
delivery team,
40days
Sticking problem;
waiting for product
specialist, 140 days
24-08-2013 18

Step-4 Follow Single Priority System
• Old Practice: There were multiple priorities
leading batches left half way, the real urgent
batches were left waiting
• Now: Single Priority System led to delivering the
orders that were required urgently by customers.
– WIP and inventory reduced
– Lead Time reduced by 20%
– Increase in Cash Revenue for the month = 15%
24-08-2013 19

FG
FG
FG Stock
FG
FG
FG Stock
Out
Less Urgent More Urgent
Basis of Single Priority System- MTS
24-08-2013 20

Time Elapsed Time left
Due
Date
Time
Elapsed
Time left
Time left
Time Elapsed
Time
left More
Urgent
Orders
Less
Urgent
Orders
Order-A
Order-B
Order-C
Order-D
Time to deliver Order= 100%
Basis of Single Priority System- MTO
24-08-2013 21

RED
YELLOW
GREEN
MTS Products: Lower the Stock in Hand, Higher the Urgency (Priority)
DesiredSystem
StockLevel(100%)
RED
GREEN
Less Stock in
Hand- Urgent
More Stock in Hand-
Less Urgent
MTS-
Priority
Grading
MTS-
Product1
MTS-
Product2
A Simple yet Effective Priority System
24-08-2013 22

Due
Date
GREENMTO-
Priority
Grading
YELLOW RED
Start
Date
MTO Products: Shorter the Time Left for Due Date, Higher the Urgency (Priority)
Lead Time 100%
Time Elapsed
Most
Urgent
Time
Elapsed
Less Urgent
MTO-
ORDER1
Urgent
MTO-
ORDER2
Less Urgent
A Simple yet Effective Priority System
24-08-2013 23

Process Order # Urgency Product
N002543 Endangered Cetrizine 10mg
N002570 Endangered Cetrizine 10mg
N002556 Endangered Omeprazole 20mg
N002577 Endangered Omeprazole 20mg
N002523 Endangered Glimepiride 4mg
N002554 Glimepiride 4mg
N002588 Glimepride 4mg
N002511 Simvastatin 80mg
N002545 Cetrizine 10mg
N002590 Cetrizine 5mg
N002623 Omeprazole 40mg
N002643 Omeprazole 40mg
N002594 Glimepiride 4mg
24-08-2013 24
Visualization of Priorities of
Work Orders

Step-5 Management By Constraint
• Old Practice: The organization ran a large number
of improvement projects which led to bad
multitasking and thinning out of organization’s
bandwidth. In fact, hardly any improvement
project delivered higher revenue.
• Now: The Constraint Resource was identified and
organizational attention was increased on this.
– Improved utilization of constraint by 20%
– Lead Time reduction by 25%
– Increase in Revenue = 23%
24-08-2013 25

Too often we chase too many
techniques
LEAN
SIX
SIGMA
BPR
BSC
ABC
TQM
OUT
SOURCING
AUTOMATION
DIGITIZATION
QBD
TPM
TPS
SQC
AGILE
KANBAN
ERP
MRP
24-08-2013 26

Complexity of improvement
• Take an example of a plant:
– 500 resources
– Involved in 100s activities
– Producing over 1000 SKUs
– 100s open process orders at any time
• At any moment there are 100s of improvement initiatives.
• Managers are bogged down with a long ‘to do list‘ to chase
improvements.
• Actually, management attention (the most critical and costly
resource) is continuously diluted even if you use Pareto Principle.
Q H
PM
S
D
Q H
PM
S
D
Q H
PM
S
D
Q H
PM
S
D
Q H
PM
S
D
Q H
PM
S
D
Q H
PM
S
D
Q
H
P
M
S
D
QH
P M
S
D
Q
H
PM
S
D
Q H
PM
S
D
Q H
PM
S
D
Q
H
PM
S
D
2724-08-2013
D

Too many initiatives dilute
management attention
• Response time of organization becomes sluggish
Number of Improvement projects
ResponseTimetoexecutechange
Brink of Chaos
Chaos
28
• Making improvement in Business System becomes very complex
• As a results failure rate of improvement projects >70%
24-08-2013

Improvement Projects have not lived
upto expectations
Measurement Crore Rupees
Sales 100 110
Material Cost 40 44
Margin 60 66
Operational Expenses 40 47
Operational Profit 20 19
10%
5%
24-08-2013 29

Strategy for Growth
• When there is overwhelming complexity and
chaos, Focusing on the right thing is the right
strategy.
• Focusing mechanism called Theory of
Constraints, TOC ideally suits this need.
• Further, organizations need to improve the
process of improvement itself rather trying to
learn each and every new technique of
improvement.
24-08-2013 30

Re-viewing Complexity
100 mn
units/
month
100 Ton strong Chain
100 units / month capacity chain
24-08-2013 31

Strength of the chain is no stronger than the
weakest link…
Trying to improve each link is not necessary to
improve strength of the chain…
But improving the weakest link by 10% improves the
strength of the whole chain by 10%
24-08-2013 32

Constraint in a Line Flow
Coating
12 hrs
Packing
10hrsRM
1 batch
per 24 hrs
Process Flow for Tablets
Compression
24 hrs
Blending
8 hrs
24-08-2013 33

Focusing on Constraints Improves Financial
Performance Dramatically without Increasing expenses
proportionately
Measurement Crore, Rs
Sales 100 110
Material Cost 40 44
Margin 60 66
Operational Expenses 40 40
Operational Profit 20 26
Sales Up by
10%
Profit Up by
30%
24-08-2013 34

Managing by Constraint
• Identifying Constraint is the first step
• Managing the Constraint requires behavior
change
– Most of the constraints are not bottlenecks
– They are constraints because of the way they are
managed
• Capacity of a plant is the capacity of its people
to see hidden capacity.
24-08-2013 35

Constraint decides the Capacity
• An hour lost at constraint is an hour lost for
the complete line
• Trying to improve anywhere than constraint
does not take the organization any where
• Organization must take decisions to exploit
the constraint
• Just decision is not enough, everybody in the
organization must subordinate to the
constraint.
24-08-2013 36

Baseline
revenue
Before After
In Less than 60 days24-08-2013 37

Results of Capacity Hunt Program
• Hidden Capacity Identified within 24 hrs
• >60% Capacity Revealed in less than 60 days
• Gross Capacity improved by 30% but Revenue
increased by 60%... That’s improving direct
impact of improving operations on Revenue in a
non-linear way.
• ….And More Benefits are still coming in; without
taking too much risk and without costly trade-offs
24-08-2013 38

Remembering the Laws of Operations
• Redefined the definition of Operations:
– It is no more cost reduction, firefighting,
– Nor it is about quality, safety and health.
• Ever Improving Flow is the prime objective
• Have a mechanism to know when not to
produce
• Install a Single Priority System
• Must practice a focused mechanism to
balance flow
24-08-2013 39

Operational Excellence is a Journey
towards achieving Strategic Intent
• There are different strategies for growth, sustainability
and harmony
• Every company has to make a choice
• Consider that the world is only going to be more
complex and chaotic
• A choice, where you can make a difference not by 1%,
nor by 5% but by over 20-30%
• For some organizations Leveraging Operations is
becoming a decisive competitive choice. Why not, if
dramatic improvements can be obtained quickly and
sustained without costly trade-offs and burn-outs.
24-08-2013 40

Reality
• Constraint is not always a resource
–It is often a policy
• Recruitment policy, purchase policy,
maintenance policy, training policy,
CAPEX policy, cost control policy, travel
policy, productivity policy
• Sales, Product Development, Distribution,
HR, Marketing, Finance, Strategy
24-08-2013 41

TOC Steps to
Achieve Continuous + Radical Improvement
Step 0. Identify the Goal of the System/Organization
Step 0.5 Establish a way to measure progress to Goal
Step 1. Identify the system’s constraint.
Step 2. Exploit the system’s constraint.
Step 3. Subordinate everything else to the above decision.
Step 4. Elevate the system’s constraint.
Step 5. If a constraint is broken, go back to Step 1. But don’t
allow inertia to become a constraint.
24-08-2013 42

TOC is an improvement technique
with cyclic progression
Identify
Discover
Decide
Analyze
Subordinate
Synchronize
Elevate
Expand
43
System
Constraint
24-08-2013

The Process of ongoing improvement
Ident
ify
Syste
m
Cons
train
t
Explo
it
Cons
train
t
Subo
rdina
te to
Cons
train
t
Eleva
te
Cons
train
t
Ident
ify
Syste
m
Cons
train
t
Explo
it
Cons
train
t
Subo
rdina
te to
Cons
train
t
Eleva
te
Cons
train
t
Ident
ify
Syste
m
Cons
train
t
Explo
it
Cons
train
t
Subo
rdina
te to
Cons
train
t
Eleva
te
Cons
train
t
Ident
ify
Syste
m
Cons
train
t
Explo
it
Cons
train
t
Subo
rdina
te to
Cons
train
t
Eleva
te
Cons
train
t
Time
Performance
4424-08-2013

The Operating
System
Hesitation to
Improvements
Start
Implementation
Grasping
Problem
Direction
to
Solution
System
Design
Setting
War room
Align
Suppliers Poor
Behavior
Understanding
Business
Identifying
the Core
Improving
Measurement
Purpose
Identifying Weakest link
Leveraging Weakest Link
Setting Operational
Improvement Targets
Blame
Game
Vicious
Cycle
Raw material
Stock outs
Failing in
Purpose
Irrational
Measurement
Leadership
@ work
Right
Behavior
People
Attrition
New Business
Model
Time
Growth
Copyrights2012©CVMarkConsulting.

Where to Find More Details?
Or Call +91 94480 70081 or write to lolla@cvmark.com
24-08-2013 46

The Biggest Secret !
• Huge Capacity is hidden in organizations
irrespective of the industry they belong to.
– Pharmaceuticals
– Manufacturing
– Software Development
– BPOs
– Education Sector
– Food and Grain Distribution
Keep following http://time2change.co.in for the
forthcoming whitepaper on the generic model of
Revealing Hidden Capacity!
24-08-2013 47

Thank You!
24-08-2013 48

Capacity hunt program reveals huge hidden capacity

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