A ROADMAP FOR DISCRETE MANUFACTURING
I recommend capex changes that will improve creditworthiness and retained earnings. I also propose an overarching framework that will give you a competitive advantage and have a lasting impact on the balance sheet.
With capex expenditure across all workstations:
This is illustrative of a real live project. In doing so I refer to the article by The International Society of Automation (Alford, 2010) on reducing process variability.
This is what I do
Mathematical modelling:
1. Decomposition of the production system into workstation level micro-systems
2. Deploy Little’s Law
3. Solve systems of linear equations
4. Analytical approximations for a general server queuing system for work-in-progress (WIP) computations
This abstract modelling framework has been developed at the Texas A&M University, USA. Approximation based queueing theory has been applied to manufacturing from back in the 1980s and it began with Whitt’s (1983) work on a queueing network analyzer. Curry and Feldman’s (2008) development of analytical approximation models at Texas A&M can be used in evaluating factory performance.
I use a non-proprietary strategy model developed by Bruce Henderson at BCG. After capex investments that result in a reduction in standard deviation of workstation processing time which result in a falling WIP, I propose increasing factory throughput. This also gets us firm-wide economies of scale that moves the needle on the balance sheet.
The beauty of such an exercise lies in the fact that we are able to get a freeze on the contour of our expansion plan for the factory. At 5% of throughput increase we max out. The utilization rates for the workstations remain at less than 100% leading to steady state flow conditions.
These computations are at the product level.
Impact on the balance sheet
1.Creditworthiness: By reducing WIP the percentage of current assets as WIP goes down. This improves your creditworthiness evaluation by financial institutions.
2.Higher retained earnings: Reducing WIP increases your retained earnings.
3.Increase Throughput: Avoid stock-outs, improve customer service levels, unit cost goes down. Throughput this way is really multipronged and gives you the right set of tools to gain a strong competitive advantage.
a. Return on assets improves
b. You can quickly expand by negotiating cheaper Capex financing solutions
c. A model made popular by BCG
Competitive advantage:
1. With better creditworthiness arising out of a reduction in WIP we dominate our competitors who are at our increased throughput levels
2. With improved customer service because of increased throughput levels we blank out and eat into our competitors’ (the ones who are at our current throughput levels) market share
Note: Calculations provided on request.
References
Curry, G. L., Feldman, R.M. (2011). Manufacturing Systems Modeling and Analysis. Springer.
Whitt, W. (1983). Queueing Network Analyzer. The Bell System technical journal 62(9): 2779–2815
