Strategic Implications of Variability & Little's Law

Manufacturing Strategy

The conventional wisdom of accounting considers excess capacity as waste. However, reserve capacity may reduce other forms of waste. These are strategic issues that require considerable reflection at the highest levels. The sections below illustrate a few of the ways that variability, capacity and Little's Law affect the development of an effective Manufacturing Strategy.

Finance

Capital Investment

Many firms require very high utilization rates before authorizing investment for additional capacity. This is unwise if higher utilization increases inventory more than the additional capacity cost.

Such policies may also work against marketing strategies that depend on delivery performance. Before implementing high utilization policies, management should consider not only the total investment (including inventory) but also the effect on marketing.

In addition, utilization policies should distinguish between low cost equipment that needs only low utilization rates and high cost equipment.

Cost Structures

Conventional costing systems may not accurately distribute the cost of variability created by a wide product mix. The cost of this variability often appears in overhead accounts that are allocated in distorted ways. For more on this, see "Product Costing" and "Lean Accounting." This also relates to marketing strategy.

Manufacturing

Embracing Variety and Variability

Coping effectively with variability can lead to an effective marketing strategy. Such strategies are quite difficult, but, when mastered, are also quite effective. Competitors simply cannot develop the ability to compete on this dimension. Variability as strategy usually takes one of two forms:

• Offering a wide range of products often with many new and different products.

• Offering to supply large orders, custom products or special projects on short notice.

The first approach requires high competence in product development and product introduction as well as high flexibility in manufacturing.

The second approach requires the maintenance of excess, idle capacity. When an order or project arrives, manufacturing can produce it quickly. Such idle capacity incurs cost and such strategies are only effective when pricing and margins compensate for this additional cost.

Marketing

Customer Needs

Since high utilization is generally incompatible with high variability and low inventory, priorities for these variables should be established. The key is to clearly identify the customer's buying decision criteria.

When most customers buy only on price, this indicates that low-cost production has the highest priority. Low cost production indicates maximum utilization of capital. It might also indicate the use of backlog to achieve steady throughput. Both of these approaches increase throughput time and affect delivery adversely.

When delivery is the primary decision criteria for customers, excess capacity, low inventory and minimal backlog is the best approach. However, these strategies may increase cost.

"Build It and They Will Come"

Policies that prevent capacity investment until demand is proven often inhibit growth. New capacity requires time to commission and customers will rarely wait.

Companies that build capacity in anticipation of growth usually find that their new capacity attracts growth. Future pages will address these issues of capacity planning and strategy.

Product Variety

Increasing the product offering is a common marketing strategy. However, additional products rarely increase sales volume in  proportion their number.

The result is a product mix with a few high-volume products and many low volume products. This brings further consequences, such as:

• The additional variety increases overall cost, primarily in overhead.

• The costing system may not accurately distribute the additional cost and under-price the low volume items.

• The additional variability may increase inventory and adversely affect delivery performance.

When considering new products, executives should consider the effects of such product proliferation.

Embracing Variability As A Strategy

A few, rare firms embrace variety as a successful business strategy. Some offer a wide and constantly renewed product mix that competitors cannot match. Others specialize in unusual, custom products that command high prices.

However, to be successful in this, firms must gear their order processing and manufacturing to coping with such variety (see below). This is difficult, but, when successful, highly profitable.

The Variability Perspective

Most Lean Manufacturing elements either reduce variability, adapt to it or both. This can be a useful perspective for developing Lean Manufacturing strategy. Here are some examples. The links will take you to various articles that address these topics in more detail:

TQM/Six Sigma

Capability analysis, part of SPC, ensures that the inherent variability in a process is small enough to ensure defect-free production. Control charts discover unrecognized sources of variability before they can produce defects.

Cellular Manufacturing

Grouping similar parts (Group Technology) and processing them in workcells reduces the variability from differences in routing. It also reduces the variability associated with transport and batching.

Kanban & Pull Scheduling

Kanban reduces variability from the scheduling system. It smoothes the flow and helps reduce batch sizes.

Team Development

Teams reduce variability in many ways: their lines of communication are shorter and more predictable; their responses to situations more consistent; they enhance the effects of workcells, SMED and other Lean elements. Teams both reduce variability and enhance the ability to cope with it.

Setup Reduction (SMED)

Shigeo Shingo's SMED approach reduces setup cost and enables lot size reduction. This, in turn, reduces the variability from batching. In addition, SMED makes setups not only shorter, it makes them more consistent in terms of time and quality.

Mixed Model Production

Running multiple products on a production line smoothes upstream demand and, hence, reduces upstream variability. Configuring a production line is an example of coping with unavoidable customer demand.

Efficiency, Balance & Variability

Efficiency is the traditional focus of manufacturing managers. However, Little's Law, Theory of Constraints and the relationships shown elsewhere in this series show that, when designing and managing production operations, balance and variability are equally important.

• Efficiency-- focuses on accomplishment of individual process steps and completing each step with minimal resource input. Efficiency is well appreciated and most engineering efforts are directed to it.

• Balance-- focuses on several or all steps and attempts to balance a resource, i.e., time. Balance is well appreciated in line operations but is often ignored when processes are disconnected. When balance is attempted, it is often based on overall averages rather than balance on each cycle.

• Variability-- is the consistency of each step to ensure that each cycle of the process is identical. Variability is often under-appreciated and causes many (perhaps most) manufacturing difficulties.

References