Paul Hardiman, TPM consultant manager at Industry Forum explores how organisations can control their losses and even turn them into profits by learning how to use value analysis/value engineering (VA/VE) and industrial symbiosis.

Whether an organisation uses lean principles or other tools like Total Productive Maintenance (TPM) to drive improvement, it is important for an organisation to fully understand all losses and their associated costs to enable focused improvement activities. Costdown pressures will only intensify as global competition progresses and emerging economies continue to improve.

For TPM, the Japan Institute of Plant Maintenance (JIPM) encourage organisations to group losses into three main categories comprising of 16 losses.

 

The first task for an organisation is to ask whether they have a true picture of all losses. Many organisations think they do, but a more detailed analysis often identifies many gaps.

Next is to look at the way the losses are accounted for. Many are reported as measures such as overall equipment effectiveness (OEE), parts per million defect (PPM) or percent scrap or rework. But what are these losses really costing?

Finance will often make assumptions based on the data, which often are not visualised or understood throughout the organisation.

“The first task for an organisation is to ask the question whether they have a true picture of all losses”

A tool extensively used in TPM is a loss cost matrix. The following guidelines can be used to assist in drawing up your own loss/cost matrix and in calculating the cost of the losses. You will need at least one person in the team with detailed financial knowledge. They will need to know how the costing system works in your own organisation.

To create the matrix list the 16 losses down the left hand side of a grid. You may need to split some of the losses into more than one line e.g., rework and scrap, as they have slightly different cost components.

Along the top of the grid create columns for the total manufacturing costs, split into categories that reflect typical line items in the Profit and Loss account.

The matrix is then populated to show which losses inflate which costs. The solid and outlined circles show the direct and indirect impact, respectively, of the losses on the various costs.

“Finance will often make assumptions based on the data, but often these results are not visualised or understood throughout the organisation” 

Again detailed knowledge of how costs are made up in your organisation will help in populating the matrix.

Now calculate the cost of the losses in the right hand column. The following formulae are guidelines as to how some of these may be done. The finance team will need to provide a lot of the information to make the conversion.

 

 

In this matrix we are showing the costs for the whole organisation and so the losses at level 4 of the loss tree will have to be totalled across the whole tree.

Now think about other costs that can be included in the loss totals. Some examples are shown below:

• Penalties for missed or late deliveries. Premium freight costs.
• Costs associated with outsourcing manufacture to catch back on lost production.
• Any significant supplier rebate costs – i.e. paying a higher price per unit for supplied items as the predicted volume (which would have been supplied at a cheaper unit price) was not bought in.
• Impact from cash flow disruption; not being paid in the expected time slot as delivery late, so needing to borrow money. This will incur the costs associated with borrowing.
• Scrapping material as a result of a breakdown e.g., if other earlier parts of the process can’t be shutdown.
• Costs of catalyst loss. If a catalyst is used in the process and it has a known shelf-life then loss can be incurred  when it is not used to process materials during extended breakdowns.
• The cost of utilities e.g. heat/light/ water/waste costs can’t be recovered at any point.

It is very important to capture how you calculate each of the loss costs so it can be repeated later. You should write down the sources of information used, the conversion factors (correct at that date), any assumptions made and the actual formulae used in your organisation.

Once the matrix is created this can now be used by the improvement teams to attack and reduce the biggest losses. It is easy at the end of the improvement activity to see the true financial benefit to the organisation.

This matrix exercise may well identify an area which requires sustained attention. A proven and effective method for progressing such areas is value analysis/ value engineering (VA/VE) which was developed in the United States during World War II. It spread to Europe and the UK during the 60s and 70s but in recent decades has become unjustly neglected.

A VA/VE project should be carried out by a cross- functional team and needs effective leadership. It is easy to find how to guides for VA/ VE on the net and it is worth using one which goes into some detail and following each step through.

“The key idea in industrial symbiosis is process waste only exists in relation to a specific process. The process waste from a given firm is just stuff the firm doesn’t know how to transform into something customers want”

One of the powerful aspects of VA/VE is the effort that goes into identifying, analysing and refining the problem. A common feature of failed costdown projects is they assumed too rapidly the real cause of the problem had been identified and ended up only tackling symptoms rather than the real issues.

VA/VE also goes through a well-structured method of brainstorming solutions and then carefully selecting and refining possible solutions. Often three options are taken forward some way and the final option is only selected on a careful cost-benefit analysis.

A good VA/VE project guide will also include suggestions on how to play the inevitable organisational politics that surface in a project of this kind. For example, it is important at an early stage to identify the main stakeholders involved in the solutions that are being investigated and to keep them informed of how the project is developing. A sudden surprise at senior level when the project is well developed can easily provoke hostility, resistance or even rejection. A senior project sponsor is also an invaluable asset. This method of developing innovation is currently emerging globally in the public sector under the new name of i-team.

It is important to recognise that this disciplined approach to sustaining or enhancing product performance, while making major reductions in cost, has been used by Chinese manufacturers to progress from significant regional players to dominant global firms in specific markets. This development has been analysed in the book The Dragon at Your Door: How Chinese Cost Innovation is Disrupting Global Competition by Ming Zeng and Peter J Williamson. The project leader for VA/VE exercise can make good use of the examples in this book, to help persuade doubters of the importance of boosting value while reducing cost.

“VA/VE is becoming a must- have capability for manufacturers in advanced countries. In particular, where a firm detects that its market is under threat from Asian companies using a cost innovation approach, the determined use of VA/VE is a good way to kickstart a response”

It is true that currently the low cost competitive platform of Chinese manufacturing is facing various challenges which are beyond their control. This means they will almost certainly develop the strategies which they can control like
cost innovation. Effectively this means that VA/VE is becoming a must-have capability for manufacturers in advanced countries.
In particular, where a firm detects that its market is under threat from Asian companies using a cost innovation approach, the determined use of VA/VE is a good way to kickstart a response.

Many experienced observers of the global manufacturing scene think the strongest cards advanced country manufacturers possess lie in the power and potentiality of the networks they can develop and leverage. An important example of this approach goes under the name industrial symbiosis (IS).

IS started as an academic idea but it was first shown to be practically effective in the West Midlands. The key idea in IS is that process waste only exists in relation to a specific process. The process waste from a given firm is just stuff the firm doesn’t know how to transform into something customers want. Whether the waste is in fact useful to someone else is unknown until a deliberate search is made.

IS uses the power of networks to find customers for the material that other network members can’t use. It is important to recognise the immense power of this approach. The firm generating the waste finds that something that it had to pay someone to dispose of becomes a revenue item – cost has literally been changed into value. Similarly the firm that takes the waste as input finds it benefits from a costdown on its purchasing bill.

This approach relies on the network being large and varied so there is a good chance a reasonable proportion of the identified wastes can find new users. It is also helped by a well-designed matching system.

IS now has an important profile in Europe. In its 2020 flagship initiative, Roadmap to a Resource Efficient Europe the European Commission highlighted the role industrial symbiosis schemes can play. The European Resource Efficiency Platform (EREP) has acknowledged the role of “facilitated industrial symbiosis” schemes in “diverting waste from landfill, contributing to the preservation of resources and moving waste up the value chain”. It has called
for the wide-scale implementation of IS networks across Europe. It also credited industrial symbiosis projects for accelerating innovation and creating green jobs. There is now an important desire to implement a Pan-European network of industrial symbiosis programmes.

Europe’s leading experts in the implementation and development of facilitated industrial symbiosis projects and networks have joined forces to create the European Industrial Symbiosis Association (EUR-ISA). EUR-ISA initially brings together the organisations responsible for up to 10 established industrial symbiosis programmes (collectively engaged with more than 20,000 companies across Europe) and provides the European Commission with a focal point to accelerate industrial symbiosis in Europe in order to generate substantial economic, environmental and social benefits.

This article was first published in The Lean Management Journal, September 2014 Edition

www.leanmj.com

 

 

 

Innovation has been climbing corporate agendas for some while. Bigger firms are these days being warned that they face the threat of a smaller firm coming up with a disruptive innovation that may well weaken their competitive position and may even result in their demise. This kind of disruptive innovation will be equally serious for smaller firms in the supply chain.

Everyone knows that innovation is a risky process and this means it is bound to feature when risk management becomes a key feature in the forthcoming revision of ISO 9001, the global quality management standard. More and more organisations will be under pressure to review and improve their innovation risk management approach.

Innovation can cover either product or process development. Within product development the set of ideas that Eric Ries developed under the heading ‘lean startup’ has become very popular particularly in the thriving startup communities in London and other major cities in the UK. Lean startup is a way of managing one of the major risks in new product development – the risk that the product developed doesn’t meet a definite and identifiable customer need. It is a very clever extension of the one of the key ideas in classic lean – that value exists in the eyes of customers.

Lean startup often involves the rapid prototyping (RP) methodology. In modern RP the goal is to develop, test and modify prototypes as fast as possible – maybe moving through two or three prototypes in a single day. This is simply the application of the lean idea of the PDCA Deming Loop to the product development process. It’s the practical consequence of the idea that value exists in the mind of the customer. The more you explore the customer’s reaction with prototypes the more likely you are to end up with a product that is seen as valuable. By proceeding in this way the risk of customer rejection is reduced. This remains the single biggest cause of the failure of new products.

RP originally was linked to the emerging method of additive manufacturing/3D printing and this growing market is still partly driven by growth in prototyping needs. Modern RP methods use a variety of prototyping methods not just 3D printing, sometimes with very simple models which can be quickly created from standard physical modelling resources – literally the sort of resources used by kids on Blue Peter projects.

Another major risk in new product development is the inverse of the first challenge a new product must surmount. Products often fail because they match the market needs more successfully than anticipated and a rapid ramp up in production is needed. Clearly the more effective that RP is in getting value into the product, the more likely it is that it will appeal to the market in a big way and demand will take-off.

Failing to expand production into the market revealed by your new product hits another area of risk – the risk that a competitor will be second to market and be more successful. A large firm may well have the capability to take your product, reverse engineer it, make some modifications and market their derivative product more successfully. This scenario means the value created in the product development phase is taken over by a competitor.

Start-ups often manage this risk by using contract manufacture selecting a contractor who has the ability to expand production if necessary. These contractors are often elsewhere in Europe in the lower cost countries in Southern Europe or Asia. However this approach isn’t risk free. The risks associated with partner choice are best managed by a formal structured approach where proper evidence is gathered in and an objective comparison is made between several potential partners.

But even if the selected partner is effective in being able to scale up production, there are additional risk factors in working in virtual teams where say the designers and marketers are in one location and the production team are in an overseas location. The issues raised by this approach are usefully explored by Deborah Duarte and Nancy Snyder in their book, Mastering Virtual Teams. One of the several critical success factors that Duarte and Snyder identify is the need for standard organisational and team processes.

They suggest that common standard technical processes are useful in:

• Definitions of requirements
• Estimates of Costs
• Procurement
• Team Charters
• Project Planning
• Documentation and document sharing
• Reporting
• Controlling

The virtual scenario means that ideally each of these is supported by software which is proven and well understood by all the team members. In addition there needs to be accepted team processes in soft areas like conflict resolution procedures and communication protocols.

Duarte and Snyder point out that the leadership challenges are substantial with virtual teams and they recommend that the leader should be competent in:

• Coaching and managing performance without traditional forms of feedback
• Selecting and using communications software
• Leading in a cross cultural environment
• Networking and building and maintaining trust
• Developing and adapting organisational processes suitable to the task at hand

Much of this will also be needed if the new product team are all in the same locality in the same organisation. But the problems of getting a successful new product team working when there are distances in time, space and culture plus organisational interfaces are obvious and clearly several orders of magnitude greater.

An excellent foundation for assessing and overcoming these challenges are Industry Forum’s New Product Introduction (NPI) services. These can assess your existing NPI processes and help design a process which really meets your needs and is underpinned by an effective approach to project management. Risk management is an important theme in the IF package which also encompasses programme management and feasibility analysis.

The automotive industry has in depth experience of NPI and the UK industry has a good reputation in this regard. Tools which have been developed and perfected in this sector such as Advanced Product Quality Planning (APQP) and Production Part Approval Process (PPAP) will be introduced both inside the customer organisation and across the supply chain. The automotive industry also has in depth knowledge and experience of what is involved in fast ramp-up of production levels so that break-even is achieved on schedule or even ahead of it.

We can be sure that innovation is a business theme that is here to stay. Getting a sound NPI process designed and in place has to be a major strategic priority for most businesses who want to meet today’s global business challenges. Industry Forum is an ideal partner in this kind of work.

Further information:

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When companies begin to implement Total Productive Maintenance (TPM) they often start by piloting Autonomous Maintenance (AM).  This is understandable as AM is one of the key distinguishing features of TPM and also one of the most important activities when understood correctly.  To understand AM correctly it needs to be seen as an improvement activity within TPM, rather than production teams taking on maintenance activities.

In the evolution of TPM in Japan, AM grew out of the 5S activities of production teams, as they found that in order to deal with barriers to Quality, Delivery and particularly Cost performance they needed to improve equipment conditions, initially by applying the principles of 5S and QC circles.  AM was not the result of a desire to reduce maintenance costs or maintenance departments wishing to hand tasks over to production, rather it was the result of production teams wishing to control and improve their equipment.

Equipment performance is measured using OEE (Overall Equipment Effectiveness), which has become an industry standard, based on the Availability, Performance and Output Quality of the equipment.  These three factors are then broken down into Losses – Breakdowns, Changeovers, Minor Stoppages and Speed Loss usually being the largest contributors.  Of these TPM identifies the major cause of Breakdowns, Minor Stoppages and Speed Losses as the accelerated deterioration of the equipment – as much as 70% (95% in one French survey!) of equipment losses are due to preventable deterioration of equipment, and this is where Autonomous Maintenance comes in.

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Autonomous Maintenance put simply is the restoration and prevention of accelerated deterioration and has a major positive effect on OEE.  It is a step by step improvement process, rather than production teams taking on maintenance tasks.  While visitors to TPM Prize Winning plants may be impressed by the operator maintenance standards displayed in the workplace, and the condition of the equipment and OEE performance, these are all the effects or endpoints of AM, and to reach these endpoints companies must follow the step by step process defined by the Japan Institute of Plant Maintenance (JIPM).

The seven steps of Autonomous Maintenance follow three phases.  At Industry Forum, an associate agency of JIPM, we also identify a Step 0 – understanding the equipment functions and safety risks.  The first phase then follows the first three steps of Initial Cleaning, Elimination of Sources of Contamination and Inaccessible Areas, and Provisional Cleaning and Inspection Standards.

To conduct Step 1, Initial Cleaning, teams of production, maintenance and engineering staff shut down and lock off the equipment and then perform an in depth cleaning and inspection, looking for any signs of deterioration. Management are also often involved in these pilot exercises – one plant manager told me that he only really understood AM by taking part in an AM workshop.  ‘The devil is in the detail’ – only by identifying and restoring all signs of deterioration can we ensure equipment performance is fully restored.

This raises another important point – AM requires some resources, and a rule of thumb is that issues raised during this initial exercise should be addressed within eight weeks, so the advice is always to look at one machine in depth, rather than trying to implement AM comprehensively.  The advantage of this is that it enables a plant to rapidly discover the extent of equipment deterioration and the resource required to eliminate it.

Step 2 is to Eliminate Sources of Contamination and Inaccessible Areas – once equipment has been restored we need to ensure it does not deteriorate again by controlling all the contamination which leads to deterioration and by improving accessibility for cleaning and maintenance.  This is where we challenge teams to think creatively and look for the root causes of contamination, controlling them at source.  Step 2 is important because if we do not control contamination we can become locked in an endless cycle of cleaning and restoration.

This then leads into Step 3, Establish Provisional Cleaning, Inspection and Lubrication Standards.  Apart from the condition of the equipment, these standards are the most visible evidence of Autonomous Maintenance.  Starting from current documentation, the AM team follow the lubrication and inspection schedule, noting any problems with accessibility, lubrication flow etc and develop their own standard indicating items to be cleaned, checked or lubricated, the methods to be used and frequency and responsibilities.  Some technical checks may still be the responsibility of maintenance rather than production and this is noted in the documentation.

This step also involves the visual management of the equipment and inspection process – marking gauges and sight glasses and even visually numbering the inspection route to prevent checks being missed.  The final outcome of steps 1-3 should be a restored and improved piece of equipment with a visually managed standard for cleaning, inspection and lubrication.  This is what we see in the TPM prize winning factories, but it does not happen without significant effort and attention to detail.

The second and third phases, steps 4-7, consolidate the first three steps by improving production skills and knowledge and developing team autonomy, so that the production team develop ownership of their equipment, learn to set their own goals in line with company policy and manage their own improvement activities.  This illustrates the dual aspect of AM, restoring equipment but also developing people and small group activities.

This can present a challenge in process industries where we have a large equipment base and a small number of people on rotating shifts and 24/7 working.  Focusing the AM activity is even more important here and equipment ranking is often used to identify priority equipment for AM.  Again the recommended approach is to pilot AM activities and learn from the pilot before attempting to roll out AM plant-wide.

The most common mistakes companies make in implementing Autonomous Maintenance are to start at the end point – the provisional standard – without going through the step by step process of restoration and improvement and also to start with too large an implementation before learning about equipment condition and resource requirements through pilot activities.  While the JIPM step by step process may seem overly prescriptive to some, it is a tried and tested methodology which is the surest way of delivering the required result – with AM there are no shortcuts!

If you would like to know more about how Industry Forum can help your business successfully implement the various elements Total Productive Maintenance please contact us using the details below. 

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• Implementation of AM (1 day open course / in house)

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We are used to the idea that the UK economy has exhibited a ‘productivity puzzle’ since the crisis of 2008 – with employment remaining strong while output has been weak.

The trend in business investment which has failed to recover from the 2008 crash has helped reinforce the ‘productivity puzzle’ image. ONS have just published some new business investment figures for the economy as a whole.

UK Business Investment

£m
2003	2004	2005	2006	2007	2008	2009	2010	2011	2012	2013
122003	121444	139487	119380	135765	141255	119774	121853	120263	124910	123637

(these are chained volume figures with a reference year of 2010)

We can see that for about a decade UK business investment has bounced around in the region – £119bn  to £124bn.  The exceptions were 2005, 2007 and 2008 when investment was over £135bn. Since 2008 there has been little to suggest that the economy is about to return to those peak years.

So the picture that emerges is that the UK economy is maintaining employment and investment at constant levels – and productivity isn’t improving. There is a certain consistency about this.

However is now possible to further examine the ‘puzzle’ by drilling down within the two thirds of jobs which are in the ‘non financial business economy’ thanks to recently published detailed data covering the 5 years 2008-12 from ONS.

Looking at employment, in 2008 this segment of the economy represented 22.1m jobs – out of a total number in the economy around 30m. By 2012 this had fallen less than 2% to 21.7m – with the lowest employment level occurring in 2010. Over the same period (2008-12) gross valued added (GVA) increased by 2.9%. So productivity increased between 2008 and 2012 by 4.8%  – a CAGR of around 1.2% pa. This is a rather more encouraging picture than has been painted by those who think UK economy exhibits a‘productivity puzzle’. Employment didn’t fall far but productivity has increased at a decent in two thirds of the economy – especially considering the tough overall conditions in the economy.

Manufacturing is part of this broad aggregate under consideration here and it shows a rather different pattern. Employment fell by about 8.5% in 2009 but over the next three years declined much more slowly so that the total drop between 2008 and 2012 is just under 11%.  As has so often been the case there has been little change in manufacturing gross valued added (apart from a dip in 2009) and  by 2012 manufacturing GVA was less than 1% down on 2008. It follows that productivity has increased by just under 11% between 2008 and 2012 – a respectable CAGR of 2.7% pa. But this has been achieved via a loss of jobs – the continuation of a trend that has been evident for at least 15 years.

We know from other sources that 2012 was a year when the world economy did not progress as well as expected – so the achievement of manufacturing output close to the 2008 peak in that year is a quite reasonable. There are other signs that growth in manufacturing has taken place in 2013 and 2014.

There have been fears that a stagnant level of investment might mean that the economy may not be able to increase output as global demand recovers. In fact, while the non-financial business economy saw capital investment 13% down in 2009 and 2010 relative to 2008, but in 2011 it recovered to just under the 2008 peak and in 2012 was around 8% ahead. This suggests that as economic conditions have improved in 2013 and 2014 this segment of the UK economy will have been able to expand to meet rising demand thanks to a gradual recovery in capital investment.

The manufacturing picture is even more encouraging. Capital expenditure in manufacturing followed the same time profile as the aggregate non-financial business sector but in 2012 was nearly 10% up on 2008.

The recently released statistics make it possible to drill down into individual sectors. In vehicle manufacturing (which includes a major portion of the supply chain) there were falls in 2009 and 2010 in capital investment but a very strong recovery in 2011 and 2012 with both years 32% up on 2008 .

In contrast the 2012 employment level in vehicle manufacturing was over 20% down on 2008 (although 2012 shows a slight recovery on 2010 and 2011). Output fell very sharply in 2009 with a strong recovery in 2010. The adverse global situation pulled 2012 output back but it is still about 7% ahead of 2008 and we know that in 2013 and 2014 further growth has taken place.

With capital investment and falling labour levels vehicle manufacturing has seen dramatic productivity growth. In the period 2010-12 relative to 2008 –  average productivity was over 35% up. Productivity achievements on that scale should help ensure the continued flow of inward investment into the sector.

These figures for vehicles apply to the whole sector in ONS terms – not just vehicle assembly. However it is important to stress that the actual automotive supply chain is larger than the ONS classification. Vehicle manufacturers buy in services, particularly business services, and no services are included in the vehicle sector supply chain figures. There are also parts of the automotive manufacturing supply chain which are counted in other manufacturing sectors by ONS such as metals, plastics, chemicals, textiles, etc.

However, the ONS data does cover vehicle manufacturers’ purchases. Relative to 2008, VMs’ purchases were 13% higher in 2011 and 16.5% higher in 2012. These results are very much in line with the strategic vision of the Automotive Council – a strengthened UK supply chain is needed to support ambitious VM expansion strategies and make the most of the new opportunities.

Within the ONS figures there is a section termed ‘manufacture of parts and accessories for motor vehicles’. In 2008 this sub-sector employed as many people as vehicle manufacturing. Sadly by 2011, the sub-sector employment was only 75% of vehicle manufacturing. The employment fall in the vehicle manufacturing sector has been concentrated in the supply chain.

But is not all bad news. In 2008 this subsector invested £132m and this fell to £14m in 2009. Since then the increased investment by vehicle manufacturers has spurred a capital investment surge in the component sub-sector which has risen to £243m in 2011 and £354m in 2012. These figures suggest there is a radical shift to more capital intensive modes of production in the supply chain.

Looking at the productivity figures for the ONS defined vehicle manufacturing sector with the VMs’ figures excluded, we find that, between 2008 and 2011, productivity increased by CAGR of 15.1% pa – again these gains suggest radical changes in the organisation of the supply chain – with a substitution of capital for labour yielding dramatic productivity increases.

Purchases by the VMs totalled £40.6bn in 2008 and by 2011 had risen to £43.5bn and on to £45.0bn in 2012.  However the total turnover of vehicle sector excluding the VMs was £14.0bn in 2008 and in 2011 and 2012 had only recovered to just over £13bn. So the increase in volume of production in the VMs has driven increased buying but this has not yet been reflected in supply chain turnover increases. Clearly the Automotive Council strategy of strengthening the supply chain needs to be followed through vigorously.

However, within these reduced turnover levels, there has been in an absolute increase in value added . Against a  2008 figure of £3.61bn, valued added, in 2011 the figure was £3.84bn and then  £3.7bn in 2012.The failure of the supply chain to increase its turnover is disappointing but the capex, productivity and value added improvements suggest that supply chain competitiveness is increasing. The Automotive Council plans still have  some years to run and it may well be the case that the productive transformation that it shown in the shift to more capital intensive methods will lead to higher turnover as well.

The best indicator of productivity is output per hour work – any job might either be on short-time working, overtime or somewhere in between. ONS issued some data on this basis in July. It is based on an index where 2010 is 100 and breaks down manufacturing into 10 sectors. The time series goes up to Q1 2014:

Sector	£ output per hour 2010	Q1 2014 index (2010=100)
Transport Equipment	30.4	128.4
Computers & electrical	33.3	110.0
Rubber & plastics	23.9	104.9
Basic metals	22.4	102.6
Food	29.0	102.5
Textiles & Clothing	22.8	101.7
Paper & Printing	22.3	95.2
Machinery	28.3	94.3
Petroleum & Other	25.5	90.6
Pharma & Chemicals	77.7	86.6

 

Transport Equipment includes automotive as the largest subsector and aerospace as the second largest. The CAGR productivity rate for this sector is in excess of 6% p.a.  Rubber & plastics, computers & electrical and basic metals are all in the supply chain for transport equipment manufacture.

The analysis shows that the Coalition’s growth strategy is working through in some sectors –  most clearly in automotive (and also in aerospace.) The analysis also shows that different manufacturing sectors are experiencing very different trajectories. The Coalition’s segmented approach to strategy makes a great deal of sense against that background.

The latest ONS statistics also throw more light on the ‘productivity puzzle’ with an analysis of output per hour worked for the whole service sector. Finance and Insurance at index 90.2 in Q1 2014 and Real Estate at  87.4. This suggests that one aspect of the ‘puzzle’  may be the past reliance of the UK economy on finance and property for superficial growth and that the goal of rebalancing the economy may be a suitable response.

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The tension between risk management and quality management is very much alive at the moment. It has been reported that too often, senior managers fail to set project budgets at a level consistent with the necessary standards of quality, cost and delivery, with the inevitable result that too many projects are at risk and fail on at least one of these requirements.

Risk management starts at strategic level and is linked to the standard strategy tool of a SWOT analysis (strengths, weaknesses, opportunities and threats). The “T” in SWOT refers to threats. Risk arises in connection with a threat to an asset or desired goal, and risk management starts by identifying gaps in the protection which is in place – the vulnerabilities. If there is no vulnerability, there is no risk.

Daniel Kahneman in his recent best seller, Thinking Fast and Slow (2011), discusses the major body of evidence that we all have a propensity to misidentify risk. Many studies have shown that in assessing risk, we give more weight to our emotional attitude rather than the objective evidence of probability. Where a risk and its potential outcome alarms us a lot, we are more likely to overestimate its probability.

A key move in overcoming this bias involves a concept which was first formulated in the seventeenth century by the mathematician, Blaise Pascal. He was the first person to the see the value in multiplying the probability of a risk by the value or loss in the relevant outcome. This product is called the expectation. Thus we may be aware of an outcome which alarms and which we judge might cost £1m. However, the evidence may suggest that the probability is only around 1% or 0.01. The value of the expectation is therefore £10,000.

“Once risks have been identified and assessed, the ways to manage risk fall into one or more of these four major treatments: avoidance (eliminate), reduction (mitigate), transference (outsource or insure) and retention (accept and control)”

Suppose there is a second risk which is valued at £80,000 but where the probability is 20% or 0.2. The value of the expectation is £16,000. This second risk should take a higher priority than the first risk as the value of the expectation is greater. This way of thinking is central to a key tool in managing risk in new product development – failure mode and effects analysis or FMEA as it is usually known.

A good way of avoiding pitfalls in risk management is to follow a reliable standard. ISO 31000 is a family of standards relating to risk management codified by the International Organization for Standardization.

The purpose of ISO 31000:2009 is to provide principles and generic guidelines on risk management and it seeks to provide a universally recognised paradigm for practitioners and companies employing risk management processes. The latest version of the standard dates from 2009. The ISO 21500 Guidance on Project Management standard aligns ISO 31000:2009 and is intended for a broad stakeholder group including:

1. Executive level stakeholders
2. Appointment holders in the enterprise risk management group
3. Risk analysts and management officers
4. Line managers and project managers
5. Compliance and internal auditors
6. Independent practitioners

“The management process should address methodically all the risks surrounding the organisation’s activities past, present and in particular, future.”

Audit is an important point of connection between risk management and quality management. Any quality management regime will involve an audit programme. Drawing up the audit programme should reflect an assessment of risk and the programme should be formally approved at board level in case the board are aware of extra risks that need to be covered.

The main quality management standard ISO 9001 is being revised and it is likely that risk management will become much more prominent in the requirements. For example, the current draft states:

“The organisation shall determine external and internal issues, that are relevant to its purpose and its strategic direction and that affects its ability to achieve the intended outcome(s) of its quality management system.”

This high level requirement means that organisations should identify threats and weaknesses and actively improve their response to these factors in order to meet the standard.

We define risk as an event with the ability to impact (inhibit, enhance or cause doubt about) the mission, strategy, projects, routine operations, objectives, core processes, key dependencies and or the delivery of stakeholder expectations.

Risk has two components:

1. Severity: if harm occurs
2. Probability: of harm occurring

Each business situation has to be considered as its own distinctive state of affairs. However, there are common Industry Forum Business Excellence Through Inspired People risk categories such as:

1. People
2. Lack of people skills and / or resources
3. Unexpected absence of key personnel
4. Ill-health, accident or injury to people
5. Premises
6. Inadequate or insufficient premises
7. Denial of access to premises
8. Damage to or contamination of premises

Other important risk categories are assets, IT, suppliers and communications. Risk Assessment is defined by the ISO/IEC Guide 73 as the overall process of risk analysis and risk evaluation. This covers a number of essential risk management techniques such as brainstorming, FMEA and scenario analysis.

“…audit is an important point of connection between risk management and quality management.”

Once risks have been identified and assessed, the ways to manage risk fall into one or more of these four major treatments: avoidance (eliminate), reduction (mitigate), transference (outsource or insure) and retention (accept and control).

The business environment doesn’t stand still and key factors are always emerging and developing. Risk management therefore has to be a continuous and developing process which runs throughout the organisation’s strategy and the implementation of that strategy. The management process should address methodically all the risks surrounding the organisation’s activities past, present and in particular, future. In the context of quality assessment for standards like ISO 9000, there has to be real evidence that the risk management process is taking place starting with leadership.

 

This article was first published in The Lean Management Journal, July 2014

www.leanmj.com

The public profile of 3-D printing has reached a new high. On June 19 2014 Geoffrey Fowler had a whole page on the subject in the Wall Street Journal. He was prompted by the US launch of a home use 3-D printer by MakerBot for less than $1400. MakerBot also offer an online store where you can buy and download printable objects – building on Apple’s appstore business model.

The day before, the Financial Times included a section, Engineering the Future with a piece by Tanya Powley, ‘Now You Can Print Your Own Robot’. She explained that additive manufacturing had been around since the 1980s but that in recent years it has gained a heightened presence in both consumer and industrial markets – in 2013 the total products and services market rose 35% to just over $3bn.

On 20 June 2014 Michael Sorkin, CEO of iGo3D, a European 3-D printing product and services chain which has recently opened a facility in Moscow, made a presentation in Berlin where he gave an analysis of his latest results which show that in his business, the services market is growing faster than sales of products. Within services the biggest category is professional prototyping work – the classic area where 3-D printing first made an impact. 3-D printing has now become a topic that senior managers need to understand and a blue chip US consultancy has started to run prestige person to person briefing sessions on the subject.

Aerospace and Defence is one area where 3-D printing has made inroads and it is thought that the global market is currently in excess of $250m. Boeing currently prints 200 parts on 10 aircraft platforms. By 2020 GE expects to have made 100,000 fuel nozzles by 3-D printing. The nature of aerospace demand is well suited to the cost and performance characteristics of 3-D printing.

In automotive, the advanced manufacturing technique that has made greatest progress is probably robotics. Premium automotive manufacturing conditions have some similarities with aerospace and so this is the area where progress may well be made. Local Motors in the US has a project to use 3-D to make an electric car. In early June the engine and transmission was installed into their prototype.

Low volume parts for the aftermarket is another area where serious work is under way on 3-D printing currently. In the same pattern as iGo3D, various organisations are working on offering a bureau service to the automotive supply chain.

This bureau concept is similar to an arena where the technique has become very well established – the Fab Lab movement. A Fab Lab is a small-scale workshop offering personal digital fabrication and is equipped with a range of digitally controlled tools. The program began as a collaboration between the Grassroots Invention Group, the Center for Bits and Atoms and the Media Lab at MIT. A related driver was a MIT course called ‘How to Make (Almost) Anything’. According to MIT in 2013 there were around 125 labs in 34 countries. In London about a year ago the arts charity, SPACE, launched a crowdfunding campaign on Kickstarter for a Fab Lab in East London which would contain a range of production facilities. The project had the goal of maximising accessibility and so the annual fee is only £20 but it did not meet its funding goal of £15000.

Deloitte University have concluded that aerospace and defence is the arena where Advanced Manufacturing (AM) – the broader set of techniques which includes 3-D printing – is likely to develop. The reasons are that the AM techniques favour

• Manufacturing parts with complex designs
• Manufacturing parts that require complex machining
• Reducing a part’s weight
• Reducing the complexity of assembly
• Speeding time to market

Firms in the supply chain should consider that the ability to offer AM may increasingly be a requirement for OEMs. There is likely to be a premium to pay when recruiting staff with materials science and design backgrounds. The impact on the IT function is likely to include better integration between R&D and design systems and manufacturing systems.

Major firms are most likely to use AM in a way which secures benefits in product development timescales and costs. But in the medium term AM should come to be used to produce parts with improved functionality.

In June 2013, Vince Cable announced £14.7m to support businesses developing 3-D printing projects via a collaboration between the Technology Strategy Board and Research Councils. The programme is particularly focused on healthcare and energy and projects are expected to take 1-3 years. This programme is part of a total fund of £440m to support new manufacturing techniques.

In May 2014, the new Technology Director at the Institute of Advanced Manufacturing (a collaboration between Coventry University and Unipart), James Simester, announced that he has targeted £5m in funding to explore advanced manufacturing fuel rails and powertrain systems. He explained that ‘the initial focus will be on the automotive sector with the intention of applying the cutting edge research and advanced engineering in other sectors including such as aerospace, power generation, oil and gas’.

In June 2013, IBM published an interesting study of the disruptive potential of these technologies on manufacturing supply chains. They concluded that the electronics sector is particularly vulnerable. The average cost of products will fall and scale economies will be less advantageous. On the demand side mass customisation and personalisation will become more important drivers for the profitable introduction of these techniques. Location of production is likely to shift to being closer to the customer. Crowd sourcing is likely to become more important in new product development.

So, we are in a situation where potentially disruptive changes in manufacturing supply chains and business models may be in their initial phases. It isn’t likely that they will all get disrupted but it is also unlikely that no supply chain will undergo large scale rapid change.

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The strength of the UK manufacturing recovery has started to register on a global scale according to a new survey of global manufacturing leaders by Deloitte. These leaders are looking to the US, China and the UK as the principal growth markets in the next two years.

The UK has a limited number of indigenous global manufacturers and much of the major manufacturing investment here comes from overseas, particularly the US, Germany and Japan. If smaller UK owned firms are to benefit from these opportunities, even more focus on being an effective supply chain partner is vital. The survey shows that global manufacturers are looking for increasing levels of supply chain transparency and visibility driven by improved use of data, analytics and business intelligence tools. The integration of new technologies remains an important strategic driver for them and with a focus on greater partnerships and collaborative business models.

In the Deloitte survey, forty percent of respondents say they currently lack visibility across their extended supply chain, with thirty three percent saying it was due to either inadequate IT systems or a lack of skills. So far the gains in supply chain visibility have resulted from stronger relationships between manufacturers and their top-tier suppliers. This pattern has been evident in automotive and aerospace for some while, two sectors where the UK is especially strong. More than three-quarters of Deloitte’s respondents say that their relationship with top-tier suppliers is now strong enough for them to share real-time capacity and demand data. This sets a new standard for the lower tiers of the supply chain in the UK. Reviewing the survey data, Deloitte conclude that, over the next decade, there will be dramatic reductions in the time it takes organizations to get their products into market because of advances in three areas: 3D printing technology, collaboration and supply chains.

A majority of respondents in the survey think that they may achieve a globally integrated supply chain within the next three to five years. More than half say that they already use global demand planning and global capacity planning technologies in their supply chain enterprise-wide. All of this means that for smaller UK firms to be partners of the global majors they must meet the objective standards of global competitiveness not just in QCD but the more demanding areas of management, partnership, innovation and information systems.

One of Deloitte’s interviewees commented “Given the ongoing shifts that we continue to see in product lines, technology and supply chains, it’s not surprising that organisations are prioritising a wide variety of analytics and data-driven investments in an attempt to get a better handle on their costs and profits. Many manufacturers are looking for any way they can to get more insight into their business.”

The global manufacturing supply chain is probably the area where the much touted ‘internet of things’ will first become a potent reality with sensors up and down the supply chain providing managers with key operational data with the potential for the achievement of higher levels of performance excellence. This suggests that if smaller firms in the supply chain are to be part of this emerging scene they will need to acquire new skills and capabilities in fields which are already experiencing skills shortages thanks to the boom in digital services investment. Deloitte found that a third of respondents believe that their lack of supply chain visibility was a direct result of inadequate IT systems and an equal number pointed to a lack of skilled talent as impacting the effectiveness of their supply chain. In Deloitte’s survey forty-five percent of respondents say that new technology could be the biggest enabler in helping their organizations communicate critical demand signals, capacity constraints and supply chain disruption data across their supply chain. Deloitte infer that once technology proves itself mature enough, decision-makers in global majors will become keen adopters.

The UK automotive and aerospace supply chains need to keep a close watch on this fast changing environment. Deloitte suggest that consumer product manufacturers have had greater success in building partnerships, achieving supply chain visibility and determining profitability than their peers across the broader manufacturing sector. Consumer product manufacturers are often much closer to the end-consumer than their peers elsewhere in manufacturing. This supports the view developed by McKinsey Global Institute that a key factor driving the progress of advanced manufacturing down the supply chain is the need to satisfy the fast moving consumer markets in which prosperous consumers demand the latest goods and service personalised to meet their specific tastes and needs. This kind of market pattern is particularly significant in the premium automotive sector where the UK has developed a major global position with very strong brands.

Another important area where supply chain capability needs to improve is risk management. The new version of ISO 9000 will make effective risk management a central feature of quality management. This will almost be carried through to the sectoral derivations of ISO 9000 in automotive, aerospace and medical technology. Again the UK supply chain will need to stay ahead of these requirements if they are to demonstrate to global majors that they are globally competitive partners.

With these demands on lower tiers in the supply chain, these smaller firms can reasonably expect better partnership behaviour from their customers. A survey published at the beginning of June found that in the UK economy overall, some £75bn is owed to suppliers by their business clients. Total trade credit now stands at £327bn, making it the number one funding source for businesses, according to the research from the Credit Management Research Centre and Taulia. This is 20% larger than bank credit to businesses. More transparent supply chain management could bite cash flow benefits to lower tier suppliers in due course.

Industry Forum has over fifteen years’ experience in supply chain improvement not just in automotive but several other sectors. The introduction of new technologies will only deliver real benefits if the operational disciplines improve to exploit the true potential of better information flows. Industry Forum has ample experience of helping clients bring this about.

 

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