M112 - The Efficiency Syndrome
This lesson discusses the widely held belief in manufacturing that keeping people and machines busy is necessary to make a profit. It explains why the belief is wrong and how the practice of releasing additional raw material (additional to that which is needed to meet on-hand customer orders) to keep people and machines utilised, inflates lead times and damages financial performance.
What you should do
- Read the learning objectives carefully.
- Download the handouts (see Unit Notes below).
- Watch the video (below) and make your own notes.
- Review the Unit Notes.
- Refer back to the learning objectives to ensure you have satisfied each one.
What you should know
At the end of this lesson you should understand:
- What the Efficiency Syndrome is.
- How it inflates inventories and, therefore, manufacturing lead times.
- How long lead times damage financial performance.
- The numerous other negative effects of operating in a high inventory environment.
M112 - The Efficiency Syndrome
1. Click here to download the unit handouts.
2. The content of this unit is a summary of a small part of Dr Goldratt’s critique of common manufacturing practice.
3. A very common assumption you hear in organisations is that ‘in order to be successful/profitable, everybody must be working hard’.
4. In manufacturing plants, the way that management keeps people busy is to release more raw material than is required to meet demand in the short term. This is justified by variability in customer demand, the forecast for demand over the coming months, etc.
5. The problem this creates is queues in the manufacturing plant. Queues, or more accurately inventory levels, determine lead time through the plant. The longer the manufacturing lead time, the more likely you are to miss the due date for delivery promised to the customer.
6. Therefore, inventory equals lead time.
7. The more inventory, the bigger the queue. The bigger the queue, the longer the manufacturing lead time. The longer the manufacturing lead time, the more likely we are to miss the due date for delivery. Non-customer orders are being processed while customer orders wait in the queue. If we miss the due date, our customers begin to see us as unreliable. This makes it harder to win customer orders and a vicious circle is created.
8. This obviously impacts our finances too. The longer an order takes to produce, the less we can invoice in one period (month/quarter/year). Your sales are therefore lower, fixed costs remain the same and consequently your net profit is lower.
9. Fixed costs for many manufacturing companies (in the West at least) are often 50% of turnover. A drop in sales can have a very large impact on net profit.
10. There are many other negative effects that are caused by having long lead times too, including: cash being tied up for longer than necessary, co-ordination on the shop floor is much harder, over time goes up, investment goes up, quality problems are harder to identify, finished goods are higher, etc etc.
11. The goal of a manufacturing plant is to make money now and in the future. We are ONLY productive when we do things that move us towards that goal. Releasing inventory just to keep people busy moves us away from the goal.
12. And we are doing it to ourselves...