Mark Spearman, President and CEO, Factory Physics In this session we will discuss: -Manufacturing Myths that Muddle Management: -Bottlenecks and non-bottlenecks—meeting demand -One Piece Flow—what is the real cost? -ABC Inventory Policies—how low can you go? And many more! Mark L. Spearman is President and CEO of Factory Physics, Inc., a firm that provides management consulting, training, and software to improve manufacturing and supply chain management. In his former life as an academic, he was Head of the Department of Industrial and Systems Engineering at Texas A&M University and also a professor at Georgia Tech and Northwestern University. He is coauthor, with Wallace J. Hopp, of the book, “Factory Physics” that was named the IIE Book of the Year. He has helped more than one hundred companies over the last twenty five years apply the principles of factory physics to improve operations by increasing productivity, reducing cycle times and inventories by developing integrated supply chain approaches that are both simple and effective.

1. Manufacturing's Holy Grail:
A Practical Science for Executives and
Managers
Mark L. Spearman, PhD
President
Factory Physics® is a registered trademark. All rights reserved.

2. Strategy. Execution. Profit.
Medical device companies feel economic
pressure, record M&A levels—March 1, 2012

3. Strategy. Execution. Profit.
―If medical devices companies want to continue to
make money as prices face continued
pressure, their only option is to take cost out‖ –
McKinsey and Company ―Design to Value‖ 2010

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

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

6. What’s a manager to do?

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

9. Strategy. Execution. Profit.Strategy. Execution. Profit.
Can’t Do That …
 Must reduce costs—increase utilization of labor and
equipment
• Can you decrease cost by meeting demand with fewer
shifts?
• Postpone CapEx?
 Must increase cash flow—convert inventory into
cash
• Is it possible to reduce inventory?
• Improve customer service?
 Must maintain (increase) customer service—high on
time delivery
• Give customer anything—anytime?

10. Strategy. Execution. Profit.Strategy. Execution. Profit.
Before you can answer the hard
questions …
 Can you answer the easy questions?
 If you change X in your supply chain, what happens
to important measure Y?
 Does the ―important measure‖
• Go up?
• Go down?
• Stay the same?
 Simple! Just answer the five questions (three
questions)!

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

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

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

14. Strategy. Execution. Profit.
The Hard Questions
 Customer Delivery
o How long do they
wait?
o Do they wait at all?
 Capacity
o Ours or outside?
o 24/7 or have back
up capacity?
 Inventory
o How much?
o What?
o Where?
 Classes of product
o Standard “quick-ship”?
or Custom?
o Anything they want
any time they want it?

15. Strategy. Execution. Profit.
Answers from science …
 What to make?
 When to make it?
 How much to make?
 How many people and
machines do I need?
 How much inventory
should I have?
High On-time delivery, low cost, low inventory

16. What are the right questions?
What structure works best for your business?
High
Profitability
Low
Costs
Low Unit
Costs
Less
Variability
High
Utilization
Low
Inventory
Quality
Product
High
Sales
Many
products
Fast
Response
More
Variability
High
Inventory
Low
Utilization
Short
Cycle Time
High Customer
Service
High
Throughput
The Goal

17. Strategy. Execution. Profit.
The Fundamental Factory Physics Framework
Two essential components
Demand
Transformation
 Flows
 Stocks
As variability decouples
demand and transformation—
Only three buffers:
1. Inventory
2. Time
3. Capacity
Factory Physics Framework links financial and operational goals.
Production
Assembly
Distribution
Market Demand Market Demand
Planned
Demand
Planned
Demand
Demand Stock Flow Diagram
- Work In Process (WIP)
- Flow
- Stock (Inventory)
PROFIT DROPS

18. Strategy. Execution. Profit.
Operations Strategy: Choose the future!
 Operations strategy is selecting the ―portfolio‖ of:
• Inventory Buffer—money tied up in inventory
• Time Buffer—responsiveness to customer (backorder time, fill rate)
• Capacity Buffer—replenishment frequency (setups, purchase orders)
• Variability—in demand, forecast, and replenishment
InventorySuppliers CustomersCapacity Inventory
Variability
Time
Portfolio management determines performance
and profitability.

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

20. Strategy. Execution. Profit.
Some Basic Factory Physics Principles
 Little’s Law
• Relates basic plant performance
measures
 VUT Equation
• Quantifies queueing effects
• Relates variability, capacity, and
time buffers
 Variance of Lead Time Demand
• Drives inventory and service
• Accounts for variability in demand
AND supply
e
ea
q
t
u
ucc
tUV
12
CT
22
Appropriate use provides predictive control
and optimal performance.
2222
LD d
ughput)Time)(Thro(CycleWIP

21. Strategy. Execution. Profit.
Push Production
BN
MTS
Demand
Finish
Early StockWIP
Whichever is less!
Demand
In
Output
Rate
Output Rate equals Demand
or BN Rate

22. 7.2 parts per day with 3 day cycle time, 16 hour work days.
Demand
Graph showing WIP, cycle time,
demand, utilization.

23. Strategy. Execution. Profit.Strategy. Execution. Profit.
One Piece Flow
One
Piece
Takt Time = 30 seconds
30 seconds30 seconds 30 seconds
Station 1 Station 2 Station 3
One
Piece
One
Piece

24. Strategy. Execution. Profit.
Takt Time and Mean Time
Mean of 25 sec, takt time of 30 sec, 95% done in time.
0.0000
0.0200
0.0400
0.0600
0.0800
0.1000
0.1200
0.1400
0 10 20 30 40 50 60
Sec
Probdensity

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

26. Strategy. Execution. Profit.
Graph showing WIP, cycle time,
demand, utilization.
7.2 parts per day, with 0.7 day cycle time, 23 hour work day
Demand
Shorter cycle time at the cost of
7 extra hours per day

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

28. Strategy. Execution. Profit.
Example:
Large ROQ, No Safety Stock
0
20
40
60
80
100
120
0 10 20 30 40 50 60 70
Day
Quantity
IP(t) I(t) IO(t) B(t) DATA: ROQ = 60, ROP = 50, AvgLT = 10, AvgDmd = 5 Dmd
What is the customer service level?
What is the cycle service level?
~96%
~60%

29. Strategy. Execution. Profit.
Back to the Hard Questions
 Customer Delivery
o How long do they
wait?
o Do they wait at all?
 Capacity
o Ours or outside?
o 24/7 or have
recourse?
 Inventory
o How much?
o What?
o Where?
 Classes of product
o Standard “quick-ship”?
o Custom?
o Anything they want
any time they want it?

30. Strategy. Execution. Profit.Strategy. Execution. Profit.
Inventory Issues
 Replenishment frequency—capacity buffer
• Order quantity determines replenishment frequency
 Stock out frequency—time buffer
• Safety stock determines stock out frequency
 Inventory Investment—inventory buffer
• Inventory depends on order quantity and safety stock
and item cost

31. Efficient Frontier for Stock
Minimum inventory for given service and
capacity levels.
Optimal
Policies
Convert strategy
to tactics!

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

33. Strategy. Execution. Profit.
Plan Capacity
(work force, OT,
outsourcing)
Optimize
Planning Rules
Apply Rules in
ERP
+/- Long-term
Capacity?
Execute
(general pull)
Use Recourse
Capacity?
Strategy
Policies
Control
Optimize
to
Maximize
Cash Flow

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

35. Strategy. Execution. Profit.
Plan Capacity
(work
force, OT, outsourci
ng)
Optimize
Planning Rules
Apply Rules in
ERP
+/- Long-term
Capacity?
Execute
(general pull)
Use Recourse
Capacity?
Strategy
Policies
Control

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

37. Application to Particular Situation
Raw Material
Inventory
DemandProduction
FG Demand
How do we tie this all together?

38. Strategy. Execution. Profit.Strategy. Execution. Profit.
The S&OP Process: Three Basic Steps
 Strategy—Assess demand and capacity
• What is the demand? Is it sufficient? More than we can
handle?
• Do we meet financial objectives?
 Policy—Balance inventory, response time, and capacity
• Policies reside in the ERP system
• Optimize policies to maximize cash flow
 Control
• Achieve financial and service performance through execution
of optimally defined processes. Continually improve.
S&OP is where we implement Factory Physics

39. Strategy. Execution. Profit.
Framework provides link between the
―Current‖ and the ―Possible‖
Efficient frontiers provide executive view, connect to daily execution.
A three plant supply chain…
…or a three machine production line.
Five SKUs…
… or 5,000 SKUs.
Flows Stocks

40. So, how did you do…
Three questions …

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

42. Strategy. Execution. Profit.Strategy. Execution. Profit.
Question 2
 In a push production system controlled by MRP that
has utilization of 90% …
What happens to the throughput when we install a one-
piece-flow system?
One piece flow:
Low WIP
Short cycle time
Lower throughput
More overtime to meet same demand

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

44. Strategy. Execution. Profit.Strategy. Execution. Profit.
So, how did you do?
 Got them all …

45. Strategy. Execution. Profit.

46. Strategy. Execution. Profit.
Or not so well …

48. Strategy. Execution. Profit.Strategy. Execution. Profit.
Go have a drink and call me in the
morning
 spearman@factoryphysics.com
 (979) 846-7828