equipment replacement decisions and lean manufacturing

Robotics and Computer Integrated Manufacturing 18 (2002) 255–265

Equipment replacement decisions and lean manufacturing

William G. Sullivan, Thomas N. McDonald, Eileen M. Van Aken

Grado Department of Industrial and Systems Engineering, Virginia Polytechnic Institute and State University, Blacksburg, VA, USA

Abstract

Traditional manufacturing systems are built on the principle of economies of scale. Here, the large fixed costs of production are

depreciation-intensive because of huge capital investments made in high-volume operations. These fixed costs are spread over large

production batch sizes in an effort to minimize the total unit costs of owning and operating the manufacturing system. As an

alternative to ‘‘batch-and-queue,’’ high-volume, and inflexible operations, the principles of the Toyota Production System (TPS) and

lean manufacturing have been widely adopted in recent years in the US [1–4]. In this paper, we illustrate an equipment replacement

decision problem within the context of lean manufacturing implementation. In particular, we demonstrate how the value stream

mapping (VSM) suite of tools can be used to map the current state of a production line and design a desired future state. Further, we

provide a roadmap for how VSM can provide necessary information for analysis of equipment replacement decision problems

encountered in lean manufacturing implementation. r 2002 Elsevier Science Ltd. All rights reserved.

Keywords: Lean production; Equipment replacement; Cellular manufacturing; Value stream mapping

1. Introduction

Traditional manufacturing systems are built on theprinciple of economies of scale. Here, the large fixedcosts of production are depreciation-intensive becauseof huge capital investments made in high-volumeoperations. These fixed costs are spread over largeproduction batch sizes in an effort to minimize the totalunit costs of owning and operating the manufacturingsystem. Large work-in-process inventories are alsocharacteristic of traditional manufacturing. The resul-tant ‘‘batch and queue’’ operation produces largenumbers of a particular product and then shiftssequentially to other mass-produced products.

As an alternative to batch-and-queue, high-volume,and inflexible operations, the principles of the ToyotaProduction System (TPS) have been widely adopted inrecent years throughout the US [1–4]. Application ofTPS principles have led to lean manufacturing (alsocalled lean production, or lean thinking [4]) in whichproduction and assembly cells consisting of product-focused resources (workers, machines, floor space, etc.)are closely linked in terms of their throughput times andinventory control. These cells are typically U-shapedor rectangular and lend themselves to (1) smooth(balanced) work flow across a wide variety of products,(2) elimination of waste, (3) high quality output, (4)

flexible operation, and (5) low total unit productioncosts. Economic benefits attributable to lean manufac-turing include reduced lead-time and higher throughput,smaller floor space requirements, and lower work-in-process [2].

In factories using lean manufacturing, large machinescharacteristic of batch-and-queue processes (typicallyreferred to as ‘‘monuments’’) are often no longer alignedwith lean work cells and are not needed or desired.Instead, smaller more flexible machines are typicallyorganized into work cells devoted to the production of afamily of products [1,4–6]. Workers then operate themachines in the cell to minimize the cycle time for afamily of products, minimize inventory, and maximizequality.

In existing factories, eliminating monuments andinvesting in new, smaller machines can be troublesometo managers who were responsible for originallyapproving a high-volume batch-and-queue manufactur-ing process. Scrapping a massive piece of equipment,which still has a sizeable book value, can be viewed asadmitting that a mistake was made years ago byinvesting in manufacturing technology that quicklybecame obsolete. Therefore, the decision to abandon(or replace) high-volume monolithic machines in favorof cellular manufacturing systems that employ TPS andlean manufacturing principles can be extremely difficult

0736-5845/02/$ - see front matter r 2002 Elsevier Science Ltd. All rights reserved.

PII: S 0 7 3 6 - 5 8 4 5 ( 0 2 ) 0 0 0 1 6 - 9

for managers to make, fraught with subjective factorsbeyond economics.

The purpose of this paper is twofold: (1) to provide aroadmap to illustrate how value stream mapping (VSM)and its associated tools can be used to design a desiredfuture state aligned with lean manufacturing principlesand (2) to examine the economic aspects of replacementdecisions created by lean manufacturing systems usinginformation on anticipated cost savings from VSM. Webegin with a discussion of VSM and its associated tools,how they are used to map a current state and design afuture state. We then use a hypothetical example toquantify the typical economic benefits associated withlean manufacturing. Lastly, we analyze the economictrade-offs arising from a decision to invest in a futurestate including work cells that replace a high-volumetransfer line.

2. Lean manufacturing

Lean manufacturing has been increasingly adopted asa potential solution for many organizations, particularlywithin the automotive [3,7,8] and aerospace [9–11]manufacturing industries. Although a number of prin-ciples and tools appear to be derived from Just-in-Time,cellular manufacturing, and World Class Manufactur-ing, lean manufacturing has emerged relatively recentlyas an approach that integrates different tools to focus onthe elimination of waste and produce products that meetcustomer expectations [4,12].

Womack and Jones [4] used the term lean thinking tolabel the thinking process of Taiichi Ono and the set ofmethods describing the Toyota Production System.James-Moore and Gibbons [13] define key areas offocus, each with associated principles, within the leanmanufacturing approach: flexibility, waste elimination,optimization, process control, and people utilization.These areas of focus and principles can be operationa-lized using specific tools and techniques. A number ofauthors have defined the portfolio of tools/techniques toimplement lean manufacturing [12,14,15]. In this paper,we demonstrate how (VSM) can be used as a means toidentify where waste occurs within the transfer line[4,16].

A value stream is defined as all the value-added andnon-value-added actions required to bring a specificproduct, service, or combination of products andservices, to a customer, including those in the overallsupply chain as well as those in internal operations[4,17]. VSM is an enterprise improvement technique tovisualize an entire production process, representinginformation and material flow, to improve the produc-tion process by identifying waste and its sources [17]. AVSM, both current and future state, is created using apre-defined set of icons (shown in Fig. 1). VSM creates a

common language about a production process, enablingmore purposeful decisions to improve the value stream.

A value stream map provides a blueprint forimplementing lean manufacturing concepts by illustrat-ing how the flow of information and materials shouldoperate [17]. VSM is divided into two components: bigpicture mapping and detailed mapping [12]. Beforestarting detailed mapping of any core process, it is usefulto develop an overview of the key features of that entireprocess. The overview will help accomplish the follow-ing [12]:

* Visualize the flows.* Identify where waste occurs.* Integrate the lean manufacturing principles.* Decide who should be on implementation teams.* Show relationships between information and physical

flows.

Visualizing the flow creates the ability to see where,when, and how both the information and product flowsthrough the organization. As defined in [12], there areseven wastes that can occur in a system.

1. OverproductionFProducing too much or too soon,resulting in poor flow of information or goods andexcess inventory.

2. DefectsFFrequent errors in paperwork or material/product quality problems resulting in scrap and/orrework, as well as poor delivery performance.

3. Unnecessary inventoryFExcessive storage and delayof information or products, resulting in excessinventory and costs, leading to poor customer service.

4. Inappropriate processingFGoing about work pro-cesses using the wrong set of tools, procedures orsystems, often when a simpler approach may be moreeffective.

5. Excessive transportationFExcessive movement ofpeople, information or goods, resulting in wastedtime and cost.

6. WaitingFLong periods of inactivity for people,information or goods, resulting in poor flow andlong lead-times.

7. Unnecessary motionFPoor workplace organization,resulting in poor ergonomics, e.g., excessive bendingor stretching and frequently lost items.

To describe and create an overview of a productionprocess, ‘‘big picture’’ mapping is used [12,18]. Fig. 2 is ageneric example of a big picture map for current statesituation in a hypothetical transfer line. Fig. 2 encapsu-lates the five basic phases in the big picture mappingexercise [12]:

* Define customer requirements.* Map information flows.

W.G. Sullivan et al. / Robotics and Computer Integrated Manufacturing 18 (2002) 255–265256

* Map physical flows.* Link physical and information flows.* Complete the map by making the above information

visual and include a timeline of total lead-time vs. thevalue-added time.

Information concerning product family, customerdemand (when, where, how many, and how often),parts to be manufactured, packaging requirements, andcustomer stock to be held are gathered during thecustomer requirements phase. The information flow

Fig. 1. VSM icons [17].

Production

Control

I ++I

1 day

I

3 days

I

4 days

I

Supplier 4 Week Forecast

Weekly FAX

Weekly Schedule Daily Ship

Schedule

Customer

Weekly

Shipments Daily

Shipments

60/30 Day Forecast

Daily Order

Production Lead Time

9 days2.75 hrs

Value Added Time

165 minutes60 min45 min30 min 1 day30 min

CT = 30 min

CO = 10 min

2 Shifts

CT = 30 min

CO = 66 min

2 Shifts

2

CT = 45 min

CO = 25 min

2 Shifts

CT = 60 min

CO = 90 min

2 Shifts

1

CNC Milling Drilling CNC Turning

3

Finishing

5

Shipping

2

Fig. 2. Current state value stream map of transfer line.

W.G. Sullivan et al. / Robotics and Computer Integrated Manufacturing 18 (2002) 255–265 257

phase gathers data on the customer forecast and howthis information is processed within the organization aswell as forecast information given to suppliers. Physicalflows are concerned with inbound raw materials/components and internal processes. For incoming rawmaterials information on demand, number of deliveries,delivery quantities, packaging, and lead-times is col-lected. Internal processes use information concerningthe key steps within the organization, processing time ofeach step, machine downtime for each process, inven-tory storage points, inspections, rework loops, cycletime, set-up time, number of workers, and operationhours per day. Linking the physical and informationflows is concerned with the type of scheduling informa-tion used, work instructions, and what is done whenproblems arise. To complete the map, a time line isadded at the bottom of the map recording theproduction lead-time and the value added time.

Detailed mapping is done after the big picture map iscomplete [19]. The standard seven tools defined as partof detailed VSM are outlined in Table 1 and described infurther detail in Appendix A. These tools are aimed athelping to identify waste in any system [12,20,21].

The next step in the VSM process is to map theproposed future state [17]. This is shown in Fig. 3 for thelean work cell that replaces the hypothetical transferline. The eight questions that must be answered toconstruct the future state map are listed in Table 2 [17].The five first questions are concerned with basic issuesrelated to the construction of the future state map. Thenext two questions deal with technical implementationdetails such as the details of the control system (e.g.,‘‘heijunka’’). They help define non-mapping details suchas production mix, order release time, etc. Finally, thelast question in Table 2 is related to the definition ofeffort or actions needed (‘‘kaizen’’) to migrate from the

Table 1

Detailed VSM tools [12,20,21]

Detailed VSM tool Description of tool Key categories of waste targeted

Process activity mapping Classifies processes as operations, transports, inspections, delays,

storages, and where communications occur

Waiting, transportation, inappropriate

processing, unnecessary motion,

unnecessary inventory

Attempts to eliminate unnecessary activities, simplify and combine

activities, resequence operations for reduced waste

Supply chain response matrix Evaluates and portrays inventory levels and critical lead-time

constraints

Waiting, unnecessary inventory,

overproduction

Evaluates the need to maintain stock within the context of short

lead-time replenishments by identifying large sectors of time and

inventory

Production variety funnel ‘‘Visual mapping technique that plots the number of variants at

each stage of the manufacturing process’’ [12, p. 33]

Inappropriate processing, unnecessary

inventory

Provides understanding of how the supply chain operates and the

accompanying complexity that needs to be addressed

Helps identify where buffer stocks may be held prior to

customization, where to target to inventory reductions, and

where to make changes in the processing of products

Quality filter mapping Identifies where quality problems exist Defects

Classifies defects as either product, service, or internal scrap

Each defect is mapped along the supply chain

Establishes both internal and external quality levels

Demand amplification mapping Graph of quantity against time Unnecessary inventory, overproduction,

waiting

Used either within an organization or along the supply chain

Highlights the bullwhip effect

Used to see the extent of amplification as orders move upstream,

gain insight into batch scheduling policies, and analyzing inventory

decisions

Decision point analysis Determines where the point at which the value stream goes from

pull to push

Overproduction, waiting, unnecessary

inventory

Aids in the assessment of processes that operate both upstream

and downstream from the decision point

Allows the develop of ‘‘what if’’ scenarios to view the operation of

the value stream if the decision point is moved

Physical structure mapping Provides an overview of the value stream Transportation, unnecessary inventory

Helpful in determining industry outlook, how the industry

operates, and in focusing attention to areas that are not receiving

sufficient attention


current to the future situation. The final step in the VSMprocess is to develop an action plan to implement thefuture state.

In many cases, the future state can be designed usingthese questions in a straightforward manner, using onlythe manual approach prescribed in Rother and Shook[17], to create a feasible future state that can beimplemented quickly. However, there are some situa-tions where other analysis tools, such as discrete eventsimulation, may be needed for more complex produc-tion lines (as described in [22]). Next, we will discuss anexample of how the information provided from VSM

can be used to conduct economic justification analysis ofa lean manufacturing cell.

3. Example of legacy system replacement

As shown in Fig. 2, a weekly MRP schedule based oncustomer needs is generated for each process step of theproduct line and is used to push orders throughproduction. Each product goes through a turningprocess, a milling process, a drilling process, and afinishing process prior to shipment. Each processoperates two 8-h shifts. The line at the bottom of thecurrent state map in Fig. 2 represents manufacturingprocessing time and time in inventory for the productionprocess. The observed production lead-time is 9 dayswhile the observed value-added time is 165 min. Asshown in Fig. 2, there are significant amounts ofinventory between each of the process steps. Largeinventories tie up capital, hide defects, allow for longset-up times, and require floor space that couldotherwise be utilized [2–4,12,21]. The current state mustbe changed in order to improve the system (see Table 2).

3.1. Moving from current state to future state

In completing a current state map and in addressingthe guiding questions in Table 2, typically a design teamis assembled and is composed of people in operations,

Remove

monuments

Reduce

setup &

scrap

Implement

pull

Production

Control

8 hours 6 hours

Supplier 4 Week Forecast

Weekly FAX

Weekly ScheduleDaily Ship

Schedule

Customer

Weekly

Shipments Daily

Shipments

60/30 Day Forecast

Daily Order

Production Lead Time

16 hrs 45 min

Value Added Time

165 minutes60 min45 min30 min

Product

Daily

Order

30 min

Raw

Material

Milling Drilling Turning

3

Finishing

5

Shipping

2

CT = 30 min

CO = <1 min

2 Shifts

CT = 30 min

CO = 20 min

2 Shifts

CT = 45 min

CO = 5 min

2 Shifts

CT = 60 min

CO = 30 min

2 Shifts

Fig. 3. Future state value stream map of lean production line.

Table 2

Guiding Questions for Future State Design [17]

Future State Questions

Basic 1. What is the takt time?

2. Will production produce to a finished goods

supermarket or directly to shipping?

3. Where can continuous flow processing be utilized?

4. Is there a need for a supermarket pull system

within the value stream?

5. What single point in the production chain will be

used to schedule production?

Heijunka 6. How will the production mix be leveled at the

pacemaker process?

7. What increment of work will be consistently

released from the pacemaker process?

Kaizen 8. What process improvements will be necessary?


scheduling, engineering, materials, and purchasing. Thiscross-functional composition of skills is essential toaddress how to create the desired future state. Thedesign team, after completing the current state map,should use detailed mapping tools as appropriate toexplore alternative future states and decide upon adesired future state. As shown in Table 1 and describedin Appendix A these tools are specifically aimed attargeting categories of waste, many of them in particularfocusing on unnecessary inventory.

From the current state shown in Fig. 1, severalalternative future states may be explored by the designteam. An action plan is developed to determine whatchanges are necessary to achieve the future state. Theplan should detail what areas will be improved first,how they will be improved, and the order for otherimprovements. Beyond these listed in Table 1, there arealso additional tools (e.g., Spaghetti Diagrams) that canbe used to help reduce floor space, lower worker traveltimes, and increase the flow of products. In our example,we focus on the reduction of inventory first. All but oneof the detailed mapping tools (quality filter mapping)aids in the reduction of inventory. Reducing work-in-process (WIP) will also lower the defect rate, due tofewer parts being manufactured prior to discovery ofdefects [4,16,17,23]. After making the improvementsrequired to reduce WIP, defects can be targeted. Qualityfilter mapping is a tool targeted specifically for defectreduction. This tool, combined with improvement indefect rates as a result of the WIP reduction, enablesoverall improvements in defects. In this example,therefore, the primary focus is on improving inventoryand defects, with additional improvements targeted inother areas (e.g., set-up reduction). Fig. 3 illustrates thedesired future state, after having explored alternativeconfigurations using the seven detailed mapping tools,and the guiding questions in Table 2.

As shown in Fig. 3, the large amounts of WIPbetween the processes have been removed by the U-shaped work cells. The reduction in WIP requires thatset-up times at each process be reduced as well. Set-upreduction requires each process to develop proceduresand tools that allow for quick and precise set-ups [24].The future state map uses the same process steps as thecurrent state map, but has a production lead-time of16 h and a value-added time of 165 min. By lowering theamount of WIP between each process and usingmistake-proofing, the cost of inventory and the cost ofdefects can be reduced. These savings can then be usedin determining if it is economically worthwhile toimplement the lean manufacturing concepts embeddedin the future state.

Previous research and case studies provide reasonableestimates for quantifying the cost savings associatedwith lean manufacturing cells. In the design of severalU-shaped cellular machining operations to replace an

existing transfer line, increased throughput and qualitycan be estimated to be worth $100,000 per year for thishypothetical example, as explained below. Lean manu-facturing implementation has been shown to reduceWIP by 33–68% and reduce defects by 45–90% [2]. Inthis example, we use as a conservative estimate animprovement in WIP of 33% and a reduction in defectsof 45%. An analysis of the current state map translatesthese percentage improvements into economic figures.The manufacturing line operates two 8-h shifts 250 daysper year. The current production rate is 70 units per day,the current defect rate is 10%, and current WIP is 2500units with a 20% annual carrying cost. The cost of WIPin the current state is estimated to be $600,000 annuallyand each part scrapped has an associated cost of $76.20.The reduction in WIP results in a one-time savings of$198,000. With a 20% carrying cost this results in a$39,600 annual savings over the life of the line. Thereduction in the defect rate results in a savings of$240.03 per day or approximately $60,000 per year. Thetotal savings therefore is approximately $100,000 peryear.

The lean manufacturing cell will have a capitalinvestment of $330,000 in 2001 and will be installedand de-bugged for operation commencing in January2002. Retrofitting various components of the transferline to integrate them into the flexible work cells isincluded in this investment. Consequently, the residualvalue of the existing transfer line (the legacy system) isexpected to be only $20,000 and it has a current bookvalue of $100,000. The U-shaped work cells will have afive-year MACRS property class for tax purposes, andthey will have no residual value when they are disposedof at the end of year six. The after-tax MARR is 12%per year, and the effective income tax rate is 40%. Keyanalysis questions to investigate are: Should thisinvestment in the lean manufacturing work cell andassociated technology be made? What happens to thelost value of the old transfer line?

3.2. Equipment replacement analysis

First, we examine the sunk cost associated with thetransfer line. The $100,000 book value is a sunk cost andis irrelevant, except to the extent that it affects incometaxes. A long-term loss in value of $100,000–$20,000=$80,000 is experienced if we implement thelean manufacturing work cells and dispose of (abandon)the existing equipment in the transfer line. In thishypothetical example there are two monuments, a CNCmilling machine and a CNC turning machine. Ifmanagement dislikes this ‘‘long-term loss’’ and prefersto write off the $100,000 book value as depreciation,serious errors can be made which jeopardize futureprofits to the company.


If the existing transfer line is somewhat technologi-cally obsolete, its cost pattern looks like that shown inFig. 4. In Fig. 4, CR is the capital recovery cost, and itincludes future depreciation and the imputed interestcost of having money tied up in the old equipment (i.e.,its market value, if any). The CR curve is usually fairlyflat as shown in Fig. 4. Future operations and main-tenance (O&M) expenses typically rise very sharply astime progresses. The economic life is the point in timethat minimizes the sum of CR and O&M, and often it isone year for a technologically obsolete system. In ourexample, we assume that the economic life of thetransfer line is one year, which means that immediatereplacement should be considered. The main question atthis point centers on the profitability of the proposedreplacement in the lean manufacturing work cell. Next,we examine the economic merit of selling the bulk of thetransfer line for its market value and investing in thelean manufacturing system.

With reference to the topic of ‘‘replacement analysis’’discussed in Sullivan et al [25], the after-tax consequenceof selling the transfer line for $20,000 is shown in Fig. 5.We then use this after-tax cash flow, which includes a$32,000 tax credit created by the long-term loss ondisposal of $80,000, to offset the capital expenditure of$330,000 for the U-shaped work cells. The entire worksheet for the proposed machining cells is shown inFig. 6. The $80,000 loss is written off against adepreciation reserve account that has been establishedsolely for this type of accounting transaction. It is notcorrect to add the sunk cost of $80,000 to the capitalinvestment in the new cellular workstations.

The present worth of the after-tax cash flows createdby the proposed cellular manufacturing system is:

PWð12%Þ ¼ � $278; 000 þ $86; 400 ðP=F; 12%; 1Þ

þ $102; 240 ðP=F; 12%; 2Þ

þ $85; 344 ðP=F; 12%; 3Þ

þ $75; 208 ðP=F; 12%; 4Þ

þ $75; 208 ðP=F; 12%; 5Þ

þ $67; 600 ðP=F; 12%; 6Þ

¼ $66; 114

Because the PWð12%Þ > 0; this proposed investmentrepresents a profitable use of the firm’s scarce capitalresources. In fact, the economic value added (EVA) canbe shown to be $66,114 (A/P,12%,6)=$16,079 per year[26]. This popular metric indicates that the proposedcapital investment creates shareholder (equity) value ofover $16,000 per year. Therefore, the future state shouldbe adopted, and the existing transfer line should bechanged to a lean manufacturing cell.

4. Conclusions

Kaplan [27] identifies several tangible and intangiblebenefits of CIM that can be extended to the analysis ofbenefits in lean manufacturing. The tangible benefitsproposed by Kaplan include inventory savings, reduc-tion in floor space, and higher quality. In particular,WIP and finished goods inventory can be reducedthrough improved flow, increased flexibility, betterquality, and improved scheduling [27]. Most financialaccounting systems do not provide a good estimate forreductions in employee walking distance and travel time,and space freed up by lean manufacturing. Kaplan [27]suggests estimating the value as an opportunity costof the space, either in terms of its rental value orannualized cost of new construction. Higher qualityresults from fewer defects produced before the defect iscaught, equipment that stops producing when a defect isdetected (autonomation) [16,23], and standardized workprocedures that have all workers performing theoperation in the same manner.

The intangible benefits proposed by Kaplan [27]include greater flexibility, shorter throughput andlead-times, and increased learning. Greater flexibility is

EquivalentAnnualCost

Now

O & M

CR

Time

Fig. 4. Transfer line cost pattern.

EOY Before-Tax Cash Flow

Depreciation Taxable Income Income

Tax @

40%

After-Tax Cash Flow

2001 $20,000 Ø $20,000-$100,000

$32,000 $52,000

Fig. 5. After-tax consequence of selling transfer line.


achieved by having smaller, more versatile equipmentand a multi-skilled workforce. With the removal of largequantities of WIP, throughput and lead-time arereduced. Reductions of as much as 95% have beenreported in some organizations [27]. There is also amarketing advantage from being able to meet customerdemand within shorter lead-times. Increased learning isa result of exposure to technology and tools associatedwith lean manufacturing. Even if the equipment doesnot pay for itself, the experience gained by managers,floor associates, and maintenance may prove valuablewhen future technologies are implemented [27].

Although we have utilized a hypothetical example inthis paper, the concepts and tools presented here caneasily be applied to actual situations. This paper hasillustrated a roadmap for how VSM can be an importanttool to define, analyze, and quantify waste, such asexcess WIP and defects, as shown in this example.Visualizing sources of waste in the current state, as wellas the potential benefits that can be realized inimplementing a future state for a product value stream,can help managers more easily and more objectivelyconduct equipment replacement analyses as they con-sider and pursue the adoption of lean manufacturing. Inaddition, this approach and analysis method can beextended to other types of capital investments, beyondtraditional processing equipment, such as conveyors andother material handling systems.

Appendix A

A.1. Process Activity Mapping

Process activity mapping has its origins in the field ofindustrial engineering and is also known as processcharting [20,21]. This is a key tool in the detailed VSMprocess [12]. There are five stages to this approach:

1. Study of the flow processes.2. Identification of waste.

3. Consideration of the efficiency of the sequencing.4. Consideration of the layout or transportation

routing.5. Determining if all steps are necessary [20,21].

Process charting involves following three simple steps:(1) Fill in the main body of the chart, (2) Assign flows,and (3) Analysis [12]. To fill in the chart the processsteps are recorded starting with the trigger point. Allactivities, areas where they occur, distances moved, timetaken, and the number of people involved are recorded[12,20,21,28]. Konz [28] identifies five standard types ofactivities (1) operation, (2) transport, (3) inspection, (4)delays, and (5) storage. Hines and associates [12,20,21]agree on the first four, but combine the ‘‘storage’’activity with the ‘‘delay’’ activity. Hines and Taylor [12]give the following guidelines for the activities:

* Operations add value or set a rule that an organiza-tion is willing to pay for.

* Transports concern movement around the plant orbetween sites. An organization would prefer to notpay for this.

* Inspections are checks on quality or quantity ofproduct or information.

* Delays are where the product or information has noactivity or is waiting.

Hines and Taylor [12] add one additional category forinformation flows: Communications. Communicationsrefers to transmission or movement of information andcan involve time and distance. The last step is theanalysis. During analysis the number of operations,moves, inspections, storages, delays, and total distancemoved can be summarized [28]. A flowchart of the typesof activities being undertaken can then be developed.The completed process activity map can then be used asthe basis for further analysis. This is often achievedthrough the use of techniques such as 5W1 H (Who,What, When, Where, Why and How) [28]. The basis of

EOY

A Before-TaxCash Flows

B MACRS Dep’n.

C=A-B Taxable Income

D=-0.4(A-B)

IncomeTaxes

A+D After-Tax

Cash Flows

2001 -$330,000 Ø Ø Ø -278,000*2002 100,000 66,000 34,000 -13,600 86,4002003 100,000 105,600 -5,600 2,240 102,2402004 100,000 63,360 36,640 -14,656 85,3442005 100,000 38,020 61,980 -24,792 75,2082006 100,000 38,020 61,980 -24,792 75,2082007 100,000 19,000 81,000 -32,400 67,600

*-$330,000 + ($52,000 from disposal of the transfer line)

Fig. 6. Worksheet for determining after-tax cash flows.


this approach is to try to eliminate activities that areunnecessary, simplify or combine others, and seeksequence changes that will reduce waste [20,21]. Processactivity mapping focuses on the wastes of waiting,transportation, inappropriate processing, unnecessarymotion, and unnecessary inventory.

A.2. Supply chain response matrix

The supply chain response matrix has its origins in thetime compression and logistics movement [20,21]. Thesupply chain response matrix is used to evaluate andportray the inventory levels and critical lead-timeconstraints for a particular process. It allows themanager to evaluate the need to maintain stock withinthe context of short lead-time replenishments byidentifying large sectors of time and inventory [12].The horizontal axis represents the cumulative lead-time for both the supplier and internal operations. Thevertical axis represents the cumulative amount ofinventory (in days) at specific points in the supplychain. This shows the typical number of working days ofinventory in the system. To develop the chart, theamount of inventory stored and the lead-time requiredto plan, produce, and move the materials to the nextoperation are calculated. This information is placed on asimple x2y chart making sure to use the cumulativeamount of time and inventory [12]. Each individuallead-time can then be targeted for improvement, thusfocusing on the wastes of waiting, unnecessary inven-tory, and overproduction [20,21]. Hines and Taylor [12]state that the logistics pipeline map is a complement tothe supply chain response matrix. The logistics pipelinemap shows inventory levels on the vertical axis andcumulative process time on the horizontal axis. Withineach organization, it identifies where inventory and timeaccumulate.

A.3. Production variety funnel

The production variety funnel ‘‘is a visual mappingtechnique that plots the number of variants at each stageof the manufacturing process [12] and is similar to IVATanalysis which views internal operations as consisting ofactivities that conform to I, V, A, or T shapes:

* ‘‘I’’ shapes are used for organizations that consist ofunidirectional, unvarying production of multipleitems. Chemical plants would be and example of an‘‘I’’ plant.

* ‘‘V’’ shapes are used for organizations that uselimited raw materials processed into a large varietyof products. Textiles and metal fabrication industriesare examples of ‘‘V’’ plants.

* ‘‘A’’ shapes are used for organizations that havemany raw materials but a limited number of finishedproducts with streams of raw materials using

different facilities. The aerospace industry is anexample of an ‘‘A’’ shape.

* ‘‘T’’ shapes are used to describe organizations thathave a multiple combinations of products using alimited number of components made into semi-processed parts used in a range of different versionsof final products. The household appliance industryand the electronics industry are example of a ‘‘T’’shape [20,21].

The process path is on the horizontal axis and thenumber of products is on the vertical axis of theproduction variety funnel. For each product, the processpath through the facility is identified. Then the numberof products created at each stage of the conversionprocess is identified, and the final number of outputsproduced from each stage is plotted.

Such delineation allows the mapper to understandhow the supply chain operates and the accompanyingcomplexity that needs to be managed. The productionvariety funnel can be helpful in identifying where bufferstocks may be held prior to customization, where totarget inventory reduction and where to make changesin the processing of products [20,21]. The productionvariety funnel focuses on the wastes of inappropriateprocessing and unnecessary inventory.

A.4. Quality filter mapping

Quality filter mapping is a tool developed by Hinesand Rich [21] that is used to identify where qualityproblems exist in the value stream. The map showswhere three different types of quality defects occur in thevalue stream:

1. Product defectsFdefects found in goods producedthat are passed on to the customer.

2. Service defectsFdefects that are results of anaccompanying level of service rather than directlyrelated to the goods themselves. Hines and Rich [21]state that the most important of these service defectsis inappropriate delivery in conjunction with incor-rect documentation.

3. Internal scrapFdefects that are caught prior todelivery to the customer.

Quality filter mapping is designed to establish bothinternal and external quality levels as well as levels ofcustomer service. Each of the defects is mapped alongthe supply chain. This can include the distributor; theassembler; first, second, and third tier suppliers; anddefects in raw materials. This approach clearly identifieswhere defects are occurring and thus identifies wherethere is wasted effort. Quality filter mapping is used toprimarily to identify the waste of defects. The tool canbe used internally by using individual departments or


work areas instead of different companies (e.g., suppli-ers) [12].

A.5. Demand amplification mapping

The demand amplification map is a graph of quantityagainst time. It shows the batch sizes of a product atdifferent stages of the production process [12]. It can beused within an organization or along the supply chain.The ‘‘bullwhip’’ or ‘‘Forrester effect,’’ where demandchanges amplify the further one gets away from theoriginal demand source is an important result of thistool [12]. This tool can be used to: (1) visualize the extentof the amplification as orders move upstream, (2) gaininsight into batch scheduling policies and batch sizing bylooking at both quantity and timing, and (3) analyzeinventory decisions [12]. There are six steps in thedevelopment of the demand amplification map [20,21]:

1. Identify the stages to collect data from.2. Identify products to be studied.3. Decide on the time horizon.4. Decide on the analysis period.5. Collect batch size and inventory data.6. Plot.

The demand amplification map is a powerful tool forevaluating inventory and scheduling policies. Whenusing the demand amplification map, mappers mustdistinguish between the amplification due to change-overs and the amplification due to inventory policies.There should be low variation in batch sizes and thebatches should arrive at regular time intervals [20,21].The analysis can provide information that would behelpful in redesigning the value stream and managingfluctuations in demand. Demand amplification mappingfocuses on the wastes of unnecessary inventory, over-production, and waiting.

A.6. Decision point analysis

The decision point is the point in the value streamwhere demand-pull gives way to forecast-push [20,21].Understanding where this point lies is beneficial for tworeasons:

1. With respect to the present, this knowledge allows forthe assessment of processes that operate both up-stream and downstream from this point. This is toensure alignment with the relevant push or pullphilosophy.

2. With respect to the long-term, this allows for thedevelopment of ‘‘what if’’ scenarios to view theoperation of the value stream if the decision point ismoved. This may allow for a better-designed valuestream.

Decision point analysis focuses on the wastes ofoverproduction, waiting, and unnecessary inventory.

A.7. Physical structure mapping

Physical structure mapping is the second tool of theseseven tools that was developed by Hines and Rich [21].Physical structure mapping is used to obtain an over-view or industry level view of the value stream. Thisoverview is helpful in determining what the industrylooks like, how it operates, and in focusing attention toareas that are not receiving sufficient attention.

This tool has two parts: volume structure and coststructure. Part (a) shows the structure of the industry bythe tiers that exist in both the supplier and distributionareas with the assembler located in the middle. Part (b)shows the industry in a similar manner, except that itlinks the organizations according to the value-addedprocesses. The physical structure map addresses thewastes of transportation and unnecessary inventory.

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