Managing Manufacturing Arrears - Interim Managers

What causes arrears?

There are in fact a number of potential causes:

Growth

We could consider arrears arising as a result of the order book exceeding the capability of the business - sometimes our own internal capacity and sometimes material / component availability - as a 'positive' reason; after all, growth is better than business decline. In fact it is still a problem. Arrears means late deliveries and letting customers down, which can very quickly lead to a reduction in new orders being taken.

And of course, taking orders in excess of capacity is a basic failing in itself. Our planning process should highlight where we don't have capacity or material supply for a particular date. Not having this fundamental discipline in place is evidence of mismanagement and committing to a date we can't achieve does several things:

• It means we will let down this customer, or possibly another.
• In fact we may let down several customers because an infeasible plan (a nonsense - if we can't achieve it then we can't call it a plan) will probably lead to firefighting and chaos.
• An example was a business that made to order and typically supplied numerous complex units for export within each contract. In most cases the customers wanted single shipments so a when a particular contract became the top priority the components for that contract were highlighted and expedited at the expense of everything else.
• If at some point during the life of the contract it became clear that the customer didn't really want the delivery on the planned date, or if a particular purchased component could not be procured on time, or a key item failed inspection, or (... enter an experience of your own) then another contract would be flagged as urgent.
• In a number of cases planning staff then realised that they couldn't complete some other contract because components (for example, castings) had been diverted from this order to the previously most urgent and machined to a different configuration. So this job couldn't be completed either, and another would then be chased.
• Loading orders for dates that cannot be achieved will result in our planning system sucking components into the business that then aren't shipped on time. As we all know, the most common reason for excess inventory is arrears. The firefighting described above compounds this problem, leading to excess levels of work in progress and making the production areas hard to manage. Walking into a factory for the first time and seeing part-complete kits or great queues next to machining centres is a cast iron pointer towards arrears.

Avoiding arrears caused by growth requires some formalised mechanism for assessing capacity - this may be the classic textbook Master Production Scheduling (MPS) / Available to Promise (ATP) approach or a simple wall chart with weekly / daily capacity and current production plan. What we all need as a bare minimum is some form of alarm system that highlights where the customer requirement needs increased capacity or special action to procure components.

In some cases we can meet a requirement in excess of current capacity. Products sold on lengthy lead times may allow sufficient visibility for extra shifts to be planned or a sub-contract resource to be identified. If this is the case then the commitment can be made. If we clearly can't meet the requirement then this has to be recognised up front.

In fact promising a date later than customers are seeking may not be a problem. Wouldn't they perhaps prefer a ten-week promise and delivery in ten weeks than a seven-week promise and delivery in nine? After all, they may use our promise to make their own plans and commitments to their own customers.

Plant breakdown

This, of course, can happen to all of us. In some cases the plant that falls over is a resource that we can replace relatively easily - simple drilling or component turning where there are plenty of sub-contractors around that can step in to help us over a crisis. Production supervisors and planners can, hopefully, react to this quickly and such problems can be overcome relatively easily. In any case, such plant is rarely the constraining resource within the business - expensive, dedicated equipment is more likely not to have spare capacity. When plant of this nature breaks down, then recovery is much more difficult. Dr Goldratt's lesson from 'The Goal' remains - if any resource is working flat out then we can't work it any faster. Bottlenecks determine our true capacity.

(In fact, we may be able to increase output in the future if the plant in question only runs one or two shifts each day because we don't have operators with the skills for running additional hours on a permanent basis. We may be able to increase working hours in the short term; for example if the plant is currently manned 6 to 2 and 2 to 10 we can perhaps we could perhaps introduce 12-hour shifts - but not for long of course because operators can't be effective for long while working such hours. During that time we could train additional workers and move to three-shift working.)

So, how do we avoid such problems? Well, the first step of course is looking after the plant. We've all been hearing about Total Productive Maintenance for a number of years and most of us have learned and applied the lessons. (Sadly this remains 'most' rather than 'all'. My colleagues and I still discover companies where people have been on courses on the subject but nothing has happened. Operators still undertake minimal maintenance or even plant inspection activities, schedules are noticeable by their absence and people accept that standard times are missed because plant is worn and cannot be run at the speed on which the standards are based.)

What else can we do? One thing is arrange alternative processes. I have engaged in debates with corporate management who always want old equipment thrown away when new plant is installed - for example when conventional borers, lathes and so on are replaced by the latest technology in machining centres. If we have the space, why not keep the old machines? Of course we should find an area outside the main flow of components so that we don't have to keep walking around it or lengthening the distance travelled by components (one of Ohno's seven wastes) but if the area for the old plant doesn't need a great deal of preparation then why not? This gives us an alternative, though of course the lead times for the alternative method will be longer since a one-stop shop at the new plant will be replaced by visits to several machines with all the associated movement and queuing.

Supplier failures

The most glaring example I have seen in recent times was a business that sourced many castings from one foundry in the UK. When this foundry went into administration they supplied no product for over a month. When the financial recovery programme was agreed they returned to production, but with lower volumes. They also suffered significant quality problems resulting from reduced resources in the front end process, that of order-handling and pattern selection, and in the final inspection area.

What should we do in this situation? Obviously the first step in avoiding such problems has to be keeping close to key suppliers so such circumstances do not come as surprise. In this case there was some warning, but not as much as would have been needed to secure capacity in an alternative foundry, move patterns and bring the new supplier up to speed - that is, if such capacity existed in any other UK supplier. Local resources have diminished in recent years as component manufacturing has moved to the East.

Of course, where we feel vulnerable, we can hold component buffers, or safety stock. In a business of extensive product variety this is never easy. It requires the ability to forecast and carries with it the cost of capital sitting on the shelf when it could be used to minimise the cost of financing the business.

• The silliest example that my colleagues and I encountered of this was in a business which had launched a new product and were unable to get a number of suppliers up to the volume required when the product took off. Because of the inadequate planning processes in place (see earlier) arrears quickly arose, and kept rising.
• A major international management consultancy prescribed 'safety stock' as the solution and recommended defining an additional two weeks' usage within the newly-installed planning system. Nobody questioned this but, when challenged, people later recognised that they should have spotted the flaw.'Our suppliers can't meet the actual demands, yet we are now going to throw in an additional requirement. How on earth can we expect this requirement to be met?'
• What this did, of course, was simply increase inventory. On those items where the existing demand could be met, the additional requirement could also be met in perhaps two-thirds of the cases. On these, stock rose since the production level was still constrained by the shortages.
• In some cases the existing demand was being met but this sudden injection of two weeks' average usage was the straw that broke the camel's back. These items now also had purchase arrears. Where the purchase order delivery dates were amended to reflect the revised supplier promises the MRP system created purchase action messages telling people to pull these deliveries forward.
• The business thus now had twice as many items with purchasing arrears or MRP messages and the expediting team were chasing all of these - even though they knew that half of the overdue purchase deliveries were not constraining production. Their problem was that they didn't know which half!

Combination of circumstances

Although the issues outlined above can often be identified as root causes behind arrears situations there are often a number of reasons. A typical situation is one where problems have arisen through another of the reasons but inadequate planning systems have compounded matters.

Once we have an arrears situation

The first question we should ask ourselves when we have significant arrears is 'why has this happened?'

We may not set out to immediately address the root cause - I had the experience of a high pressure steam test plant that had been out of action for some time leading to significant queues of items to be processed through this plant and subsequent stages. There was undoubtedly a long-term activity of getting to the root cause of the problem and preventing recurrence but the priority had to be getting on top of the arrears.

On the other hand, the root cause may need immediate action. The example quoted above was a business that had grown substantially. When I was asked to take responsibility for the Operations function the business was still selling on a standard lead time. The factory was broken down into product-based focused units, all of which had several weeks' worth of output due in the past. The worst, producing 85 sophisticated units per week, had over 750 units overdue in the assembly area. The forward load showed that the plant was full for the next 8 weeks even if the arrears could be magically eliminated with immediate effect. In this case the forward planning mechanism (or lack thereof!) was undoubtedly a limiting factor for any corrective action programme and needed immediate action.

Firefighting / Progress chasing

As noted earlier, the instinctive short-term reaction is for everybody in Production to revert to progress-chasing. One of my first bosses took me aside after a daily production meeting and asked me what I felt about what we had just witnessed. We had stepped the production plan up by 20% for the last quarter of the financial year and now had overloads in key areas of the plant with massive arrears in the welding shop because the machine shop had been slowest of all to react to the increase.

I said that I didn't think it would work. The planners and superintendents in these areas had all made lists of priorities and had agreed to report status at the next meeting, 8am the following day. Nobody had asked the question about whether the plan was feasible and what needed to be done to make the unachievable elements possible. In fact the office manager for the machine shop had several times tried to draw people's attention to information from the capacity planning system - IBM's CAPOSS, at that time a leading-edge solution - and had, in effect, been shouted down.

My boss smiled and said he was glad I had noticed. He explained that he was sixty two years old, would soon be retiring and couldn't wait. He had seen this all before, he said, and didn't want to see it again.'Production people revert to type. They don't want to stop and think. They are happy to run around waving their arms, telling people to stop that job and start this one, then run back two hours later and do this one instead. It doesn't deliver success but they go home feeling that they've done their best.'

Planning

As with most crises, the only way to get out of trouble is to plan our way out.

This doesn't mean go off and invent some sophisticated set of tools, or implement a new computer system (though it might mean making better use of one that is already installed). One key lesson about planning is that simple systems are more likely to deliver than complicated ones, a lesson that is particularly relevant when everybody is under pressure. An arrears situation, with customers continually on the 'phone or visiting to review progress and in-house Sales and Customer Services people trying to manipulate things to prioritise their own business, is nothing if not pressurised!

Increasing output

Increased levels of output are, of course, an essential. How these are achieved depends on what factors have constrained things until now. While better planning undoubtedly helps (everybody running round like a headless chicken isn't the best way to achieve efficiency), there can be a number of areas to be addressed, including:

• Making more time available at bottleneck resources. This may be taking steps to facilitate longer additional shifts, as described earlier. It may simply be moving activities such as preventative maintenance, coolant changes, gauge calibration, bench cleaning and so on to non-production times,
• Sub-contract. It sounds simple, but identifying which items or operations best lend themselves to outsourcing can require some thought. There may then be discussion over whether the sub-contract should include all operations within the manufacturing process or just the ones which are causing an overload in-house. There can be arguments in favour of either approach - again, it sound simple, but ...
  • We also have to recognise that sub-contracting from specialist pieces of plant is not easy. Sub-contractors who have invested heavily in such plant aim for utilisation and don't look to keep spare capacity available to rescue people like us who have run into problems. Even where they say they can take our work on short lead times these businesses are job shops, often with limited planning processes. They may say they can meet the requirement in order to secure our business when they have no means of knowing whether or not this is feasible.
  • Then sub-contractors have to learn about our work - understand the drawings, recognise the critical aspects of each component, create NC programmes or modify ours, perhaps modify our tooling for their equipment. After all of this we should probably go through some form of First Part Approval, which adds further delay. (The alternative may be taking a chance and suffering quality problems which bring even further delay.)
• Outsourcing - buying some components complete is subtly different from sub-contract, where we are only buying the service of manufacturing. Typically we would sub-contract items machined from, say, castings and would then supply these castings free-issue to the vendor. We may also take this approach for components made from specialist materials - sub-contractors; rarely have the resources or inclination to buy materials. Items made from standard bar, sheet, etc., can usually be bought complete quite easily.
• Reducing wasted time - this may involve a formalised approach to address inefficiencies caused by the location of plant, racking, and so on, but in general a business battling its way through arrears cannot allocate resources to a formal 5S programme, for example. We have to carefully weigh up time spent on any improvement programme against the short term savings that will be accrued. Professional managers wince at taking short term approaches but there are times when we have to recognise that we are battling alligators; we can drain the swamp later.
• Improving productivity through changing culture and attitude. People in a business that has been struggling, for whatever reason, are rarely the most motivated of souls. Establishing and, essentially, communicating a vision can begin to change this. If people believe that success can be achieved, and that they will be respected as being part of the success, then they will perform better.