The material fow

challenge
Boosting profts by
boosting velocity
2
We have seen
implementation of improved
material fow capabilities
throughout a production
system generate returns of
13x on average in the frst
year of implementation.

The challenge is to defne
the right operating model
and then to successfully
execute the improvement
effort.
3
The Aerospace and Defense (A&D) industry trend towards
increased visibility and emphasis on reducing program costs
and schedule overruns are driving companies to improve
their manufacturing operations. Inefciencies that were
hidden by cost-plus pricing now have a direct impact on
the bottom line, especially as programs move from low-
volume development to rate production. To thrive in this
new environment, A&D companies must fundamentally
change the way they manage their production operations
and material ow.
Many A&D companies have adopted elements of the
Toyota Production System and lean manufacturing tech-
niques, yet have not been successful in meeting the cost
proles and schedules demanded from their customers. This
article focuses on effective material replenishment methods
that we believe A&D companies should consider in their
efforts to slash costs and cycle times while boosting quality
and responsiveness to improve their bottom-line perfor-
mance. Based on our own recent experiences (see chart)
and experiences of companies in the A&D industry, we have
seen implementation of improved material ow capabilities
throughout a production system generate returns of 13x on
average in the rst year of implementation. The challenge is
to dene the right operating model and then to successfully
execute the improvement effort.
Introduction
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y = 13.072x - 6.271
R = 0.7831
Chart 1 (Annual cost benet vs. client investment)
4
Traditional approach to factory material ow
Many A&D companies that produce low-volume, highly
engineered products continue to deploy a decades-old
push model to control the ow of material in their
factories. The traditional model looks something like this:
The MRP system uses a bill of materials to generate
purchase orders based on a predicted build plan. Suppliers
ll the orders as best they can, despite multiple changes
and priority shifts. The receiving department accepts
the materials whenever they happen to arrive and then
places them into the warehouse inventory. At some point,
another group assembles the materials into kits. Later, a
different group delivers the kits in large batches to the
production line. From there, the materials and partly
assembled components are pushed through the manu-
facturing process according to a production schedule that
may or may not align with actual customer demand.
However, specic problems can arise by following this
approach including:
A lack of visibility to supply chain constraints, what
material is in the factory, and whether the materials are
raw, kitted, or Work in Process
Numerous hands-offs with suppliers and between
different departments, with limited coordination. This
lack of coordination reduces accountability and increases
the risk of material shortages
Excess inventory throughout the supply chain and at
each internal process step. This buffer inventory takes
up space and ties up capital. It also hides operational
problems and inefciencies
Conficting demands for materials. One of the most
common conicts is whether to allocate scarce materials
to standard production or production of spare parts.
Conficts between production and sustainment require-
ments will only exacerbate the issue
The net result is usually high inventory costs, inefcient
internal and supplier operations, and a lack of production
system exibility.
Push Push Push Push Push Pull
SIS
Receiving &
Stocking
Kitting Floor Stock Assembly Testing Shipping
Cycle Time
Push
Suppliers
Customers
Inventory Buffers
Material Control System
Multiple Scheduling Systems
Chart 2 (Traditional push model for materials)
5
A new vision
Factory material ow (FMF) has traditionally focused within
the four walls of the company. And, as noted earlier, there
is considerable room for improvement even within that
limited area. However, that is just the beginning. For many
A&D companies, even greater benets can be achieved
by expanding the scope of material ow to include the
companys extended supply chain. A properly functioning
supply chain can dramatically reduce the amount of
inventory throughout the extended supply chain and in
the factory that must be stored and managed. It can also
signicantly reduce the amount of handling that needs to
occur before the materials are ready for use. By synchro-
nizing material ow throughout the supply chain, as well
as within the factory, companies can dramatically reduce
costs while improving speed, quality, and exibility.
The new approach to managing factory material ow is
based on a pull model in which materials are drawn
through the production system as they are consumed.
This approach can signicantly reduce the amount of
excess inventory, while improving efciency and cycle
time. However, it requires a nely tuned operation, a high
degree of collaboration with suppliers, and a clear material
replenishment strategy to make it work. Since operational
problems can no longer be concealed with this model,
companies that implement a pull model can expect a
steady stream of process improvement opportunities to
continually boost their performance and competitiveness.
Chart 3 (New pull model for materials)
Receiving and
Stocking Kitting Assembly Testing Shipping
Customers
Suppliers
Suppliers
Single integrated scheduling and material control system
3PLs
Cycle Time
Pull Pull Pull
Pull Pull
Pull Pull Pull
6
Key features of the new vision:
Pull, not push
The fow of materials is paced by consumption. Parts and
materials are replenished at the same rate they are used
rather than piling up throughout the supply chain and
factory in various buffer zones.
Single demand pulse. As materials are consumed, a
demand signal is automatically generated to trigger
replenishment. This is often implemented through new
technologies.
Scope extends beyond the four walls of the factory
The company must communicate and collaborate with
its entire supply chain to maintain a steady, efcient,
and timely stream of assemblies, components, and raw
materials.
An effcient material fow begins even before the frst
materials order is placed. Products are designed in
collaboration with suppliers to optimize the parts and
materials. Designs are stabilized to reduce or eliminate
last minute changes that wreak havoc on materials ow
and supply chain efciency.
Eliminate silos
Processes are designed to eliminate unnecessary
hand-offs and maximize efciency without regard for
traditional process and organizational boundaries. For
example, receiving, kitting, and delivery to the POU may
be combined into a single department. Similarly, third-
party vendors currently handling supply chain logistics
may also be given responsibility for managing material
ow within the factory.
Visibility
New processes and technologies allow the company to
keep track of all materials owing into and through the
factory. Access to critical supply chain information such
as inventory levels, work status, and constraints can
enable proactive management of in-bound material well
before delivery problems arise.
We have seen companies across multiple industries
successfully use similar techniques to dramatically improve
their operations and overall performance.
7
P
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Material Replenishment Strategy
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Pull Receiving Kitting
Business Requirements
Policies and Procedures
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Putting the pieces together
Improving factory material ow requires a clear vision and
material replenishment strategy. However, having the right
vision does not guarantee success. As the saying goes, the
devil is in the details. Too many companies do not focus
enough attention on the processes, technologies, and
people capabilities that make the vision real, which causes
their results to fall far short of expectations. The following
is a framework that shows all of the key elements and
how they should t together.
Chart 4 (Framework for Improving Factory Material Flow)
8
Improving factory material ow requires close attention to
each of the following elements.
Business requirements. Companies need to refne
business requirements that impact key processes in the
short, medium, and long term to provide the foundation
for the FMF vision. A lack of clarity in the denition
of requirements can lead to unknown bottlenecks or
constraints.Business requirements and activities are
gathered from key stakeholders and customer data sources
to support each process. For example; Production Control
personnel must have the ability to identify critical shortage
items and issue shortage requirements direct to production
or shipping from the receiving dock.
Policies and procedures. This is where the rubber meets the
road. Having the right policies and procedures helps translate
the vision into action. These procedures are how manage-
ment will run the dayto-day business to meet customer
demand. A companys processes must be dynamic and have
the exibility to adapt to changing customer requirements.
Processes. This revised approach to factory material
ow requires new and different business processes. That
means working in collaboration with your suppliers to plan
production and forecast demand for materials, instead
of generating orders and expediting when materials do
not show up on time. Examples include: combining the
receiving process with kitting and POU delivery so materials
dont sit around gathering dust (and tying up capital);
Requesting replenishment in small batches throughout the
production cycle, instead of placing a big request at the
end of the shift; Addressing production problems as they
occur, instead of putting them off until later (or never),
and; Scheduling downtime for maintenance to reduce
unexpected disruptions. These are just a few common
examples. The right answers will depend on the unique
needs of your business.
Technology. A pull model for material ow needs to be
synchronized across the business. This requires integrated
systems and information fow. Specifcally, the Enterprise
Resource Planning backbone should be seamlessly inte-
grated with the systems for shop oor management,
transportation management, and other systems. Few A&D
companies have achieved this level of integration within
their own four walls. Even fewer have established inte-
grated systems with their suppliers and customers.
People. When contemplating a fundamental shift in your
business, it is easy to focus all of your attention on systems
and processes. After all, those are tangible solutions to
tangible problems. However, in many cases, the most
important changes revolve around people. This new
approach to factory material ow requires new skills and
capabilities. Managers and staff who formerly spent their
entire day focused in one narrow area, such as receiving may
now be asked to expand their scope of expertise to include
kitting and delivery. That will require cross-training and
improved exibility. The new approach also requires people
to change their mindset and behavior. In the old cost-plus
environment, people were rewarded for maintaining the
status quo and not making waves. In the new performance-
based environment, the focus is on efciency and continuous
improvement. Ignoring the people issues that are likely to
arise during a transformation is a recipe for failure.
9
Keys to success
Although the ideal approach varies from company to
company, there are a number of effective practices that
are almost universally applicable. Here are just a few of the
lessons weve learned helping A&D companies and other
manufacturers in their efforts to address their material ow
challenge.
Create a single integrated scheduling system to
support pull. The new vision for factory materials ow
requires close coordination within the factory and across
the entire supply chain. An integrated scheduling system
that is based on pull signals is the backbone that makes
such coordination possible.
Revise your factory layout. Under the pull model,
smaller batches are delivered more frequently. To support
this higher velocity, the production line layout must be
modied to maintain reliable and efcient replenishment.
At the same time, reduced inventory requirements should
enable a more compact operation with less distance
between stations.
Keep track of your supporting materials. When opti-
mizing their materials ow, many companies forget about
the containers and xtures used for kitting and assembly.
If these supporting materials dont have an efcient return
path from the POU, they can bring the production line to a
grinding halt.
Focus on visibility. Many companies lose track of their
materials once they enter the receiving dock. They might
know the location of materials in the warehouse or factory,
but they dont know exactly where they are located or
what state of production they are in. A similar problem
exists for materials in the supply chain. Without visibility, it
is impossible to optimize your materials ow. Remember, if
you dont have visibility to it, you cant manage it.
Improve your kitting approach. In a high-velocity produc-
tion environment, it is necessary for companies to have
material visibility down to the component level in order to
maintain material ow. Business policies and procedures
need to be established and maintained to manage kits
that are issued to production with material shortages, in
addition to having the capability to replace a damaged or
nonconforming component to a specic kit.
3PLs. As customer demand increases, companies often
require outside support to address capacity constraints
and reduce cost. Third Party Logistics (3PLs) companies
can be leveraged to support logistics activities across the
value chain, including inbound logistics, yard manage-
ment, outbound logistics and distribution, aftermarket
services for spare parts and returns, and manufacturing
support. Manufacturing support may include activities,
such as kitting, subassembly, inventory planning, and line
replenishment to the point of use. 3PLs have been success-
fully leveraged in multiple industries in both union and
nonunion environments.
Supply Chain Collaboration (SCC). Effective SCC can
reduce the time and expense required to bring new
products to market. It can lead to more efcient opera-
tions by reducing inventory, reducing the risk of cost
overruns, and delays in production and delivery, and it can
strengthen a companys ability to compete.
10
Taking action
In todays challenging economic times, it is imperative
for A&D companies to demonstrate to shareholders and
government customers the ability to reduce cost, build
in quality, increase throughput, and have adaptive exible
processes in place to meet changes in customer demand.
We believe the Factory Material Flow capability can help
you in you efforts to achieve such tangible results as:
Reduced inventory levels with greater balance
Increased material visibility
Improved production effciency and cycle time
Enhanced collaboration and integration with the supply
chain network
By embracing the FMF capability, companies can success-
fully lay the foundation for future growth. The following
four-phase approach should be considered as you
implement and improve your companies FMF capability:
Is your company faced with solving the Material Flow
Challenge? Deloitte has helped clients across a wide range
of industries use this approach in support of their efforts
to dramatically improve their processes and increase their
internal capabilities. Our services have helped our clients
achieve signicant value creation and Return on Investment
(ROI).
Other common levels of improvements weve seen are
highlighted below:
Greater than 50% improvement in throughput
Greater than 50% reduction in cost of quality
Greater than 25% reduction in direct and overhead labor
Fixed asset utilization levels of 70% to 80%
5% to10% reduction in supplier cost
40% to 90% reduction in inventory
Assess
Gain insight into current operating practices and limitations related to material availability
and replenishment from supplier to POU.
Understand the current manufacturing capabilities and operational barriers, internal and
external, related to the production system.
Reconfgure
Establish the processes and systems necessary to ensure a balanced, visible, and uninterrupted
ow of material from the supply chain to the line to support production rates and product mix.
Defne fexible, high-velocity manufacturing capabilities to convert customer-specifc require-
ments into defect-free assembled products.
Implement
Deploy consistent and reliable material replenishment capabilities
to support lean/pull production system.
Deploy reconfgured lean/pull production system.
Conduct a phased rollout of the lean production model.
Sustain
Keep inventory levels in sync with changes in supply and demand.
Support culture change to maintain sustainability of lean/pull execution model.
Measure performance and continuously improve.
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