The Manufacturing Performance Management Benchmark Report June 2006 \ The Manufactiuring Performance Management Benchmark Report Executive Summary espite indications of a reviving economy and 2 decades of improvement in manufacturing productivity, continued global competition and increasing de-D mands from customers, shareholders, and regulatory agencies are forcing manu-facturers to continue to seek ways to improve manufacturing performance. Manufacturing performance management strategies have reduced inventory and manu-facturing cycle times, and more complete and on-time shipments of better quality prod-ucts. Yet there seems to be no relief in sight from the constant pressure of mandated cost reductions and higher expectations of customer service. Today we see a subtle shift in pressures. Customers continue to demand lower prices; however customers’ demand for shorter lead times has now become the number one driver in manufacturing performance management strategies. Cost reductions remain the focus of all enterprises and many still struggle with data collection and cultural issues. The Manufacturing Performance Management Benchmark finds far too few commercial IT solutions being utilized, although Best in Class companies are significantly ahead in terms of deployment as compared with their average and laggard competitors. Better per-formers are getting better while poorer performing companies ...
The Manufacturing Performance Management Benchmark Report June 2006
The Manufactiuring Performance Management Benchmark Report
Executive Summary
Despite indications of a reviving economy and 2 decades of improvement in manufacturing productivity, continued global competition and increasing de-mands from customers, shareholders, and regulatory agencies are forcing manu-facturers to continue to seek ways to improve manufacturing performance. Manufacturing performance management strategies have reduced inventory and manu-facturing cycle times, and more complete and on-time shipments of better quality prod-ucts. Yet there seems to be no relief in sight from the constant pressure of mandated cost reductions and higher expectations of customer service. Today we see a subtle shift in pressures. Customers continue to demand lower prices; however customers demand for shorter lead times has now become the number one driver in manufacturing performance management strategies. Cost reductions remain the focus of all enterprises and many still struggle with data collection and cultural issues. TheManufacturing Performance Management Benchmarkfinds far too few commercial IT solutions being utilized, although Best in Class companies are significantly ahead in terms of deployment as compared with their average and laggard competitors. Better per-formers are getting better while poorer performing companies make little progress, so the performance gap is widening. Key Business Value Findings Best in Class companies, while still paying close attention to cost containment, have be-gun to turn their attention to outward facing improvements, including customer satisfac-tion and supplier collaboration. These companies maintain and increase their market leadership position through sustained vigilance, more accurate performance metrics, and improved flexibility in responding to demand. Better performance also correlates directly with frequency of measurement. Schedule compliance and complete and on-time ship-ments are very much the focus of attention, but even better performing companies still pay the price with high levels of inventory to ensure customer satisfaction. Implications & Analysis Lean manufacturing techniques are embraced by over three quarters of all companies in pursuit of manufacturing performance improvements. The pull strategies associated with Lean philosophies was evident in the majority of participating companies, a significant difference from Aberdeens study eighteen months ago. There is a significant difference in the business capabilities sought by Best in Class enterprises versus industry average and laggards. While poorer performers are seeking to identify and eliminate bottleneck and streamline operations, Best in Class have moved beyond these efforts to place more emphasis on collaboration with customers and suppliers. These Best in Class companies are more than twice as likely to deploy IT solutions, particularly for planning, execution and control. Even top performers still fall short of expectations in terms of analytical so-lutions: On-Line Analytical Processing (OLAP) has not made its way out of the financial and marketing departments.
The Manufacturing Performance Management Benchmark Report
Recommendations for ActionThe following specific actions are recommended for companies looking to improve per-formance management: •Indicators (KPIs) more frequently quality devia-Measure Key Performance tions should be monitored and measured in real time; operational metrics such as shipment performance and schedule compliance should be measured daily; met-rics that measure assets such as inventory should be measured weekly. •Balance cost reduction efforts against customer satisfaction as acceptable cus-tomer service levels are achieved, work specifically to reduce inventory levels. •Use available technology for data collection, operational efficiency and visibility integrated manufacturing and operations intelligence platforms, as well as ana-lytics and other business intelligence tools All companies must consider the four elements of performance: Planning: scheduling, sequencing or load leveling production • •Execution: instruction, inspection or status •Control: plan vs. actual status, alerting, re-planning or corrective action •Analysis: effectiveness or improvement opportunity identification With very few exceptions, real-time integration across these 4 elements has been either non-existent or a custom effort, loosely coupled at best. All companies would benefit from a more focused effort on closing the loop between the first three of these critical elements, developing a philosophy of continuous improvement and promoting a culture where change is welcomed and embraced.
The Manufacturing Performance Management Benchmark Report
Chapter One:Issue at Hand
•No relief from pressure to drive prices and costs down •Demand for increased speed and agility escalates •Significant improvement in manufacturing performance takes time and effort Dmmeunam-claepmodeubolgco,innttiuctyvi-nasdfsanigedndincretitionadnasredloherahss,eromstcumronigofcrraeeisgencryalatoreguitnanorpmemevginodprfanuurctnomoynavinigcedesofid2decaidnietipsevraofsontica facturers to continue to seek ways to improve manufacturing performance. Manufacturing performance management strategies have produced reductions in inven-tory and manufacturing cycle times, and more complete and on-time shipments of better quality products. Yet there seems to be no relief in sight from the constant pressures of tmoamnedrasteerdviccoestreductionsandhigherexpectationsofcus-Competitive Framework .Key AmbeenrtdeSetnrastepgrieevsiouBseanucnMhmafrakctusrtiundgy,PecrfoonrdmucatnecdeeMianhtaegeen-The Aberdeen Competitive gFramework defines enter-months ago, found leading manufacturers looked to theserises as fallin into one of strategies and supporting IT solutions in order to maximizethe three following levels of current operations and foster continuous improvement. Inpractices and performance: December 2004, Aberdeen reported the number one pressure customers for loLa ards30% ractices (f6ac9e%d),wfoalslotwheeddbeymtahnedneferodmtomeetincreaseddewmearndpriwcieths nificantlthat are si behind the same level of resources (58%). Other factors were thethe average of the industry drive to improve return-on-investment (ROI) (51%) and theIndu r demand for shorter lead times (50%).ractsitceysntohramt r(e50re%s)enttheToday we see a subtle shift in pressures. Customers continueaverage or norm to demand lower prices, with 64% of respondents selecting 20%Best in class this as a top influential factor in driving manufacturing per-practices that are the best formance efforts, remarkably similar to results in late 2004.currentl bein em lo ed However, customers demanding shorter lead times has now su erior toand si nificantl become the number one pressure faced by manufacturers the industry norm (67%) (See Figure 1). Pressure to improve ROI has eased slightly, but over half of our participants indicated they were pressed to meet increasing demand with the same resources, an indication that the requirement to do more with less is alive and well in spite of signs of a recovering economy. This phenomenon is much more prevalent in companies who do not perform as well (82%). This comes as no sur-prise since success fuels growth.
The Manufacturing Performance Management Benchmark Report
Figure 1: Subtle Shift in Pressures
Customers demanding shorter order lead times 50% 67% Customersdemandinglowerprices64%69% 58% Required to meet increased demand with same assets and people 55% 51% Improve return-on-invested-capital/assets 43%37% Customers demanding more complete and on-time shipments 39%Highdemandvolatility/marketiscyclical232%6%0% 10% 20% 30% 40% 50% 60% 70% 80% 2006 2004 Source:AberdeenGroup, June 2006 Companies in the United States and Canada in particular feel the manufacturing economy is still under fire from several directions. North American companies have been chal-lenged by the introduction of lower priced products coming into their markets from coun-tries with inexpensive labor, causing the trend in recent years toward low cost country sourcing (LCCS), in turn, introducing a higher level of complexity into the supply chain. In the meantime some of these offshore companies, having grasped a foothold in US market share, have moved more operations to the United States, yet are still managing to keep costs and prices low. Toyota is a prime example. After establishing its market lead-ership position, it has continued to move operations closer to its US consumers. Today 85% of Toyota parts are manufactured in the United States, which subsequently reduces supply chain complexity, shortens lead times, and sets the bar higher for its competitors. In order to remain competitive, manufacturers need to differentiate by developing flexi-bility to respond to customers who have become more demanding in what they want and when they want it. In the consumer market, additional pricing pressure is felt from the introduction of con-troversial knock-off products. The quality of these imitations of well-known and pre-mium-priced brands has improved to the extent that all but the least cost-sensitive con-sumers consider them in their comparison shopping, thereby squeezing margins and mak-ing pricing pressure a constant.
The Manufacturing Performance Management Benchmark Report
PACE Ke For more detailed descri -Enterprises that have mastered what Aber-tion see Appendix Adeen describes in the manufacturing perform-ance management competitive framework as Aberdeen a lies a methodolo to benchmarkBest in Class practices have made significant research that evaluates the business ressures, actions, ca abilities, and enablers PACE thatprogress in: ipnrdoicceastesecs.orTphoerasteetebremhsavairoerdinefisnpeedciafiscfoblulosiwnse:ss•Reducing manufacturing cost Pressures external forces that im act an•Shrinking manufacturing cycle times or anizations market osition, com etitive-•Improving schedule compliance ness, or business operations •Satisfying demand for more complete Acotiroannsizaaraohcareticanesthatthstesurtnisekatnoitnditoensoesrand on-time shipments pressuresAberdeens December 2004 study observed a Ca abilities the business rocessdisproportional number of manufacturing com etencies re uired to executeperformance improvement initiatives had corporate strategyproduced little or no results and suggested Enablers functionalit the keenterprises plan for a long term commitment of technolo solutions re-to programs. Methodologies and technologies uired to su ort the or aniza-are not enough to guarantee success. As out-tions enablin business rac-lined in Aberdeens PACE methodology, tices there needs to be a clear linkage between the business pressures, strategic actions and re-quired capabilities, as well as technology enablers. Figure 2 clearly demonstrates some improvements take longer to attain. While significant improvements in throughput and complete and on-time shipments can be achieved in 1-2 years, improvements in product quality take longer, but there is value gained from continued improvement efforts. Find-ings also imply that early gains are not necessarily sustained. Figure 2: Better than Industry Average Performance Attainment 3405%%36%35%36% 3205%%30%28%25%%26% 23 20% 18% 15% 10% 5% 0% ProductCompleteeManu-ThroughputfMaactnuur-ingcSocmhepldiualneceReturnonITnuvrennst:oryInventory QualityasnhidpomnelinntfcaycctlueritnimgeCostAssetsF/GTRu/rMns&WIP More than 2-5 1-2 Less than 5 years Years Years 1 year Source:AberdeenGroup, June 2006
The Manufacturing Performance Management Benchmark Report
•Best in Class seek market differentiation while others strive to compete •Data collection and culture issues present challenges •Customer satisfaction comes with a price •Best in Class monitor key performance metrics more frequently anu Mqua me of performance improvement. Aberdeens research findings show that enterprises with Best in Class operations and performance improvement practices were significantly more likely to outperform their competitors in complete and on-time shipments and schedule compliance. However, even in Best in Class companies this achievement was often at the expense of increased inventory levels. This explains why almost a third of Best in Class companies still view reduction in finished goods inventory as a top choice for strategic action. There are some notable differences in the strategic actions of Best in Class companies versus the combination of industry average and laggards (Figure 3). While better per-formers remain focused on reducing costs, they also pay much more attention to building agility and flexibility into their manufacturing processes, seeking better market differen-tiation. Enterprises that have not achieved this level of performance spread their attention more evenly across the more traditional activities in order to achieve market acceptance, which is a lower standard than market superiority. Although absolutes are difficult to compare across industries and even from one company to another, Best in Class companies have reduced manufacturing costs 13% on average, as compared to a disappointing 4% for all other respondents (see Table 1.) Measurement of manufacturing cycle times presents the same challenge. However, better performers were able to reduce cycle time by 16% and average lead times were significantly shorter. Schedule compliance and complete and on-time shipments are much easier to benchmark across companies and industries. Aberdeen found that while Best in Class companies achieved a slightly smaller percentage increase, these better performers were either ap-proaching or had already reached a plateau where smaller increments signal significant improvement.
Chapter Two: Key Business Value Findings
The Manufacturing Performance Management Benchmark Report
Best inClass All Others Source:AberdeenGroup, June 2006
Table 1: Performance Improvements KPI Best in Class All Other Respondents Before After % Im rove- Be- After % Improvement ment fore Manufacturing Costs146% 40%13%55% 53%4% Complete and on-time shipments 87% 97%11%73% 82%12% 81% 94%16 Schedule compliance%66% 77%17% Manufacturing cycle time (days) 25 2116%30 2613% Source:AberdeenGroup, June 2006