1. Manufacturings Holy Grail:A Practical Science for Executives andManagersMark L. Spearman, PhDPresidentFactory Physics is a registered trademark. All rights reserved.

2. Strategy. Execution. Profit.Medical device companies feel economicpressure, record M&A levelsMarch 1, 2012

3. Strategy. Execution. Profit.If medical devices companies want to continue tomake money as prices face continuedpressure, their only option is to take cost out McKinsey and Company Design to Value 2010

4. Strategy. Execution. Profit.The Medical Device Tax: Stop Dreaming andStart Planning Forbes, April 9, 2013

5. Strategy. Execution. Profit.The Layoff List: Medtech Cutbacks Continuein 2013 QMED Daily, May 31, 2013

6. Whats a manager to do?

7. Strategy. Execution. Profit.Strategy. Execution. Profit.Seek the Holy Grail Higher efficiency leading to lower cost Better customer service creating greater sales Less inventory yielding more cash High profitability! OR, you could

8. Strategy. Execution. Profit.Strategy. Execution. Profit.Cant Do That Must reduce costsincrease utilization of labor andequipment Can you decrease cost by meeting demand with fewershifts? Postpone CapEx? Must increase cash flowconvert inventory intocash Is it possible to reduce inventory? Improve customer service? Must maintain (increase) customer servicehigh ontime delivery Give customer anythinganytime?

9. Strategy. Execution. Profit.Strategy. Execution. Profit.Before you can answer the hardquestions Can you answer the easy questions? If you change X in your supply chain, what happensto important measure Y? Does the important measure Go up? Go down? Stay the same? Simple! Just answer the five questions (threequestions)!

10. Strategy. Execution. Profit.Strategy. Execution. Profit.Question 1: Throughput and Revenue In a push production system controlled by MRP thathas utilization of 90% What happens to the long term output rate (throughput)when we speed up a bottleneck machine?

11. Strategy. Execution. Profit.Strategy. Execution. Profit.Question 2: Throughput and Cycle Time In a push production system controlled by MRP thathas utilization of 90% What happens to the throughput when we install a one-piece-flow system?What happens to cycle time?

12. Strategy. Execution. Profit.Strategy. Execution. Profit.Question 3: Inventory and Cash In a make-to-stock system using a reorder quantityof 100 units, with an imperfect forecast What is the fill rate (% on hand) if the safety stock is zero? Somewhat less than 50% Around 50% Greater than 50%

13. Strategy. Execution. Profit.The Hard Questions Customer Deliveryo How long do theywait?o Do they wait at all? Capacityo Ours or outside?o 24/7 or have backup capacity? Inventoryo How much?o What?o Where? Classes of producto Standard quick-ship?or Custom?o Anything they wantany time they want it?

14. Strategy. Execution. Profit.Answers from science What to make? When to make it? How much to make? How many people andmachines do I need? How much inventoryshould I have?High On-time delivery, low cost, low inventory

15. What are the right questions?What structure works best for your business?HighProfitabilityLowCostsLow UnitCostsLessVariabilityHighUtilizationLowInventoryQualityProductHighSalesManyproductsFastResponseMoreVariabilityHighInventoryLowUtilizationShortCycle TimeHigh CustomerServiceHighThroughputThe Goal

16. Strategy. Execution. Profit.The Fundamental Factory Physics FrameworkTwo essential componentsDemandTransformation Flows StocksAs variability decouplesdemand and transformationOnly three buffers:1. Inventory2. Time3. CapacityFactory Physics Framework links financial and operational goals.ProductionAssemblyDistributionMarket Demand Market DemandPlannedDemandPlannedDemandDemand Stock Flow Diagram- Work In Process (WIP)- Flow- Stock (Inventory)PROFIT DROPS

17. Strategy. Execution. Profit.Operations Strategy: Choose the future! Operations strategy is selecting the portfolio of: Inventory Buffermoney tied up in inventory Time Bufferresponsiveness to customer (backorder time, fill rate) Capacity Bufferreplenishment frequency (setups, purchase orders) Variabilityin demand, forecast, and replenishmentInventorySuppliers CustomersCapacity InventoryVariabilityTimePortfolio management determines performanceand profitability.

18. Strategy. Execution. Profit.Application of Practical Science

19. Strategy. Execution. Profit.Some Basic Factory Physics Principles Littles Law Relates basic plant performancemeasures VUT Equation Quantifies queueing effects Relates variability, capacity, andtime buffers Variance of Lead Time Demand Drives inventory and service Accounts for variability in demandAND supplyeeaqtuucctUV12CT22Appropriate use provides predictive controland optimal performance.2222LD dughput)Time)(Thro(CycleWIP

20. Strategy. Execution. Profit.Push ProductionBNMTSDemandFinishEarly StockWIPWhichever is less!DemandInOutputRateOutput Rate equals Demandor BN Rate

21. 7.2 parts per day with 3 day cycle time, 16 hour work days.DemandGraph showing WIP, cycle time,demand, utilization.

22. Strategy. Execution. Profit.Strategy. Execution. Profit.One Piece FlowOnePieceTakt Time = 30 seconds30 seconds30 seconds 30 secondsStation 1 Station 2 Station 3OnePieceOnePiece

23. Strategy. Execution. Profit.Takt Time and Mean TimeMean of 25 sec, takt time of 30 sec, 95% done in time.0.00000.02000.04000.06000.08000.10000.12000.14000 10 20 30 40 50 60SecProbdensity

24. Strategy. Execution. Profit.Strategy. Execution. Profit.Assembly Line CapacityWidgetAssemblyTakt Time = 30 secondsStandard Work= 25 secondsStandard Work= 24 secondsStandard Work= 22 secondsStation 1 Station 2 Station 3Capacity Buffer =1 24/30 = 20%Capacity Buffer= 16.7 %Capacity Buffer= 26.7 %25 sec in 30 takt is the same as working 6 days to do 5 days of demand.WidgetAssemblyWidgetAssembly2 hour make-up period for every 10 hour work period.

25. Strategy. Execution. Profit.Graph showing WIP, cycle time,demand, utilization.7.2 parts per day, with 0.7 day cycle time, 23 hour work dayDemandShorter cycle time at the cost of7 extra hours per day

26. Strategy. Execution. Profit.Strategy. Execution. Profit.Optimal Inventory Policies?Traditional Methods Many times are too simple or simply wrong1. Too simple: EOQ does not considerrandomness2. Wrong: Traditional safety stock model,Safety Stock = z SD(Lead Time Demand)where z is from normal table

27. Strategy. Execution. Profit.Example:Large ROQ, No Safety Stock0204060801001200 10 20 30 40 50 60 70DayQuantityIP(t) I(t) IO(t) B(t) DATA: ROQ = 60, ROP = 50, AvgLT = 10, AvgDmd = 5 DmdWhat is the customer service level?What is the cycle service level?~96%~60%

28. Strategy. Execution. Profit.Back to the Hard Questions Customer Deliveryo How long do theywait?o Do they wait at all? Capacityo Ours or outside?o 24/7 or haverecourse? Inventoryo How much?o What?o Where? Classes of producto Standard quick-ship?o Custom?o Anything they wantany time they want it?

29. Strategy. Execution. Profit.Strategy. Execution. Profit.Inventory Issues Replenishment frequencycapacity buffer Order quantity determines replenishment frequency Stock out frequencytime buffer Safety stock determines stock out frequency Inventory Investmentinventory buffer Inventory depends on order quantity and safety stockand item cost

30. Efficient Frontier for StockMinimum inventory for given service andcapacity levels.OptimalPoliciesConvert strategyto tactics!

31. Strategy. Execution. Profit.Making it real!

32. Strategy. Execution. Profit.Plan Capacity(work force, OT,outsourcing)OptimizePlanning RulesApply Rules inERP+/- Long-termCapacity?Execute(general pull)Use RecourseCapacity?StrategyPoliciesControlOptimizetoMaximizeCash Flow

33. Strategy. Execution. Profit.Strategy. Execution. Profit.How much capacity do you need? Plan to run 25 days per month Total inventory required: $6,016,000 On-time delivery: 96% Cycle Time: 12 days Plan to run 26 days per month Total inventory required:$3,948,000 On-time delivery: 96% Cycle Time: 8 days Strategic Decisioncost vs. inventory

34. Strategy. Execution. Profit.Plan Capacity(workforce, OT, outsourcing)OptimizePlanning RulesApply Rules inERP+/- Long-termCapacity?Execute(general pull)Use RecourseCapacity?StrategyPoliciesControl

35. Strategy. Execution. Profit.Cash Flow Optimization Before optimization Cycle Times: 49, 71 days WIP & FG value =$4,330,000 After optimization Cycle Times: 24, 15 days WIP & FG value =$1,290,000Same capacity in both situations.

36. Application to Particular SituationRaw MaterialInventoryDemandProductionFG DemandHow do we tie this all together?

37. Strategy. Execution. Profit.Strategy. Execution. Profit.The S&OP Process: Three Basic Steps StrategyAssess demand and capacity What is the demand? Is it sufficient? More than we canhandle? Do we meet financial objectives? PolicyBalance inventory, response time, and capacity Policies reside in the ERP system Optimize policies to maximize cash flow Control Achieve financial and service performance through executionof optimally defined processes. Continually improve.S&OP is where we implement Factory Physics

38. Strategy. Execution. Profit.Framework provides link between theCurrent and the PossibleEfficient frontiers provide executive view, connect to daily execution.A three plant supply chainor a three machine production line.Five SKUs or 5,000 SKUs.Flows Stocks

39. So, how did you doThree questions

40. Strategy. Execution. Profit.Strategy. Execution. Profit.Question 1 In a push production system controlled by MRP thathas utilization of 90% What happens to the long term output rate (throughput)when we speed up a bottleneck machine?Throughput is set by demand or the bottleneck, whicheveris less. At 90% utilization, it is demand No change to long term throughput if you speed up thebottleneck

41. Strategy. Execution. Profit.Strategy. Execution. Profit.Question 2 In a push production system controlled by MRP thathas utilization of 90% What happens to the throughput when we install a one-piece-flow system?One piece flow:Low WIPShort cycle timeLower throughputMore overtime to meet same demand

42. Strategy. Execution. Profit.Strategy. Execution. Profit.Question 3 In a make-to-stock system using a reorder quantityof 100 units, with variability in replenishment times,and an imperfect forecast What is the fill rate (% on hand) if the safety stock is zero? Somewhat less than 50% Around 50% Greater than 50%Greater than 50% The cycle fill rate (the probability of running out at leastonce during the replenishment cycle) will be around 50% The customer fill rate (what the customer sees) will begreater than 50% if the lot size is greater than one.

43. Strategy. Execution. Profit.Strategy. Execution. Profit.So, how did you do? Got them all

44. Strategy. Execution. Profit.

45. Strategy. Execution. Profit.Or not so well

46. Strategy. Execution. Profit.Strategy. Execution. Profit.Go have a drink and call me in themorning spearman@factoryphysics.com (979) 846-7828