(Editor’s note. This Executive Focus: Profit Maximization in Manufacturing, was originally written for another industry, but there are things to think about for any company that may be on the line between a small job shop and a larger production environment.)
Over the last several years, many small-to-medium size companies have been trying to achieve greater profit maximization by fine tuning their full-scale production facility. Each has endeavored to reap wider profit margins by executing lean events and performing six sigma analyses. Yet, many have failed to reach their ultimate goal.
When examining why these organizations have ultimately not yet achieved their goal, we have found one common theme. Each began their operation as a small job shop servicing either one very large customer or many small customers. Moreover, each has systems, people, and processes in place that worked well when the company was a job shop. The implication of applying this template onto a large-scale repetitive production facility is an increase in employee friction and inefficiency.
Because an organization’s departments are intertwined, companies may try to implement lean principles in a function or department such as purchasing or inventory only to find that the rest of the operation will not align themselves with the change. The outcome is an erosion of profit maximization.
To resolve this problem, you must first clearly understand whether you are currently a job shop or a mass production environment. After understanding your current environment, you should then focus on aligning the organization's functions along three dimensions: organization structure/roles, skill set, and information/data flow.
The following are 35 questions to assess whether your organization is truly a job shop or a mass production environment. For each question, answer yes or no.
Sales
a) Is your sales cycle shorter than three months?
b) Does your sales department "close deals" without the need of intensive interaction with other departments, especially engineering?
c) Is a majority of your employed sales staff’s salary derived through commissions?
d) Does your sales staff have and use a catalog with pre-priced products?
e) Does your sales staff sell from product data sheets?
Program/Project/Product Management
a) Do you have more product managers than project/program managers?
b) Is there a handover from engineering to product management after which no major engineering activities are required?
c) Can you sell the same product with marginal or no changes?
Engineering
a) Is the ratio of engineering cost to total cost 5 percent or less?
b) Are your engineers primarily developing new products (not for projects)?
c) Can your operation begin work without constant engineering updates?
Planning
a) Does your planner usually meet the previously planned output goal?
b) Do your planners use an ERP or an enterprise planning system without any help of spreadsheets or MS Project?
c) Does your planner infrequently have non-customer related “get on the same page” meetings?
d) Can your planner rely on historical sales data to forecast future plans?
e) Does your planner instill a “frozen” planning period into the production plan?
Purchasing
a) Has your purchasing organization identified and proposed a plan of action to delineate between commodity versus strategic purchases?
b) Can your purchasing manager begin work without the constant input of engineering updates/drawings and resources?
c) Can your purchasing managers name the core components of your product?
d) Does your purchasing team have or offer supplier partnership incentives and awards?
e) Can you verify cost savings per purchasing manager within a margin of plus or minus 3 percent for the same components over a three year period?
Quality
a) Can your quality manager begin work without the input of engineering resources?
b) Do you have a high level of quality without a 100% quality check on components and finished goods?
Inventory
a) Do you end the year without significant ‘write-downs’ for leftover inventory?
b) Do you mainly use standardized storage bins in your warehouse/storage area?
c) Since your last layout reconfiguration (including contents and bins), has your inventory department been able to keep their area organized and properly catalogued?
Assembly
a) Do your assembly workers perform quality checks based on predefined and documented quality procedures?
b) Is your assembly worker able to 'spot' quality issues based on experience in assembling certain repeatable components?
c) Are a large majority of your assembly workers considered specialists of certain assembly work, rather than someone with all-around skills able to execute very different assembly work?
d) Does your assembly worker get all of their instructions exclusively from standard work descriptions?
Logistics
a) Do you have “frame contracts” with large parcel shippers that can rely on your shipment estimates?
b) Do you buy only one or a few types and sizes of packaging materials?
c) Does your logistics team begin work able to 'spot' quality issues based on experience in of processing repeatable products?
Service
a) Do you have a person solely tasked with customer service?
b) Does the customer service person train by using your product catalog?
If you replied yes to a majority of the questions, you are most likely in a mass production environment. If however, a majority of your answers are no, then you may be in a job-shop type of business.
Applying mass production environment solutions to a job shop type environment will ultimately erode profits. Both models can be successful and highly lucrative, if properly aligned. A better alignment of your organization type to your organization's structure, skill set, and information/data flow processes can help to eliminate frictions and inefficiencies enabling your business to take full advantage of its strategic position.