This was an interesting trip for a couple of reasons. Firstly, I needed to drive from Milan into the Italian hills and find my hotel in the dark. This was more fun than I thought as I ended up in a new Smart car with and eco system, which was eventually revealed to travel 250 km on only 11 litre of petrol costing in total €17. My old Jag would have required £65 (€75)! Secondly, and of course more important, was that this was a potential new customer in a new sector and completely unknown to me.

The review was very interesting, it is rare to find a ’T plant’ in Europe now.

I was at a manufacturing company in central Europe that makes very high precision equipment. They are in a fantastic location and as one might expect they have a very low employee turnover rate and can attract the highest quality people.

Essentially they build and by components to a forecast and assemble product from a stock held just before assembly. The market demands a lead time that at present cannot be achieved if hey tried to make all the components and buy all the components needed to order.

The manufacturing business is a ‘V plant’ feeding a ‘T plant’. They are as one might expect very focused on the technical nature of their product. They are implementing lean. They have an excellent lean visual management implementation in one of their offices.

Early on in the discussion after checking the expected symptoms existed for a ‘V and a T plant’ I asked how much do you think you can increase the profit in the next two years. After a short time the answer was we are working towards increasing profits from around 10% towards 14%. My feeling was that they could probably do much better but knowing most would not agree with the conclusion, I kept this assumption to myself until I had a little more data sufficient to show how much more they might be able to achieve.

Most of the lean and other initiatives being taken, as expected, were focused on waste reduction and on reducing cost. Even if they make a fantastic effort the chance of reducing cost sufficiently to increase profits significantly is very slim. The operating expense of the company is around 20 million. A saving of 1% to 1.5 % would be considered excellent. This however would only increase profits by 240k if the saving was across the whole of the company. It would be a 7% increase in profits moving profit close to 11%. The material purchased to create the sales was around 10 million and again if purchasing work very hard to source from low cost economies and on reducing other supplier prices they might save 1% which is 100k or a 3% increase in profit. Therefore if we take a very optimistic view of what can be achieved profit might increase by 10% or 340k a new profit of 11% on sales. My feeling was that they was probably a very good chance to increase profits by much more than that.

The main issue in a ‘T plant’ is shortages. Often though it is not realised how much damage this is doing. Firstly, in many cases the MRP system is hiding the shortages by allocating the stock on hand to orders that can be built. To understand the true potential I wanted to get them to think through the phenomenon of shortages. Before doing that though I wanted to understand how they were managing the ‘V plant’ which feeds the ‘T plant’ first.

If they were like any other business they would be trying to find a compromise between two needs. On the one hand they would need to keep production costs down so they would be trying to spread the cost of the machine shop set ups. On the other hand they would be trying to minimise inventory and throughput times. They confirmed that they were thinking but not absolutely applying economic batch thinking. They were setting batch sizes in order to spread the cost of the set up across more parts. Recently they were considering the need to reduce inventory and throughput time. In response they were considering reducing the batch size their judgement suggested a batch size of a third would be OK.

I asked the team if we double the size of a batch how much money does the company actually save. After a little discussion they said nothing! I asked if we half the size of the batch how much extra money do we spend, again but after a shorter discussion they agreed nothing! I then explained a bit about where the concept of product cost and value added came from and got agreement that it was not a real number and we were using it beyond its original intended purpose.

We explored the issue further discussing what a manufacturing person would say if we tried to run too many small batches through their machines. We agreed that they would predict they would run out of capacity. In this was we agreed what was important in sizing a batch was the avoidance of creating new bottlenecks as this would reduce capacity and sales. We touched on the need to develop a better planning process which enabled the concept of transfer batches and process batches to be used instead of setting batches according to some arbitrary costing rule. The need of the customer and assembly are much more important. Larger batches would increase shortages and slow the arrival of parts to assembly and force the company to consider holding larger quantities of stock in from of assembly. The exact opposite of what the want.

At this point I asked about shortages. They agreed it was a big issue for assembly. In response to asking what they did when there was a shortage they confirmed they moved on to make another order, even if they had to use some of the parts form orders with a shortages. Asking why they said because we cannot afford to have the assembly people idle.

Asking a rhetorical question I said does that not mean you are building some orders early, even though your delivery performance is only 70% to 80%? Going on I said does it not mean that you are actually creating more shortages on the order that originally had a shortage? Does this not mean that in order to keep assembly busy you are making the supply system more unstable, forcing more expediting and more re-planning? It was not difficult to draw a picture of the significant waste that the action taken to keep assembly busy was generating. The chain of actions sparked by the original shortage was wasting capacity in all feeding department and applying the assembly department capacity to building product that might be early when they had other orders that were already late or going to be late.

It was agreed fairly quickly that the amount of capacity wasted was in excess of 20% of the total available in the company.

Having reached this point it was possible to return to my conclusion tat profits could be much much bigger. I asked for some basic financial data that would enable me to calculate the T I and OE. T (Throughput) was about 70% of sales. Withe the information already established it was possible to agree that if they could reduce shortages they would be able to produce 15% to 20%, with minimal increase in expenses except the material needed for the additional product. Taking a conservative 10% increase it was clear that profit would increase by 33% from 3.3 to 4.3 million more likely it would be easy to reach 4.9 million a 50% increase in profit.

This of course cannot be reached without winning extra sales. To d that several things would be needed not least to improve the on time performance from 70 % to 80 % into the very high nineties. We spent the rest of the meeting mapping out how these things could be achieved.