berry, hill - 1992 - linking systems to strategy

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Linkin

System

to Strateg

Linking Systems to Strategy

William L. Berry

Ohio State University, USA, and

Terry Hi l l

London Business School UK

Many firms make large investments in processes and manufacturing

infrastructure, such as control systems, without an adequate understanding

of

their markets. Few appreciate the need for the link to be made. They see

manufacturing investments and agreements on markets to be independent sets

of decisions. However, as these investments are both large in terms of costs

and time-scales, getting it right is critical to the short- and long-term prosperity

of

a

business. Many companies make costly mistakes owing principally to the

fact that their manufacturing strategies have not been developed to reflect key

differences in their markets. Without a strategy, investments in manufacturing

lack context and subsequent coherence. T he result is a reactive response by

manufacturing which typically fails to alert firms to the trade-offs involved and

the binding nature of the decisions being made.

No Strategy, Poor Systems

Companies are understandably concerned about manufacturing's corporate role

in an increasingly competitive environment. Recognizing the size of the function

and the magnitude of its strategic contribution, CEOs are looking for

improvements in manufacturing as

an

integral part of

a

total corporate response.

Manufacturing's failure to develop a set of coherent responses designed to

support the business results in a strategic vacuum. To meet corporate

expectations and CEOs' demands, manufacturing has, in the past, resorted

to investing in a series of panaceas. Transferring solutions rather than

understanding the problems and issues involved has often proved costly and

inappropriate.

One area of investment which characterizes these features is that of

manufacturing planning and control (MPC) systems. As a large infrastructure

investment and as a critical function in the management of manufacturing this

provides a classic example of the panacea-driven approach which has

characterized past decisions. M aterial Requirements Planning (MRP), Just-In-

Time (JIT) and Optimized Production Technology (OPT) are recent illustrations.

Bought more for their apparent benefits than business fit it is not surprising

that previous research[l] reported that 62 per cent of the MRP applications

studied cost as much as $5 million yet failed to realize their full benefits as

the following specific company examples illustrate:

Company

A

Company A is a medium-sized US manufacturer of high quality, domestic

furniture. Manufacturing comprises few operations and uses relatively simple

process technologies to make high volume standard products which result in

Received September 19

Revised February 19

International Journal of Opera

& Production Management, Vo

No .

10 , 1992, pp. 3-15. ©

University Press. 0144-3



low work-in-process inventory. The need to provide short lead times in key

market segm ents has led the company to invest in high levels of

finished

goods

inventory.

In the past the company controlled manufacturing by central scheduling and

manual shopfloor

control

supported

by visual

checking

and

verbal communication

between departments. In order to achieve improvements in equipment utilization,

productivity and order tracking in the manufacturing process, the company

installed a computer-based, shopfloor control system with automated order

tracking, queue control, despatching and capacity planning features at an overall

cost of about 0.75 million. However, the real area for improving overall business

performance was to support sales growth by fulfilling customer orders more

quickly while keeping finished goods inventory under control. This meant

improving the master production scheduling function in order to better reflect

actual sales mix in plant schedules, and so avoid imbalances in finished goods

inventory, characterized by current inventory shortages and excess stock. The

investment in the shopfloor control system was not only unnecessary, but the

increase in paperwork raised overheads and took supervisory and management

effort away from the key area of master production scheduling.

Company B

Company B, a European manufacturer of telecommunications switchgear,

underwent a series of product changes fuelled by new product technology

improvements in the market, moving from the use of electromechanical to

electronic components. While the old product components were made-in-house

using a range of batch processes and final assembly lines, the company decided

to purchase the new product technology in the form of components.

Beset with several dimensions of manufacturing change, the company retained

its previous MRP system as a tested and proven device. However, it failed to

realize that the manufacturing task had moved from the control of a broad range

of complex internal processes, and the corresponding control of work-in-process

inventory, to key issues of vendor scheduling and component inventory

management. As a result, resources were not switched to vendor scheduling,

and the correct purchased parts were not brought in on time. Also, while the

old system reflected tight controls

on

work-in-process inventory, the new system

had little work-in-process inventory but required much higher levels of purchased

parts inventory. Consequently, pressure was placed in the wrong areas, shortages

increased, and the control system was unable to cope with the new demands.

Company C

Company C, a UK agricultural equipment manufacturer, had for many years

produced a standard line of tractors in high volume for stock, using line processes.

After a substantial drop in sales volume, the firm responded with a variety of

new products offering

a

broad range of

options

produced

in low volume

to specific

customer orders. To support the shift in marketing strategy, new investments

were made in batch manufacturing processes. The new manufacturing task

involved the scheduling of small batches of components and assemblies for

particular custom er orders in functionally-oriented, process centres.



Linki

System

to Strate

Not recognizing the changed nature of the manufacturing task and wishing

to minimize overall investment, the firm decided to retain its previous

manufacturing planning and control system which was designed to support the

production of standard products on a repetitive, line production process. As

a consequence, substantial difficulties were encountered in planning and

scheduling the low volume, product option components, both on internal

processes and suppliers. The system was unable to integrate forecasts, customer

orders, and master schedule information for the low volume product options

and provide reliable delivery promises to customers. The result was lengthy

manufacturing cycles, simultaneous shortages and excesses in inventory, and

poor customer service.

omp ny

Company

D,

a UK aerospace company manufacturing a wide range of products

for both the original equipment and spares markets, decided to invest in a

comprehensive, MRP system with standard computer software for both

requirements. This included master production scheduling, time-phased material

planning, capacity requirements system planning, and shopfloor control. Given

the complexity of the data

base,

training and system running-time requirements

and support, the investment exceeded £5m, with an installation time of

V

years, and significant overall running costs. After installation, subsequent analysis

recognized that large parts of the system were not required to plan and control

the spare parts business. Sixty per cent of the original database investment

and a large part of current running costs were attributable to this part of the

company s activity, but were not necessary or appropriate for its effective control.

What was required for this make-to-order, low volume, intermittent business

was simplified master scheduling, material planning and shopfloor control

modules without a requirement for the order tracking, queue control, and priority

despatching features essential for the OEM part of the business.

rom Panaceas to Policy

The examples show how companies may invest in planning control systems

which, though sound

in

themselves,

do

not fit the needs of

a

business. However,

the outcome is not only an expensive and time-consuming mistake but, more

importantly, firms believe that the planning and control problem has been

resolved. The consequence is that the company

may

not only have lost market

opportunity, but may lose out altogether.

How can companies, therefore, improve the relevance of their systems

investment? The approach is twofold:

• Link markets to processes to manufacturing planning control systems.

• Recognize the different decision-making functions in MPC systems and

their different roles within specific businesses.

Typically, manufacturing

is

reactive in corporate strategy making which reinforces

the strategic vacuum/panacea syndrome explained earlier. The problem is,



therefore, how to get the manufacturing dimensions into this debate at the right

time and the right level. The key is to analyse a company's marke ts not only

in terms of the marketing perspective but also in terms of those dimensions

which manufacturing needs to provide. The concept of order-winners and

qualifiers helps differentiate the manufacturing task and hence signal the nature

and extent of both process and infrastructure investment[2]. This procedure

is illustrated by the framework and arrow directions in Table I. The steps concern

the principal stages which embrace the corporate marketing decisions on the

left and the facets of manufacturing strategy on the right. In turn, the arrows

illustrate the iterative nature of the debate and the need to forge the essential

links between objectives, marketing and manufacturing.

Businesses need to make different choices of process depending on market

requirements. As shown in Figure 1 there are a number of basic processes

which

may

be used

to

meet the needs of different markets. Companies typically

select a process to reflect order winners and anticipated volumes. The choice

having been made (e.g. A1 and B1 in Figure 1) then the associated point on

the numerous business dimensions and investments (see

A2

and

B2

results.

One critical trade-off concerns manufacturing planning and control system design.

These systems are

a

key element of manufacturing infrastructure and comprise

functions at three different levels within a business (see Figure 2)[4]:

egy Issues in

p. 33; 3, p. 38]



Linki

System

to Strate

• overall business direction;

• detailed material and capacity planning;

• execution system s.

Whereas most companies recognize the levels

involved

what is not appreciated

is that the principal functions within each level need to be designed to meet

the requirements of individual businesses. Only in this way can companies select

the particular functions they need and then design the relevant parts of the

system in a way which supports the manufacturing process and, in turn, enables

manufacturing to support better key differences in its markets.

As

illustrated earlier, the failure to appreciate this leads companies to make

inappropriate investments in systems (e.g. Companies A and D) or to miss

opportunities for sound investments under changing market conditions or to

support process reinvestments (e.g. Companies B and C).

Reasons for Failure

So,

why do system failures occur? The reason is not the system itself but the

failure to design and fashion the MPC functions to the needs of a business.

The four principal reasons for these failures are described below, and are

illustrated by the company examples given earlier.

Inappropriate Investment

An

underlying them e throughout has been the need to recognize that whereas

an MPC function may be sound in itself it may not be relevant to the needs

of a business. As an example the investment in the shopfloor control system

in Company A would actually impair overall performance.



Original Investment Made Inappropriate by Market Changes

Given the dynamic nature of its markets, Company B failed to recognize that

its system design needed to reflect market change and switch

its

emphasis from

shopfloor control to vendor scheduling.

Systems Need to Reflect Process Reinvestments

Whereas Company C recognized the need to reinvest in the hardware of

manufacturing, it failed to recognize the necessity for reinvesting

in

its systems

and software as an integral part of manufacturing's total support, a failure which

undermined overall business performance.

ttempting to Resolve Diverse Manufacturing Problems with Single Solut

Often companies cope with diverse manufacturing situations by implementing

single solutions which result in the inadequate support of

the

systems' needs

of individual processes . Company D's failure to separate out the different needs

of its OEM and spares businesses led to the implementation of a single but

expensive solution to meet the demands of two different businesses.



Linkin

System

to Strateg

Applying Concepts Not Solutions

The key to designing MPC systems which fit the business is to link:

To

do this, companies need to use the concepts explained

in Table

I and Figures

1 and 2 and not rely on the easy but inappropriate option of applying standard

solutions. This final section builds on these earlier concepts, provides the

principles on which effective systems need to be built, and illustrates their use

through company examples.

Match MPC System s and M arkets

Company E is a market leader based largely on creating new products and

meeting customer applications in the packaging industry. Following rapid growth,

competitors entered the market and introduced price competition. In order to

match past sales growth and profit levels, the company identified a major new

market segment in which to sell its existing products.

In MPC system terms this required changes in the master production

scheduling (MPS) function. While the existing market characteristics were:

• make-to-stock products;

• delivery speed supported by

finished

goods;

• low product variety; and

• high production volume;

the new markets comprised:

• make-to-order products;

• delivery speed achieved through rescheduling;

• high product variety; and

• low production volumes.

Table II provides the conceptual basis for understanding how different types

of

MPS

systems can be designed to reflect th e particular needs of

a

business.

In this case the company moved from a make-to-stock (MTS) master production

scheduling system to a two-type M PS system to m eet both the Make-to-Stock

and the Make-to-Order (MTO) characteristics of the existing and the new

markets now supplied.



Matching Process Change by System Change

Faced with more frequent product design changes, a w ider product range, and

shorter customer lead times, Company F, a microcomputer equipment

manufacturer, found its choice of manufacturing process to be increasingly

inadequate. This company's original choice of batch processes with functional

layouts and scheduled under MRP had led to 75-day manufacturing lead times,

large inventory holdings and a high incidence of obsolete stock.

With a need to achieve short lead times, lower inventory levels and the

elimination of the costs associated with inventory obsolescence, the company

undertook a series of manufacturing investments with regard to set-up

reductions, cellular

layout

and a simplified shopfloor control system. The result

was a pull system for shopfloor control responding directly to demand, and

manufacturing in small order quantities. The outcome was rapid design changes,

low inventory,

short four-day lead times, lower overhead costs and the elimination

of obsolete stock.

The general features of

a

pull type of shopfloor control system which needed

to be made at Company F to meet the changes in the manufacturing process

are summarized in Table III. This table illustrates how strategic manufacturing

variables need to be linked to shopfloor control system alternatives as well as

the general features of pull and push types of shopfloor control systems.

Markets — Processes — M PC Systems

The major theme throughout has been to stress the need for companies to

link markets, pro cesses and M PC systems. To illustrate this, two companies



Linkin

System

to Strateg

1

Strategic variables

Markets:

Product: type

range

Individual product volume per period

Accommodating demand versatility:

total volume

product mix

Delivery: speed

schedule changes

Manufacturing:

Process choice

a

Source of cost reduction: overheads

inventory

Changeover cost

Organizational control

Shopfloor control approach

Push type

Special

Wide

Low

Easy/incremental

High

Achieved by schedule

change

More difficult

Jobbing/low volume

batch

Low

Low

High

Centralized

a

In jobbing, the shopfloor control is handled by the operator

Pull type

Standard

Narrow

High

Difficult/stepped

Low

Achieved through

finished goods

inventory

Less difficult

High volume

batch/line

High

High

Low

Decentralized/

(shopfloor based)

Table II

Linking Manufacturi

Strategy to the Desig

of the Shopflo

Control Syste

have been selected to represent the way in which this can be accomplished.

To help in

the explanation, both companies in these examples represent pure

forms of both process and systems design.

Company

G manufactures customized hydraulic products in low volume on

a make-to-order

basis.

The appropriate manufacturing process choice is batch

with long manufacturing lead times, complex routeings, the sharing of processes

and the need to manage capacity. In this company, the material planning approach

is based on a time-phased MRP system as shown in Table IV.

Company

H , on the other hand, produces a narrow range of motorcycles,

in high volume, with limited product change or enhancements. The relevant

process choice is high volume batch and line processes, and the opportunity

to reduce both set-up times and batch sizes. For this situation, the relevant

material planning design comprised a rate-based material planning system as

shown in Table IV.

These two examples represent companies with different markets, production

processes and system designs which have been appropriately developed to

provide a coherent approach to each business. Table IV illustrates the concepts

underlying this critical linkage and demonstrates design alternatives each

appropriate to different business conditions.

Systems Design for Complex Markets

The last two companies were classed as pure because they represent classic

examples of different manufacturing situations. Most companies, however, do

not enjoy this level of clarity.



2

Strategic variables

Markets:

Product: type

range

Individual product volume per period

Ability to cope with changes in

product mix within a period

Delivery: schedule changes

speed

Manufacturing:

Process choice

a

Source of cost reduction: overhead

inventory

Material planning approach

Time-phased

Special

Wide

Low

High potential

Difficult

Through

scheduling/excess

capacity

Batch

No

No

Rate-based

Standard

Narrow

High

Limited

Easy

Through

inventory

Line

Yes

Yes

a

In jobbing, shopfloor control is handled by the operator

Where this is so, th e key to resolving the complexity typical of most organizations

is for a company to simplify the control task by identifying differences required

by the m arket, and then reflect these in the p roce ss and infrastructure investment

which it makes.

Company

I, a materials-handling equipment manufacturer, was confronted by

a changing mark et w here p rice sensitivity and produ ct customization we re both

increasing. Th e first ste p was to reflect th ese ma rket requirem ents in the design

of the manufacturing process. The next was to feature these within its MPC

systems design.

One characteristic of Company I was similar to Company G's markets and,

therefore, its proces s and system respon ses n eed ed to be developed in the same

way. As the company's markets required a broader range of optional features

to be produced in low volume, the company reorientated its MPC system to

provide assem ble-to-order m aster production scheduling, time-phased materials

planning, and a push type of shopfloor control system for one portion of the plant.

Th e o ther principal market requirem ent w as for lower prices. To reduce costs

the company need ed to standardize as much of its product as possible thus creating

high volume in its component m anufacturing with the attendant opportunity to

achieve low cost s. To support this aspect of the market requirements, the company

installed manufacturing cells to produce high volume, standard components and

supported this process with a rate-based material planning and a pull type of

shopfloor control system. This part of its business was, therefore, similar to

Company H. Figure 3 provides a way of illustrating this and shows the relative

parts of its processes that correspond to Companies G and H.



Linking

Systems

to Strategy

13

Conclusion

Why don't panaceas work? Solutions presuppose that market requirements and

hence corporate characteristics are the same. What you can be sure about in

business today is that nothing is further from the truth. This article illustrates

the critical need to link markets and manufacturing strategy. In turn,

manufacturing strategy comprises a coherent set of responses in terms of

process and infrastructure investment which essentially need to reflect the

characteristics of a company's m arkets both today and tomorrow. T he critical

interrelationship of these aspects is clearly demonstrated by Table AI which

provides an overview of the market-process infrastructure linkage. This

framework is illustrated by Companies G and H and offers a comprehensive

way to review a company's response and allows it to identify the necessary

changes in order for its MPC system (as one part of manufacturing strategy)

to support the business better.

References

1. Schroder, R.G., Material

Requirements

Planning: A Study of Implementation and

Practice.

American Production and Inventory Control Society, Falls Church, VA, 1981.

2 .

Hill, T J. , Manufacturing

Strategy: Text

and Cases, Richard

D.

Irwin, Homew ood, IL, 1989.

3.

Hill, T.J., M anufacturing Strategy: The Strategic Managem ent of the Manufacturing

Function,

2nd ed., Macmillan, Basingstoke, UK, (in press).

4.

Vollmann, T.E ., B erry, W.L. and Whybark, D.C., Manufacturing Planning and Control

Systems,

3nd ed., Richard D. Irwin, Homewood, IL, 1992.



Company

Company G

Market

characteristics

Customized

products

Wide product

range

Low volume

per product

Make-to-order

Initial vs repeat

orders

Future order

call-offs

Order winners

and qualifiers

Design capability

Delivery speed

Delivery

reliability—Q,Q

Quality-Q

Pr ice -Q

Manufacturing strategy

Manufacturing

Task

Reducing

process lead

time

To manufacture

to engineering

specifications

and quality

standards

Delivery

reliability is

critical

Features

Batch

manufacturing

Long process

routeings

High precision

work

Accommodate

delivery and

design changes

with reliable

deliveries

Labour cost

equals 60 per

cent

Control of actual

costs against

budget

Scrap and rework

order priorities:

first orders,

normal scrap

allowance

Manufacturing planning and control system

Master production

scheduling

Make-to-order

assemble-to-order

Customer

orders

Anticipated

orders

Forecast

orders

Used for rough

cut capacity

planning due to

long lead time

impact on

delivery

Customer order

promising

Material planning

Time-phased

material

planning

Material is

particular to

customer orders

High

obsolescence

risk

Extra materials

needed for

scrapped items

Trade-off:

shorter lead

time vs raw

material

inventory

Shop-floor control

Push system

Priority

scheduling of

shop orders

System

supported by

despatching and

production

controller

personnel

Capacity

requirements

planning by

work centre

Order tracking

and status

information



Linking

System

to S

15

Company H Narrow product

range

Standard products

High volume per

product

Seasonal demand

Sales from finished

goods inventory

at distributors

Introduction of new

products

Changing product

mix

Price

Delivery speed

(through

finished goods

inventory in

distribution

divisions)

Quality - Q

Delivery reliability

- Q

Basic design and

peripheral

design changes

- Q

To provide a low

cost

manufacturing

support

capability

To support the

marketing

activity with

high delivery

speed through

finished goods

inventory

First order

processing

uncertainties

(process

unknown, time

estimates)

Process and

product

uncertainties

High volume batch

and line

production

process

Short set-up times

Small batch sizes

Low cost

manufacturing

Low labour cost

High material cost

Inventory reduction

(raw material,

components and

WIP)

Overhead reduction

(low M PC

costs)

Make to stock

Manufacture to

forecast

Level production

Three month frozen

planning horizon

Manufacture to

replenish

distribution

inventories

Rate-based material

planning

Pull system

Kanban containers

JIT flow of material

Low raw material,

component and

WIP inventory

Note: Q denotes a qualifier, i.e. a capability required for the company to en ter and remain in its market. Q,Q deno tes an order-losing sensitive qualifier, i.e. a capability

which if not supported leads to a rapid loss of business.

Table AI.

(Continued



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berry, hill - 1992 - linking systems to strategy

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