Operational Strategy: Balancing Planning and Control

1. Operational Strategy: Balancing Planning and Control Vish V. Krishnan The University of Texas at Austin

2. 2 Recapping from Last Class Coordination across functions and business units is a major challenge. Creating incentive compatibilities is key. Minimizing incentive incompatibilities essential for smoother functioning. Firms organize themselves to minimize transaction costs. Markets motivate, Hierarchies coordinate. Double marginalization is the phenomenon under which profits in a vertically integrated firm is higher than the combined profit of unbundled firms (with monopoloy power). Transaction characteristics, Value chain profit patterns, and Channel structures should influence scope decisions.

3. 3 Profits in a Vertically Integrated Company

4. 4 Double Marginalization in the Microsoft Case Excerpts from "An Expensive Pig in the Poke: Estimating the Cost of the District Court�s Proposed Breakup of Microsoft�, 9/21/00. Stan Liebowitz , Professor of Economics , University of Texas at Dallas. "� There are several reasons to believe that the price of Windows would rise. As has been noted in a declaration by the government�s expert Carl Shapiro, and in an Amici brief by Litan, Noll, Nordhous and Scherer, there is a well-known problem that economists refer to as double marginalization. The double marginalization problem occurs when two firms, each with market power, produce complementary products. Each firm attempts to charge a markup that would maximize its profits, taking the other firm�s markup as given, and in so doing the price for the two combined goods contains a higher markup than if a single firm had set a profit maximizing markup for the two goods jointly. Thus, if one believes that both the AppCo and the OpCo will have market power, prices after the breakup would be expected to increase." [at pages 3-4.] "A detailed analysis of Microsoft�s pricing clearly demonstrates that Microsoft�s behavior in application markets can be classified as that of a price cutter, or a firm following a low-price strategy. After the breakup, new leadership will exist in one or both companies and each will have to choose a pricing strategy. It is impossible to know in advance what pricing strategies will be adopted by these companies. Although it is possible that both the OpCo and AppCo will follow the same type of low price strategy used by Microsoft, it is likely that at least one, and perhaps both companies, will adopt a different, higher-price strategy, perhaps due in part to the double marginalization factor mentioned earlier." [at page 10.]

5. 5 Roadmap for the Day Discussion of the Goal Push and Pull Control Systems Toyota Case Discussion Review of other Operational Items Robust Quality Time Pacing

6. Principles of The Goal: Jonah�s Wisdom

7. From Firm Level To The Plant Level...

8. The Goal and Sub-Optimal Decision Making Decisions in companies are often sub-optimal. Sales chooses to sell products that maximizes commissions Marketing/Manufacturing may be interested in maximizing gross margin per unit. The product mix that maximizes profit may be different from the above. Product takes more time on a bottleneck. Product is more complex to design.

10. Marginal Value of Time on Various Resources Marginal value of time on a non-bottleneck is ---- Marginal value of time on a bottleneck resource = Activation and utilization are not one and the same. Lot size calculated using economic order quantity idea overestimates value of time on non-bottlenecks. economic order quantity helps determine the optimal batch size given setup times and inventory carrying costs.

11. Bottleneck Management By now, we know the enormous significance of bottlenecks. What are some ways to detect a bottleneck?

12. 12 Getting More Out of a Bottleneck What are various ways, identified by The Goal to manage bottlenecks effectively?

13. 13 Impact of Uncertainty on a Production Line Fluctuations accumulate on the negative side instead of canceling out. Remember the boy-scout line The Goal calls it �Dependent Events� A balanced line creates a managerial nightmare. Queues build up. Bottleneck shifts.

14. 1. Identify the system constraint(s) 2. Decide how to exploit the system constraint(s) 3. Subordinate everything else to the system constraint 4. Elevate the system constraint 5. Do not allow inertia to become the primary system constraint Takeaways From The Goal

15. Balancing Planning and Control in Production

16. Stockless Production at Hewlett-Packard

17. PUSH AND PULL CONTROL STRATEGIES

18. Tightly linked production system; Low safety nets Low inventory Low wastage of space and materials Quality problems low due to immediate feedback. Problems bubble up to the top. Cycle time lower in a Pull system What capabilities do you need to run a system like this? Embodied in Just-in-Time Production System Virtues of Pull Control

20. 20 What was the historical context in the late 1940�s when Toyota began working on TPS? The key objective of TPS: Elimination of Waste (muda) Elements of TPS: Jidoka and Kaizen: Just in Time Heijunka

21. 21 How Toyota Implements/Transplants TPS? At its heart, TPS is a Pull system (which is reactive, does not plan). How does Toyota implement TPS? Is there no inventory in the plant? Is there no planning? How long is the line shut down normally? How did Toyota transplant TPS? The operating word to describe Toyota is �pragmatic�.

22. 22 The Seat Problem What is the seat problem? The key dilemma in solving the seat problem Cost of stopping the line versus veering away from TPS

23. 23 Quantifying the Dilemma What is roughly the cost of stopping the line? Lost sales? Overtime - entire plant? Overtime parts of the plant What is the cost of not stopping the line? Can it be quantified?!

24. 24 Recommendations to Doug Friezen... How should the seat problem be solved pragmatically/smartly?! Immediate term Medium Term Long term

25. What Toyota Did Doug Friesen formed a team that did a 5-Why�s exercises on the seat problem. Discovered that: Seat reordering form was illegible to supplier. Supplier plant conditions needed changes (poor lighting etc.) Product needed redesign for manufacturing. To resolve the problem, Toyota Installed poster boards on the overflow area that displayed the number of cars in the area. Set itself goals to gradually reduce the overflow area size to zero. If the size went beyond the goal, an andon-like action was triggered. Sent a Toyota team to the supplier to help them make production changes (involve workers more deeply in the process), streamline Toyota�s interaction (ordering form), and redesigned the seat for optimum production. As a consequence of these actions, the seat problem was largely solved in the next few months, but product variety was continuing to pose challenges in the plant in other areas.

26. Lean Production The Toyota case exemplifies the workings of a lean enterprise - a term coined by MIT�s International Motor Vehicle Program (IMVP), and described in the book �The Machine that Changed the World� The thesis of IMVP is that production management policies are key determinants of plant operating performance. Plants that are lean are capable of simultaneously achieving quality, productivity, and variety (�mix complexity�) much more easily than non-lean (buffered) plants. A lean enterprise is characterized by low (but not zero) inventory levels, quality as a part of the process, and broad spans of worker control. Geographic location of the plant does not influence a plant�s performance as much as its corporate parentage and its management. In the absence of management infrastructure, technology seems to have little effect on operating performance. A well-trained flexible work force, product designs that are easy to build, and a high performance supplier network are far more important.

27. Where the Field is Currently: Performance variations among global firms in the automotive industry have substantially narrowed. World-class firms take about 11-15 hours to assemble (per vehicle). Product development cycle time down to 18-36 months. Flexibility and variety are becoming increasingly important. Leanness + Flexibility is being called Agility. The key is to plan for variety carefully, and maximize differentiation while containing component proliferation. Some recent observations suggest that there are limits to leanness [Cusumano, 95, SMR]. Pushed too far, a lean enterprise may become fragile! Striking a balance continues to require fine judgement, and is an eternal challenge!!

28. 28 TPS Takeaways Leanness: Elimination of Waste Jidoka, Heijunka (flexibility) Tight link between production and detection Implementation is very pragmatic Planning and forecasting present Opportunity for recovery Exception handling Line does not stop very long Applications to Other Domains Services Software

29. 29 TPS Takeaways Appropriate Technology Utilization Leanness: Elimination of Waste Jidoka, Heijunka (flexibility) Tight link between production and detection Implementation is very pragmatic Planning and forecasting present Opportunity for recovery Exception handling Line does not stop very long Applications to Other Domains Services Software

30. The choice between Push and Pull is a false choice. What managers need is a blend of Push and Pull to take advantage of the planning capabilities of Push and the excellent control capabilities of Pull. Use planning for long lead time items, deciding buffer sizes, managing transitions&changes Use Pull for normal production of one particular product in set volumes Toyota illustrates how to pragmatically combine planning and control Entire line does not stop for each andon pull Line segments are buffered from each other (with small size buffers) Close communication with suppliers about plans. Immediate problem resolution and prevention. Key Takeaways

31. Introduction to Quality

32. 32 Old-Fashioned Product Design Attitude Design product for maximum performance. Producibility is unknown until after launch. Design can be modified after launch to make it producible. If you can build one prototype, you can easily build 1000�s Product quality is manufacturing�s job. What are the problems with the old attitude? Does design have impact on quality?

33. 33 One of the difficulties: Tolerances! How tolerances evolved? Because it is very difficult to make parts consistently to the same dimension and because we don�t want to throw away many parts that exhibit only a minor deviation from the target dimension, a tolerance window was specified within which products could lie without being thrown away. The tolerance window was merely being tolerated, the desire was to make parts to the target dimension. Over time, this idea degenerated and the general impression in the shop floor was that the goal is to be within the tolerance window. Sony plant in San Diego and Tokyo

34. 34 Get As Close to Target As Possible Taguchi�s main argument : the customer hardly cares about whether a product falls just outside or inside the tolerance window. �Customers do not give a hang about staying in spec� For customers, the proof of a product�s quality is in its performance when rapped, overloaded, dropped, splashed. You gain nothing in shipping a product that barely satisfies corporate standards over one that just fails�� In other words, a firm must strive to set good, robust targets and get as close to this target as possible. Taguchi�s solution: 

35. 35 Quality Loss The costs of a product�s failure in the field (�external failure�) are much greater than fixing it in-house or even preventing failure altogether. For assembled products, failure often arises from tolerance stack-ups. Even when individual components are within the tolerance limits, subassemblies fall out of tolerance due to stack-up of tolerance limits. Taguchi�s Quality loss functions penalize all deviations from target values including those within the tolerance limits.

36. 36 Quality Loss Function

37. 37 Who�s the Better Shot: Sam or John? Not all Deviations from Target are Equal

38. 38 Setting Targets While the shop-floor should be focused on getting as close to the target as possible, it is impossible to always keep deviations to zero. Designers should ensure targets are set such that deviations from them do not lead to large performance fluctuations. �Design Quality in�

39. 39 Robustness is the property of a product to function under a variety of operating conditions. Even amidst uncontrollable disturbances in the shop floor, and in the customer's environment. These uncontrollable disturbances coming from outside are called noise. What the customer wants from the product is highsignal despite noise. Robust Design

40. Lessons Learned