I was telling some friends at a brunch about what I do, and how variety drives cost in manufacturing. “But all the manufacturing has moved to China,” commented one person. I’ve heard this comment over and over.
A picture is worth a thousand words — and here’s one that fits the bill.
We’ve seen this before. It’s a lot like the trend in agriculture that started in the 19th century and is still happening today: We produce more and more food every year with fewer and fewer farm workers due to increases in productivity.
However, there is a subtle point in U.S. manufacturing output that shouldn’t be missed. While the value of agricultural products (corn, beef, etc.) doesn’t have a wide range, that’s not true for manufacturing goods. The value of manufacturing output in the U.S. is significantly impacted by the fact that we are producing high-value goods such as industrial machinery, as opposed to low-value goods such as plastic toys and apparel.
As the percentage of cost in goods rises, the waste due to product variants becomes a significant percentage of total cost. Companies need to plan their production in anticipation of demand. As the number of variants gets higher, it drives tremendous inaccuracy through the planning process and translates into waste. When the value of each item is high, the cost of variants is a significant portion of total cost.
The waste due to variants is further exacerbated when supply capacity is higher than demand. In this scenario, end items are produced in anticipation of demand. Due to the large number of variants, the chance of having the right customer choice is minimal. Consumers are witnessing this on auto dealer lots. Each wrong configuration translates to a significant cost increase and profit erosion for the manufacturer and every constituent in the supply chain. The power of demand over excess supply has a spiraling effect of creating more product variants and raising costs.
While the U.S. should be celebrating the increasing productivity of the American worker, we have a tremendous responsibility to manage the cost of product variants.
This brings me back to my comment at brunch. A tremendous amount of automation has been executed to speed the supply chain. It’s time to stop and think about what the consumer actually wants and what we’re building if we hope to make money in manufacturing.
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That’s a great diagram – and the point about high value waste is very true. One mid-size industrial manufacturer we know has 12 warehouses full of inventory! Their approaches of lean manufacturing and better S&OP can only go so far to reducing waste. Similarly, all of those companies implementing PLM for portfolio management start with some assumptions about what the product set is. What better time to question our assumptions than this recession?
In one of my past companies, our sales persons were more adept in selling items we did not have in finished goods inventory. The manufacturing department, while manufacturing to stock based on internal forecast, complained of the number of ECNs thay received to convert the finished goods to meet actual customer orders. The perennial dilemma of knowing what exactly the customer wants is a big problem. Any solution that predicts it more accurately is a boon. It will help save the companies a lot of money in engineering change costs or lost opportunity by not having the right mix of real finished goods. I would be interested in knowing the level of wasted profits on ECNs from FAT (Final Assembly and Test) or near FGI to Real FGI.