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Measurable economic consequences of investments in flexible capacity
International Journal of Production Economws, 23 ( 1991 ) 47-57
47
Elsevier
Measurable economic consequences of in flexible capacity
nvestments
Michael Corbey* ~acultv oflnduso ml Eng, nee, mg and Management ~ctcnce Et nd t,o ~en I/nn t.,~tl o/ Technology P 0 BoA 513, 5600 MB Emdhoven, 7lie Netherlands
Abstract Investments in flexible cqpacltl2¢ are large It is not surprising that a sohd econom,e ,nfrastrueture Is a precondition From the straleglc prospect,re the structural support will rest on c aahtative grounds Yt t, the central problem posed m the present article ts how the economic consequences of mves),~qcnts in flex~b!e :apac,hco c--.r, actual!3 be ~eas_wed h ~s worked out m tlaree steps 1"o begin wm~, tnc j.~t-'.e-T~me concept ~s placed m an integral framework ofgoods-flow control Th~s is essential because ~t will be found that, w~thout th,s anab~ ~ there is a dang, er that the esUmate of the posmve effects will be too optimistic Subsequently, we introduce a concrete proot.c',on situation Lastly, for the selected production $1to:atlorl the concrete economic consequences of a flexible capacity investment o.l: bc c _ _^.~ c-,,. ¢t~r~,no nnmt t~ that the investment will m fact lead to an adjustment ofzhe log~stics concept Foa that reason, the m a x i m u m Just-In-T~me advantages can be reahsed At the same time the possible misrepresentation resulting from "'trad~t)onal" eost~ calculation will be examined
I. Inw~,dnetion
problems internally and those that exist between the various functions ,,n industry assume the form
In recent years, many enterprises have been confronted with problems generated by the growing dyqamws of the market. The features of the dynamic market are expressed in - growth tn customer-specific products (going to segmented ma;kets, mdlvldual customers), - h i g h degree of rood,float,on m products or component parts (short hfe cycles) Compames failing to come to grips with these developments wl|l soon suffer the consequences of greatly intensified competition A high degree of adaptablhty is called for m selhng, production and purchasing A constant process of adaptation of these tunctton~ is called for Adaptation
of large diversified Mock. (unsaleabthty risk) and
*lr Michael L' Corbey works as a sclenUfic researcher in the subject group industrial Economy, Faculty of industrial Engineering and M~'~agement Science, Elndhovea umverslty of Technology He ~s also active as advisor to the |nstttuut lnformatletechnologie voor Produktautomatlsenng ( I T P / T U E TNO~ ,~. E,ndt'~'.~n
long dellver~ limes. Some examples can be found m Brmkman [ 1 ]. By lntroducmg new working mett~,ods, processes and adapted logistics management, com~ panies try ',o ward off the abovemenuoned effects Lot size plays an important role in all of this. The last decade has seen the emergence of new logistic management concepts for which the traditional manner of determmmg let sizes, e.g Camp (Harris-Wilson) ECQ formula, ts not optimal Namel~¢, logistic concepts such as Just-InTime (JIT) and OPT (Optimized Production Technology), which emphatically endorse that point of view, state unequivocally that the aim has to be the reduction and, if posz'.ble, the ehmmatron of lot sizes. In other words, the opttroum I ~t slze IS o~.~e The magic word !s Technical Flexlbthty Machines with short reset times do mcleed citable lot sizes to be reduced without any great loss m effic~enc~ and dust-in-Time hun-
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48 dhng of orders to be mstztuted T h ~ JIT concept can be a powerful weapon in the hands of a company determined to stay competitive in a dynamic market Schonberger [2 ] speaks ot " . JIT attempts to control costly resources of ~d~e,
SU~n a a
- idle inventories, which constitute waste of scarce material, resources and, indirectly, energy for basic material conversion and refining. - storage of idle inventories, which wastes limited space, -defect:ve parts, subassemblies and final products, which are a waste of materials and energy" With this last point, Schonberger means the Total Quality Control reqmred for the proper operation of the Just-in-Time method The positive effects of improved product quality is not part of the present article There are also drawbacks to the advantages just mentioned Apart 7ram all #'_c orgzr.~,~.tiona ~ pr,~blems following tl,, introduction of a JIT co~_cept ~_l~_to a (Western) company (for :nstance, see Durhnger and Wortmalm [ 3 ] ). cono siderabie amounts of money have to be invested in machines capable of flexlbiy processing a wide range of products To keep the JIT concept operable resetting times have in fact to be drastically reduced Authors like Shmgo [4] have shown that, in given manufacturing environments, a certain amount of reduction of setting time can be attained with relatwely 5~mple, lowcost techniques and organlsahonal measures But the posslbflitms offered by such low-cost measures are not mfimte In this connectmn it should not be forgotten that the success story of the setting-time leduction of the big presses at the TOYOTA factory, from, 8 hours to 2 minutes, is ~pread over a period of fifteen years. If results with the introduction of the JIT concept have to be successful in less time, then structural investments m flexible capeeity are a necessity. Investments In flexible capacities are voluminous It is not surprising that a sohd economic infrastructure is a precondmon. From the strategic prospective the structural support will rest on quahtative grounds. The continuity of the company is at ~ssue because, without flexible capacity the competitive power of the company will be Insufficient.
When a flexible capacity investment has to be just'~fied, it :.s often done on no more that ~tvateglc-ouahtatlve supporting grounds It ,~s ~a a-gument which calls loudly to the entrepr~ l~eur to take tl~e risk, in fact the lack of concrete financial savings m hard fignre~ l~ replaced by an ~tu~tlve, strategic vision which certainly cannot afford to be wrong The primary task of the controller is, however, to reduce the company's financial risk to reasonable proportions and keep them there It is thus for good reasons that the controller will draw up an estimate of the conc-ete savings that can be made with these investments The central problem posed in the present article is how the ecoqomlc consequences of investment m flexible capacities can be measmed it is worked out m three steps To begin with, we placed the Just-In-Time concept in an integral framework of goods-fow co,~trol. This is essentml, because it will be found that, without this analysis, there is a danger that the estimate ~,,ithe positive effects will be too optimistic (Sect:on 2 ) In Sect~cn 2 ;'-.e ,~: ~':,,duce a concrete ~.2oductloI~ SltuatJon, namely production of component parts folio'~ed by an assembly line Customers' orders are assembled absolutely flexibly, but what we have m the manufacture of the component parts ~s "tradltmnal" production m lots It is assumed that, by investing in flexible caDacltv, component parts can be made directly to customers' order It will be shown that, without adjustment of the integral log s:,es concept, all of the potential advantages o' toe investment in flexible capacity cannot be ext.'o:,te,~. Lastly, for the selected product)on situation, the concrete economic consequences of a flexible capacity investment wll! be examined (Section 4). Our starting point will be that the investment will in fact lead to an adjustment of the logistics concept and that, for that reason, the maximum Just-In-Time advantages can be reahsed At the same time the m~srepresentatmn result,ng from "traditional" costs calculation will be examined. 2. J u s t - I n - T i m e in an integral logistics concept
When an a~:empt is made to improve stock policy, great lrlpormnce IS attached to an anal~-
49 s~s of the lntegra! goods flow (for exa_m__p!e~ see Bertrand and W0ngaard [ 5 ] ) A simple, yet very perceptive example of such an integral concept IS the so< ailed Customer Order Decoupllng Point ( C O D P ) control concept
[6] F~gure 1 shows an integral goods flow Five possible decoupling points are marked in. They separate the customer-order part o f the activities (on the right hand s~de o f the decouphng point) from the a c t w m e s based on forecasting/planrang ( l e f t - h a n d s l d e o f t h e d e c o u p h n g p o i n t ) The customei order m o v e s along the goods flow up to the decoupling point, whence ~t is delivered directly to the customer In general, the decouphng point will coincide with the m a i n storage point. It likewise applies that, in principle, lhere are no stocks downstream o f the decouphng point, and that upstream there are stouks only when it ~s economically justified Thus the first step ~s the d~c~_smn as to where there will be stock points !n the mte5~al ~,l~aiii T~,c =;lo~c uf the Vo~,,.,..:, oi :he de~c,o,ei;-3 pn~:,, ~s "" 2he ,qr~* mstaqce, a process ,~ :~ghmg market r e q m r e m e m s t~mong other things, delivery dates d e m a n d e d by the cus-
t o m e r ) ag.nmst throu~.:put O_mes m the production and d~stnbutlen process These, :n turn, are decisive for investments m stocks and m the productlon process. The hard dlStlnctJon that this control concept makes between customer-onenied acttvltles on the one , a u u and activities based on planning on the other, grea0y simphfies the task of illustrating how the J I T pnnc~ple works According to the J I T control concept, there should only be productlon when there is an actual demand It is m fact assumed m the present artmle, that the d e m a n d process m the chain is not intended f ~r the purpose of building up stocks, but actually for bandhng customers' orders. This observation lmpiles that, after the customer-order decoupl.mg point, the Just-In-Time production has to be ~mpiement~d up to, and including d e l I v e ~ to the customer for instance also the physmal distribution! This is an ex, remely ~mportant marginal condition for ,.nvestment m flexible c a p a c m e s and will be con, !tiered m mo~deta,A *_.,.,S~et,.on 3 The capacme~ after the customer-order deeoupling point have to 0e very fie~oie m order to absorb the changes m m~x a n d / o r volume which
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I-'tg 1 Ftve posmons for the decouphng point (DP) (Source Van Hees [ 6 ] )
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50 are Inseparable from customer order~ in a dynamic market, wtlhoul disrupting the agleed delivery times Furthermore, m this concept, the order-acceptance function of mediation can also be apphed to deal with limited flex~h,,hty beyond the customer-order decouphng point The lmpor:ance of an integral analysis ~s thus demonstrated Shifting the CODP from DP-2 to DP-3, for example (see FJg 1) wdl at once affect component-part production before assembly. That d e p ~ m c n t ~,dt then .aot be m a pos~tion to paCs parts to assembly at will, but only when there is demand from assembly This means that ec-npo~ent-part manufacture can be faced with a build-up of stocks if the production r'la.,:nmg is not adjasted if the mtegrm cnam is not kept a : ]er constant observation, this effect could easily be neglected and even lead to the ~umponents lhctory being negatively judged on account of ~t~ b ~n,',o excessive stocks v In assessma ~he situation, one should therefore be very careful to reahse that ~ " e n J!T ~s aoFhed, the main s~,~ck point has It, Hlove upstream m the chain. ~ar~ Hees says that this is related to the entrepreneur's risk mentioned earlier It ,s illustrated lC~ Fig 2 Considerable amounts of money are invested in DP-1 in stocks of end products spread over a number ofdlstrlbutmn points This implies a high risk of being left with unsaleable goad: -~t D o-~ on the otne~ hand, the risk lies mainly in faliule to meet delivery times and in overrun of precalculation costs of the project Finally, the entre-
F~g 2 Entrepreneursrisk and the locatmn oethe decouphng po:vt (Source Van Hees [6] )
preneur's risk related to the fixed assets w,,.i! also be increased because of investments in (costly) flexible capaotles when the decouphng point is shifted upstream The strategic appeal to taking the entreprenea:sh~p risk referred to lp d~e introduction is mus certainly justified The question is however, whether concrete effects can be discovered which support such strategic intuition It is for this ~urpose that ~ concrete production sm.atmn ~s examined 3. Concrete production situation An industrial enterprise manufactures a ~reat variety of end products it consists of a namber of component part factories and an assembly line In ~he interests of slmphclty we shall concentrate on the combination of one components factory. plus an assembly line The customer-order decoupling point is positioned beyond the components factory In the components factory In question, work includes heavy pressing on a traditional rougiaiy 2000-ton press. Hundreds of dlfferent semlfinlshed products are pressed from about thirty different raw materials. In addltmn, the factory carrles out various cutting actlvlt:~s with conslderabl ,~ overca~ac~tv The ~ress*~d semifinished pakt~ a~c a~oembled on the assembly line together with several parts from other components factor,.es The possible combinat'o~.s are practically unhmited It could be said that the heavy pressing work of the components factory &vldes the product range rata 100 main types (semlfinlshed product) Depending on customer orders, the main type is processed on the assembly line to a practically unique, customerspecific product There are m fact ~_housands of types of end products The components factory centres on the big press As the resetting tames are cons!derab!e, a lot size rule is followed, based on Carop s EOQ tormma, w m ~ n I.l~tClllllllCa [h(~ Iot ~lZe i.'y noraparing the costs of holding stocks of semlfinlshed 7rc~t:ct with the costs revolved m resetting the press Green this lot size, t~ae internal co~t price of the semlfimshed product can be determined The structure of tht~ cost pnc". !s as follows"
51 The material value (to be paid to suppliers): 30% - The fixed part of the added value (fixed m a n capacity, deprecmtion, etc. )" 60%. - The varmble part o f the added value (energy): 10% Sales have greatly increased m past years thanks in part to extensmn o f the already wide range of end products F u ~ h e r growth ~s, however, impossible without budding a new assembly line, as assembly is already being done in three shifts. How :ver, no substantial further growth is expecttd In the market that IS served, so that the company has reconciled itself to the fact that ~t wall not qerve a (relatively ~,nall) part of that market The growth o f sales has also had its effect on the component-parts factory Capacity problems arose with regard to the 2OO0-ton ~;ess T~Is has led to contracting part o f the wo-k out (10%). The price charged by the suppher charges amounts of 110% of the internal price. Growth has also brought the regular need to work overt~me m the event o f breakdowns. The delivery t~me agreed with tree customer is longer than the throughput t~me of the assembly process, but not so long that one can simply shift the de~ouphng point to D P - 4 (see Fig l ) Th~s would m e a n that the C a m p tot s~zc osed for the 20O0-t(,:a, :ess would have to be clropped m favour of working with flex:ble customer-order lot s~zes (lot s~ze 1!) The ratio of setting t i m e ~o production t:me would then become so unfadurable, that ser,.ot~,s efficiency losses would occur In addition, the work contracted o , t would ha,. e to increase c o ~ d c r a b i ~ | v order to be sure that every customer order c ~ , he ~andied m the present-day situation con sloe: ~b!e safety-buffer stocks of every mare type (se'.mfin:shed) are held a: the main stock point T L . aim is reducing as far as possible the risk of being unable to start assembiv because of waiting for production o f components. Such a s~tuatlon could endanger d e h v e D times as agreed w~th the customers ba~c:y-buffer stocks ~s the standard means o f compensating for uncertainty The ct'aractemsttc problem o f th~s production s~tuat~o,~ is that the total number o f main types that will be bought is known (namely the maxIo -
mtlm number that assembly can process), but not how many of what type In other words, component-part manufac:ure has no preoiem w~th volume flexiblh~y, but cloes have one with flexlblhty o f the mix. Prebiems with reference to volume flexlblhty (for example, see Bertrand [7] ) w i l l not be considered m the present article. Because of its .ong rcsettlng (setup) t'.mes, the traditional press is a thorn m the flesh of production management, which suggests replacing ~t by a very flexible heavy press. M a n a g e m e e t clmms that, after the investment, Just-ln-Tlme "an dellvef on call by assembly In other wares, after making the investment there ~s no need to work In the component-parts factory on the basis of the fixed C a m p lot size it also clmms that contracting out will no longer be necessary and that overtime will be a thing of the past. This cotfld br)ng savings The n u m b e r ofopera~or~ needed ~t,, th~ new press ~s the same as for the old one. The space the new one will occupy remains unaltered. There are no savings here The flexible heavy press is an investment ra~,o.)x ...~,-- ~,nlOnS,.., The ,-n,,*--"~r__.,~,hz~. h,s goabts The concrete expendztures involved in the acqms~tion of the fle^,o,~ p.~oo . . ~ ~,,la,,n) fo him But how does one clctermlne the concrete yield from such an investment in flcxiblhtv 9 Thv cancretc ;avi~tgs ~: valved in this investment will be considered m detail m Section 4 However, before we can do that we must first make an empha),.c distraction between an investment :n fie>~!ble capacity wtthout and one w~th adjustment in the logistics concept. Let us assume that the stock m the lmtlal situation, that is be~ere the investment m flexible capacity, camprises 3 kinds a quantity of raw material :a stock due to purchasing-order sizes, - a quantity of work in process stock ~n comp_~nent-parts p~oductlon Th~s stock depends on the throughput t~me of parts production, a quantity o f semlfinished product stock at a decouphng poirA where, on the one hand its function is that of a buffer stock and. on tbe other. is ltseif caused by the lot size :n component-p_art pi oductlon. After investment m flexible capacity wtthout adjustment o/',h~ l~gi~tzc ce~ce0t, the customer-
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52 order dot-onpim~.nolnt remains located bekond the component-parts factory, which means that a safety-buffer stock is stili required -~ *~'~ -~. . . . phng point The safety stock can perhaps be cut d o ~ ' n "~ h i t her,~llSe "~ho thral~ohr~llt t i m e I ~ the component-parts factory is reduced We will not continue with th~s line of enquiry here In any case the decoupl,ng-pomt stock will shrink because the lot size stock will disappear I'he quant r y of work :n ~orocess m the compenent-parts factory w,Al also decrease daanks to the shortenmg of the throughput t,m~ hrcn,ght ~hc,,,* h, ~h,~ investment m flexible capacity, ttms in lact yielding an economic benefit On the other ha~d, the quantlly o f raw material wlii increase as t~:e offtake from m e components f a c t o ~ has become smaller, causing bulld-uv of raw material stocks This can, of course, be avoided by adjus mg the purchasing order quantities, but th,.s posslbihty is independent of the l n v e s t m e m in flexible cap a o t y (Observauon even ~¢the s,.Te of purchasing order quantities can be cut down, the upshot can be a ..i..,~,.,. ,~.0. , . . quantity, . h,Jg,al,v~. ec,,,,,,,-,o con~oo,,onoo in th,= o.~o Let us now assume that the production management guarantees that the total throughput t~me a f component-part production and assembly, lrthan dehvr e b l O e C t l V. C. . . ~ t c.,. t n ~ . . .~ .H.A., . . . . . . . n ~,~ ~ . . ~hr,,'~r . . . . . cry t~me to the customer In other words, thanks to the investment, the Iog,,st:cs co.ncept can be adjusted by shifting the C O D P to DP-3 (assembly to customer order ~, to D p - a (producing and db~ClllUllllt$ ~,U~I.U][,.~Iorder, nee also Fig I). What ~s the effect on stock size in that case9 The old decouphng-pomt stock of semlfin~ h e d product now disappears entirely The quantity of work m process is reduced in the component-parts factory just as in the preceding Sl~U,,,on Here, too, stocks of raw materials ,ncrease, a process which canpot however be completely prevented by adjustment of purctL~smg order quantities This is because, just as IL the old situatlon, buffer stocks have to be me, ntamed at the decouphng point, as the component-parts factory must be able to start when the customer order comes m The conclusion is that a flexible investment that g o ~ ~'.ong with an adJested logistic concept yields the greatest saving In tbe next section, in which the y~eld from the
s~t,,at,on will be &scussed m detail, the starting penlt will be that the investment does lead to the adjusted s,.tuat,.on ir. winch assembly to customer order is further adjusted to a sRuaUon wl:h both component-part productmn and assembly to customer order 4. Economic covsequences of a flexible capacity investment In our case, seven e c o n o m i c consequences can ~.~ "-~,.,~,~a~u.'~ First of all the decouphng-pomt stock of semlfimshed products disappears, It was, on the one hand, set up from buffer stocks m order to be able to carry out customer orders in assembly at any time and, on the other, because components manufactare supplied p a n s m fixed lot ~zes The~e effects are dealt w~th m Sections 4 1 and 4.2, respectlveb We have also seen that the quanUty o f work m process had dropped m the c o m p o n e n t s factory owing to the cut in throughput t~me. Th~s will be dealt with m Section 4.3 Since stock,, &sappear, there ~s less need tbr storage spa~c, see Sectmn 4.4. The productmn management guaranteed that o v e r t i m e and contracting out wo,qd no lohger be needed in the new sltuat~Jn Fhese effects will be dealt wRh m Sectmn~ 4 5 and 4 6 i_ast of all, l~. must be assumed tb_at smaller stocks represent less risk of unsaleables and this will be discussed m Section 4.7
4 1 Reduction o/safety-buffer stock In trle traditional appraoeh, the safety-buffer costs are calculated by multiplying an interest percentage by the internal cost price of the article in stock. In principle there is always a safety buffer and the standard safety-buffer stock level will be included m our considerations. In our case ~t would mean that the saving; on the buffer stocks of semlfimshed pressmgs per type can be calculated according to the ollewlng formula [savings = standard safety stock × internal cost price × interest percentage ] A n u m b e r of marginal no:es must be m a d e to this calculatmn For instance, we cannot be certain that the buffer stocks w,Ai disappear entlrzly
53 As the main stock point is shifted, the b,.~_. stocks o f pressed sem~fimshed product are m fact no longer required. However, It may m view of the t~tal throughput t i m e from the date of cust o m e r order to delivery, be necessary to lay in buffer stocks of raw material. It must be borne in m i n d that, if a customer order comes In and there are no stocks of t a ~ n~atcrza!s, the tot~_! thrau~h~ put time of the process is extended by the dehver~, time of that ra~ material Shifting the same buffer stocks uostream does, howe~er, have a p o s m v e effect, as the n u m b e r o f types contained in It drops from a hundred ( s e m i f i m s h e d ) to thirty (raw material). Thus, the safety buffer stock can be reduced per type ofs~ock item, since aggregated patterns of d e m a n d arise [ 8 ] The tc,tal buffer stock (in terms of end products) wlii therefore shrin! Fhe above ~aVlligS calculation suggests that buffer stock in i .~w materials is cheaper than that in semlfimshed products. The cost of raw materials is o f course I 's~ The question is whether the argument is corre ~ Money (capital) is invested ,.n safety-buffer st ~ck Cap'~ta! :s not gratu,tca;; the company, fo~ e~.~ample, has built up a ba.-_k aeot ~or its capital and has to pay lntele~t od ,?. The crue,~al point ~s thus the extent to which that d_~b~ will drop If the buffer store is shifted. We are faced here ,~,,.h a dec!sion calculation In a going-concera situation We therefore try to calculate the ,~onoete savings This means that we must ask ourselves how much the expenditure and prouucnun . . . . . . . . . . . . . w . , tea[/), be am:mo-,,_.ca ........ If the b u f f r stocks o f semffimshed product d ~ a p p e a r Va,, der Veeken [ 9 ] observes that, v, a h regard to labour, machines, overheads, e t c , a lower bank debt cannot really be obtained as the result of lowering stocks His conclusion is unequivocal. the real effect is on the material value and, pelhaps, energy All other expenditures remain unaffected ff buffer stocks dnsappear On the one hand. this can be traced back to expenditure recurred m the past (a ; q m s i t l o n o f m a c h i n e ) and hence no longer subj -ct to influence, on the other, because savings on hours worked will be so margmal that no actual reduction, tot example, in personnel can be achieved The real expenditures on salaries thus remain unchanged and the savings are calculaUve fictions It could be ob-
setx ed at this point that real savings can indeed c" achlev, d by working variable hours of overtime. l'hls, ~~,aever, IS no~ the case As the work is in fixed k,, sizes and one is always obhged to supply as many items as assembly can process at a m a x i m u m (purely mix flexlbllIty~), overtime and contracting out is inevitable in the stable situation In the new. pa~t-mvcstmcnt situation, overtime and contracting out will be things of the past as the result of pure Increase in capacity thanks to decreasing the resetting time and not because of reduction in safety-buffer stock Savings en overtime and contracting out are dealt with m Sections 4 5 and 4 6 The real savings on interest costs will have to be calculated by the following formula [savings = difference m buffer-store level × (materials value + energy ) × interest percentage ] It should be noted that, as regards the expenditures which can be Influenced. it makes little difference whethel l: is raw material or semifint_Sll.Cl e e* ,o" e tha~ ale kept "~ l h c . . .u.m. y. . . u n u g WhiCh o:u~x~ can be influenced is, of course, energyV The real savings are thus mainly brought about by reducnan o f buffer stoc/~'~ m the chmn, but not by shiftlng them In a d d m o n , there is a further observation tc be made about the interest percentage applied in these calculations The assumption is that the liquid means m a d e a~ailable will be used to dJromish the (short-term) bank debt fhls is a real assumption, though one could also consider using this capital fu~ uther purposes Once cannot al,ways be certain in advance of getting an interest percentage on short-term bank debts~ l he company's financia! management ,vlll pronounce as to now the released liquid means are to be used It is on this basis that the co~erete savings that can be obtained with said available means will be d e t e r m m e a Yms article will now restrict Itself to the quesnon of how roach liquid means will become avadable by investment in flexible capacity The above calculation :s an example of socalled ~maney-flow ca!culatlon, see [ 9 - ! ! ] In general, sceptics note that, "although the costs e f labour, machines, e t c , cannot be influenced im-
54 mediately, the effect m u s t c o m e in the long r u n " This a r g u m e n t is c o n e c t in principle, b u t it is precisely this long-term situation w h i c h is so unpredictable In fact, the wish to invest in flexible capacities is because future offtake is u n c e r t a i n a n d difficult to forecast in a d y n a m i c m a r k e t It is thus extremely doubtful, in antw~patton, a n d w h e t h e r the " l o n g - t e r m " situation in w h i c h the calculanve savings are to be o b t a i n e d will ever OCCUr
T h a t all costs are variable in the long t e r m is certain But was it not J M. Keynes w h o in th~s context once tc,,,arked, " i n zhe ?o,,g ru,t, - ' e will all be dead ''~ In view o f the i n v e s t m e n t o f mllh o n s of guilders in flexible capacity, t h a t is a s t a t e m e n t w h i c h should m a k e one thoughtful, for m o r e t h a n one reason Conclusion. T w o m i s r e p r e s e n t a t i o n s in calculating the proposals to out buffer stocks are v a l u a t i o n of interest e x p e n d i t u r e at the full int - : n a l cost price instead o f value o f materials a n d variable energy costs, because o f which the estim a t e d savings are too optimistic, - failure to reah~e t h a t it can be necessary, to m a i n t a i n buffer stocks at the new m a i n stock p o i n t Because o f the a b m e valuation, the difference between buffer stock in the old a n n new m a i n ¢:ock po,nts may be less favourable tha ~:he costs a p p r o a c h would lead o n e to believe. -
4 2 Reductton o f lot s'ze stocks
T h e same v a l u a t i o n p r o b l e m is e n c o u n t e r e d m the savings calculation for a r e d u c t i o n o f lot size stocks in semlfinlshed product. Here too, one will be Inclined to valuate at i n t e r n a l cost price mstead of taking the m a t e r i a l value a n d t h e variable energy costs T h e r e is yet a n o t h e r p r o b l e m t h a t occurs in lot size stocks w h i c h h a s b e e n described in detail in a n article by Van d e r Veeken [ 9 ] il~ th~ a i m is to use n o t h l n L bu* real econ o m i c effects a n d n o t calculaW. ¢ results as the bas,s for the decision-taking, t h e n changes in ;,avments in which the outstde world is i n v o l v e d , ~ v e to be e s t i m a t e d As the lot size stocks o f semi finished goods are to be f o u n d in the m i d d l e o f t h e logistic ch,u,i a n d r )t at the p u r c h a s i n g or selling sides o f the firm, one has to d e t e r m i n e w h e t h e r the altered lot size pollc) ",~ill ~_Lc, lead to changes in t h e pat-
t e r n o f p a y m e n t ~ o n b o t h sides G f t h e firm i n this case the offtake a n d p a y m e n t p a t t e r n s for finished p r o d u c t s do not change We can therefore restrict ourselves to the p u r c h a s i n g side o f the c o m p a n y T h e p a j m e n t - p a t t e r n cbm, ges, d u e to a delayed Increase in e x p e n d i t u r e , to the a m o u n t o f the p u r c h a s i n g value o f the m a t e r i a l s to be acq m r e d are o r d e r e d in smaller quanttttes a n d paid for tn accotdTnce wtth this o r d e r p a t t e r n Van der Vccxen summar,.sed this m Fig 3, in w h i c h he assumes t h a t the delayed e x p e n d i t u r e s are s h o w n m the ,.,,--,va../o b , , k d~bL N o t e t h a t there is no m e n t i o n o f smaller putchasing o r d e r quantltlesV We have, in fact, seen t h a t buffer stocks o f raw m a t e r i a l s will certainly bc required, but n o a r g u m e n t is p u t forward in j u s t i f i c a t i o n o f r e d u c i n g the p u r c h a s i n g o r d e r quantities in the new situation. T h e r e are n o such a r g u m e n t s in fact T h e possibility o f cutting d o w n the p u r c h a s i n g m a y well exist, b u t t h a t is quite u n c o n n e c t e d with i n v e s t m e n t in flexible capacity) T h e real e c o n o m i c effect o f t h e disappearance o f lot size stocks o f s e m i f i n l s h e d goods IS T h i s c o n c l u s i o n will strike the r e a d e r as quite incredible Stocks d i s a p p e a r a n d vet t h e r e is n o e c o n o m i c effect) C o n s i d e r a b l e effects c a n b e achieved, b u t these h a v e to be a t t r i b u t e d to a different positive effect o f t h e i n v e s t m e n t )n f e x I b l e eapac~_ty, n a m e l y a r e d u c t i o n in tlaroughput time, a n d with it, a r e d u c t i o n in t h e a m o u n ,~ o f work in process. it is n a m e l y the case t h a t a c h a n g e in lot size can only lead to a change in t h e p a y m e n t periods. A change in t h r o u g h p u t time, a c h l e y e d as a result o f lot size a d j u s t m e n t , c a n lead to a n actual red u c t i o n in the ,,olume o f work in process F o r ex,*,,,v,,., ,-.,., ,, ,,,,d t , J , . ~ . u o n s , ll~e ~evera! o t h e r authors, the favourable effect t h a t s h o r t e n i n g the t h r o u g h p u t u m c can b r i n g a b o u t T h i s !s diecussed m 3ection 4 3 4 3 Reduci~un m mru,,~hput ,~.me
C o m p u t e r s i m u l a t i o n p e r m i t s o n e to calculate w h a t h a p p e n s w h e n the lot sizes are reduced or, as in t h e present case, these sizes are d e t e r m i n e d by actual c u s t o m e r d e m a n d . A c o n d i t i o n for this '.s, o f course, t h a t a realistic package o f c u s t o m e r
55
Bank
is done with small, customer-order-dependent lot sizes, which increases the degree of loading For the sake o f simplicity, let us assume that we have found from the simulation that the work in process will decrease. Again we are faced with the question, " W h a t are the concrete sawngs which are concerned in this reduction of work in process 9'' The total o f slocks held by the company becomes ~,naller, which means that the company's requn-eta.,ras ofcapltal w','_,be ,'educed Here too, internal cost prices does not provide precise insight Just as in the case of the buffer stocks, o m point of departure wall have to be ~hat only the expenditures on energy and material can ensure less need for capital. The costs a,3proach in this t.ase too, suggests a higher calcu!ati,,ely fictitious e c o n o m i c consequence.
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Fig 3 Order Quantities (series) reducuon and payr le:,t periods (Source Van der Veeken [ 9] ) orders and rehab!e resetting and processing times are available. With the aid of such a simulation, the length of the new throughput time in the component-parts factoLv can be calculated and from that mformatron the a m o u n t o f work in process can be det e r m i n e d as well. The average throughput time is also dependent on the ,~-'~'; . . io ,.hat are ap~ . . , , , , ,.~. . .,u,,.s plied. We assume that these will remain unaitered U p to now ,~e .'.,ave (~)~)UlII%~LI . . . . . . . . . . . .[.n a t tnls work in process will be less than in the old sltuauon, but we cannot be cer~tain o f that. The effect on the work in process is namely d e t e r m i n e d for the most part by the loading degree of the new machine (resetting pl.us productior, in relation to the full t i m e available) In )he new situation there _t 1ng variables which are related to are two cnang the loading degree, hence the resetting time, on the one hand, is dm*hcally reduced, thus lowermg the loading degree and, on the cther, the work
In most companies, part of the accommod-.t,on costs are aiiocated to ea~h dcpdrtrqcnt by means of the costs allocation sheet in the desartmental budget, q'_h ~ is t, sually based on a rate per square or cubic metre of space used by the u ~ v a , ,m~nt ~.ceg_'~_w~__ocl_n_l.~oncosts are fixed ill most cases Reduction of these costs for a product,on deoartment because it needs less room is a calculatwe sav,,ig The rate per un,t space is not the appropriate "_nstrument fGr determining the real savings related to a c c o m m o d a t i o n In principle there are two conceivable situations In the one, the company ~s not short of space and any eventual redundancy will hardly be statable for a different purpose, in which case there are no co~crete savings to be expected The situation is different where the company is fa_ed with a shortage o f space. In o u ; case, ho',~eve:. ~t is not a hypothetical s]tnatmn, because sales have risen ~',,,ip;~ ,n re~.ent years A shed may well have to be (or already has been) hired in the present s;tuatlon because the storage capacity has simply become Inadequate. In this case too, the rate per square m e t ' e or cubic metre does not provide a eorrec~ picture of the gain to be expected when the shed r no longer needed. The real gains are namely determined by all the expenditures involved in r~ntmg the shed Tl,e :a-
56 tal of costs i n v o l v e d will, in m o s t cases, be m o r e t h a n the space concerned, mult~phed by the rate, since it is usually impossible to rent the space strictly required T h e cos,'s rate p e r unit space is m b o t h cases i n a p p r o p r i a t e for d e t e r m i n i n g real savings o n space W h e r e space is not a b o t t l e n e c k factor, the gain suggested is too optimistic, where a bottleneck does exist, it suggests too low a g a m
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4 5 Reduction in overtime In o u r case. m e p r o d u c t i o n m a n a g e m e n t guara n t e e d t h a t o v e r t i m e would not be necessary in the new situation O v e r t i m e is a b o u t 35% d e a r e r in most cases The effect o n the cash flow is, however, m o r e t h a n is suggested by tha" 35%, as overtime, in c o n t r a s t to regular h o u r s o f work vary, roughly in p r o p o a l o n to p r o d u c u o o volu m e T h e real effects can t h u s be calcula:ed from the variable m a n - h o u r rate, plus the extra-allowance fact,., % r o v e r t i m e Here the situation is n n t so misleading This is becaflse t h e lrlves* a.,~nt in flexible capacity actuaily p r o v i d e s m o r e p, odu¢twe h o u r s w i t h i n regular working t~me, so t h a t more expensive, irregular o v e r t i m e is n o longer necessa~' as a ".,.,hole
4 6 Reduction m work contracted out T h e p r o d u c t i o n m a n a g e m e n t claimed, as we knov,, t h a t t h e r e would be a reduction, not only . . . . . . L m wu~r~ c o n t r a c t e d out, b u t in o v e r t i m e as well "Ihe s e m l f i m s h e d c o n t r a c t e d - o u t p r o d u c t is 10% dearer t h a n the i n t e r n a l cost price T h i s mean~ t h a t a sav,_ng a ¢ t. .t,. oL . per ~emlfinlshed part cvntraeted could ~e a c h i e v e d F r o m the strategic perspective tht ~ i-; correct In *.hat case namely', we assume t h a t the factory has yet to be p u t up a a d t h a t all the e x p e n d i t u r e s r e q u i r e d for rr,:,ductio'a h a v e still to b ~ incurred. T h i s p r o b l e m can be cor,,pared to a m a k e / b u y dccision. Hoveever, t h a t 1~ not the case m the present Instance. T h e real yield which can be a c h i e v e d with contracted-out work is far h,gher t h a n 10%. O n e should ask oneself h o w mucl, e*.tra it would cost to produce t h a t work internally 3 : s t a~ in the case of the buffer stocks discnssed in Seztton 4 1, extra expenditu*e ~s i n c u r r e d only m relation to material a n d energy T h e outgoing cash ~..,~,v for
work c o n t r a c t c a out is r e d u c e d by far m o r e t h a n 10% In Fig 4 we see at the left-harM side the m t c r n a l cost-price structure At the r i g h t - h a n d side we see the ( v a r i a b l e ) i n v o i c i n g o f the work cont i a c t e d out. C o m p a r i s o n b e t w e e n the two a m o u n t s indicates t h a t the real effect ( = ~ d u c t i o n o f o u t g o i n g cash flow) is _+63% o f every :n-',oice for ~ o r k c o n t r a c t e d out) Here the costs app r o a c h wrongly suggests a m u c h lower effect
4 7 Reduction risk ofunsaleables T h e r e has b e e n no dlscusslo~ o f the r'.sk o f u n o saleables m buffer stocks c f s e m l f i m s h e d goods a n d lot size stocks o f s e m l f i m s h e d goods O n e could i m a g i n e t h a t part o f these a e m s could bec o m e useless t h r o u g h wastage or technical agelng. In view o f a d y n a m i c m a r k e t , the risk o f t e c h n i c a l ageing is always present. In the new situ a t i o n tb,s risk n o longer exists for s e m l f i n i s h e d items, a n d z d v a n t a g e s are t h u s to be g a i n e d here, too. In t h e light o f the foregoing coi~slderatlons, it will corae as n o s u n r i s e t h a t t h e ,ntc~ hal cost price gives a d i s t o r t e d picture o f the financial ret u r n s m this case as well. F r o m a structural perspective, all t h a t is i n v o l v e d is lower e x p e n d i t u r e o n m a t e r i a l a n d energy
5. Summary It was s h o w n t h a t t h e r e are a b o u t seven different e c o n o m i c effects to b e d i s t m g m s h e d , all o f w h i c h are i n v o l v e d in a n i n v e s t m e n t m flexible capacity. We h a v e s h o w n t h a t such an investm e n t only generates all t h e suggestea Just-P,,T i m e a d v a n t a g e s if t h e c c s t o m e r - o r d e r decoup h n g p o i n t c a n really be m o v e d u p s t r e a m as a result o f t h a t i n v e s t m e n t O t h e r w i s e stocks are only m o v e d internally in the c o m p a n y , b r i n g i n g
57 a b o u t far s h g h t e r effects t h a t t h e costs a p p r o a c h suggests a n d d o i n g less t h a n justice to p o t e n t i a l a d v a n t a g e s w h i c h c a n b e a c h i e v e d t h a n k s to flexible capacity. A n i n v e s t m e n t in flexible c a p a o t y which really results in shlft, ng t h e c u s t o m e r - o r d e r d'~ coupling p o i n t u p s t r e a m has showr~ t h a t s e v e n types ~ f savings are possible. O n e c a n also be m~sled the same n u m b e r o f tlmea aa well. T h e reader m a y rightly o b s e r v e t h a t s o m e o f t h e m i s r e p r e s e n t a t i o n s are m e r e or less trivial, for e x a m p l e in practice, space saving will s e l d o m lead to ma.lorated y:ela calculations. O n e c a n n o t fall to n o t e t h a t t h e costs a p p r o a c h p r o m i s e s too o p t i m i s t i c a result in m a n y cases. T h e " t e n d e n c y to m i s r e p r e s e n t " will t h e r e f o r e be great for the m o s t part a m o n g the i n n o v a t i v e forces w~thln t h e o r g a n l s a t l o n In fact. it is alm o s t as i f i n v e s t m e n t in flexible capacity, as s k e t c h e d o u t here, c a n practmaliy n e v e r b e justified economically! B u t th~s is n o t altogether so If the old press is w o r n o u t a n d it is t h u s correct to speak o f a n u n a v o i d a b l e r e p l a c e m e n t investm e n t , t h e picture w,-il b e m u c h rosier for flexible capacity In a d d i t i o n , a great deal m o r e can be e a r n e d in t h e area o f c o n t r a c t i n g out, o v e r t i m e , etc., t h a n is suggested in t h e costs a p p r o a c h W h e n i n v e s t i n g in flexible capacity it s h o u l d be r e a h s e d t h a t the " p r o o f o f t h e F,e x l b l h t y p a d d l n g " is t h e market. T h e c u s t o m e r will m a k e his choice o u t o f m a n y types a n d ._, rehable, if possible, s h o r t delivery, time. It will n o t m a t t e r to h i m at a / / i f I e gets his goods delivered on these condltlons, e i t h e r from stock o r by way oj~='xlble capac:ty. (Possible i m p r o v e m e n t s in quality a c h i e v e d by flexible capacity are n o t t a k e n into consideration ) Bet,er t h a n that, if there is a m a n u l a c t u r e r w h o p r o d u c e s in lots, t h a t is with stocks, b u t by good m a n a g e m e n t of these stocks c a n offer the s a m e delivery p e r f o r m a n c e as the flexible m a n u f a c turer, the c o n v e n t i o n a l p r o d u c e r cur. p".ss,_b!y be e v e n cheaper. Such good control o f ~lot ~t7e)
stocks, however, requires lnSlght into the h a n dling o f a n integral logistic concept, as the prese n t article has illustrated. F u r t h e r m o r e , C a m p ' s E c o n o m i c O r d e r Q u a n t i t y is n o t a suitable ins t r u m e n t in this context with which to d e t e r m l a e t h e lot size, as the costs a p p r o a c h fails because o f t h e calcalatlve m l s i e p r e s c n t a t l o n s w h i c h ensue
[01 Acknowledgement T h e a u t h o r wishes to express his gratitude to t t J M v a n d e r Veeken, J A M Theeuwes. E G J V o s s e l m a n a n d R A J a n s e n for t h e i r c e m m e n tary o n a n e a r h e r v e r s m n o f this article Refcrencea
1 Brine,man, S 1989 FlexlblhtmI, procesbeheer~.ng en beheersmg van processen Ph D l hes.o, ~,.aah,we~
Umvers~t~of Tecnnology 2 Schonberger R J 1982 Japaucsc Manafa~tunng l'ecnmqaes Free Press, New YOrK 3 Durhnger, P P J andWommann, JC 1983 KanbanKan m Japan, maa- hmrn Bedrofsvoermg, 4 4 Shmgo, S, 1985 Sludy of TOYOTA production systems from an industrial engineering *mwpomt JR;2 nese Management/-,tssoclallon 5 Benrand, J W M andW~jngaard J 1985 Deslructuur vaq produeuebeheerssmgsystemen lnformaue, 27 342355 6 Van Hees, R N ~1984 Orgamsahestructuuren ,nlegraie besturmg als bas'~s voor ,,oorraadbeneersmg Internal PHILIPS Report vp45N, Emdho,,eq 7 Bertrand J W M 1988 Kostenverlaglngdoorloglslmk B&ID Bednjfskupdlg Vakblad, nr 0 8 Brown, R G, 1987 Materials Management a modular hbrary Wdey, New ~tork 9 Van der Veeken, H J M, 1988 Kovenmformaue b:J ~og~stmkebeshssmgen Bednjfskunde, 19~8/1 20-30 !0 Van der Enden, C 1975 Beshssmgscalculalms Samson, Alphen aan de R.jn 11 Theeuwes, J ~ M, 1988 HeI gelastroomprmclpe eep gezond verstand ben~dermg TeGl--~-c,~eBedrqfsvoermg November-December 190-194
47
Elsevier
Measurable economic consequences of in flexible capacity
nvestments
Michael Corbey* ~acultv oflnduso ml Eng, nee, mg and Management ~ctcnce Et nd t,o ~en I/nn t.,~tl o/ Technology P 0 BoA 513, 5600 MB Emdhoven, 7lie Netherlands
Abstract Investments in flexible cqpacltl2¢ are large It is not surprising that a sohd econom,e ,nfrastrueture Is a precondition From the straleglc prospect,re the structural support will rest on c aahtative grounds Yt t, the central problem posed m the present article ts how the economic consequences of mves),~qcnts in flex~b!e :apac,hco c--.r, actual!3 be ~eas_wed h ~s worked out m tlaree steps 1"o begin wm~, tnc j.~t-'.e-T~me concept ~s placed m an integral framework ofgoods-flow control Th~s is essential because ~t will be found that, w~thout th,s anab~ ~ there is a dang, er that the esUmate of the posmve effects will be too optimistic Subsequently, we introduce a concrete proot.c',on situation Lastly, for the selected production $1to:atlorl the concrete economic consequences of a flexible capacity investment o.l: bc c _ _^.~ c-,,. ¢t~r~,no nnmt t~ that the investment will m fact lead to an adjustment ofzhe log~stics concept Foa that reason, the m a x i m u m Just-In-T~me advantages can be reahsed At the same time the possible misrepresentation resulting from "'trad~t)onal" eost~ calculation will be examined
I. Inw~,dnetion
problems internally and those that exist between the various functions ,,n industry assume the form
In recent years, many enterprises have been confronted with problems generated by the growing dyqamws of the market. The features of the dynamic market are expressed in - growth tn customer-specific products (going to segmented ma;kets, mdlvldual customers), - h i g h degree of rood,float,on m products or component parts (short hfe cycles) Compames failing to come to grips with these developments wl|l soon suffer the consequences of greatly intensified competition A high degree of adaptablhty is called for m selhng, production and purchasing A constant process of adaptation of these tunctton~ is called for Adaptation
of large diversified Mock. (unsaleabthty risk) and
*lr Michael L' Corbey works as a sclenUfic researcher in the subject group industrial Economy, Faculty of industrial Engineering and M~'~agement Science, Elndhovea umverslty of Technology He ~s also active as advisor to the |nstttuut lnformatletechnologie voor Produktautomatlsenng ( I T P / T U E TNO~ ,~. E,ndt'~'.~n
long dellver~ limes. Some examples can be found m Brmkman [ 1 ]. By lntroducmg new working mett~,ods, processes and adapted logistics management, com~ panies try ',o ward off the abovemenuoned effects Lot size plays an important role in all of this. The last decade has seen the emergence of new logistic management concepts for which the traditional manner of determmmg let sizes, e.g Camp (Harris-Wilson) ECQ formula, ts not optimal Namel~¢, logistic concepts such as Just-InTime (JIT) and OPT (Optimized Production Technology), which emphatically endorse that point of view, state unequivocally that the aim has to be the reduction and, if posz'.ble, the ehmmatron of lot sizes. In other words, the opttroum I ~t slze IS o~.~e The magic word !s Technical Flexlbthty Machines with short reset times do mcleed citable lot sizes to be reduced without any great loss m effic~enc~ and dust-in-Time hun-
0925-5273/01/$03 50 © 1991 Elsevier Soence Publishers B V All r,'ghts reserved
48 dhng of orders to be mstztuted T h ~ JIT concept can be a powerful weapon in the hands of a company determined to stay competitive in a dynamic market Schonberger [2 ] speaks ot " . JIT attempts to control costly resources of ~d~e,
SU~n a a
- idle inventories, which constitute waste of scarce material, resources and, indirectly, energy for basic material conversion and refining. - storage of idle inventories, which wastes limited space, -defect:ve parts, subassemblies and final products, which are a waste of materials and energy" With this last point, Schonberger means the Total Quality Control reqmred for the proper operation of the Just-in-Time method The positive effects of improved product quality is not part of the present article There are also drawbacks to the advantages just mentioned Apart 7ram all #'_c orgzr.~,~.tiona ~ pr,~blems following tl,, introduction of a JIT co~_cept ~_l~_to a (Western) company (for :nstance, see Durhnger and Wortmalm [ 3 ] ). cono siderabie amounts of money have to be invested in machines capable of flexlbiy processing a wide range of products To keep the JIT concept operable resetting times have in fact to be drastically reduced Authors like Shmgo [4] have shown that, in given manufacturing environments, a certain amount of reduction of setting time can be attained with relatwely 5~mple, lowcost techniques and organlsahonal measures But the posslbflitms offered by such low-cost measures are not mfimte In this connectmn it should not be forgotten that the success story of the setting-time leduction of the big presses at the TOYOTA factory, from, 8 hours to 2 minutes, is ~pread over a period of fifteen years. If results with the introduction of the JIT concept have to be successful in less time, then structural investments m flexible capeeity are a necessity. Investments In flexible capacities are voluminous It is not surprising that a sohd economic infrastructure is a precondmon. From the strategic prospective the structural support will rest on quahtative grounds. The continuity of the company is at ~ssue because, without flexible capacity the competitive power of the company will be Insufficient.
When a flexible capacity investment has to be just'~fied, it :.s often done on no more that ~tvateglc-ouahtatlve supporting grounds It ,~s ~a a-gument which calls loudly to the entrepr~ l~eur to take tl~e risk, in fact the lack of concrete financial savings m hard fignre~ l~ replaced by an ~tu~tlve, strategic vision which certainly cannot afford to be wrong The primary task of the controller is, however, to reduce the company's financial risk to reasonable proportions and keep them there It is thus for good reasons that the controller will draw up an estimate of the conc-ete savings that can be made with these investments The central problem posed in the present article is how the ecoqomlc consequences of investment m flexible capacities can be measmed it is worked out m three steps To begin with, we placed the Just-In-Time concept in an integral framework of goods-fow co,~trol. This is essentml, because it will be found that, without this analysis, there is a danger that the estimate ~,,ithe positive effects will be too optimistic (Sect:on 2 ) In Sect~cn 2 ;'-.e ,~: ~':,,duce a concrete ~.2oductloI~ SltuatJon, namely production of component parts folio'~ed by an assembly line Customers' orders are assembled absolutely flexibly, but what we have m the manufacture of the component parts ~s "tradltmnal" production m lots It is assumed that, by investing in flexible caDacltv, component parts can be made directly to customers' order It will be shown that, without adjustment of the integral log s:,es concept, all of the potential advantages o' toe investment in flexible capacity cannot be ext.'o:,te,~. Lastly, for the selected product)on situation, the concrete economic consequences of a flexible capacity investment wll! be examined (Section 4). Our starting point will be that the investment will in fact lead to an adjustment of the logistics concept and that, for that reason, the maximum Just-In-Time advantages can be reahsed At the same time the m~srepresentatmn result,ng from "traditional" costs calculation will be examined. 2. J u s t - I n - T i m e in an integral logistics concept
When an a~:empt is made to improve stock policy, great lrlpormnce IS attached to an anal~-
49 s~s of the lntegra! goods flow (for exa_m__p!e~ see Bertrand and W0ngaard [ 5 ] ) A simple, yet very perceptive example of such an integral concept IS the so< ailed Customer Order Decoupllng Point ( C O D P ) control concept
[6] F~gure 1 shows an integral goods flow Five possible decoupling points are marked in. They separate the customer-order part o f the activities (on the right hand s~de o f the decouphng point) from the a c t w m e s based on forecasting/planrang ( l e f t - h a n d s l d e o f t h e d e c o u p h n g p o i n t ) The customei order m o v e s along the goods flow up to the decoupling point, whence ~t is delivered directly to the customer In general, the decouphng point will coincide with the m a i n storage point. It likewise applies that, in principle, lhere are no stocks downstream o f the decouphng point, and that upstream there are stouks only when it ~s economically justified Thus the first step ~s the d~c~_smn as to where there will be stock points !n the mte5~al ~,l~aiii T~,c =;lo~c uf the Vo~,,.,..:, oi :he de~c,o,ei;-3 pn~:,, ~s "" 2he ,qr~* mstaqce, a process ,~ :~ghmg market r e q m r e m e m s t~mong other things, delivery dates d e m a n d e d by the cus-
t o m e r ) ag.nmst throu~.:put O_mes m the production and d~stnbutlen process These, :n turn, are decisive for investments m stocks and m the productlon process. The hard dlStlnctJon that this control concept makes between customer-onenied acttvltles on the one , a u u and activities based on planning on the other, grea0y simphfies the task of illustrating how the J I T pnnc~ple works According to the J I T control concept, there should only be productlon when there is an actual demand It is m fact assumed m the present artmle, that the d e m a n d process m the chain is not intended f ~r the purpose of building up stocks, but actually for bandhng customers' orders. This observation lmpiles that, after the customer-order decoupl.mg point, the Just-In-Time production has to be ~mpiement~d up to, and including d e l I v e ~ to the customer for instance also the physmal distribution! This is an ex, remely ~mportant marginal condition for ,.nvestment m flexible c a p a c m e s and will be con, !tiered m mo~deta,A *_.,.,S~et,.on 3 The capacme~ after the customer-order deeoupling point have to 0e very fie~oie m order to absorb the changes m m~x a n d / o r volume which
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I-'tg 1 Ftve posmons for the decouphng point (DP) (Source Van Hees [ 6 ] )
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50 are Inseparable from customer order~ in a dynamic market, wtlhoul disrupting the agleed delivery times Furthermore, m this concept, the order-acceptance function of mediation can also be apphed to deal with limited flex~h,,hty beyond the customer-order decouphng point The lmpor:ance of an integral analysis ~s thus demonstrated Shifting the CODP from DP-2 to DP-3, for example (see FJg 1) wdl at once affect component-part production before assembly. That d e p ~ m c n t ~,dt then .aot be m a pos~tion to paCs parts to assembly at will, but only when there is demand from assembly This means that ec-npo~ent-part manufacture can be faced with a build-up of stocks if the production r'la.,:nmg is not adjasted if the mtegrm cnam is not kept a : ]er constant observation, this effect could easily be neglected and even lead to the ~umponents lhctory being negatively judged on account of ~t~ b ~n,',o excessive stocks v In assessma ~he situation, one should therefore be very careful to reahse that ~ " e n J!T ~s aoFhed, the main s~,~ck point has It, Hlove upstream m the chain. ~ar~ Hees says that this is related to the entrepreneur's risk mentioned earlier It ,s illustrated lC~ Fig 2 Considerable amounts of money are invested in DP-1 in stocks of end products spread over a number ofdlstrlbutmn points This implies a high risk of being left with unsaleable goad: -~t D o-~ on the otne~ hand, the risk lies mainly in faliule to meet delivery times and in overrun of precalculation costs of the project Finally, the entre-
F~g 2 Entrepreneursrisk and the locatmn oethe decouphng po:vt (Source Van Hees [6] )
preneur's risk related to the fixed assets w,,.i! also be increased because of investments in (costly) flexible capaotles when the decouphng point is shifted upstream The strategic appeal to taking the entreprenea:sh~p risk referred to lp d~e introduction is mus certainly justified The question is however, whether concrete effects can be discovered which support such strategic intuition It is for this ~urpose that ~ concrete production sm.atmn ~s examined 3. Concrete production situation An industrial enterprise manufactures a ~reat variety of end products it consists of a namber of component part factories and an assembly line In ~he interests of slmphclty we shall concentrate on the combination of one components factory. plus an assembly line The customer-order decoupling point is positioned beyond the components factory In the components factory In question, work includes heavy pressing on a traditional rougiaiy 2000-ton press. Hundreds of dlfferent semlfinlshed products are pressed from about thirty different raw materials. In addltmn, the factory carrles out various cutting actlvlt:~s with conslderabl ,~ overca~ac~tv The ~ress*~d semifinished pakt~ a~c a~oembled on the assembly line together with several parts from other components factor,.es The possible combinat'o~.s are practically unhmited It could be said that the heavy pressing work of the components factory &vldes the product range rata 100 main types (semlfinlshed product) Depending on customer orders, the main type is processed on the assembly line to a practically unique, customerspecific product There are m fact ~_housands of types of end products The components factory centres on the big press As the resetting tames are cons!derab!e, a lot size rule is followed, based on Carop s EOQ tormma, w m ~ n I.l~tClllllllCa [h(~ Iot ~lZe i.'y noraparing the costs of holding stocks of semlfinlshed 7rc~t:ct with the costs revolved m resetting the press Green this lot size, t~ae internal co~t price of the semlfimshed product can be determined The structure of tht~ cost pnc". !s as follows"
51 The material value (to be paid to suppliers): 30% - The fixed part of the added value (fixed m a n capacity, deprecmtion, etc. )" 60%. - The varmble part o f the added value (energy): 10% Sales have greatly increased m past years thanks in part to extensmn o f the already wide range of end products F u ~ h e r growth ~s, however, impossible without budding a new assembly line, as assembly is already being done in three shifts. How :ver, no substantial further growth is expecttd In the market that IS served, so that the company has reconciled itself to the fact that ~t wall not qerve a (relatively ~,nall) part of that market The growth o f sales has also had its effect on the component-parts factory Capacity problems arose with regard to the 2OO0-ton ~;ess T~Is has led to contracting part o f the wo-k out (10%). The price charged by the suppher charges amounts of 110% of the internal price. Growth has also brought the regular need to work overt~me m the event o f breakdowns. The delivery t~me agreed with tree customer is longer than the throughput t~me of the assembly process, but not so long that one can simply shift the de~ouphng point to D P - 4 (see Fig l ) Th~s would m e a n that the C a m p tot s~zc osed for the 20O0-t(,:a, :ess would have to be clropped m favour of working with flex:ble customer-order lot s~zes (lot s~ze 1!) The ratio of setting t i m e ~o production t:me would then become so unfadurable, that ser,.ot~,s efficiency losses would occur In addition, the work contracted o , t would ha,. e to increase c o ~ d c r a b i ~ | v order to be sure that every customer order c ~ , he ~andied m the present-day situation con sloe: ~b!e safety-buffer stocks of every mare type (se'.mfin:shed) are held a: the main stock point T L . aim is reducing as far as possible the risk of being unable to start assembiv because of waiting for production o f components. Such a s~tuatlon could endanger d e h v e D times as agreed w~th the customers ba~c:y-buffer stocks ~s the standard means o f compensating for uncertainty The ct'aractemsttc problem o f th~s production s~tuat~o,~ is that the total number o f main types that will be bought is known (namely the maxIo -
mtlm number that assembly can process), but not how many of what type In other words, component-part manufac:ure has no preoiem w~th volume flexiblh~y, but cloes have one with flexlblhty o f the mix. Prebiems with reference to volume flexlblhty (for example, see Bertrand [7] ) w i l l not be considered m the present article. Because of its .ong rcsettlng (setup) t'.mes, the traditional press is a thorn m the flesh of production management, which suggests replacing ~t by a very flexible heavy press. M a n a g e m e e t clmms that, after the investment, Just-ln-Tlme "an dellvef on call by assembly In other wares, after making the investment there ~s no need to work In the component-parts factory on the basis of the fixed C a m p lot size it also clmms that contracting out will no longer be necessary and that overtime will be a thing of the past. This cotfld br)ng savings The n u m b e r ofopera~or~ needed ~t,, th~ new press ~s the same as for the old one. The space the new one will occupy remains unaltered. There are no savings here The flexible heavy press is an investment ra~,o.)x ...~,-- ~,nlOnS,.., The ,-n,,*--"~r__.,~,hz~. h,s goabts The concrete expendztures involved in the acqms~tion of the fle^,o,~ p.~oo . . ~ ~,,la,,n) fo him But how does one clctermlne the concrete yield from such an investment in flcxiblhtv 9 Thv cancretc ;avi~tgs ~: valved in this investment will be considered m detail m Section 4 However, before we can do that we must first make an empha),.c distraction between an investment :n fie>~!ble capacity wtthout and one w~th adjustment in the logistics concept. Let us assume that the stock m the lmtlal situation, that is be~ere the investment m flexible capacity, camprises 3 kinds a quantity of raw material :a stock due to purchasing-order sizes, - a quantity of work in process stock ~n comp_~nent-parts p~oductlon Th~s stock depends on the throughput t~me of parts production, a quantity o f semlfinished product stock at a decouphng poirA where, on the one hand its function is that of a buffer stock and. on tbe other. is ltseif caused by the lot size :n component-p_art pi oductlon. After investment m flexible capacity wtthout adjustment o/',h~ l~gi~tzc ce~ce0t, the customer-
-
52 order dot-onpim~.nolnt remains located bekond the component-parts factory, which means that a safety-buffer stock is stili required -~ *~'~ -~. . . . phng point The safety stock can perhaps be cut d o ~ ' n "~ h i t her,~llSe "~ho thral~ohr~llt t i m e I ~ the component-parts factory is reduced We will not continue with th~s line of enquiry here In any case the decoupl,ng-pomt stock will shrink because the lot size stock will disappear I'he quant r y of work :n ~orocess m the compenent-parts factory w,Al also decrease daanks to the shortenmg of the throughput t,m~ hrcn,ght ~hc,,,* h, ~h,~ investment m flexible capacity, ttms in lact yielding an economic benefit On the other ha~d, the quantlly o f raw material wlii increase as t~:e offtake from m e components f a c t o ~ has become smaller, causing bulld-uv of raw material stocks This can, of course, be avoided by adjus mg the purchasing order quantities, but th,.s posslbihty is independent of the l n v e s t m e m in flexible cap a o t y (Observauon even ~¢the s,.Te of purchasing order quantities can be cut down, the upshot can be a ..i..,~,.,. ,~.0. , . . quantity, . h,Jg,al,v~. ec,,,,,,,-,o con~oo,,onoo in th,= o.~o Let us now assume that the production management guarantees that the total throughput t~me a f component-part production and assembly, lrthan dehvr e b l O e C t l V. C. . . ~ t c.,. t n ~ . . .~ .H.A., . . . . . . . n ~,~ ~ . . ~hr,,'~r . . . . . cry t~me to the customer In other words, thanks to the investment, the Iog,,st:cs co.ncept can be adjusted by shifting the C O D P to DP-3 (assembly to customer order ~, to D p - a (producing and db~ClllUllllt$ ~,U~I.U][,.~Iorder, nee also Fig I). What ~s the effect on stock size in that case9 The old decouphng-pomt stock of semlfin~ h e d product now disappears entirely The quantity of work m process is reduced in the component-parts factory just as in the preceding Sl~U,,,on Here, too, stocks of raw materials ,ncrease, a process which canpot however be completely prevented by adjustment of purctL~smg order quantities This is because, just as IL the old situatlon, buffer stocks have to be me, ntamed at the decouphng point, as the component-parts factory must be able to start when the customer order comes m The conclusion is that a flexible investment that g o ~ ~'.ong with an adJested logistic concept yields the greatest saving In tbe next section, in which the y~eld from the
s~t,,at,on will be &scussed m detail, the starting penlt will be that the investment does lead to the adjusted s,.tuat,.on ir. winch assembly to customer order is further adjusted to a sRuaUon wl:h both component-part productmn and assembly to customer order 4. Economic covsequences of a flexible capacity investment In our case, seven e c o n o m i c consequences can ~.~ "-~,.,~,~a~u.'~ First of all the decouphng-pomt stock of semlfimshed products disappears, It was, on the one hand, set up from buffer stocks m order to be able to carry out customer orders in assembly at any time and, on the other, because components manufactare supplied p a n s m fixed lot ~zes The~e effects are dealt w~th m Sections 4 1 and 4.2, respectlveb We have also seen that the quanUty o f work m process had dropped m the c o m p o n e n t s factory owing to the cut in throughput t~me. Th~s will be dealt with m Section 4.3 Since stock,, &sappear, there ~s less need tbr storage spa~c, see Sectmn 4.4. The productmn management guaranteed that o v e r t i m e and contracting out wo,qd no lohger be needed in the new sltuat~Jn Fhese effects will be dealt wRh m Sectmn~ 4 5 and 4 6 i_ast of all, l~. must be assumed tb_at smaller stocks represent less risk of unsaleables and this will be discussed m Section 4.7
4 1 Reduction o/safety-buffer stock In trle traditional appraoeh, the safety-buffer costs are calculated by multiplying an interest percentage by the internal cost price of the article in stock. In principle there is always a safety buffer and the standard safety-buffer stock level will be included m our considerations. In our case ~t would mean that the saving; on the buffer stocks of semlfimshed pressmgs per type can be calculated according to the ollewlng formula [savings = standard safety stock × internal cost price × interest percentage ] A n u m b e r of marginal no:es must be m a d e to this calculatmn For instance, we cannot be certain that the buffer stocks w,Ai disappear entlrzly
53 As the main stock point is shifted, the b,.~_. stocks o f pressed sem~fimshed product are m fact no longer required. However, It may m view of the t~tal throughput t i m e from the date of cust o m e r order to delivery, be necessary to lay in buffer stocks of raw material. It must be borne in m i n d that, if a customer order comes In and there are no stocks of t a ~ n~atcrza!s, the tot~_! thrau~h~ put time of the process is extended by the dehver~, time of that ra~ material Shifting the same buffer stocks uostream does, howe~er, have a p o s m v e effect, as the n u m b e r o f types contained in It drops from a hundred ( s e m i f i m s h e d ) to thirty (raw material). Thus, the safety buffer stock can be reduced per type ofs~ock item, since aggregated patterns of d e m a n d arise [ 8 ] The tc,tal buffer stock (in terms of end products) wlii therefore shrin! Fhe above ~aVlligS calculation suggests that buffer stock in i .~w materials is cheaper than that in semlfimshed products. The cost of raw materials is o f course I 's~ The question is whether the argument is corre ~ Money (capital) is invested ,.n safety-buffer st ~ck Cap'~ta! :s not gratu,tca;; the company, fo~ e~.~ample, has built up a ba.-_k aeot ~or its capital and has to pay lntele~t od ,?. The crue,~al point ~s thus the extent to which that d_~b~ will drop If the buffer store is shifted. We are faced here ,~,,.h a dec!sion calculation In a going-concera situation We therefore try to calculate the ,~onoete savings This means that we must ask ourselves how much the expenditure and prouucnun . . . . . . . . . . . . . w . , tea[/), be am:mo-,,_.ca ........ If the b u f f r stocks o f semffimshed product d ~ a p p e a r Va,, der Veeken [ 9 ] observes that, v, a h regard to labour, machines, overheads, e t c , a lower bank debt cannot really be obtained as the result of lowering stocks His conclusion is unequivocal. the real effect is on the material value and, pelhaps, energy All other expenditures remain unaffected ff buffer stocks dnsappear On the one hand. this can be traced back to expenditure recurred m the past (a ; q m s i t l o n o f m a c h i n e ) and hence no longer subj -ct to influence, on the other, because savings on hours worked will be so margmal that no actual reduction, tot example, in personnel can be achieved The real expenditures on salaries thus remain unchanged and the savings are calculaUve fictions It could be ob-
setx ed at this point that real savings can indeed c" achlev, d by working variable hours of overtime. l'hls, ~~,aever, IS no~ the case As the work is in fixed k,, sizes and one is always obhged to supply as many items as assembly can process at a m a x i m u m (purely mix flexlbllIty~), overtime and contracting out is inevitable in the stable situation In the new. pa~t-mvcstmcnt situation, overtime and contracting out will be things of the past as the result of pure Increase in capacity thanks to decreasing the resetting time and not because of reduction in safety-buffer stock Savings en overtime and contracting out are dealt with m Sections 4 5 and 4 6 The real savings on interest costs will have to be calculated by the following formula [savings = difference m buffer-store level × (materials value + energy ) × interest percentage ] It should be noted that, as regards the expenditures which can be Influenced. it makes little difference whethel l: is raw material or semifint_Sll.Cl e e* ,o" e tha~ ale kept "~ l h c . . .u.m. y. . . u n u g WhiCh o:u~x~ can be influenced is, of course, energyV The real savings are thus mainly brought about by reducnan o f buffer stoc/~'~ m the chmn, but not by shiftlng them In a d d m o n , there is a further observation tc be made about the interest percentage applied in these calculations The assumption is that the liquid means m a d e a~ailable will be used to dJromish the (short-term) bank debt fhls is a real assumption, though one could also consider using this capital fu~ uther purposes Once cannot al,ways be certain in advance of getting an interest percentage on short-term bank debts~ l he company's financia! management ,vlll pronounce as to now the released liquid means are to be used It is on this basis that the co~erete savings that can be obtained with said available means will be d e t e r m m e a Yms article will now restrict Itself to the quesnon of how roach liquid means will become avadable by investment in flexible capacity The above calculation :s an example of socalled ~maney-flow ca!culatlon, see [ 9 - ! ! ] In general, sceptics note that, "although the costs e f labour, machines, e t c , cannot be influenced im-
54 mediately, the effect m u s t c o m e in the long r u n " This a r g u m e n t is c o n e c t in principle, b u t it is precisely this long-term situation w h i c h is so unpredictable In fact, the wish to invest in flexible capacities is because future offtake is u n c e r t a i n a n d difficult to forecast in a d y n a m i c m a r k e t It is thus extremely doubtful, in antw~patton, a n d w h e t h e r the " l o n g - t e r m " situation in w h i c h the calculanve savings are to be o b t a i n e d will ever OCCUr
T h a t all costs are variable in the long t e r m is certain But was it not J M. Keynes w h o in th~s context once tc,,,arked, " i n zhe ?o,,g ru,t, - ' e will all be dead ''~ In view o f the i n v e s t m e n t o f mllh o n s of guilders in flexible capacity, t h a t is a s t a t e m e n t w h i c h should m a k e one thoughtful, for m o r e t h a n one reason Conclusion. T w o m i s r e p r e s e n t a t i o n s in calculating the proposals to out buffer stocks are v a l u a t i o n of interest e x p e n d i t u r e at the full int - : n a l cost price instead o f value o f materials a n d variable energy costs, because o f which the estim a t e d savings are too optimistic, - failure to reah~e t h a t it can be necessary, to m a i n t a i n buffer stocks at the new m a i n stock p o i n t Because o f the a b m e valuation, the difference between buffer stock in the old a n n new m a i n ¢:ock po,nts may be less favourable tha ~:he costs a p p r o a c h would lead o n e to believe. -
4 2 Reductton o f lot s'ze stocks
T h e same v a l u a t i o n p r o b l e m is e n c o u n t e r e d m the savings calculation for a r e d u c t i o n o f lot size stocks in semlfinlshed product. Here too, one will be Inclined to valuate at i n t e r n a l cost price mstead of taking the m a t e r i a l value a n d t h e variable energy costs T h e r e is yet a n o t h e r p r o b l e m t h a t occurs in lot size stocks w h i c h h a s b e e n described in detail in a n article by Van d e r Veeken [ 9 ] il~ th~ a i m is to use n o t h l n L bu* real econ o m i c effects a n d n o t calculaW. ¢ results as the bas,s for the decision-taking, t h e n changes in ;,avments in which the outstde world is i n v o l v e d , ~ v e to be e s t i m a t e d As the lot size stocks o f semi finished goods are to be f o u n d in the m i d d l e o f t h e logistic ch,u,i a n d r )t at the p u r c h a s i n g or selling sides o f the firm, one has to d e t e r m i n e w h e t h e r the altered lot size pollc) ",~ill ~_Lc, lead to changes in t h e pat-
t e r n o f p a y m e n t ~ o n b o t h sides G f t h e firm i n this case the offtake a n d p a y m e n t p a t t e r n s for finished p r o d u c t s do not change We can therefore restrict ourselves to the p u r c h a s i n g side o f the c o m p a n y T h e p a j m e n t - p a t t e r n cbm, ges, d u e to a delayed Increase in e x p e n d i t u r e , to the a m o u n t o f the p u r c h a s i n g value o f the m a t e r i a l s to be acq m r e d are o r d e r e d in smaller quanttttes a n d paid for tn accotdTnce wtth this o r d e r p a t t e r n Van der Vccxen summar,.sed this m Fig 3, in w h i c h he assumes t h a t the delayed e x p e n d i t u r e s are s h o w n m the ,.,,--,va../o b , , k d~bL N o t e t h a t there is no m e n t i o n o f smaller putchasing o r d e r quantltlesV We have, in fact, seen t h a t buffer stocks o f raw m a t e r i a l s will certainly bc required, but n o a r g u m e n t is p u t forward in j u s t i f i c a t i o n o f r e d u c i n g the p u r c h a s i n g o r d e r quantities in the new situation. T h e r e are n o such a r g u m e n t s in fact T h e possibility o f cutting d o w n the p u r c h a s i n g m a y well exist, b u t t h a t is quite u n c o n n e c t e d with i n v e s t m e n t in flexible capacity) T h e real e c o n o m i c effect o f t h e disappearance o f lot size stocks o f s e m i f i n l s h e d goods IS T h i s c o n c l u s i o n will strike the r e a d e r as quite incredible Stocks d i s a p p e a r a n d vet t h e r e is n o e c o n o m i c effect) C o n s i d e r a b l e effects c a n b e achieved, b u t these h a v e to be a t t r i b u t e d to a different positive effect o f t h e i n v e s t m e n t )n f e x I b l e eapac~_ty, n a m e l y a r e d u c t i o n in tlaroughput time, a n d with it, a r e d u c t i o n in t h e a m o u n ,~ o f work in process. it is n a m e l y the case t h a t a c h a n g e in lot size can only lead to a change in t h e p a y m e n t periods. A change in t h r o u g h p u t time, a c h l e y e d as a result o f lot size a d j u s t m e n t , c a n lead to a n actual red u c t i o n in the ,,olume o f work in process F o r ex,*,,,v,,., ,-.,., ,, ,,,,d t , J , . ~ . u o n s , ll~e ~evera! o t h e r authors, the favourable effect t h a t s h o r t e n i n g the t h r o u g h p u t u m c can b r i n g a b o u t T h i s !s diecussed m 3ection 4 3 4 3 Reduci~un m mru,,~hput ,~.me
C o m p u t e r s i m u l a t i o n p e r m i t s o n e to calculate w h a t h a p p e n s w h e n the lot sizes are reduced or, as in t h e present case, these sizes are d e t e r m i n e d by actual c u s t o m e r d e m a n d . A c o n d i t i o n for this '.s, o f course, t h a t a realistic package o f c u s t o m e r
55
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is done with small, customer-order-dependent lot sizes, which increases the degree of loading For the sake o f simplicity, let us assume that we have found from the simulation that the work in process will decrease. Again we are faced with the question, " W h a t are the concrete sawngs which are concerned in this reduction of work in process 9'' The total o f slocks held by the company becomes ~,naller, which means that the company's requn-eta.,ras ofcapltal w','_,be ,'educed Here too, internal cost prices does not provide precise insight Just as in the case of the buffer stocks, o m point of departure wall have to be ~hat only the expenditures on energy and material can ensure less need for capital. The costs a,3proach in this t.ase too, suggests a higher calcu!ati,,ely fictitious e c o n o m i c consequence.
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Fig 3 Order Quantities (series) reducuon and payr le:,t periods (Source Van der Veeken [ 9] ) orders and rehab!e resetting and processing times are available. With the aid of such a simulation, the length of the new throughput time in the component-parts factoLv can be calculated and from that mformatron the a m o u n t o f work in process can be det e r m i n e d as well. The average throughput time is also dependent on the ,~-'~'; . . io ,.hat are ap~ . . , , , , ,.~. . .,u,,.s plied. We assume that these will remain unaitered U p to now ,~e .'.,ave (~)~)UlII%~LI . . . . . . . . . . . .[.n a t tnls work in process will be less than in the old sltuauon, but we cannot be cer~tain o f that. The effect on the work in process is namely d e t e r m i n e d for the most part by the loading degree of the new machine (resetting pl.us productior, in relation to the full t i m e available) In )he new situation there _t 1ng variables which are related to are two cnang the loading degree, hence the resetting time, on the one hand, is dm*hcally reduced, thus lowermg the loading degree and, on the cther, the work
In most companies, part of the accommod-.t,on costs are aiiocated to ea~h dcpdrtrqcnt by means of the costs allocation sheet in the desartmental budget, q'_h ~ is t, sually based on a rate per square or cubic metre of space used by the u ~ v a , ,m~nt ~.ceg_'~_w~__ocl_n_l.~oncosts are fixed ill most cases Reduction of these costs for a product,on deoartment because it needs less room is a calculatwe sav,,ig The rate per un,t space is not the appropriate "_nstrument fGr determining the real savings related to a c c o m m o d a t i o n In principle there are two conceivable situations In the one, the company ~s not short of space and any eventual redundancy will hardly be statable for a different purpose, in which case there are no co~crete savings to be expected The situation is different where the company is fa_ed with a shortage o f space. In o u ; case, ho',~eve:. ~t is not a hypothetical s]tnatmn, because sales have risen ~',,,ip;~ ,n re~.ent years A shed may well have to be (or already has been) hired in the present s;tuatlon because the storage capacity has simply become Inadequate. In this case too, the rate per square m e t ' e or cubic metre does not provide a eorrec~ picture of the gain to be expected when the shed r no longer needed. The real gains are namely determined by all the expenditures involved in r~ntmg the shed Tl,e :a-
56 tal of costs i n v o l v e d will, in m o s t cases, be m o r e t h a n the space concerned, mult~phed by the rate, since it is usually impossible to rent the space strictly required T h e cos,'s rate p e r unit space is m b o t h cases i n a p p r o p r i a t e for d e t e r m i n i n g real savings o n space W h e r e space is not a b o t t l e n e c k factor, the gain suggested is too optimistic, where a bottleneck does exist, it suggests too low a g a m
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4 5 Reduction in overtime In o u r case. m e p r o d u c t i o n m a n a g e m e n t guara n t e e d t h a t o v e r t i m e would not be necessary in the new situation O v e r t i m e is a b o u t 35% d e a r e r in most cases The effect o n the cash flow is, however, m o r e t h a n is suggested by tha" 35%, as overtime, in c o n t r a s t to regular h o u r s o f work vary, roughly in p r o p o a l o n to p r o d u c u o o volu m e T h e real effects can t h u s be calcula:ed from the variable m a n - h o u r rate, plus the extra-allowance fact,., % r o v e r t i m e Here the situation is n n t so misleading This is becaflse t h e lrlves* a.,~nt in flexible capacity actuaily p r o v i d e s m o r e p, odu¢twe h o u r s w i t h i n regular working t~me, so t h a t more expensive, irregular o v e r t i m e is n o longer necessa~' as a ".,.,hole
4 6 Reduction m work contracted out T h e p r o d u c t i o n m a n a g e m e n t claimed, as we knov,, t h a t t h e r e would be a reduction, not only . . . . . . L m wu~r~ c o n t r a c t e d out, b u t in o v e r t i m e as well "Ihe s e m l f i m s h e d c o n t r a c t e d - o u t p r o d u c t is 10% dearer t h a n the i n t e r n a l cost price T h i s mean~ t h a t a sav,_ng a ¢ t. .t,. oL . per ~emlfinlshed part cvntraeted could ~e a c h i e v e d F r o m the strategic perspective tht ~ i-; correct In *.hat case namely', we assume t h a t the factory has yet to be p u t up a a d t h a t all the e x p e n d i t u r e s r e q u i r e d for rr,:,ductio'a h a v e still to b ~ incurred. T h i s p r o b l e m can be cor,,pared to a m a k e / b u y dccision. Hoveever, t h a t 1~ not the case m the present Instance. T h e real yield which can be a c h i e v e d with contracted-out work is far h,gher t h a n 10%. O n e should ask oneself h o w mucl, e*.tra it would cost to produce t h a t work internally 3 : s t a~ in the case of the buffer stocks discnssed in Seztton 4 1, extra expenditu*e ~s i n c u r r e d only m relation to material a n d energy T h e outgoing cash ~..,~,v for
work c o n t r a c t c a out is r e d u c e d by far m o r e t h a n 10% In Fig 4 we see at the left-harM side the m t c r n a l cost-price structure At the r i g h t - h a n d side we see the ( v a r i a b l e ) i n v o i c i n g o f the work cont i a c t e d out. C o m p a r i s o n b e t w e e n the two a m o u n t s indicates t h a t the real effect ( = ~ d u c t i o n o f o u t g o i n g cash flow) is _+63% o f every :n-',oice for ~ o r k c o n t r a c t e d out) Here the costs app r o a c h wrongly suggests a m u c h lower effect
4 7 Reduction risk ofunsaleables T h e r e has b e e n no dlscusslo~ o f the r'.sk o f u n o saleables m buffer stocks c f s e m l f i m s h e d goods a n d lot size stocks o f s e m l f i m s h e d goods O n e could i m a g i n e t h a t part o f these a e m s could bec o m e useless t h r o u g h wastage or technical agelng. In view o f a d y n a m i c m a r k e t , the risk o f t e c h n i c a l ageing is always present. In the new situ a t i o n tb,s risk n o longer exists for s e m l f i n i s h e d items, a n d z d v a n t a g e s are t h u s to be g a i n e d here, too. In t h e light o f the foregoing coi~slderatlons, it will corae as n o s u n r i s e t h a t t h e ,ntc~ hal cost price gives a d i s t o r t e d picture o f the financial ret u r n s m this case as well. F r o m a structural perspective, all t h a t is i n v o l v e d is lower e x p e n d i t u r e o n m a t e r i a l a n d energy
5. Summary It was s h o w n t h a t t h e r e are a b o u t seven different e c o n o m i c effects to b e d i s t m g m s h e d , all o f w h i c h are i n v o l v e d in a n i n v e s t m e n t m flexible capacity. We h a v e s h o w n t h a t such an investm e n t only generates all t h e suggestea Just-P,,T i m e a d v a n t a g e s if t h e c c s t o m e r - o r d e r decoup h n g p o i n t c a n really be m o v e d u p s t r e a m as a result o f t h a t i n v e s t m e n t O t h e r w i s e stocks are only m o v e d internally in the c o m p a n y , b r i n g i n g
57 a b o u t far s h g h t e r effects t h a t t h e costs a p p r o a c h suggests a n d d o i n g less t h a n justice to p o t e n t i a l a d v a n t a g e s w h i c h c a n b e a c h i e v e d t h a n k s to flexible capacity. A n i n v e s t m e n t in flexible c a p a o t y which really results in shlft, ng t h e c u s t o m e r - o r d e r d'~ coupling p o i n t u p s t r e a m has showr~ t h a t s e v e n types ~ f savings are possible. O n e c a n also be m~sled the same n u m b e r o f tlmea aa well. T h e reader m a y rightly o b s e r v e t h a t s o m e o f t h e m i s r e p r e s e n t a t i o n s are m e r e or less trivial, for e x a m p l e in practice, space saving will s e l d o m lead to ma.lorated y:ela calculations. O n e c a n n o t fall to n o t e t h a t t h e costs a p p r o a c h p r o m i s e s too o p t i m i s t i c a result in m a n y cases. T h e " t e n d e n c y to m i s r e p r e s e n t " will t h e r e f o r e be great for the m o s t part a m o n g the i n n o v a t i v e forces w~thln t h e o r g a n l s a t l o n In fact. it is alm o s t as i f i n v e s t m e n t in flexible capacity, as s k e t c h e d o u t here, c a n practmaliy n e v e r b e justified economically! B u t th~s is n o t altogether so If the old press is w o r n o u t a n d it is t h u s correct to speak o f a n u n a v o i d a b l e r e p l a c e m e n t investm e n t , t h e picture w,-il b e m u c h rosier for flexible capacity In a d d i t i o n , a great deal m o r e can be e a r n e d in t h e area o f c o n t r a c t i n g out, o v e r t i m e , etc., t h a n is suggested in t h e costs a p p r o a c h W h e n i n v e s t i n g in flexible capacity it s h o u l d be r e a h s e d t h a t the " p r o o f o f t h e F,e x l b l h t y p a d d l n g " is t h e market. T h e c u s t o m e r will m a k e his choice o u t o f m a n y types a n d ._, rehable, if possible, s h o r t delivery, time. It will n o t m a t t e r to h i m at a / / i f I e gets his goods delivered on these condltlons, e i t h e r from stock o r by way oj~='xlble capac:ty. (Possible i m p r o v e m e n t s in quality a c h i e v e d by flexible capacity are n o t t a k e n into consideration ) Bet,er t h a n that, if there is a m a n u l a c t u r e r w h o p r o d u c e s in lots, t h a t is with stocks, b u t by good m a n a g e m e n t of these stocks c a n offer the s a m e delivery p e r f o r m a n c e as the flexible m a n u f a c turer, the c o n v e n t i o n a l p r o d u c e r cur. p".ss,_b!y be e v e n cheaper. Such good control o f ~lot ~t7e)
stocks, however, requires lnSlght into the h a n dling o f a n integral logistic concept, as the prese n t article has illustrated. F u r t h e r m o r e , C a m p ' s E c o n o m i c O r d e r Q u a n t i t y is n o t a suitable ins t r u m e n t in this context with which to d e t e r m l a e t h e lot size, as the costs a p p r o a c h fails because o f t h e calcalatlve m l s i e p r e s c n t a t l o n s w h i c h ensue
[01 Acknowledgement T h e a u t h o r wishes to express his gratitude to t t J M v a n d e r Veeken, J A M Theeuwes. E G J V o s s e l m a n a n d R A J a n s e n for t h e i r c e m m e n tary o n a n e a r h e r v e r s m n o f this article Refcrencea
1 Brine,man, S 1989 FlexlblhtmI, procesbeheer~.ng en beheersmg van processen Ph D l hes.o, ~,.aah,we~
Umvers~t~of Tecnnology 2 Schonberger R J 1982 Japaucsc Manafa~tunng l'ecnmqaes Free Press, New YOrK 3 Durhnger, P P J andWommann, JC 1983 KanbanKan m Japan, maa- hmrn Bedrofsvoermg, 4 4 Shmgo, S, 1985 Sludy of TOYOTA production systems from an industrial engineering *mwpomt JR;2 nese Management/-,tssoclallon 5 Benrand, J W M andW~jngaard J 1985 Deslructuur vaq produeuebeheerssmgsystemen lnformaue, 27 342355 6 Van Hees, R N ~1984 Orgamsahestructuuren ,nlegraie besturmg als bas'~s voor ,,oorraadbeneersmg Internal PHILIPS Report vp45N, Emdho,,eq 7 Bertrand J W M 1988 Kostenverlaglngdoorloglslmk B&ID Bednjfskupdlg Vakblad, nr 0 8 Brown, R G, 1987 Materials Management a modular hbrary Wdey, New ~tork 9 Van der Veeken, H J M, 1988 Kovenmformaue b:J ~og~stmkebeshssmgen Bednjfskunde, 19~8/1 20-30 !0 Van der Enden, C 1975 Beshssmgscalculalms Samson, Alphen aan de R.jn 11 Theeuwes, J ~ M, 1988 HeI gelastroomprmclpe eep gezond verstand ben~dermg TeGl--~-c,~eBedrqfsvoermg November-December 190-194