Late fall 2014 The Finnish Production Planning and Control Society asked me to write about the philosophies behind production control to its member bulletin. Despite the years, all the phenomena still exist.
The fact that I am not officially a member of the Society gives me freedom to ponder the philosophy of production planning and control, because I cannot get thrown away from the association. I may, though, get a lifelong ban as a punishment.
According to Wikipedia, the public database produced by the public:
Production control is the procedure by which a company seeks to steer production to meet the requirements in terms of quality, quantity and delivery time for the manufacture of ordered products. Production control has traditionally included production scheduling, inventory control and efficient utilization of production capacity. Today, production control includes the cost and quality management of the entire supply chain, as well as the flow of information in addition to material flows. The aim of production control is to implement the production strategy chosen by the company.
That’s it. There are other definitions, too, but this will do for so far.
As a consultant, I have been privileged of having facilitated more than 200 and superficially dealing with around 1000 different organizations, many of which do not produce any physical product, but the final product is e.g. a piece of software or a regulatory decision. Which of these organizations has had the best performance?
If I evaluate this from a customer’s point of view, I need to go further backwards, into the previous 16 years, when I still worked with something tangible. I prefer exploring things through personal, self-experienced examples. In 1990 I was the boss of a factory. As I was once in the evening still in the office, the laboratory caught a fire. The fire brigade arrived in five minutes. The start of the fire was extinguished. From the customer’s point of view, fire brigade’s production control worked brilliantly.
Let’s examine the case in relation to the previous definition.
Production scheduling
5 minutes from the (automatic!) order, the extinguishing unit had already arrived to the actual place of production and started the production, spraying water. The timing was excellent. In very few organizations I have seen such a good responsiveness. The fire brigade deserves recognition for their customer orientation. Of course, they may have been already driving around in the neighborhood, ready to spray, so that success would have been based on a guess: “Maybe the next fire will be here”. In the rush I didn’t understand to ask about that. The timing was brilliant, but the control philosophy they used remained a mystery. Guessing it hardly was. Could it have been order-based?
Inventory control
I’ve never been in the crew of a fire truck to extinguish a fire, but extinguishing them in advance, into inventory, feels somehow obscure. The only imaginable form is spraying all buildings wet, just in case. This would have, during both summer and winter, its own negative impact. Doesn’t sound like a good philosophy.
One form of inventory is unfinished work, uncompleted cases. That doesn’t sound very nice, so a happier name has been invented: the order book. In a number of management team meetings I have seen applauds when the order book is huge. Next the same team wonders why there are no new orders rushing in at the old pace - why don’t customers want to queue at us. Is this a customer-oriented philosophy?
Efficient utilization of production capacity
I don’t know how many fire trucks there were in the garage of fire department, perhaps 10. They sent four of those to us. The remaining 6 probably stayed in the garage, crews having their dinner, or maintaining their equipment, or playing volleyball. Production capacity utilization was rather modest. And after the return of those four trucks, the utilization rate was close to zero. Not a good philosophy either, at least according to the traditional efficiency perspective.
Let’s investigate this a little deeper. Divide the annual cost of ten trucks and crews by the amount of liters sprayed during the year. We get the liter cost. Expensive liters. The cost of a liter is conveniently lowered by raising the utilization rate, i.e. reducing resources. This is quite fashionable nowadays.
When only one of the ten trucks and crews are left, the utilization rate is fairly good, at times. While the only truck is busy and there comes another alarm, then the extinguishing time will be chosen from the reservation book. An inventive fire brigade will place its reservation book on the internet for everyone to see, it would be truly customer-oriented. The customer can reserve a suitable time all by him-/herself. Instructions could be placed next to the booking table for how to keep the target burning to prevent it simply extinguishing itself. If the fire would self-extinguish during the waiting, the fire brigade’s visit would be pointless, once they finally arrived, precisely in the confirmed schedule with excellent delivery punctuality.
The function of production control is to implement the production strategy chosen by the company
In life there’s always random fluctuation. Therefore, some element in the organization’s operation will have flexibility accordingly, always. There are three choices: inventory, delivery lead time or utilization rate. The fourth is content: a jacket was ordered but trousers were produced. Let’s talk about that some other time.
Often it’s not worth making products into stock, as they get obsolete. Making into stock is based on guessing: surely someone will buy these one day. What if nobody buys? A wrong guess. Many companies have gone bankrupt because of this efficiency philosophy: their money was driven into inventory with great efficiency but products then became obsolete. Fortunately, services cannot be produced into stock.
The earlier statement of efficient utilization of production capacity already includes a mind-set of high utilization rate. If guessing is unfavorable and therefore making into stock is not preferred, but still a high utilization rate is reached for, the delivery lead time is left as a place for flexibility. If really a high utilization rate is reached, a thick order book comes as a bonus. Thick order book = long queueing time, with customer’s eyes.
If the flexibility is set into utilization rate (it will never end up there by itself), one can manage with small stocks, even without, and customers still don’t have to wait. Lower utilization rate is annoying, but this isn’t so bad if the profit e.g. triples, as often has happened.
The benefit of no queues, i.e. low utilization rate, comes through the balance sheet. The unit cost rises but so does profit through a slimmer balance sheet. However, the balance sheet doesn’t automatically go down, there are sad examples of this also in listed companies. Which does your management team examine longer, the profit & loss statement or the balance sheet? Heavy balance sheet = big threat! By the way, financial department is not in charge of the balance sheet contents, although they count the numbers in it.
The correct philosophy?
The starting point of choosing the philosophy is to understand the uncertainty of demand. The fire brigade doesn’t know in advance where to go and with how many cars. They have chosen such a philosophy that they don’t need to know. A customer order is a very exact forecast. If the company knows the actual demand for its products, it may choose to set the flexibility to the delivery lead time (if the customer accepts to wait) or inventory (if one has the money and the courage) or both.
Customer’s perspective? All the money comes from the customer and only from there. It might be worthwhile to listen to what the customer thinks about the alternative philosophies, including the consequences. The more turbulent the world changes to, the more important it is to be able to live without queues and inventories, both of which have their threats. The fire brigade has made a wise choice.
So, what was the fire brigade’s production control method? They really don’t seem to have one. If you know how to live without a work queue (order book), you don’t need much of control, you just execute right away. Putting it very sharp, it could be thought that production control - which is only one part of the enterprise resource planning - is actually a management system for queues. You might be able to live without one, some are already doing it. (And after saying this, I guess I’ll be banned…)
Happy Pre-Christmas party season for everyone, let’s meet in taxi queue!
Hannu Vierimaa
The author is a BSc (Eng) who worked for the first 16 years of his career in four business groups of Nokia Corporation in 12 different jobs. The years since 1999 he has spent on a personal exploration trip as a consultant, aiming to help his customers to get rid of queues. The biggest improvement has been 2800 %, or 28 times better performance.
Whether you agree or disagree, please contact
hannu.vierimaa (at) processman.com
or +358 400 622 711.