Digital manufacturing: How masters do it
Few companies have cracked the puzzle of operational flexibility—improving demand fulfilment while simultaneously reducing conversion costs
Flexibility for manufacturers was always a good-to-have trait. But it never superseded cost efficiencies, let alone productivity—probably because customers always prioritized price and faster delivery. Now imagine a future where your customer will choose to pay more for a product whose delivery is deferred right until the time of use. That future is already here.
Recent research pegs the on-demand economy in the US at about $60 billion (Harvard Business Review, 14 April, 2016). Most of this market hinges on the ability to deliver at the time of demand—be it an Uber, the groceries (Instacart) or a much-needed massage. But what happens when mountaineers demand climbing shoes and ask it to be delivered at base camp? Or when an underwater pipeline repair team requires welding equipment delivered 15,000 feet below sea level? The focus, thus, shifts from a simple ‘deliver on-demand’ request to a more complex, ‘manufacture on-demand’ problem.
Auto replenishment is straightforward when you order coffee or detergent via Amazon Dash. Drones can deliver refill packs from the warehouse within the hour, if you are an Amazon Prime customer. Predictive asset maintenance is also made possible through what some call “production at the edge”. Advanced sensors, telematics and 3D printing together reduce occurrences of unforeseen outages by supplying spare parts ‘before-demand’. Market economics has truly morphed in the sense that the point of purchase has shifted from the time of demand to the time of consumption. In fact, customers are increasingly unwilling to demand well before they consume.
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Soon, this desire to purchase at the time of consumption will spread beyond just groceries or spare parts. When that happens, clever supply chain tactics and small-scale additive manufacturing capacities will no longer suffice. How will manufactures respond to the hyper-personalization and ultra-postponement of everything?
We spent a good part of the last two years studying 247 manufacturing companies and how they were responding to the changing nature of demand. While most companies comprehend the gravity of the situation, only a handful successfully respond by transforming what matters most—production systems.
What defines flexibility?
Ninety-four percent of executives we surveyed admitted to flexibility being a strategic priority. And yet, nine out of 10 companies were still unable to clearly articulate what it meant to be flexible. More than half confused it with performance attributes such as efficiency, productivity, quality and even returns on investment.
From the responses obtained, we broke down this fragmented understanding of flexibility into three logical bits—responding to changes, controlling costs, and delivering on time. While the first two aspects could be tuned to match go-to-market strategies, delivering on time was clearly non-negotiable and could not be a variable in the equation.
We, therefore, defined ‘operational flexibility’ as the ability to improve demand fulfilment while simultaneously reducing conversion costs. We also proposed a performance ratio to quantify flexibility at an organization level—the ratio of percentage demand fulfilment to the conversion cost as a percentage of goods sold.
Based on this definition, we found that only 11% of those we had surveyed could both lower costs and increase demand fulfilment in the period between 2005 and 2015. A majority—three out of four companies—had improved levels of demand fulfilment but had lost control over costs, in the process. Chasing the often elusive customer came at a cost that boards and shareholders had somehow overlooked or discreetly discounted.
All kinds of companies had failed at flexibility—from automotive and industrial equipment companies to oil and gas majors. There were companies with revenues over $100 billion and those under $5 billion. There were Japanese manufacturers and Chinese manufacturers. There were companies that had more than doubled production levels, and even those who had reduced production levels by 10% or more. We found no correlation between industry, geography, size, growth rate and their level of flexibility.
What were the secrets of these 11% ‘masters’ of manufacturing? We found three common traits: more products with fewer parts; investments in cross-training; and agile digitization.
More products with fewer parts
Over 80% of companies with high flexibility scores—those we term as ‘masters’—believed that “producing more stock keeping units (SKUs) per line” was a key success factor for them. More than half of the masters said they wanted to further increase the number of SKUs per line, over the next decade.
But more SKUs must be met with fewer components if conversion costs are to be kept in check. Toyota’s New Global Architecture (TNGA) is a case in point. A modular scheme similar to Volkswagen’s MQB (Modularer Querbaukasten) strategy and BMW’s Strategy Number ONE, it banks on giving more choice to the customer—but on a simplified platform and with fewer components—all with the aim of cutting conversion costs. The aim is to transition from having 100 different platform variants, to just five standardized platforms across all its models. These five platforms, then, cascade into a manageable selection of accompanying components and unique interior choices, helping retain design distinctions. Toyota expects TNGA to help cut factory investments by 40% and factory manpower by about 20% (bit.ly/2tjti0e). In addition, design improvements to the standardized platforms are likely to improve driving experience, and fuel efficiency.
Investments in cross-training
More than nine in 10 of the flexibility masters said that cross-trained operators were instrumental to achieving flexibility. What’s more, companies that did not master flexibility placed less importance on employing such workers (only 79% saying it was an important capability).
Honda’s new ARC (Assembly Revolution Cell) line is a great example at that. Built from scratch in 2015, for its new Prachinburi plant in Thailand, each ARC unit is made up of one rectangle platform and two circular platforms placed at the long ends of it. Each wheel-mounted ARC unit carries one vehicle body at the centre, and four operators with a complete set of parts to be installed at the four ends. The entire production line comprises 50 such moving ARC units one after another—each capable of assembling a car from start to finish. Adding or removing ARC units is made easy as there are no overhead conveyors nor is the line excavated into the plant floor. This allows flexibility to increase or decrease volume and SKUs at short notice without any major cost implication. What’s more, you need only four operators and not 200, to build a single unit.
Then there are other incremental efficiencies built into the design of the line, such as the loop shape which allows full boxes of parts to be supplied, and empty boxes to be retrieved at the same position, in a single trip. Operators are not required to walk back and forth between the moving line and the parts shelves, saving precious time. Since each operator is responsible for a wider range of tasks, feedback to design and development teams turns out to be more insightful.
But reducing changeover times is not the only benefit that ensues. Cross-trained operators are also better suited to optimize time and effort across multiple tasks while the line is operational. The strategy has helped Honda improve work efficiency by 10% as compared to that of a conventional line.
The use of digital designs and 3D printing enables rapid prototyping which, according to more than 80% of the masters, was imperative for improved flexibility, and allows companies to experiment more with alternative designs.
Such technologies have, for instance, enabled a large European auto company to slash the development time for a critical component from 20 weeks to only two, with cost savings of 92%. In the company’s truck division, 3D printing has helped reduce the tool manufacturing time from 36 days to two. Moreover, tools printed using a material called thermoplastic have helped slash the tooling costs by 99%.
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Flexibility is not an end state: it is only relative to the need for it. But done right, it can earn measurable financial returns even through times of uncertainty. As companies grapple with digital technologies and their side effects, flexibility is likely to be the most important barometer for success in the future.
Raghav Narsalay is managing director and Aarohi Sen is a manager at Accenture Research.