Finding Herbie

The way things are now

Any business is made up of multiple changes occurring either simultaneously or in an array of related sequence. There are routine variations and improvement is an ongoing process.

In today’s economy; business survival is a daily challenge. Small businesses are expected to be agile in changing their production plan at a short notice to cater to their clients wavering needs.

Now what do customers usually need? They typically want on time delivery of good quality material in small quantities so that inventory is less all the while demanding a cheaper price. But this is easier said than done.

Automation does not come cheap. You need uninterrupted power supply to run such facilities. In India, small businesses are often located in remote areas where the last mile connectivity is missing. Labor shortage and unionism are everyday issues. Infrastructure is under developed. Running a small business in these circumstances is an everyday challenge. 

When I started looking into various aspects of our family managed manufacturing business; my dad (who spent close to 40-42 years working in large manufacturing companies) asked me to read The Goal by Dr. Eliyahu Goldratt who is famous for his Theory of Constraints. 

The underlying management idea behind TOC is to achieve more of the goal of a system. Contrary to popular belief, “When all are working all the time, then it is inefficient work.”

Dad used to say that the book is like a Bible for the manufacturing world and every newbie should absorb it. Like Jonah, my dad was my mentor. And I was (am) Alex in certain aspects as I continue to try and improve the operational aspect of the business. My first lesson in manufacturing was – “There are just too many variables and each can be a potential Herbie.”

Who are what is Herbie

In the book, Herbie is a character that helped Alex to interpret the concept of a bottleneck. A bottleneck is the cause for productivity loss and reduction in output of a system. Goldratt says that bottlenecks have to be identified and load balancing done to ensure throughput is even and we get more of the goal.  

Look at the above image. However, large the bottle maybe, rate of water entering or leaving it will depend on the diameter of the neck.

What is productivity? Making more money? Increase profits and ROI?

It means to improve throughput – (rate of sales), cash flow, reduction of inventory and operational (money used to convert inventory to throughput) expenses.

Thus, Total plant capacity = Bottleneck capacity.

Bottleneck per Unit cost = Total plant operation cost/ total bottleneck production hours

Goldratt advises – “Do the work only when that is needed.” Make what you will sell and not what you will stock or to increase work load or increase production efficiency. Focus on the pull method instead of push.

Essence of Time

In a process industry, the steps are either sequential or parallel converging at some point. If there are multiple steps that finally converge, aim should be to coincide at the point of convergence instead of some processes getting over early and then waiting for others to catch up. Easier said than done though!

But, we can try to identify the slow throughput processes and increase manpower there to expedite output. Load balancing is the key and probably lower batch sizes. In our factory, we were used to making large orders. Now with the shift in economy, people are ordering multiple items in smaller lot sizes. It affects setup time but able to manage more clients and inventory is less as we manufacture and dispatch. Tricky but completely doable!

This brings the concept and importance of Time in manufacturing – Setup, Process, Queue and Wait.

Setup is time required to set the machines to start production.

Process time is the span from start of production in a system to getting the output. A system can have many smaller subsystems.

Queue is waiting at bottlenecks to be processed.

Waiting is a part waits for another to finish for others to finish and catch up.

Today, Overproduction (in make to stock businesses) is a huge waste.

Find the critical path and how to reduce stress on bottleneck. Maybe add extra hands, increase number of machines, change the process layout. Something will definitely make a difference. Goldratt points out that “Quality control should be done bottleneck process so that defects are not worked on.”

My takeaway from “The Goal”

The story is of Alex, the plant manager of UniCo, a manufacturing plant in Bearington.  He has couple of other specialists to help him with his job which I don’t have. With my limited resources, I am also trying to achieve my twin objectives of cutting costs and increasing efficiency.

I do have a Plant Controller Lou and Production Manager Bob merged into one as our Production and Factory Chief. Stacey the inventory control manager in our small business is one person who does billing, stock management and even doubles up as an extra hand in production when the need arises.

I am managing Purchase, Customers, Collections and Productivity enhancement projects. I am Ralph Nakamura the data processing manager working in tandem with our Accounts manager. Luckily, the company is now functioning under the supervision of a Chartered Accountant (who also happens to be my husband).

Our largest Herbie today is availability of labor and continuity of service.

One might advice to go for automation and overcome the manpower issue but in smaller lot sized plants like corrugation, full automation is a bane. The challenge for small businesses is to keep the throughput intact with lesser number of skilled manpower and technology (especially in India).

Financial performance and reporting is crucial. The second Herbie is lack of adequate liquidity and internal accruals. We have to reduce operating expenses by increasing production and streamlining cash flow.

To compete, we have to be flexible towards market demand. On one hand where we must be getting more orders and processing them, at times it makes sense to forego some business where capital might get locked. Not doing a particular business is also a critical business decision which many of us often overlook. Warren Buffet has not only made money by investing in good stocks but also by identifying the bad ones.

Now I consciously focus on what the constraint is, how to fix, and focus efforts on it and continue doing it. If I cannot increase sales, I try to reduce my inventory, increase the inventory turns and reduce expenses. This has given me additional capacity and when I use it I am only paying the Marginal Cost as my fixed cost remains the same. After all, in business Bottom-line is important.

The bottleneck “Herbie” will keep on shifting and that is why we need go to the Gemba (real place like a workplace where action is happening) and do Genchi Genbutsu (go and see for yourself) to identify it as it moves. We will discuss my Gemba and Genchi Genbutsu encounter in the next post.