November 1996 € Volume 6 € Number 11

Is Production Performance Too Good?

By Mike McCormick, CPIM

W hen performance directives are met or exceeded, recognition is given for a job well done and attention turns to areas in obvious need of improvement. But we must look at high performance areas to determine what is really happening. Sometimes we can use them as a "best practices" example for improvements elsewhere. Sometimes exceptional performance in one area is the direct cause of problems in others.


The scenario
Production planners, plagued by shortages, are working long hours to keep the production line satisfied with raw material. The planning of future production is a luxury, as all of their time is required for expediting purposes. The schedule in the system is inadequate. They must release orders early to keep the work flow from stopping. Through frequent informal meetings with procurement to expedite suppliers, they are managing to keep production moving.

Procurement is also putting in long hours, but with growing frustration. Every purchase requisition they receive is an urgent need for production. The need dates on new orders seem impossible to meet and buyers are continually calling their suppliers to pull in delivery schedules. Authorization for priority shipping has become the rule, not the exception.

Despite the problems with material supply, the production department is meeting aggressive goals to improve efficiencies and meet direct labor standards. Overtime is at a minimum, the level of work-in-process inventory is high, and work stoppages have dropped substantially. Production schedules in the system are out of sync with real needs so the production manager schedules the shop floor himself. Through his efforts customer demand is not only being met, but exceeded.


The perception
In their monthly review of the Cost Summary Report, management sees direct labor costs are doing well, but growing overhead and material costs are eating into profits. Customer satisfaction is OK, but cash flow is poor. The procurement manager is told to improve the situation in the short term. The production manager is congratulated and tasked with keeping labor costs at current levels.


How the scenario evolved
In the beginning was "The Plan." The plan was developed with input from all functions to establish a top-level production schedule that could be met while meeting financial objectives. All functional managers signed up to the plan and the plan was put into motion.

The production manager was then given aggressive goals to maintain a high level of performance as measured by cost accounting metrics of labor standards and labor efficiency.

Production planning and procurement set up a material input plan to meet the initial production schedule with a few weeks of inventory as a buffer. Purchase requisitions were released and suppliers were scheduled to deliver material to meet the plan.

Once production started, the production manager began efforts to reach a high level of performance. Innovations on the floor successfully reduced production cycle times. It didn't take long to realize that the schedule was not aggressive enough to satisfy performance goals. To maintain a steady flow on the floor, the production manager developed his own shop floor schedule which necessitated pulling shop orders sooner than the original plan.

It also didn't take long to deplete the inventory buffer created by production planning and procurement. Shortages began to interrupt production, and planners and buyers began their neverending mode of expediting.


The problem
The production manager changed the initial formal plan but the plan doesn't know it. He made informal changes to the schedule during execution, but the supply system continued to plan raw materials based on the unchanged formal plan.

If there is a need to change the plan, the whole organization must be aware of, and contribute to, revisions to the formal plan in the system so it can be supported.

The exceptional performance by production was the direct cause of the problems in material and overhead.

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