machines italia: trends in manufacturing best practices

Trends in

Manufacturing

2 Spring 2011 I www.machinesitalia.org

from the Italian Trade Commissioner

North American manufacturers have faced many challenges over the past decade. During that time, the Italian Trade Commission in Chicago and the

Machines Italia project have worked to help you im-prove and leverage your industrial capabilities amid these changing—and often trying—conditions. As part of that effort, we have offered a series of reports on manufacturing best practices and trends affecting your business.

In this guide, Trends in Manufacturing, we have collected and updated all these reports into a guide that shows how any manufacturing firm can navigate a path to a more productive and prof-itable future. In addition, a new report—“Flexible Manufacturing”—explores how changing markets and demanding customers are driving the need for flexible equipment and production systems.

This guide will help you identify how to im-prove operations, enhance relationships with cus-tomers and suppliers, and achieve optimal perfor-

Guiding Manufacturing Improvements,Forging Successful Partnerships

mance from your employees, equipment, and facilities. It’s likely, too, that your path to a more profitable future will require investments in equip-ment and technology to remain competitive in an increasingly global economy. It’s our hope that as you move forward, you’ll consider how Italian equipment and machinery manufacturers—and the innovations and industrial expertise they offer—can accelerate your success.

Italian equipment and machine partners have already helped thousands of manufacturers like you survive and thrive over the past decade. We look forward to continuing our support of North Ameri-can manufacturers as they improve performance, enter new markets, and delight customers over the next decade—and beyond.

Sincerely,

Pasquale BovaTrade Commissioner - Chicago

Table of Contents

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Table of Contents 3 Expecting More Value from Industrial Equipment Manufacturers

15 Strategic Asset Management — Lower Risk, Reduce Costs, Improve Performance

23 Capacity Optimization — Getting the Most from Operations

33 Flexible Manufacturing — Reconfiguring Operations for Competitive Advantage

41 Customer Line Integration — New Profit Opportunities

49 Powerful Performance Measures That Drive Improvement

57 Benchmarking — Locating and Leveraging Best Practices

65 Smart Capital — Savvy Manufacturer’s Guide To Equipment Purchases

72 Machinery Manufacturer Performance Benchmarks

88 Resources for Achieving World-Class Operations (Italian Machinery Manufacturers Associations)

Italian Trade Commission - ChicagoAddress:401 N. Michigan Avenue, Suite 3030Chicago, Illinois 60611

Toll-Free:1-888.ITALTRADE / 482.5872 (U.S. and Canadian Callers)

Telephone: 312.670.4360 (outside the U.S. and Canada)

Fax: 312.264.6209

E-mail: [email protected]

Web Site: www.machinesitalia.org

The Italian Trade Commission’s Machines Italia project is operated through its North American offices in Chicago, Atlanta, Los Angeles, Toronto and Mexico City. Its headquarters are located in Rome, Italy.

Throughout Trends in Manufacturing, data tables and charts may not always sum to 100%: some tables and charts refer to questions for which respondents could select more than one answer; rounding of statistics may also affect the sum of tables and charts.

2 Spring 2011 I www.machinesitalia.org

Who We Are

Machines Italia is a project by the Italian Trade Commission (ITC) to promote Italian-made machinery and technology to manufacturers

in North America. The Italian Trade Commission is the Italian government agency entrusted with the promotion of trade, business development and industrial cooperation between Italian and foreign companies. It supports the internationalization of Ital-ian firms and their consolidation in foreign markets.

Learning about Italy’s market and industries is the first step to identifying business opportunities for local companies. The Italian Trade Commis-sion, with its network of 117 offices in 87 countries around the world, and here in North America via its offices in Chicago, Atlanta, Los Angeles, Toron-to and Mexico City, provides information and as-sistance to companies such as yours interested in establishing relationships with Italian companies.

In partnership with 14 leading Italian machin-ery manufacturers’ associations and, in particular, FEDERMACCHINE (Italy’s National Federation of Associations of Manufacturers of Capital Goods Intended for Industrial and Handicrafts Manufac-turing Processes), Machines Italia supports numer-ous activities in North America overseen by the ITC's Chicago office, ranging from programs with academic institutions to business development for multiple machinery sectors. Machines Italia’s 14 member associations represent more than 10,000 companies.

Machines Italia Who We Are

Participating industry machinery manufacturing sectors include companies involved in the produc-tion of equipment for agricultural/farm machinery; ceramics; earthmoving machinery; food processing; glass; foundry and metallurgical; footwear, leather-goods, and tannery; marble and stone; metalwork-ing; packaging; plastics and rubber; printing, graphic and converting; textiles; and wood.

A fifth or 20% of Italy’s exports to local compa-nies and consumers annually here in North Ameri-ca is industrial machinery. The same numbers also reflect industrial machinery’s percentage of all Italian exports worldwide.

As part of a re-industrialization of local markets, Italian solution providers are helping North Amer-ican manufacturers turn out viable products every day, in many cases more efficiently and competi-tively. This, in turn, provides economic growth and development within local economies.

Machines Italia’s efforts to showcase the inven-tiveness and flexibility of Italy’s industrial sectors are helping North American manufacturers recog-nize the advantages of partnership with Italian solu-tion providers.

In fact, many Fortune 100 companies, ranging from agricultural to aeronautics companies, use Italian machinery and technology. North America’s best-known manufacturing giants have discovered the benefits of integrating Italian equipment into their production lines and processes.

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Expecting More Value from Industrial Equipment Manufacturers

Customers now want more from industrial equipment manufacturers in the way of prod-uct enhancements and services. But how can industrial equipment manufacturers provide

more in these tough economic times and still sustain profitability?

The answers can be found in data compiled by the Next Generation Manufacturing (NGM) Study, a research initiative that assessed how manufacturers (including 410 industrial equipment manufacturers) are progress-ing with key corporate strategies to succeed into the next generation.1 Four strategies in particular—customer-fo-cused innovation, human-capital management, superior processes/process improvements, and supply-chain man-agement and collaboration—help industrial equipment manufacturers succeed today and tomorrow in satisfying customer demands for more value at lower costs. In ad-dition, the NGM Study data capture the voices of those customers, identifying what equipment buyers consider most valuable—and what they think of the ability of their equipment providers to succeed at key strategies.

Industrial equipment manufacturers face an ex-panding list of customer demands for value, forcing them to innovate—in both products and services—to meet these needs. Industrial equipment providers, in addition to being adept machine designers and build-ers, now must be line integrators and asset-management specialists as well, offering customer services ranging from training to leasing. And, of course, all this oc-curs while the traditional pressures of doing business are intensified amid a recovering global economy and increased regulations.

Industrial equipment buyers now consider quality and performance just the ante to get into the game. What they’re also looking for are value-added features (in both goods and services), and they’re willing to pay for them. Scott Buechel, executive vice president of Buechel Stone Corp. in Fond du Lac, Wis., says that while he’s always looking for better pricing, he also understands that value-added goods and services come at a cost. “Sometimes we’re willing to pay for something a little bit more if we know there’s a value-add[ed feature] throughout the term of the product.” At Buechel Stone, the value-added service he’s looking for is responsiveness: “When equip-ment goes down, how do they service it during that time? How quickly do they respond? Do they work with you to get the problem resolved? Do they give you answers? Do they come out and look at it?”

Brad Burnett, general manager of manufacturing at Inman Mills Ramey Complex in Enoree, S.C., says, “I’m looking for the expertise to understand the equip-ment from not only the supply side, but also the ser-vice side, the technical and electronic specification side, and they need to have people within the United States that are accessible.”

At Donsco Inc., value-added service is about mainte-nance: “The big thing we’re looking at right now when we’re evaluating equipment is the focus on the main-tenance of the equipment. Everything from quality of the blueprints and the manuals that are provided with it,” says Chris Buck, plant manager for Donsco Inc. in Wrightsville, Pa. “Have they gone as far as defining pre-ventive-maintenance tasks, spare parts, recommended spare parts?”

1 Next Generation Manufacturing Study, The MPI Group, 2009.

4 Trends in Manufacturing I www.machinesitalia.org

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The types of value-added goods and services are as varied and complex as the industrial equipment market itself, but success for any individual equipment provider is as simple as focusing the entire organization on what its customers want—and providing it as quickly and cost-effectively as possible by improving internal operations and the supply chain. Yet corporate strategies to achieve these goals—customer-focused innovation, human-cap-ital management, process improvements, and supply-chain management and collaboration—haven’t yet been adopted by many industrial equipment providers.

Customer-Focused InnovationCustomer-focused innovation—the ability to “develop, make, and market new products and services that meet customers’ needs at a pace faster than the competition,” according to the NGM Study—requires listening to the voice of customers. And those voices vary: Herb Ben-zel, mill foreman at Kountry Kraft Kitchens in Newm-anstown, Pa., looks for machinery that he can modify for alternate uses, and doesn’t have much use for single-function tools. “[A piece of equipment] might not be for that plan now, but later down the road we’ll use it for that.” So he’s buying versatility and the ability for equipment to complete various tasks.

Richard Hansen, production manager at Skyline Manufactured Homes in San Jacinto, Calif., says, “In house, we are always looking at ergonomics and safety, not necessarily in that order… Methods to make them perform ergonomically would always be appreciated from a vendor.”

And Donsco’s Buck says customization is one of his top machine priorities. For example, Donsco wants con-trollers in equipment to be what the company is used to working with, to minimize the number of software ap-plications his staff must troubleshoot. “Those are some of the things we’ll recommend up front,” he says. “It’s about 50-50, the people who will work with you and the people who just won’t.”

It’s not surprising that some equipment makers won’t listen to Buck’s (or others’) requests and work with them. Relatively few industrial equipment manufacturers have achieved world-class customer-focused innovation: Only 11% of industrial equipment manufacturers report them-selves to be at a world-class level for customer-focused innovation (ranked 5 on a 1-5 scale), and another 30% believe themselves to be near world-class status for this particular strategy (ranked 4 on a 1-5 scale) (Figure 1).2 Yet customer-focused innovation is important among industrial equipment manufacturers, as 60% of indus-trial equipment manufacturers rate customer-focused innovation as “highly important” to their organizations’ success over the next five years (Figure 2). The gap be-tween industrial equipment manufacturers who believe customer-focused innovation is highly important and those achieving actual world-class performance means that many firms are striving for improved performance but remain unaware of best practices, unable to execute them, or unwilling to try.

2 All research and strategy definitions in this chapter, unless otherwise noted, are based on data from the Next Generation Manufacturing (NGM) Study, which was coordinated by the American Small Manufacturers Coalition, conducted by the Manufacturing Performance Institute (MPI), and supported by Manufacturing Extension Partnership centers and partnering organizations. A total of 2,529 manufacturers participated; for this report, 410 “industrial equipment manufacturers” were identified using the three-digit NAICS codes 333 for machinery manufacturers. For more information, go to www.mpi-group.net.

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dedicated to new product development/R&D vs. 37% of industrial equipment manufacturers furthest from world-class.

39% of industrial equipment manu-facturers at or near world-class customer-focused inno-vation have more than 5% of sales invested in new prod-uct development/R&D vs. 22% of industrial equipment manufacturers furthest from world-class.

47% of industrial equip-ment manufacturers at or near world-class customer-fo-cused innovation have advanced measurement systems for assessing return from customer-focused innovation vs. 17% of industrial equipment manufacturers furthest from world-class.

What is abundantly clear from the NGM Study data, though, is that the first step in successfully innovating to meet customer needs is recognizing the importance of a customer-focused strategy: Among industrial equipment manufacturers at or near world-class customer-focused innovation, 75% rate the strategy as “highly important,” compared to only 49% of industrial equipment manu-facturers furthest from world-class status.

The industrial equipment manufacturers at or near world-class customer-focused innovation also are more likely to execute best practices necessary to get them to world-class (Figure 3):

48% of industrial equip-ment manufacturers at or near world-class customer-fo-cused innovation have more than 5% of their workforce

Figure 1. Rate your organization’s progress towardworld-class customer-focused innovation:

(Industrial equipment manufacturers)

1=No progress 2 3 4 5=World class

3.9%

16.9%

38.1%

30.1%

11.0%

Source: Next Generation Manufacturing Study

Figure 2. Rate the importance of customer-focused innovationto your organization’s success over the next five years:


1=Not important 2 3 4 5=Highly important

0.5%4.7%

11.3%

24.0%59.6%

Industrial equipment manufacturers furthest

from world-class customer- focused innovation

Industrial equipment manufacturers at or near

world-class customer-focused innovation

Best practices

More than 5% of the workforce dedicated to new product development/R&D 36.7% 47.6%

More than 5% of sales invested in new product development/R&D 21.6% 39.2%

Measurement systems or reviews for monitoring return: “Regular monitoring and review of company-specific metrics by CEO and senior staff” or “Regular monitoring and review of company-specific metrics by CEO and senior staff and transparency and clarity throughout the organization”

17.3% 46.8%

Figure 3.


Value-Add

difficult as many equipment makers have kept hiring to a minimum, and in the process inadvertently removed the human touch. For example, Benzel of Kountry Kraft Kitchens wants his equipment providers to offer speed-ier service—because overly automated phone systems and days-long waits for service create frustration and slow production. “I know there’s a lot of machinery out there, but sometimes I think it could be just, ‘Hey, pick the phone up quick.’”

Buechel of Buechel Stone would like to see provid-ers offer more training, such as instruction on new ma-chinery and annual refresher courses on old equipment. “Just a short, hour training class: Here’s key critical parts. Here are the main things that need to be greased. These need to be maintained. Here’s why.”

“We’ve run into occasions where there’s been com-munication problems back to their headquarters,” says Donsco’s Buck. “You’ll have a mechanical guy in here, and he needed to talk to an engineer to find out about the PLC program. He hasn’t been able to get hold of the guy because they weren’t in the office or were tied up with another project. So I would say that would be an area for improvement: When an equipment manufacturer sends techs out to sites, make sure there’s full technical sup-port back at the home base.”

And, importantly, industrial equipment manufactur-ers at or near world-class customer-focused innovation are more likely to achieve business results indicative of world-class customer-focused innovation (Figure 4).

23% of industrial equipment manufacturers at or near world-class customer-focused innovation have more than 10% of their annual SKUs ac-counted for by new products vs. 8% of industrial equip-ment manufacturers furthest from world-class.

32% of industrial equip-ment manufacturers at or near world-class customer-focused innovation derive more than 25% of sales from products introduced in the past three years vs. 18% of industrial equipment manufacturers furthest from world-class.

Human-Capital ManagementIt’s easy to forget that value-added features can be the direct result of interacting with a single person: an in-sightful salesperson who recognizes an equipment need before the customer does, a helpful support agent who pinpoints the right manual, or an empowered line work-er who spots a machine defect and knows how to correct it before the problem occurs. All these actions, though, require a workforce that has been meticulously hired, developed, and rewarded.

A world-class workforce is directly linked to the ca-pability to offer value-added features because talented employees can often delight customers—without having to even develop or sell a product. That ability can be a bonus in today’s economic recovery, but it’s also more


from world-class customer- focused innovation

Industrial equipment manufacturers at or near

world-class customer-focused innovation

Performances

More than 10% of total SKUs are annually new products 7.6% 22.9%

More than 25% of sales derived from product introduced in past three years 17.6% 32.1%

Figure 4.

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None of these customer requests are extraordinary, but they do demand skilled employees and well-man-aged workforces. But despite human capital being at the center of value-added features a manufacturer can offer, just 5% of industrial equipment manufacturers report themselves to be at world-class status for human-capital management—organizations that “secure a competitive performance advantage by having superior systems in place to recruit, hire, develop, and retain talent”—and only 23% are near world-class status (Figure 5).

Surprisingly, not even half (45%) of industrial equipment manufacturers believe that human-capital management is “highly important” to their organiza-tions’ success over the next five years (Figure 6). Here, too, industrial equipment manufacturers attentive to human-capital management are more likely to be at or near world-class with this strategy: 66% rate the strat-egy as highly important, compared to only 36% of in-dustrial equipment manufacturers furthest from world-class human-capital management.

Industrial equipment manufacturers at or near world-class human-capital management also are more likely to implement workforce best practices, allowing employees to take ownership of their functions, giving them resourc-es to identify and solve problems that can directly affect customers, and having management systems in place to see if these efforts are working (Figure 7).

51% of industrial equip-ment manufacturers at or near world-class human-cap-ital management have a majority of employees empow-ered vs. 20% of industrial equipment manufacturers furthest from world-class.

36% of industrial equipment manufac-turers at or near world-class human-capital manage-ment train each employee annually more than 20 hours vs. 21% of industrial equipment manufacturers furthest from world-class.

43% of industrial equipment manufacturers at or near world-class human-capital man-agement have advanced measurement systems for assessing return from human-capital management vs. 15% of indus-trial equipment manufacturers furthest from world-class.

Figure 5. Rate your organization’s progress towardworld-class human-capital management:



8.8%

33.6%

29.1%

23.3%

5.2%


Figure 6. Rate the importance of human-capital managementto your organization’s success over the next five years:



2.5%5.1%

16.8%

30.7%

44.9%


Value-Add

And, importantly, industrial equipment manufactur-ers at or near world-class human-capital management are more likely to achieve business results that reflect a stable and growing workforce, one able to add value and improve customer satisfaction as well as operational productivity.

43% of industrial equip-ment manufacturers at or near world-class human-capital management report value-add per employee (measured as sales minus cost of materials divided by number of employees) vs. 31% of industrial equipment manufac-turers furthest from world-class.

76% of industrial equipment man-ufacturers at or near world-class human-capital man-agement report labor turnover of 5% or lower vs. 65% of industrial equipment manufacturers furthest from world-class.

Superior Processes/ Process ImprovementValue-added features are, indeed, a bonus to customers, but only if the core competency of the industrial equip-ment manufacturer—the ability to design, make, and de-liver product in a timely manner—is solid and continu-ously improving. Very few customers will be delighted by receiving custom features or services associated with a piece of faulty machinery that arrives late and causes a line to shut down.

To be profitable and provide value-added features requires ongoing improvement of an organization. The days of passing costs to customers are long gone, as is the notion that machine-maker profit is built into the price (price = costs + profit). The equation has switched (profit = price – costs), forcing industrial equipment

manufacturers to repeatedly improve processes in order to offer best pricing and return a profit.

Burnett of Inman Mills Ramey Complex believes many of his equipment suppliers are using lean man-ufacturing principles to improve. He says industrial equipment providers have to keep getting better because many criteria for what they provide, such as high quali-ty, are now a given. “You expect quality to be engineered into the process, into the services. If it is not there, you expect that supplier to have the liability to back up and replace that equipment as well as replace whatever your downtime is. It’s an expectation. That’s not an add-on. It’s an expectation.”

Seeing improvements from his equipment sup-pliers is critical because the issue is “can we make a better product at less expensive cost because we’re competing with the rest of the world,” adds Burnett. “We know we’ve got a higher labor rate to start with; we’ve got to figure out how to utilize our ingenuity and utilize new equipment faster and less expensively to offset those other things. We have higher labor rates because we’re in the United States. We expect equip-ment providers to help offset that through their tech-nology improvements.”

Industrial equipment manufacturers furthest from world-class human-

capital management

Industrial equipment manufacturers at or near world-class human-capital

management

Best practices

Majority of employees participate in empowered work teams 20.3% 50.8%

More than 20 hours of training annually per employee 20.6% 36.2%


15.1% 43.3%

Figure 7.

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Value-Add

ing with some of the equipment companies, and we’ve offered suggestions that they should start using lean not only in their manufacturing process but in their design process,” says Buck. That includes applying visual or-ganization concepts of lean to their products. “So that when a piece of equipment comes into our plant, it’s very visual. All the controls are labeled, operating rang-es on gauges are marked in red, yellow, and green.”

Approximately 7% of industrial equipment manu-facturers report themselves to be at a world-class level for process improvement—organizations that “record annual productivity and quality gains that exceed the competition through a companywide commitment to continuous improvement”—and 34% are near world-class status (Figure 8). More than half of industrial equipment manufacturers (58%) believe that process improvement is “highly important” to their organiza-tions’ success over the next five years (Figure 9). Indus-trial equipment manufacturers focused on process im-provement are more likely to be at or near world-class with this strategy: 71% rate the strategy as highly im-portant, compared to just 49% of industrial equipment manufacturers furthest from world-class processes and process improvement.

Hansen of Skyline Manufactured Homes says that while his company is making the transition to lean manufacturing, he doesn’t know if his equipment pro-viders are. “If they have, they should be telling us that… It would be important for them to tell us.” (See

)Others have prodded their suppliers to get on board

with process improvements. “We’ve actually been work-

Figure 8. Rate your organization’s progress towardworld-class processes and process improvement:



16.8%

38.8%

33.9%

7.1%3.4%


Figure 9. Rate the importance of process improvement toyour organization’s success over the next five years:



3.4%16.8%

38.8%

25.9%

57.9%

Lean Equipment MakersMost machinery manufacturers report that they are attempting to be lean: 73% of machinery manufacturing plants follow lean manufacturing methods. Other improvement methods followed include six sigma (33% of machinery manufacturers), total quality management (29%), theory of constraints (22%), and the Toyota Production System, from which lean evolved (21%). Surprisingly, 11% of machinery manufacturers follow no improvement methodology.3

3 MPI Manufacturing Study, combined U.S. data from 2006-2010 studies, The MPI Group, 2011.


Value-Add

Industrial equipment manufacturers at or near world-class processes and process improvement are more likely to implement best practices that enable em-ployees to drive improvements, to give them tools and equipment to support their problem-solving ideas, and to have management systems and reviews in place to see if these efforts are really improving the company and helping to satisfy customers (Figure 10).

68% of in-dustrial equipment manufacturers at or near world-class processes and process improvement have a majority of their workforces engaged in their organization’s specific improvement method vs. 28% of industrial equipment manufacturers furthest from world-class.

43% of industrial equipment manu-facturers at or near world-class processes and process improvement invest more than 5% of sales in capital equipment vs. 37% of industrial equipment manufactur-ers furthest from world-class.

43% of industrial equip-ment manufacturers at or near world-class processes and process improvement have advanced measurement systems for assessing return from process improvements vs. 21% of industrial equipment manufacturers furthest from world-class.

And, not surprisingly, industrial equipment manu-facturers at or near world-class status are more likely to achieve business results that indicate ongoing internal improvements and superior performance to customers are occurring:

51% of industrial equipment manufacturers at or near world-class processes and pro-cess improvement report that 96% or more of their de-liveries are perfect (on time, high quality, to all customer specifications) vs. 44% of industrial equipment manu-facturers furthest from world-class.

28% of industrial equipment manufacturers at or near world-class pro-cesses and process improvement report three-year pro-ductivity improvements of more than 50% vs. 14% of industrial equipment manufacturers furthest from world-class.


from world-class process improvement

Industrial equipment manufacturers at

or near world-class process improvement

Best practices

Majority of workforce fully engaged in organization’s specific improvement method/approach 28.3% 68.0%

More than 5% investment in capital equipment as a percentage of sales 36.5% 43.3%


20.9% 43.1%

Figure 10.

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Supply-Chain Management and CollaborationIndustrial equipment manufacturers have always relied upon the performance of their supply chains. With hundreds or thousands of sourced components, requirements for quality, timeliness, and engineering detail from suppliers are mandatory. Today equipment makers increasingly must work with their suppliers and other manufacturers in developing and installing complete lines, even taking on the role of line integrator. Supply-chain collaboration and management have never been more important.

One seemingly simple but often overlooked example of supplier collaboration is ensuring that all equipment components will be viable for years to come. Donsco’s Buck wants equipment providers to be in regular communication with their subcomponent suppliers to guarantee that every part of a machine is up-to-date. “We have some brand-new pieces of equipment that have some obsolescence issues with some of the subcomponents… Somewhere along the way two people should have been talking so the equipment manufacturer could have either

provided a cross-reference and just went ahead and put in the new part.”

Possibly because of the volume of suppliers and the complexity of implementing a supply-chain strategy, few industrial equipment manufacturers (3%) report themselves to be at world-class supply-chain management and collaboration—organizations that “develop and manage supply chains and partnerships that provide flexibility, response time, and delivery performance that exceeds the competition”—and only 22% are near world-class status (Figure 11). But part of the issue is that not enough industrial equipment manufacturers are attentive to the strategy: only 34% believe that supply-chain management and collaboration is “highly important” to their organizations’ success over the next five years (Figure 12). That’s a key to supply-chain improvement, as 52% of industrial equipment manufacturers at or near world-class status rate the strategy as highly important (another 43% rate it near to highly important), compared to only 27% of industrial equipment manufacturers furthest from world-class status that rate it highly important (and only 30% that rate it near to highly important).

Figure 11. Rate your organization’s progresstoward world-class supply-chainmanagement and collaboration:(Industrial equipment manufacturers)


25.9%

39.8%

21.5%

2.5%10.4%


Figure 12. Rate the importance of supply-chainmanagement and collaboration to your

organization’s success over the next five years:(Industrial equipment manufacturers)


4.6%

8.8%

20.3%

32.8%

33.5%


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Industrial equipment manufacturers at or near world- class supply-chain management and collaboration also are more likely to implement supply-chain best practices, dedicating staff to growing customer and supplier “part-nerships,” investing in information technology tools that enable supply-chain partners to better communicate and gain visibility into product and business plans and schedules, and having management systems in place to see if these efforts are working (Figure 13).

46% of industrial equip-ment manufacturers at or near world-class supply-chain management and collaboration have more than 5% of their workforces dedicated to supply-chain and partner development, management, and collaboration vs. 17% of industrial equipment manufacturers furthest from world-class.

33% of industrial equipment manu-facturers at or near world-class supply-chain manage-ment and collaboration invest more than 5% of sales in information technologies (IT) vs. 12% of industrial

equipment manufacturers furthest from world-class. (See for more analysis of equipment and IT spending among the best machinery manufacturers.)

33% of industrial equip-ment manufacturers at or near world-class supply-chain management and collaboration have advanced measure-ment systems for assessing return from supply-chain management vs. 14% of industrial equipment manufac-turers furthest from world-class.

Industrial equipment manufacturers at or near world-class supply-chain management and collaboration are more likely to achieve business results that show im-provements affecting the entire supply chain and turning them into competitive advantages (Figure 14).


from world-class supply-chain management and collaboration

Industrial equipment manufacturers at or near world-class supply-chain

management and collaboration

Best practices

More than 5% of the workforce dedicated to supply-chain and partner development, management, and collaboration 16.6% 45.8%

More than 5% investment in information technologies as a percentage of sales 11.8% 33.0%


14.0% 33.0%

Figure 13.


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27% of industrial equipment manufacturers at or near world-class supply-chain management and collaboration describe their suppli-ers and customers as “strategic participants” vs. 14% of industrial equipment manufacturers furthest from world-class.

15% of industrial equip-ment manufacturers at or near world-class supply-chain management and collaboration have reduced supply-chain inventories over the past three years by more than 25% vs. 8% of industrial equipment manufacturers fur-thest from world-class.


from world-class supply-chain management and collaboration

Industrial equipment manufacturers at or near world-class supply-chain

management and collaboration

Performances

Reduction of inventory throughout the supply chain by more than 25% over last three years 8.0% 15.1%

Strategic suppliers and customers are active participants in operations 13.8% 27.2%

Figure 14.

World-Class InvestmentsMachinery manufacturers that report their firms to be at or near world-class in four or more of the six NGM Strategies (only 16% of machinery manufacturers) are much more likely to invest in capital equipment and information technology than those firms that are at or near world-class status in three or fewer of the strategies:

Capital Equipment

<1% <1–5% <6–10% >10%

40.3%

38.7%

17.7%

3.2%

2.7%


Industrial equipment manufacturersat or near world-class status in

0–3 NGM strategies

Industrial equipment manufacturersat or near world-class status in

4–6 NGM strategies

11.7%

52.3%

27.3%

8.7%

Information Technologies

56.5%

9.7%

22.6%

11.3%

33.8%

52.7%

10.8%

Investment as % of sales


Value-Add

ConclusionThe message is clear: Industrial equipment providers

have significant room not only for improvement, but in recognizing what to improve in the first place. The NGM Study data show this is especially true of four key strategies necessary for success into the next generation—strategies that are at the heart of value-added goods and services:

Designing products in the way their customers tell them that they want them designed.

Developing their workforces to solve customer problems and provide value-added services.

Constantly improving internal operations so that adding value does not add to the customer price.

Improving supply-chain processes and relationships so that customers achieve competitive advantage in servicing

customers. The first step in implementing these strategies and

providing value-added features to customers is listening to customers and transmitting their needs and requirements back to the organization, on to employees, and out into the supply chain. Buechel of Buechel Stone says the equipment providers who listen to his feedback get an edge on com-petitors, but he also wants honest evaluations of his ideas. “Let me put it this way,” advises Donsco’s Buck. “If there’s an option, [not collaborating with us] can be a deal breaker. Unfortunately, often there are no other alternatives . . . But everything being equal and there are other alter-natives, it would be a deal breaker.”


Strategic Asset Management

Strategic Asset Management — Lower Risk, Reduce Costs, Improve Performance

Regardless of where a manufacturer competes in today’s global economy, two factors under-lie its strategy: a relentless push to reduce costs and an equally relentless focus on

customers’ current and future needs. Savvy manufac-turing leaders are optimizing machine performance to manage both pressures—and to boost profits. The bottom line? Effective use of machinery assets— strategic asset management—is now a must for man-ufacturers in a highly competitive, unpredictable global economy.

Leading manufacturers have always focused on optimizing machine performance. For example, U.S. manufacturers closest to world-class manufacturing status have exhibited better equipment performance, as well as greater equipment-performance improvement, over the past three years (Figure 1 on next page).1

What Is Strategic Asset Management?Strategic asset management seeks advantage from a firm’s hard assets—transforming them from mere production equipment into competitive weapons. A manufacturer’s strategic assets can include information technology (IT) systems, transportation fleets, energy-producing equip-ment, and other capital investments. Strategic asset management encompasses activities that touch them all, ranging from business-intelligence data gathering to MRO (maintenance, repair, and operations) efforts, and from continuous-improvement goals to IT solutions.

Strategic asset management also often involves out-sourcing some or all maintenance or management activi-ties to equipment or IT systems providers. Many of these vendors have recognized the need for their customers to focus on core competencies while getting more value from their equipment; these vendors are creating new service divisions and programs to support plant equip-ment from installation to decommission.




It’s important to note that any (or all) goals associ-ated with production equipment fall under strategic as-set management: purchasing (both individual machines as well as parts), maintenance and parts management,

performance measurements, energy consumption, safe-ty, monitoring, continuous improvement, and flexibil-ity (i.e., changeovers, availability, customization). (See Strategic Asset Management.)


Goals Benefits Drivers

Lower capital investment Reduced costs; increased profitabilityLonger machine and parts life;

more informed purchasing decisions; better utilization of warranties

Improve uptime Higher throughput; safer environment; protection of profit margins

Preventive maintenance; less reactive “firefighting” maintenance

Enhance customer experiences Speed and flexibility; sales and profitabilityMore reliable machine performance;

easier customization of equipment and production scheduling; better quality

and on-time delivery rates

Lower operating costs Reductions in staff, training costs, machine breakdowns, scrap, and inventory

More predictable labor planning or outsourc-ing of machine maintenance; better account-ing of parts; outsourced inventory of parts;

better process control

Support continuous improvement More level production and easier root-cause analysis

Standard processes, level material flow; a wealth of data to review root cause of failures

World-Class Equipment Performance

No progress Some progress Significant progress/fully achieved

Overall equipment effectiveness (OEE) 80.0% 78.8% 83.0%

Return on invested capital 12.3% 15.0% 18.0%

OEE three-year improvement 0.0 % points 3.0 % points 5.0 % points

Return on invested capital three-year improvement 0.0 % points 0.0 % points 0.5 % points

Figure 1.Source: MPI Manufacturing Study, 2006-2010.



when customers need new and different products and services. Having adequate information about machin-ery resources means faster, more confident responses to customers’ changing needs. Strategic asset management also allows for easier customization of equipment to meet customers’ needs.

Typical customer service KPIs affected by strategic asset management include:

Employee safety: Having a dedicated focus on stra-tegic asset management—whether through full-time staff or outsourcing—demonstrates a commitment to safety. Strategic asset management providers help to as-sess both equipment safety and adherence to EHS (en-vironmental, health, and safety) regulations. They’re also critical in ensuring safe upkeep of equipment; one of the goals of strategic asset management is improved machine uptime as maintenance and repairs occur before parts and machines fail—which translates into a safer and more productive plant. Additionally, should an accident occur, the wealth of data that strategic as-set management supplies can help to pinpoint causes, document what happened, and suggest solutions.

Typical employee safety KPIs affected by strategic asset management include:

Key Performance Indicators for Strategic Asset Management

Equipment and machinery represent significant invest-ments at every manufacturing company, and as the econ-omy strengthens, automation initiatives are likely to ap-proach prerecession highs. For example, from 2009 to

85%, according to data from the Association for Manu-facturing Technology (AMT) and the American Machine Tool Distributors’ Association (AMTDA).2

Given that level of investment, it’s little wonder that manufacturing leaders are using strategic asset manage-ment to align key performance indicators (KPIs) to criti-

Customer service: -agement program is the ability to gather and analyze in-depth data about capabilities, costs, and capacity—knowledge that makes a company a better supplier

2 Association for Manufacturing Technology (AMT) and the American Machine Tool Distributors’ Association (AMTDA).

U.S. Manufacturing Technology Consumption ($ billions)

2000 $4.04

2001 $2.70

2002 $2.16

2003 $1.98

2004 $2.84

2005 $3.07

2006 $3.94

2007 $4.51

2008 $4.47

2009 $1.77

2010 $3.27

Figure 2.

Source: Association for Manufacturing Technology (AMT) and the American Machine Tool Distributors’ Association (AMTDA).



volume contracts, a streamlined purchasing process, and predetermined pricing. For example, with one step a maintenance technician can request a replacement part, check available inventory, and order the part (if it’s not in stock) at a prenegotiated price via a computer-ized MRO system linked to the equipment vendor.

Manufacturers that choose an all-encompassing out-sourced solution also can save on replacement parts and

-ery by 30% and increased use of warranties on parts to 100% of available coverage after it partnered with equip-ment supplier Rockwell Automation to provide strategic asset management. Rockwell developed a new inventory- tracking and warranty-tracking system for parts that helped stop escalating costs:

bar codes to track parts and equipment.

they complete a tag that specifies the use of the part, where it should go, and the identity of the individual who checked it out.

-ties, and indicate if the storeroom needs to order replacement parts.3

Utilize preventive maintenance, and progress to-ward predictive maintenance: At many plants, the first benefit strategic asset management provides is a reduc-tion in reactive (unplanned) maintenance and an in-crease in preventive (planned) maintenance. Ultimately, data gathered during preventive maintenance should allow for predictive maintenance, allowing managers to pinpoint when a machine will become obsolete by evaluating total cost of operation vs. the cost of replace-ment or upgrade.

Profitability: Strategic asset management protects profit margins by delivering consistent and predictable machine performance. Plant managers can take a pro-active approach to budgeting equipment replacements because they have better lifecycle data; they also can deliver more profitable performances by avoiding ma-chine-failure costs or excess scrap.

Typical profitability KPIs affected by strategic asset management include:

uptime).

Growth: As manufacturers grow, they consume idle capacity, get more from current capacity, or invest in

-chinery supplier serves our needs best? Should we out-source? A strategic asset management program offers data to answer these questions with authority, enabling informed decisions about facility and equipment life-cycle management as leaders optimize their portfolios of plants, machinery, and capital investments. In ad-dition, strategic asset management partners often help with custom lease and ownership packages.

Typical growth KPIs affected by strategic asset management include:

Best Practices for Strategic Asset ManagementStrategic asset management varies based on industry, company size, capital investment, corporate goals, etc., but typical best practices include:

Leverage purchasing power: A strategic asset management solution with one supplier or with a few suppliers offers opportunities for total-cost savings via

3

(www.rockwellautomation.com), 2003.



R. Keith Mobley, principal consultant with Life -

thor, consultant, and expert in the fields of plant opti-mization, reliability engineering, and predictive mainte-nance, argues that predictive maintenance is more than a maintenance tool or a breakdown-prevention tool: 30 years of maintenance studies show that the causes of 83% of equipment breakdowns are outside the respon-sibility of the traditional maintenance function, includ-ing such reasons as inappropriate operating procedures, nonspecification parts, and poor design. “Predictive technologies should be used as a plant or process opti-

4

Use strategic asset management to make smart growth decisions: Strategic asset management data helps to make decisions that foster growth. A manufacturer with a sophisticated asset-management strategy can use it to simultaneously grow and contain costs by maximiz-ing assets and capacity. “Typical results of an effective strategic plan for asset management include a 20% to 50% reduction in maintenance cost accompanied by a 5% to 10% increase in real production capacity, with

James Davis, VP and regional manager for Strategic Asset Management International. “The tangible results include a significant increase in profitability accompanied by a

5

Align strategic asset management metrics and practices to sector and/or regulatory needs: This prevents wasteful overuse of strategic asset manage-ment, such as excessive data collection or too-frequent

maintenance scheduling. For instance, a pharmaceuti-cal manufacturer will have different data-gathering and

parts or an oil refinery. Some of the data collected may be the same, but not all of the data. Another example is monitoring: it makes more sense for a utility plant with equipment running 24 hours a day to invest in remote

shifts five days a week.In planning preventive maintenance schedules, Kraft

Foods Inc. determined that sanitation of the equipment didn’t need to take place daily—because regulations fo-cus on containment thresholds, not daily practices. In contrast, Kraft constantly monitors its packaging ma-chinery for optimization because packaging is crucial in adding value to its products, which need to arrive in customers’ hands looking attractive and intact.6

Determine comfort levels in sharing information and relinquishing control: Manufacturers usually engage some level of outside support in strategic asset manage-ment. This ranges from purchasing a software solution with limited consultation to completely outsourcing all asset-management activities. Savvy executives have a solid understanding of internal capabilities and risk tolerances before determining which route to choose. For example, a plant with standard equipment might be more willing to outsource control of that equipment than a plant with heavily customized equipment.

4 R. Keith Mobley, An Introduction to Predictive Maintenance, Second Edition5

www.sami.com, 2008.6



Strategic Asset Management: Where to Start?Strategic asset management brings significant benefit to overall operations (see Big Picture) and, ultimately, to a company as location improvements roll up, but application of strategic asset management requires sig-nificant planning. In assembly or kitting-centric opera-tions, where machinery such as conveyers are easily maintained and replaced, sophisticated strategic asset management doesn’t make sense. Similarly, manufactur-ers that derive most of their competitive advantage from proprietary processes and processing equipment, such as medical biotech manufacturers, should be particu-larly careful in determining how much they outsource while maintaining equipment engineering and mainte-nance bench strength.

Strategic asset management makes the biggest differ-ence in traditional industries dependent on expensive and complex equipment. Its emphasis on cost cutting and customer service make it essential for competitive advantage. In these operations, strategic asset manage-ment is assessed and implemented by:

1. Understanding the situation: The first step toward building a strategic asset management program is assess-ing problem issues associated with equipment; be sure, too, that metrics are in place to fully understand the operation (KPIs) as well as specific equipment perfor-mance and maintenance tracking measures (or put these metrics in place if they don’t exist).

2. Identifying performance gaps: Few if any opera-tions run like clockwork, but you should know just how far you are from achieving your goals as an organization and the role that equipment plays in meeting or missing those goals (e.g., growth, profitability).

3. Fixing problems: Using a rigorous, scientific method of problem solving, such as PDCA (plan-do-check-act), focus on closing a gap, often through the elimination of waste in order to reduce costs associ-ated with maintenance, parts inventory, and labor. But problem solving also can address equipment-related safety issues. The challenge here is having an organiza-tion culture focused on root-cause problem solving, not temporary fixes.

Moving Forward with Strategic Asset Management

Progresstowardstrategicobjectives

Duration / Time

2. Identify the gap3. Fix the problem

4. Long-term problem prevention

1. Understand the situation



4. Planning for prevention: In this phase, begin preventive maintenance and establish procedures for parts inventory management and scheduled mainte-nance work. This should gradually improve material flow, overall stability, and quality. Also focus on link-ing machinery performance to corporate goals; manu-facturers using strategic asset management eventually build a cache of knowledge about machine performance that helps to determine how to use that equipment for competitive advantage.

Big PictureThe goals and targets of strategic asset management—lower capital investment (higher return from existing investments), improved uptime (machine availability), enhanced customer value (retention rates), lower operating costs (reduced manufacturing costs), and support for continuous improvement (improvement methodology in place)—collectively drive operations excellence. The MPI Group aggregated plants from MPI Manufacturing Studies that exhibit above-normal performance for each goal (below):

This group enjoys significantly better productivity and profitability than other plants: productivity

7


Strategic asset management won’t solve problems

will reach a stage in which long-term problem preven-tion takes precedence over firefighting and problem resolution, often with dramatic bottom-line results.


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Capacity Optimization

Capacity Optimization — Getting the Most from Operations

The ability to squeeze every ounce of pro-ductivity from existing operations can mean thousands of dollars in savings. Executives have increasingly come to understand that

maximum output does not equate to profitable produc-tivity, and are instead seeking to boost margins while at the same time preventing overproduction and bloated inventories. Indeed, the savviest manufacturers now fo-cus on capacity optimization—the ability to efficiently produce exactly what’s needed, when it’s needed, with the minimum inventory that ensures customer demands can be satisfied.

Output vs. OptimizationWidespread adoption of manufacturing strategies that link production to customer demand—such as lean manufacturing, the Toyota Production System, and ag-ile manufacturing—has created a managerial revolution. Manufacturing executives understand that producing more items faster isn’t necessarily better. Old-fashioned “equipment utilization,” in which plants would run product simply to keep equipment active—without con-cern for customer demand—has been discredited as a flawed strategy that generates excess inventory and crip-ples profitability.

Manufacturing leaders now emphasize achieving greater value from material (i.e., raw materials, work-in-process, and finished-goods inventories), labor forces, and plant equipment and capacity, trying to synchronize these inputs with actual customer orders. This is easier said than done; unanticipated spikes in demand and supply-chain interruptions can cause missed deliveries and damaged customer relationships. To help manage

this process and establish safe levels of inventories, ex-ecutives often rely on complex formulas and information technologies; yet the metrics underlying this process are often disarmingly simple. Identifying and understanding these common building blocks of success are a critical step in optimizing capacity and profitability.

Production CapabilityProduction volume as a percentage of designed plant capacity is a measure that helps to indicate when a plant is outgrowing its facility and when new capacity (i.e., new plants or expansions) may be required for volume increases. If, for example, a plant designed to produce 10,000 units per year has reached its limit, more capacity can come from this location only through process improvements, expansion, or additional labor. This metric also helps COOs to evaluate the relative productivity and health of an entire portfolio of plants: i.e., if production volume as a percentage of designed capacity is consistently low and/or falling, that’s a pretty good indication that tough decisions loom (e.g., plant closures or consolidations).

Production volume as a percentage of designed capacity also is useful at the plant level in determining whether a facility is poorly managed or scheduled. For example, if significant amounts of capacity go unused for long periods, yet the plant requires consistent use of overtime and expediting, this points to ongoing produc-tion and/or equipment availability problems, or perhaps issues with how work is scheduled and sequenced.



Capacity usage also is a manufacturing barom-eter that shows the broad health of an industry; many executives consider the “healthy” threshold to be around 80%. That’s not been the case recently, as the 2010 MPI Manu-facturing Study showed production-unit volume as a percentage of designed plant capacity at 64% (me-dian), down from 70% (median) in 2008/09.1 For plants surveyed by MPI for 2006-2010, capacity usage was

72% (median).2 Individual manufacturers should as-sess how capacity utiliza-tion stacks up against other plants in a given region and within a specific industry (Figure 1). If capacity usage is low compared to indus-try data, why? If it’s high compared to regional data and demand is expected to continue, what are the best options for handling that

demand (e.g., expand, lease capacity, outsource)?

Production volume as a percent of designed capacity also is useful at the plant level in determining whether a facility is poorly managed or scheduled. For example, if significant amounts of capacity go unused for long periods, yet the plant requires consistent use of overtime and expediting, this points to ongoing production and/or equipment availability problems, or perhaps issues with how work is scheduled and sequenced.

1 MPI Manufacturing Study, U.S. data, 2010 and 2008/09.2 MPI Manufacturing Study, combined U.S. data from 2006 – 2010 studies, The MPI Group, 2011.

Production volume (as % of designed plant capacity)

Mean Median

All Manufacturing 69.6% 72.0%

Food Manufacturing 73.4% 80.0%

Beverage and Tobacco Product Manufacturing 87.5% 87.5%

Textile Mills 71.9% 75.0%

Textile Product Mills 80.8% 80.0%

Apparel Manufacturing 53.5% 60.0%

Leather and Allied Product Manufacturing 71.7% 80.0%

Wood Product Manufacturing 70.7% 75.0%

Paper Manufacturing 74.1% 80.0%

Printing and Related Support Activities 62.2% 69.0%

Petroleum and Coal Products Manufacturing 64.8% 60.0%

Chemical Manufacturing 64.3% 69.0%

Plastics and Rubber Products Manufacturing 71.6% 72.0%

Nonmetallic Mineral Product Manufacturing 70.8% 75.0%

Primary Metal Manufacturing 70.4% 70.5%

Fabricated Metal Product Manufacturing 69.0% 70.0%

Machinery Manufacturing 70.9% 75.0%

Computer and Electronic Product Manufacturing 68.0% 75.0%

Electrical Equipment, Appliance, and Component Manufacturing 70.1% 70.0%

Transportation Equipment Manufacturing 72.0% 75.0%

Furniture and Related Product Manufacturing 68.8% 70.0%

Miscellaneous Manufacturing 66.8% 70.0%




ten (typically as a percentage of scheduled uptime) is it available? And while 100% machine availability is ideal, it’s not realistic. Equipment breaks down, and some industries and manufacturing environments are exceptionally hard on equipment. Machine availability is 90% (median), according to the MPI Manufacturing Study, but each organization should compare itself to plants in similar industries (Figure 2).

Availability and ReliabilityEven when the capacity in a plant has reached its lim-it, the ability to efficiently produce the right amount of product as needed can be severely undermined by any number of human and machine factors.

Many measures help manufacturers assess equip-ment reliability; one of the most common is machine availability—when the plant needs a piece of equip-ment to operate and help produce product, how of-

Machine availability (as % of scheduled uptime)

Mean Median


























Just as important as equipment reliability is the reliability of personnel, processes, and machines to manufacture quality product. Every product that is reworked, scrapped, or returned by the customer is a product’s worth of output gone to waste. There’s no limit to the quality measures available to assess the performance of a plant, line, cell, or product family:

or ratios, either as percent-ages of hours worked, units produced, sales vol-umes, or some other measure of total production;

(percentage of products at the completion of production that pass inspection);

particularly at critical process points upon which overall product quality may hinge;

as raw figures or ratios; and

Customer rejects are clear indications of cus-tomers’ perceptions of value. For example, one auto supplier had difficulties with a high rework rate for products coming out of a chrome paint process. After months of lost productivity as numerous parts were repainted, the plant staff realized that the majority of rejects were flawed only on the B side of the product; side A was nearly always perfect. Analysis of the prob-lem revealed that side B was difficult to paint because design engineers never intended it to be painted—it would eventually be attached directly to the auto body at the OEM and never seen again. Moreover, the cus-tomer didn’t care how side B was painted and would not have rejected the parts the supplier was scrapping. So while it’s critical to prevent poor quality from ever reaching your customer, it’s also necessary to clearly understand what the customer expects.

To understand plant-wide machine availability, the measure must be tracked by individual machine; a line dependent upon 10 machines needs only one break-down to stop production. Machine availability also can be tracked to deduct for setup times and changeovers, potential indicators that capacity is being hamstrung by excessive setup and changeover times (i.e., sched-uling improvements are needed) or inferior equipment changeovers. Remember, too, that improving machine availability by reducing the number of changeovers won’t solve the changeover problem. Why? Because effort is better spent on increasing changeover speed, which then allows a plant to conduct more change-overs, permitting greater mix of product to move through the factory more efficiently. This added flex-ibility will minimize the inventory required to satisfy customer demand.

Other measures that illuminate machine availabil-ity are figures such as failures (indicating that machines with more frequent breakdowns should be priorities for maintenance staff) and tracked by hours or as a percentage of all maintenance work (indicating a need for more preventive or predictive maintenance prac-tices to stop unexpected equipment failures). Reactive work usually involves a production stoppage—needed capacity going unused—and may occur when replace-ment parts or maintenance personnel are not available to resolve the breakdown.

Superb equipment performance means little with-out superb people to operate it. Availability also reflects measures within the labor force, such as absenteeism rates (missing workers can severely affect a cell’s or line’s productivity), labor turnover rates (new employ-ees will take longer to get up to speed than plant-floor veterans), and (high rates of-ten coincide with high absenteeism and turnover rates, indicating dangerous working conditions and poorly functioning equipment). Root causes of low measures often point to a dissatisfied workforce, unsafe working conditions, noncompetitive wages, or lack of empow-erment or potential for employee involvement—all fac-tors that eat at productivity.



Quality measures such as should be tracked as near to real-time as possible; this allows plants to stop production when the mea-sures indicate that quality processes are out of con-trol. Savvy manufacturers understand that it’s better to have a line or cell down for 10 minutes, conduct quick problem-solving, and get to a root cause and a sound solution rather than to track quality only at the end of the line—after producing an hour’s (or day’s) worth of bad product.

Speed and EfficiencySpeed, too, is important in helping to optimize capac-ity, but only in the sense that speed is aligned with the pace of demand. Lean manufacturers establish produc-tion speed by calculating which is the time available to manufacture product divided by customer demand for the product.3 For example, in a continuous-flow operation, if takt is one minute, then a product is moving off final assembly every minute, a product exits a process step every minute, and an operator completes his work on a product every minute. While understanding takt time is necessary to schedule a plant, the abil-ity to produce accurately to takt time indicates efficient alignment with customer demand. For example, three work tasks in a cell that require less than a minute each are combined for a single operator to achieve a desired one-minute takt.

An inability to produce up to takt time means that customer demand cannot be directly satisfied (i.e., not enough product coming off the line); root causes could be equipment and processes unable to operate at the re-quired speeds when needed (e.g., an ailing machine or an understaffed work cell). Conversely, exceeding takt time means that the plant is producing more product than customers demand, which could turn into excess inventory or wasted output.

Most organizations also track the time that it takes to produce goods, either from start to finish (referred to as manufacturing cycle by some and manufacturing lead time by others) or from the time an order is received until it is shipped ( ). The efficiency of these production times also can be tracked based on the percentage of time that operators or equipment are actually adding value to a given product rather than merely moving it along or having product sit in storage ( as a percentage of the total time). Value-add time is an excellent internal benchmark to gauge production efficiency, but the ratio is accurately tracked by only a handful of organizations, mostly those dedi-cated to lean manufacturing. Cycle time and lead times are generally available, but industry-specific (Figure 3 on next page).

3 Lean Enterprise Institute, 2003.



Collective Measures — OEE, LOE, and OPEThe internal plant characteristics of availability, reli-ability, and speed come together to provide an image of the plant’s overall capacity optimization. One tradi-tional measure that pulls together the physical aspects of a facility’s performance is tiveness (OEE, also referred to as efficiency). OEE is based on a formula that multiplies the quality rate of the equipment (yield percentage) by the availability of the equipment when needed (machine availability) by the equipment’s run rate as a percent-age of designed rate. While OEE is commonly captured

around a piece of equipment, it can be rolled up to mea-sure the performance of a line or work cell, or broadly applied to a full plant (Figure 4). OEE can quickly give a glimpse of a number of problems in the plant—from equipment breakdowns to sloppy quality practices.

Manufacturing cycle time (start of plant production to completion of primary product); hours

Mean Median

All Manufacturing 150.0 18.0

Food Manufacturing 53.9 4.5

Beverage and Tobacco Product Manufacturing 55.0 55.0

Textile Mills 36.2 16.5

Textile Product Mills 88.7 120.0

Apparel Manufacturing 15.3 2.3

Leather and Allied Product Manufacturing 301.3 160.0

Wood Product Manufacturing 52.0 12.0

Paper Manufacturing 37.3 11.5

Printing and Related Support Activities 41.1 10.0

Petroleum and Coal Products Manufacturing 24.0 24.0

Chemical Manufacturing 175.6 14.0

Plastics and Rubber Products Manufacturing 632.1 19.5

Nonmetallic Mineral Product Manufacturing 161.0 38.0

Primary Metal Manufacturing 59.8 24.0

Fabricated Metal Product Manufacturing 134.3 20.0

Machinery Manufacturing 246.1 24.0

Computer and Electronic Product Manufacturing 72.9 17.5

Electrical Equipment, Appliance, and Component Manufacturing 70.2 10.0

Transportation Equipment Manufacturing 137.2 24.0

Furniture and Related Product Manufacturing 56.2 23.0

Miscellaneous Manufacturing 59.6 12.0




force to supervise itself and autonomously improve pro-duction (this measure can be expressed either as a per-centage of workforce in empowered teams or a general level of empowerment within the facility). The multiple of these factors leads to LOE. OEE, LOE, and capacity usage can be multiplied into a measure of overall plant efficiency (OPE) (see ).

On the workforce side of the plant, The MPI Group advocates a measure called labor operating efficiency (LOE), which pulls together the availability of workforce (nonabsenteeism rate), the accumulated knowledge-depth of the workforce (annual labor retention rate, which is the percentage still in place after voluntary and involuntary exits), and the quality of the workforce as defined by management’s ability to empower the work-

Overall equipment effectiveness (% machine availability X % quality yield X % of optimal rate that equipment operates)

Mean Median


























based on 8% labor turnover, 10% absenteeism, and 33% empowerment)—would find that this facility has a poor OPE of approximately 11%. Meanwhile, Plant B—with a solid OEE of 85% and a satisfied and involved work-force (LOE of 85% based on 90% empowerment, 5% la-bor turnover, and 1% absenteeism)—maintains an OPE of approximately 51%. Clearly, Plant B has been doing a far better job of optimizing the equipment and people it has, and though it doesn’t have as much unused space as Plant A, it should be rewarded the new production. Sim-ilarly, the OPE analysis indicates that there is far more than just 40% capacity available at Plant A, provided improvements are made to solve the problems that led to its poor OEE and disgruntled workforce.

Based on these three components of efficiency—equipment, people, and space—executives can assess the overall efficiency of a plant network as well as in-dividual sites; decisions can then be made on how to allocate production, to improve a facility, or to augment a network of facilities. OPE helps to identify and evalu-ate where “real” capacity might exist in a corporate net-work of plants and which facilities are making the most of their resources. For example, a COO is trying to place a new product and is evaluating two plants. Plant A has 40% available production capacity and Plant B has just 30% available capacity. The quick decision might be to move production into Plant A. But an OPE review of Plant A—which takes into account a shaky OEE of 70%, and a troublesome labor environment (LOE of 27%

Calculate OPEThe following example takes data for U.S. manufacturers—MPI Manufacturing Study 2006-2010 metrics and U.S. labor data—and calculates an overall plant efficiency (OPE). Individual plants or companies can run the same calculations to determine their OPE:

1. Compute OEE by multiplying machine availability times quality yield rate times run rate.2. Compute LOE by multiplying the percentage of the workforce that is empowered times labor retention rate

times nonabsenteeism rate.3. Compute OPE by multiplying the plant’s capacity usage times OEE times LOE.

OPE for U.S. manufacturers is approximately 17%.

* Run rate based on reported OEE divided by machine availability and quality yield.** Empowered percentage computed from weighted averages for category responses.

1

Machine availability % 90.0%

Machine availability X Quality yield X Run rate = 80.0% OEEQuality yield % 97.0%

Run rate % 91.6%*

2

Empowerment % 32.8%**

Empowerment X Labor retention X Nonabsenteeism = 29.7% LOEAnnual labor retention % 93.0%

Nonabsenteeism % 97.3%

Capacity usage % 72.0%

3 OEE X LOE X Capacity usage = 17.1% OPE

Source: MPI Manufacturing Study, 2006-2010; U.S. Bureau of Labor Statistics (nonabsenteeism rate)



In a time when many manufacturers chase low-cost manufacturing options overseas, it’s worth analyz-ing how efficient and low-cost manufacturing could be right at home, whether that’s in North America, Europe or elsewhere. OPE is a useful new way to assess those possibilities, especially when measured alongside labor rates, to get a true measure of cost.

Measure and ManageNot all the problems that can throttle efforts to optimize capacity occur within a plant’s four walls; manufactur-ers also need to consider activities both upstream and downstream of the plant. Upstream issues that can be measured include and

; downstream issues can be monitored by metrics

that address customer order changes by volume and/or as well as other nonproduction factors that directly

influence customer demand and production’s ability to meet demand. For example, corporate marketing or pro-motional campaigns that create a surge in demand with-out alerting manufacturing executives are sure to wreak havoc with the best-laid plans to optimize capacity.

There are dozens more measures available to manu-facturers and many resources to find metrics specific to any type of operations environment. Savvy manufac-turers will invest the time and effort to adopt the right measures for their firms—those that help them to solve production problems, optimize capacity, boost margins, and increase profitability. Smart manufacturers measure it, improve it—and then measure it again.


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Flexible Manufacturing

Flexible Manufacturing — Reconfiguring Operations for Competitive Advantage

Manufacturers are moving toward a new era in production—a time in which they can dynamically reconfigure their operations to make products for tomor-

row that differ dramatically from what they make today. Manufacturers will eventually be limited only by their ability to translate the voice of the customer into rapid, efficient product designs.

This new production concept is known as flexible manufacturing and is the result of the convergence of five related trends:

varied tasks,

Rapidly Changing Customer Demands

Customer buying patterns change more rapidly than ever, significantly shortening product lifecycles—and making the penalty for missing a product launch win-dow even more damaging. It’s crucial that new-product

ideas move seamlessly and swiftly from design into pro-

enough to adapt to new designs, as new machinery can’t be installed for every new SKU.

And make no mistake about it, SKUs are proliferat-ing. Some 42% of manufacturers annually launch 5% or more of their total SKU lineup, and 6% of manufactur-ers introduce one-fifth or more of their SKUs annually. Companies with advanced innovation practices are even more likely to renew their SKU lineups: 54% of manu-facturers at or near world-class customer-focused innova-tion launch 5% or more of SKUs annually, with 22% of this group launching one-fifth or more of SKUs annually (Figure 1 1

Similarly, 70% of all manufacturers derive 5% or more of their annual sales from products introduced in

that more than 25% of sales are from products introduced -

turers at or near world-class status derive more than 25% of sales from products introduced in the past three years (Figure 2 2

12

identified as an ability to “develop, make, and market new products and services that meet customers’ needs at a pace faster than the competition”; 46% of companies were at or near world-class innovation.



The propensity to develop new products is even more pronounced in consumer products industries. For

-ers annually launch 5% or more of their total SKU line-up, and 10% of computer and electronics manufactur-ers introduce one-fifth or more of their SKUs annually.

sales from products introduced in the past three years;

that more than 25% of sales come from products intro-duced in the past three years.

Just-in-Time (JIT) Operations

maintaining the minimum inventory necessary to ensure timely customer deliveries, including buffer inventory to manage spikes in customer demand and safety/emer-gency stock to cover known variations in production or supplier capabilities. Why? Largely because lean manu-

inventory—whether finished-goods, work-in-progress, or supplier components and material—obscures produc-

tion problems, consumes space and resources to manage

piles of inventory lying idle in warehouses, on shipping docks, or in transport.

How many new products as a percentage of total SKUs are launched annually (count only new SKUs, not a product iteration or line extension)?

All companies

Furthest from world-class

customer-focused innovation

At or near world-class


<5% 57.7% 67.6% 46.0%

5 – 10% 26.5% 21.9% 32.1%

11 – 20% 9.6% 6.5% 13.4%

>20% 6.1% 4.0% 8.5%

Approximately what percentage of annual sales are derived from products introduced in the past three years?

All companies





<5% 30.4% 38.4% 20.8%

5 – 25% 45.0% 43.4% 47.0%

26 – 50% 16.0% 12.0% 20.8%

>50% 8.6% 6.3% 11.4%

Figure 1.

Figure 2.

Source: Next Generation Manufacturing Study, 2009.




a different SKU, operators will be reluctant to conduct changeovers, and will likely produce more of the SKU during each production run. This results in high inven-tories of materials waiting to be turned into the SKU, as well as high inventory of the finished-good SKU.

-ing their production schedules using pull systems with kanban signals4 Figure 3 5 Manufactur-ing plants that are at or near world-class manufactur-ing status6 (have made “significant progress” or “fully

-thest from world-class status (made “no progress” or

allow firms to rapidly shift production to accommodate changing customer demands, to efficiently level produc-tion schedules despite inconsistent short-term custom-er-demand patterns, and to maintain a tighter control of

Which of the following practices are used to manage inventory? All plants



Just-in-time supplier deliveries 45.4% 41.3% 55.5%

Pull systems with kanban signals 43.9% 38.5% 57.3%

Vendor-managed or -owned inventories 37.9% 34.5% 46.8%

Quick equipment changeovers 30.9% 25.1% 44.9%

One-piece flow techniques 28.7% 23.7% 43.8%

Parts/goods supermarkets 20.5% 16.6% 29.4%

Production leveling/heijunka 19.3% 14.7% 30.6%

RFID and computerized inventory tracking 11.8% 9.4% 17.2%

None of these 16.3% 20.0% 7.0%


4

been consumed.567

Louisville, 2001.

JIT ImprovementsHarley-Davidson has used lean JIT practices internally and with suppliers to reshape its operations, enabling it to meet its demand windows with 75% less inventory. In removing inventory, Harley-Davidson was able to surface and solve problems hidden by high levels of inventory, improve productivity by 50%, and decrease scrap and rework by 68%.7



manufacturing plants train each employee more than -

ployee more than 40 hours annually. More than half of manufacturing plants at or near world-class status train employees more than 20 hours annually (Figure 4

-ing in self-directed work teams; 46% of plants at or

of their workforces participating in self-directed work teams (Figure 5 8

Multiskilled Workers with Multifunctional Equipment

Workers must be as versatile as the machines they op-erate. The days of single-minded employees performing the same task repeatedly have disappeared; production

-tensive operation today may perform machine startup activities; handle loading and unloading of multiple ma-chines; perform minor maintenance activities; and man-

staff participation. Yet few employees walk into a manufacturing facil-

-facturing environment. Savvy manufacturers know that they must train employees and then give them the au-

8

What are the average annual hours of formal training received by each plant employee? All plants



Less than 8 hours 23.5% 29.3% 9.4%

8 – 20 hours 39.6% 41.3% 36.0%

21 – 40 hours 24.2% 20.3% 34.1%

More than 40 hours 12.6% 9.2% 20.6%

What percentage of production employees partici-pate in empowered or self-directed work teams? All plants



0% 24.9% 29.0% 15.5%

1 – 25% 33.1% 37.8% 21.9%

26 – 50% 13.7% 12.2% 16.6%

51 – 75% 10.2% 8.6% 14.0%

76 – 99% 8.0% 5.3% 14.5%

100% 10.2% 7.1% 17.5%

Figure 4.

Figure 5.

Source: MPI Manufacturing Study, 2006-2010.

Source: MPI Manufacturing Study, 2006-2010.



Rigid Global Supply Chains-

facturing strategies when global supply chains are dis--

almost unimaginable human suffering, but also gener-

The Wall Street Journal re-

of the problem in large part because it will mostly be

hundreds of smaller parts suppliers, a person familiar with the situation said.” More than a month after the disasters, shortages remained.

-

suppliers elsewhere in the world making thousands of parts and components. Yet while the other suppli-

for those shortages. -

in their development of supplier networks: identifying

address shortages occurring elsewhere in the network. The problem of global supply-chain disruption isn’t

poor supply-chain management. Manufacturers don’t

Even under normal conditions, manufacturers’ sup-

delays in communicating demand signals throughout their supply chains, with standard delivery times like-

time communication of demand signal and entire sup-

(Figure 6 10

The Wall Street Journal10



Flexible Manufacturing Technologies

changeover capabilities: 88% of Food Manufacturing

-ter changeover options is a concern in their plants; 41%

plants report that they run more than one product per line per day.11

-

are redefining what production means in the industries -

ally started with a fabric, which was dyed, cut, sewn, -

ship with Italian machinery manufacturer Santoni, Isra-el-based Tefron Ltd. introduced the concept of seamless technology for clothing manufacturing. With seamless production there is no fabric, as the manufacturer in-stead starts with yarn; a single Santoni machine weaves an entire garment in a few minutes, knitting in features such as hems and waistbands.12

-

of production systems to accommodate new designs has lagged, in part due to a lack of open standards for

-

-

modular, easily reconfigured, and computer controlled

-ment remains a formidable challenge to implementing agile systems in industry.”

11 Food Manufacturing12 “Santoni/Tefron Case Study,” Italian Trade Commission—Chicago Office.

Mechanical Engineering, 2001.

Figure 6. What best describes your end-to-end supply chain's abilityto respond to unexpected customer demand for existing products?

(All companies)

Major delays communicating demand signal throughout chain andmost suppliers struggle to efficiently meet demand—standarddelivery times dramatically exceeded and/or excessive inventory

Efficient communication of demand signal throughout chain with most suppliers efficiently satisfying demand—standard delivery times nearly met and right-sized inventories

Real-time communication of demand signal and entire supply chain flexible to demand spikes—standard delivery times consistently met and just-in-time inventories

Minor delays in communicating demand signal throughout chain and some suppliers struggle to efficiently meet demand—standard delivery time exceeded and/or too much inventory

4.4%

33.0%

50.1%

12.6%




14 TheFabricator.com15 we_magazine.

Automated Panel Bending Enhances Changeover Capabilities and FlexibilityMany manufacturers produce multiple parts that are kitted into complete assemblies for customers. Technologies such as laser cutting have helped kitting operations remain flexible—yet kitting presents challenges for bending operations and press brakes, which require a variety of punches and dies for bend geometries and material thicknesses. Salvagnini America introduced panel bender technology that enables a manufacturer to rapidly change between panels of significant differences (5 inches by 10 inches to 5 feet by 10 feet). “You have zero [manual] setup, because the tools position themselves to allow for clearances of long and short flanges,” says Bill Bossard, president of Salvagnini America. This means that changeovers between parts occur within six to eight seconds, a new program is launched, reference blocks and devices are positioned, hold-down tooling rearranges itself, and the machine is ready for operation. "This kind of equipment is ideal for getting closer to a lean, single-piece part flow," Bossard adds. "You might need to make thousands of products a year, and each assembly might have 50 parts. There's no reason why you couldn't run part No. 1 through 50, then repeat."14

--

signs and products (though this would likely increase

giving away—intellectual capital, but it also could open

--

mentally new philosophy concerning machines: not so -

-er, and speaker about technology, culture, and business innovation. “As such machines become smaller, more

distributed and cheaper, then their [availability] for more local production will increase dramatically.” As

personal fabrication 15 and Fablabs (small-scale operations with computer-controlled tools and

can be configured to, theoretically, make anything-

to compete tomorrow?


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Line Integration

Customer Line Integration — New Profit Opportunities

In their efforts to meet the rapid and continuously changing demands of customers in the past quarter century, manufacturers have reconfigured nearly every aspect of their businesses. After repeatedly

asking themselves a difficult question—“How much val-ue does production expertise contribute to margins and profitability?”—many had to face a stark reality: Produc-tion represents an ever-diminishing share.

Skill on the plant floor isn’t enough to succeed anymore. Instead, leading organizations now work with a team of partner and supplier companies, each of which brings its own expertise to meet the needs of a particular customer group. As manufacturers adapt to this new reality, they optimize their business strat-egies and processes to create greater value for their customers—who promptly ask for more!

This new paradigm extends to manufacturers’ shop floors as savvy executives realize that their own sup-pliers—manufacturers of high-tech production equip-ment and third-party line integrators—are often better at planning, designing, and installing new production lines and upgrades than they are (see Win-Win Collab-oration on next page).

Why do manufacturers now seek outside expertise to execute a process so fundamental to their business suc-cesses or failures? A quick review of structural changes in manufacturing offers insights in this growing trend—and practical advice on how to profit from it.

From Mass Production to On-Demand SatisfactionOnce upon a time, two imperatives drove manufactur-ers: Create production lines that churn out products as quickly as possible and run every machine at full capac-ity. Manufacturers sought to maximize output, thereby justifying (absorbing) the cost of equipment and labor. A good manufacturing facility was one that ran long, effi-cient production runs—without much focus on customi-zation or demand variation.

Today that world seems as ancient as the industrial dinosaurs that once stood astride it. A combination of heightened global competition, shortened product-de-velopment cycle times, and increased demand for cus-tomized products means that manufacturing executives now face a far more complex supply-chain and produc-tion environment. Managers must now optimize their production, assembly, test, and packaging lines to co-ordinate precisely with fluctuating customer demand. This requires that each machine or process within a production line be tuned to deliver a component to the next stage when—and only when—it is needed: the right product at the right time in the right quantity. Why? Because in today’s lean environment, the end of the line must deliver only what has been ordered—no more and no less. Managing an on-demand production line requires new skills, leaving manufacturers with a key question: Where will it be most effective to procure that expertise?


Line Integration

From Vertical Integration to Supply-Chain Management

Manufacturers once assumed that they must master and control each part of the production process; now they focus solely on what they do best—no more and no less. Savvy execs realize that mastering each part of pro-duction is rarely possible, and often limits productivity and profits. And while outsourcing may have started with noncore activities such as human resources, accounting, and information technology, leaders are increasingly comfortable outsourcing functions traditionally associ-ated with manufacturing excellence, including product design, engineering, logistics, and delivery. For some, the decision to outsource the entire production process gave rise to new businesses—contract manufacturing and contract design—and suggested that manufacturers no longer needed to own or run an assembly line, or to design the products that run on them.

Many other manufacturers, however, made a differ-

ent choice. For those who believe that making a product creates a competitive advantage, hiring manufacturing specialists to improve the effectiveness of the produc-tion process became a path toward increased profitabil-ity. These organizations sought to deploy improvement principles, such as lean manufacturing or six sigma, optimizing the links between processes and production equipment. Is it any surprise that manufacturers see the next step in production process improvement as focus-ing on how their production equipment and cells/lines are designed, configured, and integrated?

1 “Supplier Provided Automation Services Worldwide Outlook,” ARC Advisory Group, May 31, 2009.

Win-Win CollaborationMachine equipment vendors are finding opportunities to grow their businesses by addressing customer demands for line integration and upgrade services, increasing both margins and customer retention rates. The worldwide market for supplier-provided automation services was projected to grow by approximately 7% compounded annual growth rate, 2009-2013, according to the Supplier Provided Automation Services Worldwide Outlook from ARC Advisory Group.1

As manufacturers outsource elements of line design and implementation of upgrades, they do so at different levels, creating opportunities for machine equipment makers of all sizes. Not all vendors will have the capacity to deliver complete solutions, and not all customers will be able to invest in turnkey integration services:

and contract partnerships offering continuous-line integration and upgrade services.

either with larger, full-service integrators, or with a group of small manufacturers that, together, combine specialized expertise.In addition, there are significant opportunities at each step of the integration or upgrade

process, from consulting and engineering and design through to spare-parts management and replacement, including installation and training, system and device maintenance, and performance management.


Line Integration

Manufacturers Are Suppliers and Customers

Customers at every tier of the supply chain now demand total solutions from their manufacturers. This means that leading manufacturers must work hard at integrating their operations closely with those of suppli-ers and customers. For example, 24% of manufacturers who report that they’re at or near world-class manufac-turing status (“made significant progress toward or fully achieved”) describe their relationship with suppliers as partnerships, and 23% of those plants describe their relationship with customers as partnerships, according to the MPI Manufacturing Study (Figure 1).2 Approxi-mately 13% and 18% of plants furthest from world-class status (“no progress” or “some progress”) describe their relationships with suppliers and customers, respective-ly, as partnerships. With the success that world-class manufacturers have experienced by partnering with suppliers, is it any wonder that manufacturers now seek similar success in line integration by partnering with the vendors who provide their production equipment?

From Products to Solutions

Another trend driving line integration is the realiza-tion by manufacturers that customer value no longer resides primarily in the product itself, but in many other nonproduct factors, including:

and services;

relationship;

product or service may be a small part;

the end-customer and supports the product or service; and

if unrelated to the core product or service.

Yet as manufacturers have turned their attention to providing these nonproduct attributes, they still must work at optimizing product production, either on their own or in concert with partners.


Relationship with Suppliers and Customers

U.S. plants Plants furthest from world-class status

Plants at or near world-class status

With Suppliers

Buy and sell (e.g., cost and quality focus) 48.3% 51.0% 44.2%

Certification (e.g., broad qualifications established) 15.9% 15.9% 15.9%

Cooperation (e.g., sharing product ideas, best practices) 18.9% 20.7% 15.9%

Partnership (e.g., sharing resources, intellectual property) 16.9% 12.5% 24.0%

With Customers

Buy and sell (e.g., cost and quality focus) 38.1% 42.0% 31.2%

Certification (e.g., broad qualifications established) 16.9% 14.9% 20.3%

Cooperation (e.g., sharing product ideas, best practices) 25.0% 25.4% 25.2%

Partnership (e.g., sharing resources, intellectual property) 20.0% 17.8% 23.3%



Line Integration

plier Provided Automation Services Worldwide Out-look, says: “Tight operating environments and reduced demand are forcing companies to cut costs wherever possible… The result is that users rely on suppliers to provide them with a continuously expanding scope and depth of automation-related services.” The study reports that due to downsizing in the 1980s and 1990s, many end-users in process industries either eliminated or reduced the sizes of their internal automation and control engineering departments—many by 50 percent or more. In addition, automation suppliers have steadily increased their knowledge bases of the automation and controls marketplace.3

Together, these structural changes, accelerated by new technology and globalization, have forced manu-facturers to reinvent their production processes (see Food Manufacturing Line Integration Solution), often implementing complex technologies that require inte-gration among a vast array of mechanical, electrical, and electronic components. And they’ve succeeded in pro-ducing more goods than ever, while delivering them at lower prices within ever-tighter time frames.

Yet these gains have required them to increasingly look to their equipment providers as productivity-im-provement allies. Larry O'Brien, ARC Advisory Group research director and principal author of the study Sup-

Food Manufacturing Line Integration Solution4

A trend toward more natural foods and heightened food safety has increased the importance of high-pressure treatment for foods. With high-pressure treatment, packaged food is subjected to a high pressure in an autoclave (lockable and gas-tight pressure container), and the process kills microorganisms such as listeria and salmonella. Even heat-sensitive food products can be treated this way because the process occurs under ambient temperatures, and the nutritional value and taste are nearly unimpaired by high-pressure treatment.

High-pressure treatment was traditionally carried out in a separate manufacturing stage that required manual loading. Multivac developed a solution for the line integration of high-pressure equipment for the treatment of packaged foods, which also offers high-pressure compatible packaging. With the integration solution, finished food packs are automatically loaded into the transport containers; high-pressure treated in an autoclave; unloaded, dried, and printed or labeled, if required; and packed into cartons. "In this way, it is for the first time that we can process large, industrial-scale production quantities fully automatically in

responsible for high-pressure equipment at Multivac. (Patent applications for the process have been filed.)

3 “ARC Says Automation Services Market to Grow,” Automation.com reporting data from ARC Advisory Group, May 31, 2009.4 “Multivac Caters for the Efficient Line Integration of High Pressure Treatment Equipment,” News Archive, Interpack, Jan. 25, 2011.


Line Integration

Capturing the OpportunityManufacturers seeking to outsource their line-integra-tion activities and upgrades first must select an integra-tor, basing the decision on five key factors:

Project similarity: Look for integrators who have suc-cessfully designed and installed projects similar to the proposed project. First, consider the scope of the proj-ect. Some integrators excel at complete line and com-plex assembly jobs. Others are best at stand-alone work cells. Still others focus on integrating particular lines, such as conveyor systems or packaging lines. Next, con-sider whether to partner with a specialist or a generalist. Manufacturers in industries that are large enough, such as pharmaceutical, food, and oil/gas industries, can find numerous integrators who specialize in their particular industries, nearly guaranteeing that the integrator will understand the subtleties of the business. Other manu-facturers may prefer to choose an integrator with experi-ence installing a particular type of line in a variety of industries, to ensure that the project gets the benefit of new perspectives.

Product variety and partner preference: Decide whether to partner with an equipment vendor or a third-party integrator. Executives who’ve decided to purchase a particular brand of equipment might opt to have the vendor integrate the line to take advantage of the ven-dor’s in-depth knowledge of the equipment. Leaders who’d rather hire third-party integrators tend to want to tap the integrators’ familiarity with a variety of prod-ucts, seeking the best overall solution. However, many equipment vendors say they are willing to integrate oth-er vendors’ products, and are designing products that can integrate with third-party systems.

Project team type: Ask if the line-integration project will be staffed by subcontractors or in-house experts. Generally, subcontractors could provide the benefit of increased specialization, but too many subcontractors could needlessly increase the price and complexity of managing the project. The use of in-house staff could make managing the project more cost-efficient and easi-er to implement.

Integration process plan: Explore how the integrator works with its clients, including initial project specifica-tion requirements, project changes or updates, cost and timeline estimates, and on-going service and support. Will the integrator help to create the design document that describes the present system and the proposed im-provements, or require that the manufacturer provide it? Does the integrator work on a time-and-material basis, or fixed-quote? Will the integrator allow for updates and changes to the project? Is there a formal or informal pro-cess for handling changes? And, finally, does the inte-grator offer ongoing service and support?

Due diligence: Verify the integrator’s financial stability by reviewing public documents and assessing the inte-grator’s reliability by interviewing customer references. Ask peers how—and how quickly—the integrator solves problems and whether the integration project met expectations and stayed on time and on budget.

Integration Partner Criteria

Engineering Expertise

Project similarity

Equipment maker or integrator

Partner bench strength

Project management culture

Due diligence


Line Integration

Once the partnership is es-tablished, a manufacturer needs to manage six key partnership elements to ensure its ongoing success. They include:5

Clarity of roles: Each participant must understand how its contribution allows the production line to per-form at an optimum level. Manufacturers should expect to share detailed informa-tion about customer needs, as well as the particular competitive advantage they hope to achieve with the new line integration or upgrade. Long-term partnerships require that each participant agree on a road map that unites current and expected customer requirements with the hardware, software, and services that will deliver on those requirements.

End-user focus: The manufacturer should expect the machine equipment vendor/integrator to understand end-user needs. They should be willing to work to understand not only the manufacturer’s requirements, but also the customer requirements of that manufacturer. For example, line configura-tions would address changeover needs resulting from a customer base with varied and/or frequently changing demand patterns.

Trust: In addition to the leap of trust required to share the end-user information necessary to forge a successful partnership, the manufacturer and equip-ment vendor/integrator must come to an understand-ing regarding the degree to which the partnership’s line configurations are proprietary. Noncompete agreements must delineate which industries and to what extent the vendor/integrator may sell the new

technology, processes, and ex-pertise that derive from the part-nership. In particular, successful partnerships acknowledge that the equipment vendor cannot be held hostage to unending, all-encompassing noncompete agreements. Many agreements set a length of time during which the equipment vendor cannot sell the solution to a competi-tor, with the understanding that by the time the vendor is free to resell solutions, the partnership will have begun implementing

the next project. A shorter time limit—or no limit at all—should be granted for re-sale to noncompetitors. Ultimately, the manufacturer must feel confident that the implementation will not be sold to a competitor, while the vendor/integrator must be able to capitalize on the knowledge gained from a new implementation.

Shared goals: In collaboration, parties must agree to production standards and benchmark metrics. They must work in tandem to maximize overall com-petitiveness, including joint efforts to improve qual-ity and delivery.

Flexibility: Both parties must understand the need to quickly change course to meet inevitable changes in the marketplace. Use of common infor-mation-technology systems, as well as proactive, periodic, and systematic assessment and analysis of the partnership, can facilitate this flexibility.

Win-win thinking: A stable, long-term part-nership requires that both the manufacturer and the equipment provider/integrator profit from the relationship.

5 List adapted from: David Drickhamer, “Envisioning the Ideal Value Chain,” IndustryWeek, May 21, 2001.

Managing the Integration

Flexibility

Win-WinThinking

End-UserFocus

Trust

Clarity ofRoles

SharedGoals


Line Integration

Today, experienced manufacturers and their equip-ment providers understand the need for continuous, rapid change, as well as the resulting need to question every business practice and experiment with new meth-ods and processes. They understand and expect that new strategies will be copied quickly and may become standard business practices (see Material Handling Sys-tem Integration). And they know that within each new strategy lie the seeds of the next change. Companies that recognize early the need for change will be first to capi-talize on new opportunities.

The common theme throughout any industry’s re-structuring is the imperative to shift specific process re-sponsibility to that link in the supply chain that most effectively fulfills it in terms of cost, quality, speed, and expertise. Savvy manufacturers will recognize line inte-gration and upgrades as processes that require the spe-cialization that outsourcing can bring.

6 Cliff Holste, “Logistics News: The Material Handling Equipment Manufacturer as System Integrator,” Supply Chain Digest, June 8, 2010.

Material Handling Systems Integration6

Material handling equipment (MHE) manufacturers are increasingly seeking

to Cliff Holste, Materials Handling editor.

are at the front of this trend, as are

complete (or nearly complete) responsibility for system design, hardware selection, engineering, software support, and systems

project value.

game for a while.”

access to more than one vendor.

guarantee of throughput, provided they own all of the system.


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Performance Measures

Powerful Performance Measures That Drive Improvement

Every organization has its favorite metrics—measurements that gauge control, progress, and success. At a world-class organization, these measures serve as a common “performance

language” that links corporate strategy, divisional goals, plant targets, departmental budgets, and individual in-centives into a unified, results-oriented system. But at a mediocre or failing organization, these measures too often become a meaningless management mantra—targets re-petitively tracked but offering little insight into how val-ue is created for customers or the organization. Metrics at these organizations are straitjackets—restraints that waste resources, aggravate employees, and block improvement.

How can companies break out of the metrics maze and develop a more successful performance-manage-ment process? By focusing executive effort on what makes performance measures powerful and useful—and by implementing a seven-step review that continu-ously analyzes, updates, and transitions new and better metrics into the organization.

What Makes a Powerful Measure?World-class manufacturers use performance measures as tools to help their companies or plants solve problems—problems that can result in poor performance or block improvement. Every measure must either stretch their organizations toward better performance or be required for financial reporting or regulatory compliance. Power-ful performance measures answer questions that emerge from the problem-solving process:

What is the problem? World-class manufacturers clear-ly identify the problem that a measure should help solve or prevent—costs, quality, delivery, safety, productivity, etc.

Why is the problem occurring? Performance-driv-en executives invest time and effort in understanding the root causes of the problems they seek to solve. For example, quality problems in the form of rising war-ranty costs might be traced back to employee error, poor supplier components, customer misuse of product—or a combination of all three. World-class manufacturers

keep digging until the real cause is found. For example, some companies with poor safety performance have looked not at accidents that have occurred (which they are required to track and report to OSHA) but at tracking events that almost occurred (i.e., “near misses”). Hank Sarkis, president of The Reliablity Group, writes that “on average, respondents who experienced a near miss (an accident or injury that almost happened) were two and one-half times as likely to also be injured at work (the probability of sustaining an injury increases from 10% to 25% for respondents who experienced a near miss).”1 Thus, by tracking and measuring near misses, an organization homes in on the root causes of safety problems and can reduce the likelihood of accidents.

Building Powerful Performance Measures

Continuous Improvement

Available Targeted Repeatable

Support manufacturing strategy

Solve problems

1 Hank Sarkis, “Developing Cultures for Safety & Reliability in Manufacturing Organizations,” The Reliability Group.



How can recurrence of the problem be reduced or prevented? World-class manufacturers establish mea-sures that accurately identify the occurrence of root causes, thus helping employees to eliminate them and improve performance. But at mediocre firms, metrics often measure the wrong processes and results. For example, customer-support staff may be measured on call volume, regardless of whether customer problems have been solved. A more effective performance metric would be the number of callbacks per customer and case number—allowing analysis to discover the underlying problem(s).

Like any tool, a performance measure must be applied in the appropriate context. A powerful metric will:

Support the manufacturing strategy: Manufacturers can only solve problems within the scope of their cho-sen manufacturing strategy—which means all measures must support that strategy. Plant management must focus on what it can control; problems uncovered outside the scope of manufacturing—e.g., chaotic sales promotions that create demand and scheduling fluctuations—will be shared with other teams with the authority (and metrics) to solve them. It’s because of this need to “scope” the measures that lean organizations practice strategy de-ployment, cascading broad corporate measures down to departments and locations, and then empowering those units to establish detailed targets, measures, and action plans supporting the broader corporate measures.

Target specifics that reveal the bigger picture: Broad performance measures are a necessity, but they must be supported with metrics sampled at a variety of distinct process points to provide targeted problem-solving. For example, tracking finished-product yields or customer returns may only validate what’s already known—that

there’s a quality problem—without narrowing the prob-lem to specific processes or causes. Similarly, if on-time delivery to customers is always near 100% but requires significant overtime or expediting, then management must seek more targeted measures such as internal on-time delivery between production processes, expediting costs as a percentage of all logistics, etc. It’s important that organizations work to uncover performance mea-sures that highlight multiple process problems. This isn’t easy, but it saves time and resources by focusing the organization on what matters most.

Be readily available: Unfortunately, some valu-able metrics may prove impractical or too costly to cap-ture, particularly if information needs to be leveraged on a real-time basis. If, for example, a measure requires repeated documentation by a production operator, the process of collecting the metric may undermine the op-erator’s primary objective of producing a quality prod-uct. If a tough-to-capture metric is crucial, smart compa-nies may consider:

– Capturing the metric less frequently;– Using automation, if possible, to collect

the measure;– Videotaping the process and calculating an

average measure; or– Developing a metric that indirectly measures the

same thing (e.g., assemblies touched per shift per operator, which indicates if substantial assembly rework is occurring). Be consistent and repeatable: If a metric varies

constantly with no repeatable distribution, it will never offer insights. And while most measures will vary, there must be a reasonable distribution pattern that allows an organization to distinguish good performance from bad.



monthly) and have sufficient time dedicated for team activities and assignments.

After being briefed on the process and the concept of powerful performance measures, the PM team communi-cates the process and objectives to the rest of the organi-zation, describing why the company or plant is undertak-ing this effort and how it will help the plant or company improve. This initial communication should also solicit comments and ideas from everyone within the company or facility. Each PM team member discusses the process in more detail with his or her departments and/or loca-tions, encouraging shop-floor personnel to submit mea-sures that get to the root causes of problems. (If strategy deployment exists in an organization, its structure and communication tools—such as A3s and planning docu-ments [see A3 Example]—will handle these activities.)

Within this framework, world-class manufacturers use a process—such as the following seven steps—to identify, adopt, and implement a system of pow-erful performance measures.

1. Organize and Communicate A transition to better performance mea-sures can begin from a variety of starting points. For example, at a small company or plant, a CEO or plant manager may organize the effort. In larger companies and plants, leading the transition usually falls to a continuous-improvement team or individuals in charge of performance management. (In large organizations, the metrics-improvement process may be piloted in a “mod-el” facility or department and then expanded throughout the organization.) Regardless of the person or group that starts the effort, the initiative must establish a clear goal: identification of metrics that help illuminate and solve corporate problems, improve performance, and support the organization’s manufacturing strategy.

If a continuous-improvement team is not in place, consider a cross-functional performance-measure (PM) team with representation from all elements of the orga-nization. If, for example, the transition is being led at a corporate level, PM representation can be by location or division (e.g., by regions or markets served) or by func-tion or department (e.g., finance, marketing, operations). The PM team should meet on a regular basis (weekly,

Revitalizing Performance Measures

1. Organize and communicate2. Evaluate existing measures3. Identify alternative measures4. Assess potential new measures5. Merge and purge, old and new6. Test measures7. Roll out and regularly review

12

3Improved

Performance

45

7

6

© 2004 The Manufacturing Performance Institute

2 Free example of manufacturing A3 report, eVSM, www.evsm.com, 2011.

A3 Example2



3. Identify Alternative Measures Next the PM team looks externally to find measures used by other manufacturers both inside and outside their industries. During this step, the performance-measures process intertwines with a sound benchmarking program. As in benchmarking, PM team members will seek compa-nies that have solved problems similar to those that vex their own organizations. Online benchmarking resources can help the PM team to quickly identify what measures other companies and plants track. In addition, each mem-ber should call on his or her own network of colleagues (e.g., association members, mentors) to learn what’s avail-able and useful. During this step, the PM team should err on the side of bringing back too many measures, even if it’s not obvious how the measure can be applied; if a best-practices company tracks it, there may be an excellent reason that’s not immediately apparent.

There are many good repositories of performance measures and the practices that support them. For ex-ample, many companies cull the criteria demanded of winners of the Malcolm Baldrige National Quality Program. Baldrige organizations submit details show-ing performance achievements and improvements in seven key areas: leadership; strategic planning; cus-tomer focus; measurement, analysis and knowledge management; workforce focus; operations focus; and results, frequently citing metrics they use to measure in each area.3

2. Evaluate Existing Measures If a performance-measures database does not already ex-ist, the PM team gathers into one master spreadsheet or database all metrics (good and bad) tracked by the plant or company. This material should be organized in a way that makes the most sense to the organization; for ex-ample, if most measures are tracked by department (e.g., purchasing, engineering), findings should be presented in that manner.

PM team members will have individual responsi-bilities, too, for finding and logging metrics required by their constituents. For example, a maintenance supervi-sor will record machine-related measures such as mean time between equipment failures, while a divisional VP might gather measures that allow his colleagues to as-sess a plant network, such as return on invested capital (ROIC). Accompanying each measure in the spreadsheet should be:

tracking the measures;

recording, automated, outside auditor);

measurement;

or solves.

The latter three pieces of information are critical to determining the need for existing measures. Why? Be-cause once the spreadsheet is complete, the PM team will use them to remove measures that are no longer required. The PM team will distribute a list of deleted metrics to all employees with a deadline for requests to “restore” a specific (deleted) metric. The PM team should remain flexible; if even one person in the company or plant can substantiate the need for a given metric, the measure should be restored. All others will be removed from the spreadsheet, with employees responsible for tracking these measures notified to stop their capture.

3 Malcolm Baldrige National Quality Award, National Institute of Standards & Technology, www.nist.gov.



4. Assess Potential New Measures The PM team then evaluates all the potential measures. This assessment process will enable the team to catego-rize each measure as “must use,” “maybe/manipulate,” or “remove.”

Must-use measures meet all the primary require-ments of a powerful performance measure and are cer-tain to elicit a consensus response within the organi-zation. These usually spur comments such as, “I can’t believe we haven’t been tracking this,” and they often turn out to be the most basic of metrics. Indeed, many companies and facilities (especially among small- and mid-sized organizations) fail to track even rudimentary process and operations measures. For example, manag-ers at a plant with quality problems may track specific causes for returns by both customer and channel, but neglect to track specific causes for returns—missing opportunities to identify the real problem, whether internal (e.g., components from a plant department or a specific supplier are breaking down) or external (e.g., the product doesn’t function properly in extreme humidity). Must-use metrics are immediately added to the spreadsheet.

Maybe/manipulate measurements warrant discus-sion, evaluation, and revision. For example, overall equipment effectiveness (OEE) is a valuable measure-ment of efficiency, but the calculation can skew toward equipment-centric processes (see OEE Calculation). A manually intensive assembly operation within a cell might revise OEE by substituting a cell’s time-available-for-production for machine availability. As the PM team

develops new, powerful measures from the maybe/ma-nipulate set, these are added to the spreadsheet.

It’s important to note that overemphasis on any one performance measure—existing or new—is rarely pru-dent. Measures should work together or reflect/incor-porate many metrics. For example, it might be possible to improve OEE on the factory floor by annually replac-ing equipment, but that would defeat a higher-priority measure of corporate profitability. Most managers re-alize this: According to the Maintenance Performance Metrics survey sponsored by Plant Services magazine and Rockwell Automation, about 53% of respondents use a category of “budget compliance” to measure the performance of MRO (maintenance, repair, and opera-tions) activities.4

5. Merge and Purge, Old and New The PM team then evaluates all the potential measures. This assessment process will enable the team to catego-rize each measure as “must use,” “maybe/manipulate,” or “remove.”

During this step, the team will also review tracking frequencies for all measures. Tracked too often, a mea-sure may end up wasting manpower and effort. Tracked too infrequently, a metric may gather data skewed by seasonal or other fluctuations. The PM team must select tracking periods that encompass the volatility inherent in a given metric (e.g., in a highly seasonal business, tracking periods must include an entire year to be ac-curate). Conversely, a measure that changes rarely can be sampled less frequently.

4 Berger, David, “Know the score,” Plant Services, Nov. 5, 2003.

OEE Calculation

OEE = Machine availability % X Quality yield % X Run rate as % of optimal



Above all, the PM team must hone the spreadsheet down to a list of problem-solving measures that sup-port strategy and accommodate all nuances of a given business, such as unusual product mix, market condi-tions, or customer needs. This customization is critical for two reasons:

for not meeting performance targets; and

step toward becoming world class—are easier and more accurate when measures are precisely designed and applied.

6. Test Measures Before releasing a revised list of performance measures, the PM team will consult the source of metrics (e.g., the shop floor) and test the capture of each new measure, asking:

will it really help to solve a problem)?Some measures that look useful on paper fail in

real-world testing. The PM team will either revise or eliminate these. Production employees will be great al-lies during this stage, offering insights on how to refine or capture measures that only they possess.

Some metrics offer immediate insight, but others can only be tested over time, such as dollar savings due to an improvement process or results from a training curriculum. Longer-term measures will be tracked until they can be appropriately evaluated.

7. Roll Out Measures and Regularly Review With final spreadsheet in hand, the PM team introduces the new measures (see Performance Measure Spread-sheet—Production Example on next page). Plant-wide meetings or corporate newsletters can reintroduce em-ployees to the performance-measure transition process and highlight the new set of metrics. In smaller settings, PM team members will discuss the new measures in detail with their departments or locations, coaching those responsible for capturing and using the new metrics. In situations where no performance-management system exists, the PM team will help to devise a rudimentary process (e.g., line supervisor reviews hourly operator measures, department manager reviews daily supervi-sor measures, plant manager reviews weekly department measures).

It’s crucial that the PM team monitor whether the new measures actually help the organization to solve problems—or if they merely create more work. The PM team also will monitor the use of new metrics, ensuring that performance measures are appropriately reported at all levels of the organization. When problems arise, the PM team must take immediate action. If, for instance, a measure requires too much effort in capture, hurting production flow or creating counterproductive behavior (e.g., measuring consecutive days without an OSHA in-cident may actually prevent employees from reporting incidents), the PM team should discontinue its use.

The PM team will continue to meet periodically to discuss problem measures—and its own future. The PM team will select new members to replace its founders, passing on its process and responsibility for driving powerful performance to a new generation of leaders.



new measures, and discarding old ones to help the orga-nization achieve operational excellence. The framework for the process may differ or be known by other names, but manufacturers start on the journey toward world-class status by getting measurement right.

Measure and Improve

Does every successful manufacturing company follow the process outlined here? Of course not. But every successful organization embraces the fundamental concepts within the process, regularly reviewing current measures, adding

Performance Measure Spreadsheet—Production Example

Production Frequency Source Month avg. Trend

Safety—reportable incidents Daily EHS team 2

Safety—near misses Daily EHS team 7

Perfect deliveries—no issues Weekly QE Doug 91%

Unscheduled downtime (% of schedule) Daily Mfg Bob 2%

Mean time to repair (% of schedule) Weekly Maintenance Phil 1.3%

Expediting costs (% of total shipping) Weekly Shipping Kim 11%


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Benchmarking

Benchmarking — Locating and Leveraging Best Practices

Envy may be one of the seven deadly sins, but its presence is vital when it comes to opera-tions performance. Every executive wants his or her company or plant to be at least as good

as those of his or her peers; most want them to be bet-ter or best. Unfortunately, it takes more than hope to be the best. Outperforming competitors requires an intense study of those competitors—of their financial results, of their operating metrics, of their management strategies and practices—as well as a willingness to invest time, energy, and resources into adapting the results of that study to a new operations environment.

In short, every great performance, every continu-ous-improvement project, begins with a benchmark. Manufacturing facilities that use benchmarking report that sales per employee are more than $31,000 (median) higher than plants that don’t.1 And while no two organizations benchmark in the same fashion, there are four fundamental phases that manufacturing organizations must address to get the most out of a benchmarking effort (see Manufacturing Benchmark-ing on next page).

Why Benchmark?World-class organizations believe that thousands of com-panies—good and bad—around the world offer a nearly infinite number of ideas on how to improve their own operations. And traditionally only high-performance organizations—those that need improvement the least—benchmarked, while the worst performers continued to stumble along without a clue as to how much they could

or should improve. But today 40% of U.S. manufactur-ers benchmark, and they’re reporting impressive results because of it (see Power of Benchmarking).2

1 MPI Manufacturing Study, combined U.S. data from 2006-2010 studies, The MPI Group, 2011.2 Ibid. 3 Ibid.

Power of BenchmarkingAmong U.S. manufacturing plants that benchmark, 42% report that their operations have made significant progress to or achieved world-class manufacturing status, and only 8% report that they have made no progress toward world-class status; of those plants not benchmarking, only 21% have made significant progress to or achieved world-class status, while 20% have made no progress. Performance metrics at these two groups of plants also point to correlations of benchmarking with operational improvements:

benchmarkers report $204,000 (median); nonbenchmarkers report $172,214.

benchmarkers report 9 inventory turns (median); non-benchmarkers report 6.9 inventory turns.

benchmarkers report 6% labor turnover (median); non-benchmarkers report 8% labor turnover.

Benchmarkers report 0.5% (median); nonbenchmarkers report 1%.3


Benchmarking

Getting StartedHow does a company or plant start to benchmark? It does it by assigning responsibility for monitoring fi-nancial and operational health. Depending on the size of the plant or company this assignment will vary, but it typically falls to a senior executive or continu-ous-improvement (CI) leader or team. This person or group gathers internal data and observations—even as simple “we’re losing customers” or “sales are off by 40%”—which then trigger a search for potential targets or performances against which to compare. Addition-ally, there should be no limit to the number of individu-als and departments feeding early “signals” of financial and operational health in the direction of the CI execu-tive or team. Ideally, organizations will guide their im-provement efforts with a robust strategy deployment process—a core planning method for setting strategy and cascading goals and action plans down through an organization—that will involve rigorously, continuous-ly reviewing metrics, from companywide goals down to process and line metrics, and then sharing this informa-tion widely.

This internal assessment and subsequent overview of the manufacturing landscape are crucial to bench-marking: Without comparisons culled from other manu-

facturers or companies in similar industries, executives remain unaware of how much improvement is possible and the competitive challenges they face.

These comparisons spur the executive or CI team/leader to look for specific solutions that address prob-lems. It’s important to note that a “problem” isn’t always an obviously poor metric, but can instead be any issue that blocks progress toward world-class performance or a particular issue affecting customer satisfaction—i.e., it’s all about giving customers precisely what they want and how and when they want it.

Where to Benchmark?Although many organizations focus their initial search for benchmarking ideas beyond the walls of their own plants, experienced executives and CI teams make sure to look within their own companies as well. They know that innovation and best practices are of-ten as close as the next work cell or facility—and that homegrown solutions may be easier to adopt. This is especially true for companies with extensive plant networks that stretch across the country or around the globe; indeed, for proprietary issues, this may be the only available resource.

Manufacturing Benchmarking

Internalproblems/needs

Industryinformationstimulatesawareness

Competitivechallenges

Colleges anduniversities

World-classcomparisons

Operationsmodels

Identify andorganizerequirements

Assess andprioritize

Implement

Documentfindings

Assignaccountability

Tools

Processimprovements

People andcontacts

Big ideas

Via suppliersand customers

Publicizedresults

Award winners

Others

Consultancies

Benchmarkingconsortiums

NIST MEPs

Institutions Broad Assemble team

Narrow

Internal

Companies

Why Where What How

©2011 Manufacturing Performance institute


Benchmarking

As part of its total-quality strategy, which led to a Malcolm Baldrige National Quality Award, Trident Pre-cision Manufacturing tracked operational and financial performance, and analyzed internal and external data collected from semiannual surveys of customers, suppli-ers, and employees; benchmarking studies; discussions with customers; employee forums; market reports; quar-terly quality audits; and an independent assessment of Trident’s competitive position in its industry.4

Eventually, however, every dedicated benchmark-ing effort must seek data and best practices from other organizations. First-time benchmarkers are often sur-prised at how willing other companies are to exchange ideas, especially through trade or industry associa-tions. Why are even world-class companies so willing to share? Because they realize that while it’s one thing to know a best practice, it’s quite another to execute the practice and coordinate the momentum and resources for implementation.

World-class companies also pass along tips through direct contact and observations at their gemba (the place where work happens), such as plant tours, speaking engagements, industry magazine articles, published technical papers, and other published docu-ments. Other good preliminary sources include sup-pliers and customers (who better to identify best prac-tices in a given industry?).

Smart benchmarkers make sure they also look be-yond the walls of their own industry; some of the great-est competitive leaps result from transplanting ideas from one industry into another. For example, a bever-age maker may have problems with quickly changing over equipment when processing distinct beverage fla-vors or colors. The paint process at an appliance maker may have faced the same challenge when shifting from dark pigments to light pigments. Cultural issues and best practices are even more broadly applicable; many service industries, for instance health care, have now embraced the application of lean manufacturing to business processes in general. Thanks to cross-industry benchmarking, the lean practices that began at Toyota decades ago are now helping call centers, retail stores, and banks to improve their operations as well. (See Cross-Industry Benchmarking.)

Cross-Industry BenchmarkingXerox, seeking to improve its order-fulfillment process, looked to the catalog retailer L.L. Bean and examined its practices for quickly processing customer orders and providing timely deliveries.5 Benchmarking is intended to seed new ideas, approaches, targets, and practices throughout an organization so that manufacturers can explore and test new means to improvements (some that will work, and some that won’t). Smart benchmarkers don’t restrict their search to territory they already know—they look anywhere and everywhere.

4 “Malcolm Baldrige National Quality Award 1996 Recipient: Trident Precision Manufacturing Inc.,” www.quality.nist.gov, National Institute of Standards and Technology, 2001.

5 Christine Letts, William Ryan, Allen Grossman; "Benchmarking: How Nonprofits Are Adapting a Business Planning Tool for Enhanced Performance,” The Grantsmanship Center Magazine, Winter 1999.


Benchmarking

What to Benchmark?Identifying where to look guides benchmarkers in

their search for what to benchmark, a process made more efficient by having standardized processes to capture and implement benchmarking ideas. This phase should take on both a broad perspective, coordinated at the company or plant level, as well as a series of narrower, tactical targets and improvements.

The broad approach uncovers new improvement principles and searches not for specific tools or tactics, but instead for companies and organizations with great ideas and leadership. These leading companies may be identified by awards or publications (see Benchmarking Jump Start) or by organizations that foster the exchange of best practices, such as benchmarking consortiums, NIST Manufacturing Extension Partnerships, colleges, and universities. For example, Ohio State University is home to the Center for Operational Excellence,6 a con-sortium of business leaders, educators, and researchers that share a common goal of achieving world-class op-erations excellence. Similar networks exist throughout the country.

Through the Ohio State center and like-minded orga-nizations, executives interact with world-class manufac-turers. Smart benchmarkers introduce themselves into this group, meet with members, and then:

and supervisors;

Broad PerspectiveAn overarching benchmarking approach is vital because it:

the organization relative to world-class enterprises (even if the facility is already at or near world-class standards);

of the company’s existing manufacturing strategy (although it may identify weaknesses in the manufacturing strategy);

wide changes if internal analysis and benchmark comparisons lead to evidence of systemic weaknesses (e.g., inherently flawed plant manufacturing practices, methods, or strategies); and

as strategy deployment—to uniformly upgrade all operations and plants, focus the company or plant on goals that are most important, reduce the likelihood of rogue efforts, and minimize resistance to change.

6 The Ohio State University, Fisher College of Business, Center for Operational Excellence, http://fisher.osu.edu/centers/coe.


Benchmarking

A common experience of first-time benchmarkers is that the exposure to new ideas offered by these tours and information exchanges rapidly expands their own lists of goals and targets. But benchmarkers should be careful to frame their efforts based on what’s applicable to their organizations and manufacturing strategies. Additional-ly, although improving operations to industry standards is always beneficial, too slavish an imitation of another company’s strategy (i.e., markets to pursue, products to develop) may permanently brand an organization as an industry bridesmaid. Leaders may benchmark processes and performances for how to make decisions and man-age strategy, but they must always devise their own paths to market greatness.

Tactical FocusIn conjunction with a broad and ongoing review of oper-ations and relevant practices and metrics, benchmarkers regularly prioritize a list of tactical problems and pos-sible solutions to address:

Benchmarkers will uncover myriad ways to upgrade processes, and many of these will touch various improvement methodologies. But benchmarking teams must be wary of grabbing only pieces of process improvements. No improvement methodology works as well on a piecemeal basis as it does when deployed in a complete and holistic manner. This is especially true

if benchmarking efforts aren’t centralized, and various teams are left to their own devices to find scattered solu-tions to increasingly fragmented problems.

This category includes everything from training manuals and literature to pieces of equipment or software applications that help a company function more efficiently. Smart benchmarkers cast a critical eye on recommendations in this category since they often require higher levels of investment. Tools may indeed be necessary, but due diligence and well-documented return-on-investment calculations are required for any investment. And applying new technology to a flawed process only automates mistakes.

Few (if any) organizations are blessed with all the talent needed to take on major improvements. Smart benchmarkers compile a list of skills among management and plant-floor personnel necessary to implement improvements, and then determine where gaps exist. Next, they determine whether they can train for these skills or if they need to recruit new employees. Benchmarking also can help identify where and how to find talented staff, on a temporary or full-time basis, as well as indicating an approach to developing skills within communities (e.g., apprenticeship programs with local schools and universities). Some initial improve-ment efforts require an expert (“sensei” or “black belt” or similar title) to lay a knowledge foundation.

Benchmarking Jump Start Under the guidance of the National Institute of Standards

and Technology, this U.S. award program recognizes companies that exhibit exemplary product and process quality, selecting winners from manufacturing, health care, nonprofit/government, education, and service industries. [ ]

database of manufacturing and management practices and metrics that can be analyzed by industry, value chain, and many other criteria. MPI data have recently included international plants.[ ]

Administered by Utah State University’s College of Business, this award program recognizes operational excellence. [ ]

This award program, run by magazine, annually recognizes 10 “best plants” from North America based on best practices and metrics (e.g., management, employee development, operations, safety, environmental, supply chain). [ ]


Benchmarking

All processes, tools, and talent should tightly mesh with the findings of the broad review, collectively pointing toward the operations targets the company hopes to achieve.

How to Benchmark

Once benchmarkers know what to look for and where to find it, they need to learn how to turn that groundwork into operational improvements. Many companies have invested heavily in benchmarking efforts, only to fail at adopting the best practices they’ve uncovered. Smart benchmarkers follow the steps below, with variations based on cultures and project management practices:

1. Assemble a benchmarking team: Smart bench-markers pull together a cross-functional team(s) of em-ployees assigned to categories of improvement (e.g., quality, downtime, purchasing, safety) and/or specific problem areas (e.g., maintenance, receiving dock); these teams are then charged with finding practices and met-rics that can drive improvement. A benchmarking team reports to the CI team or executive, but includes repre-sentation significantly broader than the CI team itself. Some team members will have an immediate stake in the improvement process, such as a quality supervisor or a production employee in a cell targeted for quality improvement. Other team members may have indirect influence (e.g., they work in a process that receives product from the troubled cell, or in a cell scheduled to undergo similar improvements). Many organizations will select areas of focus, team members, and roles as part of their existing continuous improvement or kaizen process, mirroring the teaming structure and processes involved with kaizen events.

2. Itemize targets and findings: Smart benchmarkers aggregate the types of benchmarking data and practices they find and then prepare a database to house the infor-mation. This database or spreadsheet can include various types of information, but at a minimum should include:

contact information;

improvement effort; and

improvement.A database of performance measures and ongoing

improvements may already exist in some format within a plant and can be augmented with the new benchmark-ing information. In addition, as systematic, plant-wide improvements are sought through a planning process, such as strategy deployment, information should be culled from planning documents that track performance targets and actions and guide tactical improvements. (Note: Many best-practice plants and companies host tours in exchange for visitors’ benchmarking informa-tion and databases, and find other unique ways to sup-plement the compilation of benchmarking data.)

3. Assign individual accountability/responsibility: Regardless of the benchmarking venue—online database searches, plant tours, attending conferences—everyone on a benchmarking team must have specific assignments. If, for example, a firm opts to send a benchmarking team to a conference, each benchmarker should focus on spe-cific information related to previously identified needs—asking questions, talking privately to speakers, reviewing event materials, and meeting with other attendees. With-out division of labor, a benchmarking team can quickly be overwhelmed by the volume of information.

Armstrong World Industries’ Building

benchmarking studies the year before winning the Malcolm Baldrige National Quality Award.7

7 “Malcolm Baldrige National Quality Award 1995 Recipient: Armstrong World Industries Building Products Operations,” www.quality.nist.gov, National Institute of Standards and Technology, 2001.


Benchmarking

ensuring that enough options have been considered and that collateral results (e.g., effects on other areas or pro-cesses) have been taken into account. Regular meetings will also help to determine whether benchmarking ef-forts have stalled (i.e., no team reports any updates). Out of these meetings will emerge specific implementation assignments, timetables, and resource allocations.

Although the benchmarking effort technically ends here, the real work is just beginning. Successful imple-mentation will mean ongoing progress toward world-class status—and toward becoming a plant or firm that competitors envy. And since competition never sits still, that means the benchmarking journey never ends.

4. Codify the findings, and update the benchmark-ing database: After external benchmarking efforts, em-ployees will need to update the database with specifics on what they’ve found, and prepare recommendations they plan to put before the CI team. Supporting analy-sis, such as estimates of return on investment, should be included. For ongoing benchmarking work, establish timeframes for updating information.

5. Assess and prioritize action steps: During regu-lar meetings between the benchmarking team(s) and CI team, participants will deliver their findings, evaluate options, and prioritize specific actions the team recom-mends. Participants must question and constructively criticize any planned action by a benchmarking team,


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Smart Capital

Smart Capital —Savvy Manufacturer’s Guide to Equipment Purchases

Industrial machines aren’t off-the-shelf commodi-ties—and their purchase can’t be based solely on price and product. Instead, smart manufacturers treat the purchase of capital equipment as a stra-

tegic investment, one that boosts performance and profit while building long-term customer value. Savvy manu-facturers use an eight-step process to make sure they se-lect the right equipment from the right vendor under the right conditions to serve their needs today and tomorrow. They:

1. Assemble a cross-functional Capital Investment Team (CIT);

2. Complete a strategic-needs review;3. Determine individual plant viability and

life expectancy;4. Perform an operations analysis;5. Assess vendors;6. Detail equipment specifications;7. Compile and evaluate price, total cost, and return

on investment; and8. Negotiate and close the purchase.

Assemble a Cross-Functional Capital Investment TeamApproximately $130 billion was spent on capital expen-ditures (new and used) by U.S. manufacturers in 2009, representing nearly $12,000 per manufacturing em-ployee.1 Yet many of those investment decisions were made by purchasing departments with insufficient input from operations executives or manufacturing engineers.

Equally disturbing is that a significant number of pur-chases came directly from the plant floor, without any real involvement of either local or corporate purchasing departments. In some ways, it’s a wonder that any plant got any equipment it actually wanted or needed.

Purchasing capital equipment without the active participation of operations personnel inevitably leads to decisions based solely on price—often with disastrous consequences. “Many purchasing agents earn bonuses based on their performance of driving down the cost of the equipment they purchase. However, these agents are never asked to pay back their bonuses when later this same equipment experiences high maintenance costs and frequent failures.”2 On the other hand, investing in capital equipment without the expertise of a corporate purchasing department often results in organization-wide inefficiencies, including overpayment, missed economies of scale, and lack of integration between fa-cilities and business units.

Savvy manufacturers avoid both these pitfalls by assembling a capital-purchase team that combines the broad skills of purchasing and manufacturing, as well as the strategic input of senior executives. Customers and suppliers should also be consulted to ensure that the new equipment will create new value both in processes and in the final product. In some cases, for example, custom-ers and suppliers may be willing to renegotiate existing contracts or even to help finance the new equipment.

1 “Annual Survey of Manufactures,” 2009 data, U.S. Census Bureau, Dec. 3, 2010.2 “Ask Your OEM to Accessorize New Equipment for Lubrication Excellence,” by Jim Finch, Machinery Lubrication, January 2003.


Smart Capital

The different members of the cross-functional capi-tal investment team (CIT) form an equipment-purchas-ing nucleus for the company and bring specific skills to the purchasing process (Figure 1).

Develop a Strategic-Needs- Review ProcessThe first job of a CIT is to develop a strategic-needs-review process that assesses capital equipment invest-ments against a background of overall corporate strategy, focusing on development of a prioritized list of capital investments. In a small company, this process may be quite simple (i.e., the CEO is the purchaser and manu-facturing leader), but in large organizations this review may involve business units from around the globe.

A key component of the strategic-needs review is understanding the compatibility of the purchase with the company’s approach or methodology for opera-tions improvement (lean manufacturing, six sigma, total quality management, etc.) and technological develop-ment. A proposed capital-equipment purchase must fit within the firm’s operations philosophy, particularly in discrete-production industries where capital-equipment options range from highly automated machinery (e.g.,

robotic paint lines) to low-cost high-touch equipment (e.g., manual-load and -unload machines) to custom-built production lines.

Lean advocates and others cite the problems en-countered when trying to incorporate “monuments”—large, inflexible pieces of equipment that must run large batches—into more streamlined production processes. A lean philosophy stresses the need for operations to grad-ually incorporate equipment selections that are flexible, portable, and capable of handling small lots. Organiza-tions focused on lean should think twice before invest-ing in highly automated, large-batch-processing equip-ment that cannot be customized. Customer requirements change constantly, and manufacturers must be able to quickly and with minimal effort adapt their machinery to accommodate changes to product specifications.

Even in capital-intensive, large-batch industries such as oil refining or steel making, a corporation’s particular approach to technological development can significant-ly influence the selection of capital equipment. Nucor Corp., for example, became one of the largest steel pro-ducers in the United States by aggressively seeking out and investing in new technologies to support its “mini-mill” strategy, allowing it to surge ahead of other steel-makers hobbled by antiquated equipment.

Figure 1. Capital Investment Team

CIT

Senior Management

OperationsProcurement


Smart Capital

Savvy manufacturers periodically review their ros-ter of plants regarding the strategic roles of each and then use this analysis to reward plants that are fulfill-ing their purpose (e.g., new capital equipment, new product introductions) or to wean plants from the cor-poration (downsizing, plant closings, outsourcing).

Yet important as this information is to capital equip-ment investments, it is often unknown to purchasing or operations personnel—making the inclusion of senior executives on the CIT vital. Companies that fail to as-sess and manage their plant roster, especially during the purchase of capital equipment, face the prospect of disastrous decisions down the road, such as sudden plant closings, consolidations, and massive equipment sell-offs.

The review process also can indicate if relocation of equipment among plants is possible. Similarly, a key consideration for the CIT at this stage is to determine if outsourcers, suppliers, or even customers can alleviate the need for a particular piece of equipment. In some instances, such as when production is on-site at the customer’s location, the equipment may be acquired by the customer and then leased back.

Other manufacturers find competitive advantage by customizing capital equipment in ways that develop proprietary processes. One U.S. high-tech manufacturer was able to double the productivity for a product line simply by customizing a single machine. This opportu-nity is highlighted by the fact that studies show manu-facturers have been increasing the amount of assembly equipment they build in-house or customize.

Determine Plant Viability and Life ExpectancyA key factor in capital-equipment investments is vi-ability and life expectancy of the plant requesting the investment. In larger firms, the roster of production fa-cilities always consists of plants with a variety of rea-sons for their existence, including:

primary product;

advancement;


Smart Capital

Assess VendorsNext, the CIT assesses potential vendors against both standard supplier criteria and requirements unique to capital equipment vendors. Standard supplier criteria include:

Criteria specific to equipment vendors will include:

in-house equipment designs with turnkey solu-tions;

options; and

Unless vendor proximity is important, national and international providers should join the poten-tial vendor list. The challenge is to create dossiers on remote firms comparable to those regarding known ven-dors. Pay particular attention to vendor viability and rep-utation when making acquisitions via an online market.

Along with comparing standard evaluation criteria, the CIT should interview potential vendors for their opinions on equipment trends, industry outlook, and the types of support and services available for equip-ment. Vendors should be willing to share as much in-formation as is available to them and their engineers; reluctance to do so warns of trouble during the post-purchase relationship.

Perform an Operations Analysis

After developing a strategic-needs-review process and an understanding of the current facility lineup, the CIT re-quests an operations analysis of each capital equipment request that provides quantitative projections on how the new equipment will affect sales, profit, productivity, quality, deliverability, manufacturing costs, etc., as well as intangible benefits such as improved working envi-ronment. This analysis should include a review of the required technical skills to install, operate, and maintain the new equipment, as well as any additional training costs. In addition, the analysis should also review how well (or poorly) a facility has leveraged past equipment purchases, especially as compared to sister plants also requesting equipment.

This analysis may also include consideration of as-set management services from the equipment vendor or a third party. In many industries, particularly heavy industrial machinery, the complexity, costs, and skills necessary to maintain equipment can be prohibitive. Many OEM equipment vendors offer maintenance and predictive planning capabilities that can guarantee ma-chine availability at cost-effective prices, serving as a

costs of these service upgrades against the potential for a costly breakdown.

One note of caution regarding operations analysis: Too often, equipment purchases are approved or reject-ed based solely on whether a company can afford the investment this year. Savvy manufacturers understand that health, safety, and regulatory concerns override all other purchase considerations; if OSHA or EPA stan-dards can only be met by acquiring equipment, the real question becomes: “Do we acquire equipment now—or do we shut down?”


Smart Capital

Detail Equipment SpecificationsThe CIT then requires a detailed report of precise equip-ment specifications. This list should be exhaustive and include all appropriate parameters, such as:

The CIT also should require a report regarding unique factors beyond specifications, such as the equipment’s ability to withstand the demands placed upon it within a particular manufacturing environ-ment (e.g., continuous operations, wet or abrasive con-

During this process, savvy manufacturers require potential vendors to offer product histories—especial-ly safety and environmental track records—and, if pos-sible, references within similar industries and under similar operating conditions. These manufacturers also ask whether the capital equipment under consid-eration is the latest model or a product that’s being phased out. Older models aren’t necessarily bad—un-less users report poor performance, safety or environ-mental records—and could provide functionality at a lower price.

Note: Most industries have trade exhibitions where equipment specific to their production environments can be seen and touched. Timing the review of equip-ment and vendors around such exhibitions can signifi-cantly speed the purchasing process.

Evaluate Price vs. Return on Investment (ROI)One of the most important roles of the CIT is to evaluate costs and benefits in an appropriate financial framework. Purchase price is merely one factor in determining the total cost of capital equipment and ultimate return on investment (ROI). Instead, savvy manufacturers use total cost of ownership (TCO) and potential ROI to evaluate the effectiveness of various capital equipment investments.

TCO can be tracked in various ways, but most methodologies aggregate direct costs, including capital investment and freight charges, as well as indirect costs, including maintenance, utilities, and operating labor for the life of the equipment. TCO then builds to an ROI pro-jection that captures potential cost savings and revenue increases through scenarios such as greater productivity, increased product volume, and new process capabilities.

Maintenance Costs and ROIROI is significantly affected by equipment maintenance costs. While a rule of thumb is that maintenance costs should not exceed 5% of an asset value, benchmark performances in the chemical industry have achieved maintenance costs of 2% or less. Even in a small company with just $1 million in asset values, that difference (2% vs. 5%) in maintenance needs can add up over 20 years to more than $2.16 million (accumulated value of 20-year maintenance opportunity cost at weighted average cost of capital).3

3 “The Cost of Maintenance Destroys Your Capital Investment Returns,” Mike Sondalini, MaintenanceResources.com.


Smart Capital

Overall equipment effectiveness (OEE)—a factor of machine availability, quality yield, and production rate—is critical when estimating ROI for new equip-ment. For example, at a firm with annual sales of $10 million and an OEE of 70%, an increase in OEE to just 73% can add as much as $430,000 annually to the bot-tom line (about $143,000 per point of OEE). One note of caution: Although individual equipment OEE should be considered, primary emphasis must be on the purchase’s effect on overall efficiency of production. “For example, OEE can appear improved by purchasing oversized equipment, providing redundant supporting systems and increasing the frequency of overhauls.”4

Be familiar, too, with overall market trends in pric-ing, which could spur or delay action. A starting point is the producer price index—a family of indexes that mea-sure change over time in the selling prices received by domestic producers of goods and services—tracked by the U.S. Bureau of Labor Statistics. For example, “ma-chinery manufacturing” experienced a 1.7% producer price index increase from Feb. 2010 to Feb. 2011.5

Asset DepreciationCritical to U.S. manufacturers in identifying a total cost of ownership in 2011 is accounting for Bonus Depreciation. Bonus Depreciation was expanded by the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, and will offer 100% depreciation on qualified assets placed in service after Sept. 8, 2010, but no later than Dec. 31, 2011, and 50% for assets placed in service from Dec. 31, 2011, to Dec. 31, 2012. The Bonus Depreciation also allows a company to take the rest of the depreciation (50%) for assets in late 2010, and allows a company to deduct a portion in the current year (e.g., 60%) followed by normal depreciation schedules over the life of the remaining investment (e.g., the remaining 40%). For many firms, this government incentive to spur investment will influence their decisions to purchase in 2011 rather than delay capital expenditures.

4 “Understanding Overall Equipment Effectiveness,” Downtime Central, Business Industrial Network, www.downtimecentral.com.5 Producer Price Index, Bureau of Labor Statistics, April 2011.


Smart Capital

CIT’s response must be: How quickly can the machinery produce to our quality yields? The last thing any com-pany can afford is to damage relationships with custom-ers by unnecessarily compromising a line’s performance during an equipment installation.

Finally, the CIT will make a consensus decision on the equipment from the pool of vendors and equipment options, and then close the purchase.

The process (see Smart Capital Process) is thor-ough—especially rigorous for a small organization fo-cused on a one-time buy—but once a CIT and its proce-dures are established, the capital equipment investment process becomes a standard procedure within an organi-zation. More importantly, the results of the CIT process will inform the next round of equipment purchases, and decisions will rarely be second-guessed as ROI—and profits—take flight.

Negotiate and Close Purchase

As the purchasing process enters the stage of solicit-ing requests for quotes, purchasing members of the CIT will coordinate negotiations with equipment vendors to develop optimum packages. In fact, a good purchas-ing staff can substantially lower the cost of capital through negotiation without jeopardizing the vendor relationship. Key factors to consider at this stage are financing, lease and rental options, along with the ramifications of each (e.g., taxes, warranties, asset management, ROI, etc.). Operations members of the CIT will continue to monitor specifications as changes in the package develop.

The CIT’s overall focus will be to emphasize TCO and ROI, which starts by ensuring the optimum window for delivery and acceptance of equipment. For example, when presented with a turnkey equipment proposal, the

Smart Capital ProcessStart

Stop Negotiateand

purchase

Identify: Identify

Ve

Ye


Machinery Manufacturer Benchmarks

Machinery Manufacturer Performance Benchmarks

Are machinery manufacturers operating at world-class levels? It’s an important ques-tion, the answer to which will determine whether customers are getting optimum

value from their current vendors. To find out, though, equipment buyers have to understand the productiv-ity and profitability of these vendors’ operations—and how well vendors’ manufacturing acumen translates into improved productivity and profitability at cus-tomer organizations.

Having the right benchmarks against which to assess machinery manufacturers is a huge step in evaluating equipment providers, and can also help with a critical second step: persuading machinery manufacturers to share metrics so that customers can gain insights into vendors’ ability to aid customers’ organizations.

This chapter explores benchmarks for all U.S. machinery manufacturers that participated in the MPI Manufacturing Study from 2006 to 2010 (see Profile of Machinery Manufacturers), and also compares the bench-marks of machinery manufacturers at or near world-class manufacturing status (plants reporting “significant progress” or having “fully achieved” world-class status) against those of machinery manufacturers furthest from world-class manufacturing status (plants reporting “no progress” or “some progress” toward world-class status). The term “world-class manufacturing” has become well known among U.S. executives, and typically implies a level of operational excellence that provides a competi-tive advantage anywhere in the world. In addition to the world-class groups, benchmarks also are sorted by parent corporation revenues.

Profile of Machinery Manufacturers

Some 337 U.S. machinery manufacturing facilities participated in the MPI Manufacturing Study, 2006– 2010, identified by the North American Industry Classification System code (333) for “machinery manufacturing.” Of this combined four-year group, 77% of these machinery manufacturers are part of a private company, and 75% have been in operation for more than 20 years. The majority (59%) describe their operations as low volume/high mix. Median plant revenue is $22 million (average $110.4 million), and the median revenue of corporate parents is $34 million (average $1.6 billion). The plants are staffed by median 100 employees (average 215).

Approximately 16% of machinery manufacturers indicate that they’ve made “no progress” toward world-class manufacturing status, and another 51% have made only some progress—the two categories furthest from world-class status and identified collectively in tables as “furthest from world class.” Only 4% of these plants have “fully achieved” world-class status, and 29% have made “significant progress” toward world-class status—the two categories at or near world-class status and collectively identified in tables as “at or near world class.” In most instances, the group at or near world-class status outperforms those plants furthest from world-class status (based on “median” or typical performances for the group).



Human ResourcesMachinery manufacturers’ employees have unique skills for designing and building products and man-aging the processes that bring those goods to market. Most machinery manufacturers recognize the impor-tance of employees to their success, but many firms hinder their ability to satisfy customers by not satisfy-ing employees.

Approximately one-quarter of machinery manufac-turing plants report annual labor turnover of 15% or higher; the median for all machinery manufacturers is 6% labor turnover. Employees leaving a company, voluntarily or involuntarily, take valuable corporate knowledge with them that must be replaced, add-ing costs eventually passed on to equipment buyers. Not surprisingly, machinery manufacturers at or near world-class status report labor turnover 3 percentage points lower than machinery manufacturers furthest from world-class status: 5% (median) vs. 8%.

It seems counterintuitive that lower labor turnover rates among machinery manufacturers at or near world-class status are achieved despite paying lower hourly wages to their production employees: $15.38 (median)

vs. $15.67 at machinery manufacturers furthest from world-class status. But machinery manufacturers at or near world-class provide their workforces far higher lev-els of training, a key benefit that can be as compelling as cash: 45% train each employee annually more than 20 hours, vs. just 28% of machinery manufacturers furthest from world-class status.

Nearly all U.S. machinery manufacturers surveyed by the MPI Manufacturing Study offered paid vacation days to their workforces, and most offered employees other traditional benefits, including medical benefits and review and raise programs. But machinery manu-facturers at or near world-class status are more likely to offer programs that affect the productivity and quality of their workforces, operations, and products, including:

machinery manufacturers furthest from world-class status),

and

HUMAN RESOURCES TABLES

Machinery manufacturers

Furthest from world class

At or near world class

Less than $50 million

$50 million or more

What is the plant’s annual labor turnover rate for the most recent year?

Median 6.0% 8.0% 5.0% 5.0% 5.0%

Average 10.7% 10.7% 10.6% 11.5% 8.1%

75th Percentile 3.0% 3.0% 2.8% 2.0% 2.0%

25th Percentile 15.0% 15.0% 12.0% 10.0% 12.8%

What percentage of plant production workers are represented by a union(s)?

0% 84.9% 84.7% 85.3% 93.1% 76.0%

1 – 25% 1.2% 0.5% 2.8% 1.2% 0.0%

26 – 50% 1.5% 2.3% 0.0% 0.0% 1.3%

51 – 75% 1.5% 0.9% 2.8% 0.0% 1.3%

76 – 99% 3.9% 3.6% 3.7% 1.2% 9.3%

100% 7.1% 8.1% 5.5% 4.6% 12.0%



HUMAN RESOURCES TABLES





$50 million or more

What percentage of production employees participate in empowered or self-directed work teams?

0% 25.0% 30.3% 15.6% 25.6% 25.7%

1 – 25% 31.3% 33.9% 25.7% 19.8% 31.1%

26 – 50% 11.5% 11.5% 10.1% 11.6% 10.8%

51 – 75% 9.9% 7.8% 14.7% 11.6% 9.5%

76 – 99% 11.1% 6.4% 20.2% 16.3% 13.5%

100% 11.1% 10.1% 13.8% 15.1% 9.5%

What are the approximate wages for production employees (hourly rate without overtime)?

Average wage

Median $15.75 $15.67 $15.38 $16.50 $16.00

Average $16.18 $16.19 $16.17 $16.35 $16.91

75th Percentile $18.00 $18.00 $18.00 $19.29 $18.30

25th Percentile $13.00 $13.00 $13.88 $13.00 $14.65

Starting wage

Median $12.00 $12.00 $12.00 $11.00 $12.00

Average $12.13 $12.24 $11.97 $11.69 $12.56

75th Percentile $14.00 $14.00 $14.00 $14.00 $14.00

25th Percentile $10.00 $10.00 $10.00 $9.00 $10.00

What are the average annual hours of formal training received by each plant employee?

Less than 8 hours 27.2% 35.3% 9.4% 28.2% 8.2%

8 – 20 hours 39.0% 36.2% 45.8% 40.0% 48.0%

21 – 40 hours 25.1% 22.9% 29.9% 23.5% 31.5%

More than 40 hours 8.8% 5.5% 15.0% 8.2% 12.3%

Which of the following human-resource practices/programs are used at this plant? (multiple responses allowed)

Paid vacation days 95.4% 95.5% 96.8% 94.1% 98.7%

Paid medical benefits 88.0% 88.2% 88.9% 87.1% 89.3%

Formal safety/health program 77.1% 71.8% 87.3% 64.7% 94.7%

Annual review and raise program 78.9% 75.5% 85.7% 77.7% 86.7%

Education reimbursements 75.4% 72.7% 81.0% 70.6% 84.0%

Paid sick and/or personal days 69.1% 70.9% 65.1% 68.2% 78.7%

Formal employee training program 61.1% 54.6% 74.6% 56.5% 66.7%

Bonus plan 60.6% 59.1% 65.1% 58.8% 62.7%

Leader/supervisor development 54.3% 45.5% 71.4% 41.2% 72.0%

Teaming/team-building practices 41.7% 30.9% 61.9% 28.2% 57.3%

Profit- or revenue-sharing plan 45.1% 44.6% 46.0% 50.6% 45.3%

Recruiting and hiring program 33.7% 29.1% 41.3% 28.2% 44.0%

Apprenticeship program 24.0% 20.0% 28.6% 18.8% 32.0%

Employee-ownership options 10.9% 11.8% 9.5% 8.2% 14.7%

None of these 0.0% 0.0% 0.0% 0.0% 0.0%



useful in understanding a machinery manufacturer’s success in satisfying customers while maintaining sta-ble business performance:

productivity),

control internal costs),

cash flow), and

available capacity).Sales per employee was $205,000 (median) at ma-

chinery manufacturers at or near world-class status vs. $169,750 at machinery manufacturers furthest from world-class status. More than one-quarter of machinery manufacturers at or near world-class status (26%) re-port that sales per employee increased by 10% or more year to year, vs. just 10% of machinery manufacturers furthest from world-class status.

While material costs vary due to economic conditions -

ing component of manufacturing costs (on a per-unit basis) is a measure that reveals a machinery manufac-turer’s ability to manage its operations. Approximately 52% of manufacturers at or near world-class status re-port that they have decreased per-unit manufacturing costs (excluding purchased materials) over a three-year period, compared to just 34% of manufacturers furthest from world-class status; 17% of machinery manufactur-ers furthest from world-class status have seen per-unit manufacturing costs increase by more than 10%.

OperationsThe core of any manufacturing operation is its ability to accurately and swiftly satisfy customer demand with high-quality products in a cost-efficient, increasingly

-ers, that combination of goals often creates competing interests as delighted customers could result in exces-sive production costs. Many machinery manufacturers successfully balance customer demand with corporate efficiency and profitability, while others have trouble hitting these goals consistently.

Modern operations require a clear path for improv--

ery manufacturers, that path has been the adoption of lean manufacturing as their improvement approach; 89% of machinery manufacturers at or near world-class status have adopted lean. But as in other indus-tries, many of the concepts and tools that support lean manufacturing principles are missing, even among so-called lean plants, including:

manufacturers report using mapping, and 44% of machinery manufacturers that use lean manu-facturing report using value-stream mapping),

1 (35% and 43%), and

Even among plants at or near world-class status, adoption rates of lean concepts are only modestly higher. So while machinery manufacturers may be on a lean journey, for many the journey has only just be-gun, and they have miles to go before customers see any impact.

1 Structured improvement activity, which typically lasts three to five days and addresses a focused problem or opportunity.



Machinery manufacturers also need to manage inventories in a lean manner: enough buffer or safety stock to guarantee customer deliveries, not bloated inventories that consume cash flow and run the risk of becoming obsolete. Machinery manufacturers at or near world-class status are more likely to report higher inventory turn rates for raw material, work-in-process,

total inventory turn rate is 8 turns at machinery manu-facturers at or near world-class status vs. 5.5 turns for those furthest from world-class status—i.e., 45% great-er inventory efficiency.

output is a clear signal that a ma-chinery manufacturer offers goods desired by custom-ers. Two-thirds of machinery manufacturers (67%) re-port that total units of production increased year to year, regardless of world-class status. Yet 21% of machinery manufacturers at or near world-class status report that output increased by more than 20% (vs. 10% of machin-ery manufacturers furthest from world-class status).

Some U.S. machinery manufacturers have solid or even high-performing operations, yet other equipment plants still struggle to achieve key metrics:

time delivery rates of 80% or worse; median of 94% on-time delivery rate for all machinery manufacturers.

product first-pass yield of 90% or worse; median of 96% finished-product first-pass yield.

rework rates (as a percentage of sales) of 4% or higher; median of 1.8% scrap and rework rate.

OPERATIONS TABLES





$50 million or more

Please indicate which of the following improvement methodologies are followed at the plant: (multiple responses allowed)

Lean manufacturing 73.0% 64.6% 88.9% 61.9% 88.0%

Total quality management 29.3% 21.8% 42.9% 26.2% 33.3%

Six sigma 33.3% 23.6% 49.2% 19.1% 50.7%

Theory of constraints 21.8% 19.1% 27.0% 20.2% 26.7%

Toyota Production System 20.7% 12.7% 34.9% 4.8% 42.7%

Agile manufacturing 9.2% 5.5% 14.3% 6.0% 12.0%

Other methodology(ies) 16.7% 20.0% 11.1% 25.0% 10.7%

No methodology 10.9% 16.4% 1.6% 13.1% 5.3%

What percentage of your workforce is fully engaged in your improvement methodology (ies)?

Median 50.0% 50.0% 68.0% 70.5% 50.0%

Average 58.4% 54.1% 66.8% 60.3% 55.8%

75th Percentile 90.0% 86.3% 98.8% 100.0% 88.8%

25th Percentile 25.0% 25.0% 41.3% 25.0% 30.0%



OPERATIONS TABLES





$50 million or more

Which of these programs and/or practices occur at this plant? (multiple responses allowed)

Continuous-improvement program 75.6% 68.4% 92.7% 76.2% 85.3%

Quality certifications (e.g., ISO) 49.7% 41.7% 66.1% 40.5% 73.3%

Benchmarking 34.9% 28.4% 48.6% 41.7% 46.7%

PDCA problem-solving 42.2% 37.3% 50.0% 33.3% 53.5%

Value-stream mapping 36.2% 33.0% 42.9% 31.0% 45.3%

Waste elimination (i.e., seven wastes) 36.8% 32.8% 43.2% 37.7% 38.6%

Kaizen events/blitzes 34.5% 28.4% 46.0% 22.6% 50.7%

Strategy/policy deployment 35.1% 28.4% 47.6% 27.4% 45.3%

Total productive maintenance 28.6% 20.6% 45.0% 23.8% 48.0%

Open-book management 21.4% 18.8% 27.5% 25.0% 20.0%

None of these 9.3% 13.3% 0.9% 3.6% 1.3%

Please estimate the following operation/production measures for your plant:

Manufacturing cycle time (start of plant production to completion of primary product)

Median 24 24 20 29 8

Average 246 240 259 338 36

75th Percentile 6 6 6 6 2

25th Percentile 120 168 100 210 40

On-time delivery rate (% of goods delivered on time)

Median 94.0% 90.0% 95.0% 95.0% 95.0%

Average 88.6% 86.5% 92.6% 88.5% 92.3%

75th Percentile 97.0% 96.0% 97.9% 98.0% 97.8%

25th Percentile 85.0% 84.0% 90.0% 90.0% 90.0%

Perfect delivery rate (% of goods on time, perfect quality, and to customer specifications)

Median 93.5% 91.5% 95.0% 92.5% 95.0%

Average 88.1% 84.8% 92.2% 88.0% 88.0%

75th Percentile 98.0% 96.0% 99.0% 96.8% 98.0%

25th Percentile 86.0% 80.0% 90.0% 85.0% 87.0%

Finished-product first-pass quality yield (% of product that passes final inspection)

Median 96.0% 96.0% 97.0% 97.0% 97.6%

Average 93.5% 93.1% 94.1% 93.7% 95.4%

75th Percentile 98.7% 98.7% 99.0% 99.0% 99.0%

25th Percentile 92.3% 90.0% 94.0% 95.0% 94.0%

Scrap and rework (as % of plant sales)

Median 1.8% 1.5% 2.0% 2.0% 1.5%

Average 4.3% 3.4% 6.0% 4.4% 3.2%

75th Percentile 1.0% 1.0% 0.9% 1.0% 0.5%

25th Percentile 3.0% 3.0% 3.8% 3.3% 2.9%

Warranty costs (as % of plant sales)

Median 1.0% 1.0% 1.0% 1.0% 1.0%

Average 1.9% 1.9% 1.8% 1.4% 1.9%

75th Percentile 0.3% 0.3% 0.3% 0.3% 0.5%

25th Percentile 2.0% 2.0% 2.1% 1.2% 2.5%



OPERATIONS TABLES





$50 million or more

How has total production output (unit volume) changed in the past 12 months?

Decreased more than 20% 9.0% 10.0% 6.4% 18.8% 13.3%

Decreased 11 – 20% 3.9% 3.6% 4.6% 9.4% 1.3%

Decreased 1 – 10% 7.2% 6.8% 8.3% 7.1% 13.3%

Stayed the same 13.2% 14.6% 11.0% 14.1% 12.0%

Increased 1 – 10% 25.8% 29.1% 17.4% 23.5% 24.0%

Increased 11 – 20% 27.5% 25.9% 31.2% 20.0% 20.0%

Increased more than 20% 13.5% 10.0% 21.1% 7.1% 16.0%

What are the plant’s costs as a percentage of costs of goods sold (COGS)?

Labor

Median 18.0% 20.0% 15.0% 20.0% 10.0%

Average 21.4% 22.8% 18.6% 24.9% 12.8%

75th Percentile 30.0% 30.0% 25.0% 38.3% 15.0%

25th Percentile 10.0% 11.0% 9.4% 11.0% 8.0%

Overhead

Median 26.3% 28.0% 25.0% 30.0% 25.0%

Average 28.5% 29.0% 27.7% 30.3% 26.7%

75th Percentile 35.5% 35.8% 35.3% 39.3% 35.0%

25th Percentile 20.0% 20.0% 15.9% 20.0% 15.0%

Materials

Median 50.0% 47.5% 55.0% 46.0% 60.0%

Average 48.8% 46.7% 52.9% 44.8% 60.5%

75th Percentile 62.0% 60.0% 67.5% 60.0% 72.3%

25th Percentile 34.0% 32.3% 40.0% 30.0% 46.0%

What is the plant’s cost of goods sold as a percentage of plant revenue? (annual COGS ÷ annual revenue)

Median 67.3% 66.5% 69.0% 68.5% 65.0%

Average 64.2% 64.0% 64.3% 65.7% 62.3%

75th Percentile 53.0% 51.0% 55.0% 50.0% 50.0%

25th Percentile 78.3% 79.3% 77.0% 80.0% 75.6%

What are the approximate sales per employee for the most recent fiscal year? (include all employees, not just direct labor)

Median $174,000 $169,750 $205,000 $158,000 $252,229

Average $226,641 $206,343 $271,108 $182,590 $317,926

75th Percentile $261,500 $244,750 $338,901 $240,000 $395,000

25th Percentile $120,000 $115,038 $127,000 $120,000 $170,000

How have sales per employee changed in the past year?


Decreased 6 – 10% 4.8% 4.4% 5.8% 3.9% 5.8%

Decreased 1 – 5% 8.4% 10.3% 4.8% 7.8% 7.3%

Stayed the same 12.2% 14.3% 8.7% 14.3% 10.1%

Increased 1–- 5% 22.5% 22.7% 22.1% 24.7% 29.0%

Increased 6 – 10% 29.3% 28.6% 30.8% 20.8% 24.6%




OPERATIONS TABLES





$50 million or more

How have per-unit manufacturing costs, excluding purchased materials, changed in the last 3 years?


Decreased 11 – 20% 11.1% 6.8% 19.2% 5.0% 15.5%

Decreased 1 – 10% 27.0% 26.6% 27.9% 27.5% 29.6%

Stayed the same 12.1% 13.0% 10.6% 20.0% 7.0%

Increased 1 – 10% 34.3% 35.8% 30.8% 27.5% 33.8%

Increased 11 – 20% 9.2% 12.6% 2.9% 7.5% 8.5%


Which of the following practices are used to manage inventory? (multiple responses allowed)Just-in-time supplier deliveries 51.5% 44.6% 64.8% 56.0% 59.7%Pull systems with kanban signals 43.2% 36.6% 57.4% 35.7% 68.1%Vendor-managed or -owned inventories 45.4% 42.7% 51.9% 36.9% 68.1%Quick equipment changeovers 31.5% 23.5% 48.2% 20.2% 43.1%One-piece flow techniques 35.2% 28.2% 50.0% 22.6% 58.3%Parts/goods supermarkets 21.3% 16.0% 32.4% 14.3% 37.5%Production leveling/heijunka 18.8% 13.6% 29.6% 9.5% 36.1%RFID and computerized inventory tracking 10.5% 7.5% 16.7% 6.0% 15.3%None of these 16.7% 22.5% 4.6% 17.9% 1.4%

What are the plant’s inventory turn rates for the following categories of material?

Raw material (turns per year) (annual COGS ÷ average value of raw material on hand)

Median 10.0 8.0 12.0 10.0 12.0Average 33.8 42.7 18.6 55.5 14.175th Percentile 17.0 16.0 17.8 26.1 15.325th Percentile 5.0 4.5 6.1 5.0 4.6Work-in-process material (turns per year) (annual COGS ÷ average value of WIP on hand)

Median 13.0 12.0 16.0 15.0 16.0Average 38.8 34.6 46.8 58.7 50.275th Percentile 30.0 28.4 41.0 49.0 40.025th Percentile 7.0 6.5 10.0 8.0 12.0Finished goods (turns per year) (annual COGS ÷ average value of finished goods on hand)

Median 11.5 10.0 13.0 19.8 9.0

Average 44.5 47.5 40.2 79.0 32.075th Percentile 25.0 25.0 30.5 54.0 22.025th Percentile 5.0 5.0 5.8 6.9 5.0Total inventory (turns per year) (annual COGS ÷ average value of total inventory on hand)

Median 6.4 5.5 8.0 6.5 8.0Average 15.5 17.1 12.8 30.1 10.675th Percentile 12.0 9.0 13.5 12.2 12.025th Percentile 4.0 3.2 4.8 3.9 3.6How has the total inventory turn rate changed in the last three years?


Decreased 11 – 20% 4.1% 4.6% 3.1% 7.6% 1.5%

Decreased 1 – 10% 11.8% 11.8% 12.2% 13.9% 10.5%Stayed the same 21.0% 24.1% 14.3% 25.3% 11.9%Increased 1 – 10% 36.2% 36.9% 34.7% 34.2% 41.8%Increased 11 – 20% 15.9% 13.3% 20.4% 10.1% 22.4%Increased more than 20% 7.8% 5.6% 12.2% 3.8% 7.5%



Not surprisingly, many U.S. machinery manufac-turers struggle to achieve even typical supply-chain performances:

machinery manufacturers, but 30% report retention rates of 90% or lower.

for all machinery manufacturers, but 23% report reject rates of 1,000 parts per million or higher.

machinery manufacturers, indicating an ability to engage with diverse markets, customer demands, and product regulations, but 19% report no over-seas sales, and probably have limited knowledge of equipment specifications emerging from other countries and regions.

Most machinery manufacturers have seen costs rise -

increased, and 9% indicate that transport costs rose by more than 10%. An inability to control costs is certain to affect product pricing. Many equipment-makers look to outsourcing as a way of managing internal costs (e.g., 77% outsource some or all of their fabrication), but the efficacy of those programs in reducing prices to custom-ers is debatable: 70% of machinery manufacturers report that the prices they charged customers had risen for the year in which they were responding, and 10% of machin-ery manufacturers had increased pricing by more than 10%. In addition, equipment buyers expect some capa-bilities, such as design, to reside in-house with machinery makers. Yet 32% of U.S. machinery manufacturers out-

Supply Chain

Even the best efforts to service customers can be waylaid by poor collaboration with supply-chain partners and customers. Yet developing close, coordinated working processes among suppliers and customers is challeng-ing, and many machinery manufacturers fail to move be-yond rudimentary transactional relationships with these key partners.

-cate they have only a “buy and sell (e.g., cost and qual-ity focus)” relationship with customers; only 19% de-scribe their relationship with customers as “partnership (e.g., sharing resources, intellectual property, and cost

focused on buy and sell (44%), with just 18% indicat-

machinery manufacturers have partnering relationships with both customers and suppliers (the groundwork for efficient supply chains); at the other end of the spectrum, 22% have only buy-and-sell relationships with both cus-tomers and suppliers.

Many of the supply-chain best practices and pro-grams necessary for deeper partnership relationships are missing at a majority of machinery manufacturers:

54% of machinery manufacturers),

45% of machinery manufacturers),

machinery manufacturers),

24% of machinery manufacturers), and

23% of machinery manufacturers).



SUPPLY-CHAIN TABLES





$50 million or more

Which of the following best describes your relationship with suppliers?

Buy and sell (e.g., cost and qualityfocus) 44.0% 50.0% 37.2% 48.0% 40.9%

Certification (e.g., broad qualifications established)

11.0% 8.9% 14.0% 8.0% 13.6%

Cooperation (e.g., sharing product ideas, best practices)

27.0% 25.0% 30.2% 32.0% 22.7%

Partnership (e.g., sharing resources, intellectual property, cost savings)

18.0% 16.1% 18.6% 12.0% 22.7%

Which of the following best describes your relationship with customers?

Buy and sell (e.g., cost and quality focus) 40.8% 47.3% 33.3% 35.3% 46.5%

Certification (e.g., broad qualifications established)

10.2% 7.3% 11.9% 7.8% 14.0%

Cooperation (e.g., sharing product ideas, best practices)

29.6% 30.9% 28.6% 37.3% 20.9%

Partnership (e.g., sharing resources, intellectual property, cost savings)

19.4% 14.6% 26.2% 19.6% 18.6%

Please estimate the following customer and supplier measures for your plant:

Customer reject rates (parts per million)

Median 120.0 100.0 200.0 25.0 500.0

Average 3,497.6 2,443.6 5,278.3 1,342.7 8,527.0

75th Percentile 5.0 2.0 10.0 1.0 11.0

25th Percentile 2,000.0 2,750.0 1,000.0 1,092.8 2,500.0

Customer retention rate (% customers retained from previous year)

Median 96.0% 95.0% 98.0% 95.0% 95.0%

Average 93.5% 92.9% 94.6% 92.0% 94.7%

75th Percentile 99.0% 99.0% 99.2% 100.0% 98.0%

25th Percentile 90.0% 90.0% 90.0% 90.0% 90.0%

Overseas sales (as % of total dollar volume)

Median 10.0% 8.0% 13.0% 6.5% 21.0%

Average 17.4% 15.5% 20.2% 14.8% 25.1%

75th Percentile 30.0% 25.0% 30.0% 20.0% 40.0%

25th Percentile 1.3% 1.0% 5.0% 0.0% 5.0%

Imported material/components (% of dollar volume purchased outside home country)

Median 10.0% 10.0% 10.0% 5.5% 23.0%

Average 15.6% 15.0% 16.4% 15.0% 25.8%

75th Percentile 25.0% 20.0% 25.0% 16.3% 35.0%

25th Percentile 2.0% 1.0% 3.0% 1.8% 10.0%

Which of the following supply-chain programs and/or practices are in place? (multiple responses allowed)

Certification of major suppliers 60.2% 55.4% 68.3% 50.0% 68.3%

Sharing forecasts with suppliers 53.1% 48.2% 61.0% 40.0% 68.3%

Collaborative design with customers 54.1% 57.1% 51.2% 60.0% 46.3%

Customer-satisfaction surveys 47.1% 36.2% 62.8% 36.5% 61.9%

Access to customer forecasts 31.6% 33.9% 29.3% 30.0% 29.3%

Collaborative design with suppliers 44.9% 39.3% 51.2% 44.0% 46.3%

Supplier-management program 22.6% 10.3% 39.5% 17.3% 28.6%

Kitting/preassembly for customers 23.5% 23.2% 24.4% 22.0% 26.8%

None of these 10.2% 10.7% 9.8% 16.0% 4.9%



SUPPLY-CHAIN TABLESMachinery

manufacturersFurthest from world class



$50 million or more

How have the following (on a per-unit basis) changed in the past 12 months?

Price for your products


Decreased 6 – 10% 3.1% 3.3% 2.9% 5.9% 1.4%

Decreased 1 – 5% 10.5% 10.3% 11.4% 15.3% 8.2%

No change 15.1% 13.1% 17.1% 20.0% 15.1%Increased 1 – 5% 42.0% 46.7% 32.4% 34.1% 42.5%Increased 6 – 10% 17.6% 16.4% 21.0% 14.1% 19.2%Increased more than 10% 10.2% 9.4% 12.4% 7.1% 11.0%Component/material cost

Decreased more than 10% 0.0% 0.0% 0.0% 0.0% 0.0%Decreased 6 – 10% 1.8% 1.9% 1.6% 1.2% 2.7%Decreased 1 – 5% 9.4% 11.2% 6.5% 9.5% 9.6%

No change 6.4% 5.6% 8.1% 8.3% 5.5%

Increased 1 – 5% 29.2% 29.0% 29.0% 32.1% 30.1%Increased 6 – 10% 29.8% 29.0% 32.3% 27.4% 30.1%Increased more than 10% 23.4% 23.4% 22.6% 21.4% 21.9%Employee wages

Decreased more than 10% 0.6% 0.0% 0.0% 0.0% 1.4%Decreased 6 – 10% 0.6% 0.9% 0.0% 1.2% 0.0%Decreased 1 – 5% 2.3% 2.8% 1.6% 4.7% 0.0%No change 22.1% 22.2% 22.6% 22.4% 21.9%Increased 1 – 5% 71.5% 71.3% 74.2% 68.2% 75.3%Increased 6 – 10% 2.9% 2.8% 1.6% 3.5% 1.4%Increased more than 10% 0.0% 0.0% 0.0% 0.0% 0.0%Employee benefits

Decreased more than 10% 0.6% 0.9% 0.0% 1.2% 0.0%Decreased 6 – 10% 0.6% 0.0% 0.0% 0.0% 1.4%Decreased 1 – 5% 6.4% 5.6% 8.1% 5.9% 8.2%No change 30.2% 27.8% 35.5% 30.6% 27.4%Increased 1 – 5% 33.1% 34.3% 32.3% 28.2% 35.6%Increased 6 – 10% 22.7% 24.1% 19.4% 23.5% 26.0%Increased more than 10% 6.4% 7.4% 4.8% 10.6% 1.4%Logistics/transport costs


Decreased 6 – 10% 1.2% 0.0% 1.6% 0.0% 2.8%Decreased 1 – 5% 6.5% 6.5% 6.6% 4.8% 9.7%No change 13.5% 15.9% 9.8% 16.7% 11.1%Increased 1 – 5% 41.8% 40.2% 45.9% 45.2% 37.5%Increased 6 – 10% 28.2% 26.2% 31.2% 26.2% 29.2%Increased more than 10% 8.8% 11.2% 4.9% 7.1% 9.7%Utilities/fuel

Decreased more than 10% 0.0% 0.0% 0.0% 0.0% 0.0%Decreased 6 – 10% 0.0% 0.0% 0.0% 0.0% 0.0%Decreased 1 – 5% 1.8% 1.9% 1.6% 2.4% 1.4%No change 14.0% 16.8% 9.7% 15.5% 12.3%Increased 1 – 5% 30.4% 28.0% 33.9% 27.4% 32.9%Increased 6 – 10% 34.5% 32.7% 38.7% 35.7% 34.3%Increased more than 10% 19.3% 20.6% 16.1% 19.1% 19.2%



SUPPLY-CHAIN TABLES





$50 million or more

To what degree are the following activities outsourced and, if outsourcing does occur, to what location?

Fabrication

All 12.4% 18.0% 4.7% 9.3% 16.3%

Some 64.8% 67.2% 60.5% 68.5% 58.1%

None 22.9% 14.8% 34.9% 22.2% 25.6%

Assembly

All 1.0% 1.7% 0.0% 0.0% 2.3%

Some 26.7% 21.7% 31.8% 18.5% 38.6%

None 72.4% 76.7% 68.2% 81.5% 59.1%

Electrical

All 6.7% 6.8% 6.8% 1.9% 13.6%

Some 43.3% 44.1% 40.9% 39.6% 47.7%

None 50.0% 49.2% 52.3% 58.5% 38.6%

Design and/or R&D

All 1.0% 1.7% 0.0% 0.0% 2.3%

Some 31.4% 31.7% 29.6% 33.3% 27.3%

None 67.6% 66.7% 70.5% 66.7% 70.5%

Maintenance

All 1.9% 3.3% 0.0% 1.9% 0.0%

Some 35.2% 41.7% 27.3% 33.3% 38.6%

None 62.9% 55.0% 72.7% 64.8% 61.4%

IT

All 3.8% 5.0% 2.3% 7.4% 0.0%

Some 42.9% 41.7% 45.5% 46.3% 40.9%

None 53.3% 53.3% 52.3% 46.3% 59.1%

Purchasing

All 0.0% 0.0% 0.0% 0.0% 0.0%

Some 8.7% 6.7% 11.6% 3.7% 14.0%

None 91.4% 93.3% 88.4% 96.3% 86.1%

Transportation

All 46.2% 46.7% 46.5% 40.7% 53.5%

Some 35.6% 36.7% 32.6% 35.2% 34.9%

None 18.3% 16.7% 20.9% 24.1% 11.6%

Customer service

All 0.0% 0.0% 0.0% 0.0% 0.0%

Some 8.7% 3.4% 15.9% 5.6% 9.3%

None 91.4% 96.6% 84.1% 94.4% 90.7%

HR management

All 1.0% 1.7% 0.0% 1.9% 0.0%

Some 13.3% 6.7% 22.7% 11.1% 15.9%

None 85.7% 91.7% 77.3% 87.0% 84.1%

Sales and marketing

All 0.0% 0.0% 0.0% 0.0% 0.0%

Some 24.8% 21.7% 27.3% 29.6% 20.5%

None 75.2% 78.3% 72.7% 70.4% 79.6%



new equipment vs. 68% of machinery manufactur-ers furthest from world-class status.

45% of machinery manufacturers at or near world-class status report that profitability increased due to new IT vs. 32% of machinery manufacturers furthest from world-class status, and

-chinery manufacturers at or near world-class status report that profitability increased due to the use of improvement methodologies vs. 72% of machinery manufacturers furthest from world-class status.

Capacity / Equipment / IT

Machinery manufacturers aren’t afraid to invest in their facilities, spending on capital equipment (median 4% of annual sales), information technology (2% of sales), and process improvements (1.5% of sales).

U.S. machinery manufacturers at or near world-class report higher levels of investment in capital equipment and process improvements, but just as importantly, they were more likely than machinery manufacturers furthest from world-class to see a return from those investments:

machinery manufacturers at or near world-class status report that profitability increased due to

CAPACITY/EQUIPMENT/IT TABLES





$50 million or more

What are the following investments/expenses as a percentage of plant sales for the current year, and how is that percentage likely to change next year?

Capital-equipment spending

Median 4.0% 4.0% 4.0% 3.5% 4.0%

Average 6.2% 6.6% 5.5% 4.5% 5.7%

75th Percentile 6.5% 6.4% 6.9% 5.0% 5.0%

25th Percentile 2.0% 2.0% 2.0% 2.0% 2.0%

Information technology spending

Median 1.5% 1.5% 1.0% 1.0% 2.0%

Average 2.5% 2.4% 2.7% 2.3% 3.5%

75th Percentile 3.0% 3.0% 3.0% 3.0% 5.0%

25th Percentile 0.9% 1.0% 0.6% 0.5% 0.5%

Process improvement initiatives

Median 2.0% 1.5% 2.0% 2.0% 2.0%

Average 3.7% 3.3% 4.2% 3.1% 3.9%

75th Percentile 3.3% 4.5% 3.5% 4.8% 3.0%

25th Percentile 1.0% 0.5% 1.0% 0.6% 1.0%

Employee costs (all wages, benefits, etc.)

Median 15.0% 17.5% 10.0% 16.0% 13.0%

Average 18.5% 22.0% 14.3% 21.4% 14.5%

75th Percentile 31.5% 35.0% 19.8% 40.0% 24.3%

25th Percentile 5.0% 5.0% 4.3% 5.0% 4.0%

Utilities/energy

Median 3.3% 4.3% 3.0% 4.0% 2.0%

Average 5.5% 6.2% 4.4% 5.7% 5.3%

75th Percentile 6.0% 10.0% 5.0% 8.0% 6.0%

25th Percentile 1.0% 1.0% 1.0% 1.5% 1.0%

Material and components

Median 36.0% 32.5% 40.0% 30.0% 40.0%

Average 35.4% 33.3% 37.1% 30.4% 41.1%

75th Percentile 52.0% 50.0% 53.0% 49.0% 57.5%

25th Percentile 15.0% 15.0% 20.0% 12.0% 26.5%








$50 million or more

How did the following affect your company’s profitability in the most recent year?

Use of improvement methodology (ies)

Major increase 11.0% 5.8% 18.6% 11.5% 11.0%

Some increase 66.9% 66.0% 69.5% 57.7% 74.0%

No change 17.2% 21.4% 10.2% 24.4% 11.0%

Some decrease 1.2% 1.0% 1.7% 2.6% 0.0%

Major decrease 1.8% 2.9% 0.0% 2.6% 1.4%

Not applicable 1.8% 2.9% 0.0% 1.3% 2.7%

Application of new capital equipment

Major increase 11.7% 8.7% 17.2% 13.6% 11.8%

Some increase 58.0% 59.2% 56.9% 46.9% 67.7%

No change 24.1% 22.3% 25.9% 28.4% 19.1%

Some decrease 2.5% 3.9% 0.0% 4.9% 0.0%

Major decrease 0.6% 1.0% 0.0% 1.2% 0.0%

Not applicable 3.1% 4.9% 0.0% 4.9% 1.5%

Implementation of new IT

Major increase 3.9% 3.0% 5.5% 1.3% 4.6%

Some increase 33.3% 29.3% 40.0% 27.5% 40.0%

No change 48.1% 52.5% 40.0% 58.8% 35.4%

Some decrease 6.4% 5.1% 9.1% 5.0% 9.2%

Major decrease 0.6% 1.0% 0.0% 1.3% 0.0%

Not applicable 7.7% 9.1% 5.5% 6.3% 10.8%

Development of new products/services

Major increase 11.5% 7.0% 15.8% 14.0% 10.0%

Some increase 52.1% 52.6% 52.6% 44.0% 62.5%

No change 34.4% 36.8% 31.6% 38.0% 27.5%

Some decrease 1.0% 1.8% 0.0% 2.0% 0.0%

Major decrease 0.0% 0.0% 0.0% 0.0% 0.0%

Not applicable 1.0% 1.8% 0.0% 2.0% 0.0%

Investments in the workforce

Major increase 3.1% 1.7% 2.6% 2.0% 4.9%

Some increase 56.1% 46.6% 71.8% 52.0% 63.4%

No change 36.7% 44.8% 25.6% 40.0% 29.3%

Some decrease 0.0% 0.0% 0.0% 0.0% 0.0%

Major decrease 2.0% 3.5% 0.0% 4.0% 0.0%

Not applicable 2.0% 3.5% 0.0% 2.0% 2.4%








$50 million or more

Please estimate the following capacity/equipment measures for your plant:

Production volume (as % of designed plant capacity)

Median 75.0% 75.0% 80.0% 60.0% 72.5%

Average 70.9% 69.5% 73.3% 61.4% 71.3%

75th Percentile 85.0% 85.0% 86.0% 80.0% 85.0%

25th Percentile 58.0% 50.0% 60.0% 44.0% 50.5%

Machine availability (as % of scheduled uptime)

Median 90.0% 85.5% 90.0% 85.0% 90.0%

Average 80.8% 80.4% 81.4% 80.2% 84.9%

75th Percentile 95.0% 95.0% 95.0% 95.0% 95.0%

25th Percentile 80.0% 80.0% 80.0% 70.0% 80.0%

Operating equipment efficiency (% machine availability X % quality yield X % of optimal rate that equipment operates)

Median 80.0% 80.0% 82.0% 77.5% 80.0%

Average 77.4% 75.0% 81.5% 74.8% 77.0%

75th Percentile 90.0% 90.0% 90.0% 90.0% 85.0%

25th Percentile 72.8% 70.0% 75.0% 67.3% 70.0%

Return on invested capital (net operating profit after taxes ÷ by capital invested)

Median 18.0% 16.5% 20.0% 14.0% 20.0%

Average 26.5% 25.8% 27.9% 21.3% 31.9%

75th Percentile 33.0% 30.8% 40.0% 30.0% 55.0%

25th Percentile 7.3% 5.0% 10.5% 3.0% 11.9%


Equipment buyers should make sure that their providers are operationally superior and on their way to world-class status. Trends in Manufacturing identifies numerous best practices that can help equipment buyers make informed decisions about assessing, buying, implementing, maintaining, and leveraging equipment—and many of these decisions require close cooperation with machinery manufacturers.

are? Are they leveraging their successes for your company?

The investments and improvement activities identified in the previous chapter help ma-chinery manufacturers leverage their facili-ties for their profitability. This is especially

true of superior firms, those that have made the most

-ery manufacturers was 18% (median), but machinery

20% vs. 16.5% at machinery manufacturers furthest from world-class status.

Conclusion

Conclusion

Associations

Innovation at Work inGlobal Markets

AGRICULTURE/FARM MACHINERYUNACOMA represents Italian manufacturers of tractors, agricultural machinery and gardening machinery. These Italian manufacturers produce everything from power mowers for the homeowner to tractors and harvesters used by the world’s leading agribusiness enterprises. UNACOMA members account for 90% of Italian farm machinery production. Italian farm equipment manufacturers rank first in the world in terms of the range of machines produced. www.unacoma.com

CERAMICSItalian manufacturers of machinery and equipment for ceramics have earned a world-class reputation for providing solutions that meet a vast range of customer needs—from traditional ceramics to the latest design trends. Customers around the globe choose machinery produced by members of ACIMAC, the Association of Italian Manufacturers of Machinery and Equipment for the Ceramic Industry, because it is easy to program and simple to maintain; this machinery is also known for its ability to increase productivity and for its design flexibility. www.acimac.it

EARTHMOVING MACHINERYCOMAMOTER is the group of UNACOMA representing the Italian manufacturers of earthmovingmachinery, attachments and components. COMAMOTER has approximately 40 members (manufacturingover 80% of the total output) who build high-quality, reliable, heavy, medium and light equipmentfor worldwide use, valued at over $3 billion a year. Italy exports more than $1 billion of earthmovingmachinery, equipment and parts annually to more than 140 countries worldwide. www.comamoter.com

FOOD TECHNOLOGYASSOFOODTEC—the Italian Association of Machinery and Plant Manufacturers for Food Production, Processing, Preservation—representing, in a global leadership position, the most important reference of the Italian associations in technologies field for food industry. Prestigious and qualified companies, a great wealth of experience and reliability, an increasing technical development of products…this is what ASSOFOODTEC can offer. ASSOFOODTEC moreover operates within the Federation of Italian Mechani-cal and Engineering Association (ANIMA). www.assofoodtec.it

FOOTWEAR, LEATHERGOODS AND TANNINGASSOMAC is the association representing the Italian manufacturers of footwear, leathergoods and tan-ning machinery. The 180 member manufacturers are world leaders in this sector supplying the most advanced footwear, leathergoods and tanning technologies all over the world. The industrial sectors represented by ASSOMAC export almost 70% of their production. www.assomac.it

FOUNDRY AND METALLURGICAL MACHINERYAMAFOND is the Italian association of companies producing machinery, plants, furnaces and products for the foundry industry. Its 80 member companies provide machinery used in the manufacturing of everything from automobile engines and components to domestic appliances. AMAFOND credits the “Italian approach” to business—characterized by extra customer care and stronger personal relation-ships—as one of the reasons its member companies attract worldwide customers. www.amafond.com

GLASSAs an evolution of the Italian glass-making tradition, GIMAV—the Italian Association of Glass-Process-ing Machinery and Accessory Suppliers—represents Italian excellence in glass-making machinery to-day. This industry sector has expanded internationally by employing innovative technology that meets today’s marketplace needs. GIMAV’s 80 member companies are known for customizing machines to meet exacting end-user specifications—from high-rise building construction to fine arts applications. www.gimav.it

Associations

MARBLE AND STONEThree hundred and twenty-five companies form the foundation of Associazione Italiana MARMO-MACCHINE (CONFINDUSTRIA MARMOMACCHINE), the association representing the Italianmarble and stone machinery industries. These companies supply the advanced technology that makesItaly a global leader in the stone and manufactured stone industries. Italian machinery is engineered to be versatile and provide customers with unique solutions to process marble and stone at competitive prices. www.assomarmomacchine.com

METALWORKINGUCIMU-SISTEMI PER PRODURRE is the Italian Machine Tools, Robots and Automation Manufactur-ers’ Association. As an official representative of the industry, UCIMU-SISTEMI PER PRODURRE acts as a worldwide ambassador for some of the latest technology developed in Italy. More than 200 member companies, who produce around 70% of the output for the sector, have won universal recognition for their quality, flexibility, reliability and customization. www.ucimu.it

PACKAGINGUCIMA groups represent the Italian Manufacturers of Automatic Packing and Packaging Machinery. Its members represent 70% of the total Italian production and, on average, 80% of Italian exports. One packaging machine out of every four in the world bears the wording “Made in Italy.” And the United States is the industry’s main outlet market for the sector. The worldwide success of the Italian packing and packaging industry is firmly rooted in a consolidated technological tradition and in the ability to find customized packing solutions. www.ucima.it

PLASTICS AND RUBBERThe companies of ASSOCOMAPLAST, the Italian Plastics and Rubber Processing Machinery and MoldsManufacturers Association, are globally renowned for their “turnkey solutions”—addressing customerneeds through sophisticated machines and engineering. As a result, the Italian plastics and rubber process-ing machinery industry has seen steady growth since its inception in 1960. Italian machines are highly prized by the world’s most industrialized and economically advanced countries. www.assocomaplast.org

PRINTING, GRAPHIC AND CONVERTINGACIMGA represents the Italian manufacturers of machinery for the graphic, converting and paper industry. Members of this association are world leaders in making machinery for rotogravure and flexographic printing, paper and cardboard processing, and converting. Most of what is produced is absorbed by the packaging market with 60% of the industry's turnover, followed by the graphic arts industry with about 35%, and the rest is employed in various sectors. www.acimga.it

TEXTILE MACHINERYACIMIT is the Association of Italian Textile Machinery Manufacturers, representing 80% of the entireItalian textile machinery production. Each member takes pride in helping their manufacturing custom-ers spin “cloth into gold.” Italian textile machinery manufacturers meet the full spectrum of industry needs (spinning, weaving, knitting and finishing machines), and leading American textile and clothing manufacturers rely on the quality of Italian high-tech machinery. www.acimit.it

WOODIn every segment of woodworking, from sawmills to the industrial processing of solid wood and panel to finishing, the Italian industry is present with technological solutions capable of responding effectively to a multitude of user requirements. ACIMALL, the Italian Woodworking Machinery and Tools Manufacturers’ Association, with over 220 of the most qualified companies in their field, represents 90% of the whole industry, both in terms of employees and in turnover. www.acimall.com

ChicagoC/o Italian Trade Commission401 N. Michigan Avenue, Suite 3030Chicago, Illinois 60611Toll free: 888-ITALTRADE (482-5872)Tel: 312.670.4360Fax: 312.264.6209E-mail: [email protected]

Mexico CityC/o INSTITUTO Italiano ParaEl Comercio ExteriorEdificio Omega – Campos Eliseos N. 345Colonia Polanco – 11560 Mexico D.F.Toll Free: (in Mexico City) 5281 50 10 or(outside Mexico City) 1.800.696.6032Tel: (+52 555) 28084252813950 – 2813957Fax: (+52 555) 2802324E-mail: [email protected]

TorontoC/o Italian Trade Commission180 Dundas Street West, Suite 2002Toronto, Ontario, Canada M5G 1Z8Toll free: 888-ITALTRADE (482-5872) Tel: 416.598.1566Fax: 416.598.1610E-mail: [email protected]

The Italian Trade Commission is headquartered in Rome, Italy

Published on behalf of the Office of the Italian Trade Commission in Chicago, USA

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