FW1 - Mental Imagery
Look at the map.
235 days before opening.
Before selling, you have to produce. It means that the first task of any business is to manufacture or assemble goods and services. It's the manufacturing process.
This crucial task relies on the Operation Department and notably on the manufacturing process, which is currently the most expansive component of any business.
Manufacturing process is often connected to industry but we shall use this term in a broader meaning for describing any productive process either in an industry or either in a service.
Lesson: 1,5 hours
External readings: 9 hours
Do it yourself: About 10 hours
Total: About 20 hours
The objectives of this lesson about manufacturing process are:
-To give you tools and advices for establishing your manufacturing process.
-To show you some alternative methods for reducing the cost of the manufacturing process.
-To show you how to estimate the starting costs and the running costs of this process.
By the end, you should be able to plan your manufacturing process and to collect the first elements for implementing it.
1-NEW DESCRIPTION OF THE GOOD OR SERVICE
The Operation Department has to produce or manufacture goods or services. To set up and schedule the process, the Operation Department needs a very precise description of the good or service.
You had already describe this good or service in your first sketch but according to your market study, you have probably introduce some improvements.
You must therefore describe again your product! It must be right now the final and very detailed description including packaging and so on.
Once the good or the service has been described, you must define how you will produce it: It is the manufacturing process.
Regarding marketing and sales, there are a some classical channels and we can aim to describe them entirely. Regarding manufacturing process, there are thousands of different process according to the good and the service you product. It's quite impossible to describe them. However, you can follow some basics.
21-What is a manufacturing process
What is a manufacturing process? It is the description of all the technical operations you have to realize for producing one unit of the good. I will give two examples: a good and a service
Let's suppose that your business idea is to produce plate steels from sponge iron or salvaged materials. To product a plate steel you have to realize the following operations:
Operation 1-Raw materials: Collect and store the raw materials: Scrap or sponge iron: Where do you get it, at what price, how do you store it, what quality is usually needed, how many people do you put on this task: Salary, outsourcing, qualifications, safety regulations an so on?
Operation 2- Melting: Sponge iron is melt in an electric arc furnace: What is the cost of the furnace, where do you implement it, What is the cost of the energy, how many people on this work station, how many quantities can you manage in one hour and how many quantities do you get by the end?
Operation 3-Refining: The melting metal is refined . It means that you separate the chemical elements in order to get the specific steel you need. How do you operate this separation, qualifications wanted, Do you need a chemist for controlling the process?
Operation 4-Casting: The liquid steel is cast in products such as billets: A new list of questions.
Operation 5-Rolling: The billets are heated at 1200c and then rolled in order to get the plates: A new list of question.
That is what we call a manufacturing process and you have to master and to describe it. As you can see the manufacturing process is a very technical matter and you should need to have specific knowledge or to partner with a good engineer.
Fortunately, we have found for you a very good site that describes many manufacturing process existing in industry.
Go to www.industrygate.com . In the search engine window indicate what you are searching for. Many articles or paper provide with a description of the manufacturing process and with lists of engineering companies.
Go back to the previous table about the glacier visit and note down the means required next to each service.
Read extensively the articles that we have suggested above and that give models of process for many industries and services. It does not mean that you have just to copy. It just means that you must know what is already existing in order to get a basic support for your creative thinking.
22-Scheduling and planning
Any manufacturing process is like a flow of successive tasks chained each other. It means that you have to carefully schedule this process.
This flow can be summarized by the following drawing: Raw material: green, manufacturing process: gray, final goods: pink
Globally, the Operation Department receives some stuff from outside, uses it or transforms it and delivers the stock of finished goods to the Sales Department.
The tasks are the actions you have to conduct in order to manufacture the product. Then, you have to organize the chronology of these tasks in order to get the most effective way.
Do not confuse a task and a mean. For example a task is to refine. The mean can be a machine A or a machine B. Your study will determine the means you will use.
The first task begins with the inventories of raw materials and parts of machine that you buy outside. It is the first step. Then, there is your manufacturing process with various lines and in each line various work stations. The process ends with the finished goods ready to be deliver to the customers.
Firstly, you report the tasks in the following table and for each task, you determine the previous stage and the length of the task.
The process is quite simple but you can observe that the quality control operates along the entire process. Of course you have not to add its five hours to the time process as the following chart will show us.
Secondly, you report these information's on the following chart ( the Gantt chart): The chart is constructed with an horizontal axis representing the period of time and a vertical axis representing the task : The bars with various lengths represent the tasks and the time length for each tasks:
The chart shows that you can manage the process in 14 weeks. It means that you have gained 7 weeks compared to the 21 weeks represented by adding each task together!
You can also use the critical path analysis. Starting from the table above, you try to visualize all the time lengths and tasks on a graph. More complex process use PERT. Pert means Program Evaluation and Review Technique. It introduces three options for each length of time for a specific task: The shortest possible time, the most likely and the longest. Then a formula gives the probability of the real time.
You will find an extended description of these tools in the next reading.
Considering this global flow, you can be confronted to four major failures. In making up your planning, you have to remind these frequent failures in order to prevent them.
The manufacturing process cannot produce the final good! There is no final good because one of the work station does not function. Alternatively, there is a final good but with so many defects that it cannot be marketable. This situation is illustrated by the following drawing:
Unfortunately, this situation is very frequent in a new business. It can conduct to delay the real starting of the biz. What is more, unexpected costs most often result from this situation. It's certainly one of the most stressing situation for a new biz.
Real life example.
I have seen a large food company unable to achieve its new factory because one of the boiler never reached a sufficient temperature! It took about eight months to get it!
In agriculture, it's quite a rule: The expected quantity or quality are rarely gotten in due time.
There are three measures for avoiding a technical failure:
-Even if you think that you have a good experience, have all the manufacturing process devices and plans examined by an engineering firm.
-Always include in your contract with your suppliers the obligation to train your workers in using and repairing the machine.
-Have in your contract a clause of well functioning guarantee. It means that you do not pay the last invoice as long as the machine does nor function!
-Have a maintenance contract with your supplier.
Consider that these four measures are a must!
Regarding the defects in quality, their cause can come from different work stations. It means that you must implement a control of quality along the entire production line. Do not forget that a poor quality is often due to the raw materials that do not correspond to the required qualifications or to a bad energy (power cuts can be a permanent cause of defect).
32-Huge inventories of raw materials and parts: The economic order quantity.
Many beginners in business are stuck with huge inventories of raw material and parts. It means that the manufacturing process looks like that:
In this situation, one part of your precious cash is embedded in the inventories. Instead of producing interests in your saving account, your money is earning a negative interest because stocks usually lose their value with time (except speculative) .
Sometimes, it's a normal situation because the production of raw materials is seasonal like in agriculture. For example, if you produce cognac, you have to buy all the grapes at the same time. You cannot buy the grapes in line with the selling of the bottles to the customers.
In other cases, this situation only results from a bad management: People buy high quantities under the pressure of the suppliers and they argue that they get a discount and that the cost of the shipment is lower. Indeed, many bad managers think that it's a good policy to immobilize cash for months in raw materials!
In fact, you have to estimate your stock in using a managerial tool which is called the "Economic order quantity"
-Firstly, let's suppose that your current turnover is 10000 good units per year. Let's suppose that you need 10 raw material units for producing one good unit. It means that you have to order every year about 100,000 raw material units ( it can be wheat, steel, petrol, or anything)
-Secondly, calculate the cost of ordering raw materials. I mean the cost of the order and not the cost of the raw material unit. This ordering cost includes your people cost (the time devoted in back office and accounting for placing an order). Let's suppose that this cost is $100
-Thirdly, calculate the carrying cost of a raw material unit. This cost includes the storage, insurance, and sometimes the cost of the money you borrow for financing these inventories. Let's suppose that this cost is $0,25
Finally apply the following formula:
In this case you find 8944. It's the Economic order quantity. It means that you have to realize:
--------- 100000 / 8944 = 11 orders in the year
Use this easy tool. On the contrary, you risk to contemplate mountains of useless and costly stuff occupying a large room in your factory!
33-Huge inventories of final goods
A very common situation is the presence of huge inventories of final goods in the factory. Look at the drawing:
Once again, this situation can be normal. For example, a toy fabric produces along the year and mainly sells at christmas.
However, except these specific business, the presence of huge inventories of final goods means serious troubles. It can have three causes: The salesmen are on strike but it's a very unusual event since they are mainly paid on commissions! The demand has suddenly fallen. More often, it means that your manufacturing process has an overcapacity.
This situation can quickly conduct your biz to bankrupt because an increased amount of money is stuck in inventories. If your capacity reaches 350 per month while your sales remain at 300 per month, you get 50 in inventory the first month and 600 (50*12) by the end of the year. Your only way is to reduce the production and the the work force.
To avoid this frequent and deadly mistake, always have a capacity lower than your forecasts. If your expected forecasts are effectively reached, you can rent the capacity you lack and then increase it in benefiting of the latest technologies.
On the contrary, overcapacity often means death penalty for many business: Be very cautious about capacity. Beware of the suppliers who always make pressures to sell machines in order to raise the volume of their sales. Be minimum staffing and minimum equipped!
Real life example
According to my experience, overcapacity in small industry is the major cause of failure.
This phenomenon hits all the sectors: I could tell you countless stories on this matter.
Once again this problem frequently appears: Let's suppose that your machines work and that the final product reaches its standard quality. Nevertheless, there is something wrong because some work stations are always waiting for the trough. What is more you cannot satisfy your demand despite a sufficient global capacity. It means that there is a bottleneck in the process and it gives the following situation:
You will find easily the cause in monitoring the process. One work station has a low capacity. As all the chain moves according to the speed of the lower element, this works station is slowing down all the process.
Sometimes the machine has a lower yield than expected. Sometimes, the floor workers do not know how to use it. Whatever the reason the mistake is very easy to correct. Add a new machine or new people. Among the threats we have surveyed, it's certainly one you can easily solve without major prejudice.
Very often, the bottleneck is just a matter of workers. Let's suppose that a machine sends to the next work station 1000 bottle per hour. Once arrived on this new work station, a worker has to put a label on each bottle. Let's suppose that he can apply 200 labels per hour. Of course you will have a bottleneck and the assembly line will slow down due to the capacity of this unique worker.
You can recruit four workers for the labeling station but it would be a costly and bad solution because your automated process should be interrupted by a manual and outdated process in the labeling work station. Just buy a new machine with the right capacity to do the work and instead of recruiting four people, fire the one you have who will become useless because of the new machine.
If you avoid this four threats, you can reach the perfect flow: The black arrows means that you reduce time, you reduce machines and workers, you reduce costs, and finally you only focus on the value you add: That is the excellence:
Go to http://peerspectives.org . Click on "Operations and technology". You get 17 subtopics and for each of them an average of 5 quick read dealing with technology and manufacturing process.
Once you have established your standard manufacturing process, you could face a very complicated and expansive system. So you have to sit down and to think!
41-Target the value you bring to the customer
Remember the economic course and focus on the final steps of any process. It's here where the value is the higher both for the customer and for yourself.
Let' s suppose that you intend to bring a new perfume on the market.
The manufacturing process of a perfume implies the plantations of ylang ylang in Mauritius, the plantation of limes in Ivory coast, the production of the essential oil, the refining, the conditioning, and finally the adding of some items which constitute your core secret for producing a new perfume.
Do you intend to perform all these tasks and to transport yourself to Mauritius for planting ylang ylang? If you do like that, you will soon realize that the real value you add (that only relies on your secret mixture) represents just a tiny part of your global manufacturing process. Look at the drawing: value added: gold
It means that you must concentrate on your core value. Recall the course on specialization. Do not plant ylang-ylang and limes! Do not boil the flowers of ylang ylang or the leaves of the limes! Just buy these raw materials on the international market and only manufacture your secret mixture.
42-Assemble rather than to produce
In short, just assemble the products which are made by others producers and focus on the value you add.
Does it mean that you have not to matter with the manufacturing process? No because even if you do not do it, you have to control it. It means that if you want to have the right quantity, the right quality at the right time, you have to monitor your suppliers: The contracts must emphasize on regularity and quality. It means that the choice of your suppliers is a crucial stake.
You can imagine an industry with zero machine, zero staff, and zero location! The boss just manages a vast number of contracts with a multitude of suppliers, consultants and outsourcing. In our perfume example, instead of making the mixture by himself, he gives the recipe to a final contractor who does this task.
In some case it should be expensive but more and more big companies work like that! Instead of floor shops and machines, they manage a large army of lawyers and supervisors for establishing the contracts and controlling the manufacturing process of a multitude of contractors.
Real life example
I have known a guy who worked like that. He sold factory mills to African governments in any domain: textiles, metallurgy, chemical, food industry and so on.
He just asked descriptive and pro forma invoices to major suppliers. Thanks to these descriptive's, he drew up the plan and the manufacturing process of the future factory. Then, he ordered the stuff in Germany or in France. An engineering firm was in charge for assembling machines and equipments on the location. By the end, our man had just to give the factory keys to the African minister.
You could think that the final factory was very expensive because it was loaded by the profits realized at each step by the suppliers. In fact no because our man chose each time the best offer. Secondly, he had no brick or mortar, no staff, nothing. He had just to add to the suppliers costs, the cost of his own working time for the management of the entire process.
The problem was that the African customer had not any trained people, no technical guarantee and of course no maintenance. As a result, these factories just worked the opening day and then fell in a profound sleeping!
Once your manufacturing process is completely described, you have to list all the human resources and materials you need and to estimate their costs.
We shall go on with the simple example of the small steel industry.
According to your description, you list all your costs per unit, per month, and then on several months in distinguishing the start up period and then the running period.
In this example, we suppose that you do not get cash receipts in the six first months. It's the starting period and all the costs have to be accounted in the money you need for starting the biz. On the contrary the running costs are calculated on 12 months.
The cost can be calculated approximately from the labor market situation and social regulations.
item----number-- monthly cost-- starting cost-- running cost
Team leader 1--------4000------------24000---------48000
Total--------- -------14000----------- 84000--------168000
512-Equipments and consumables
Carry out the same calculation for Equipments, i.e. goods you can use for several years and consumables which disappear as soon as they have been used)
item---------- quantity--------- catalog cost------- Total cost
Machine 1 --------1---------------20000------------ 20000
Machine 2---------1 --------------10000-------------10000
Machine 3 -------- 2 ---------------5000-------------10000
It could be raw materials (Sponge iron), parts for the machines, petrol, energy and so on: Let's suppose 5000 per month.
Cost during the starting period: 5000 * 6 = 30000
Cost during the running period: 5000 * 12= 60000
513-Total cost of the manufacturing process
Categories------- Start up period------- Running period
Equipments--------- -40000--------------------- 0
Consumables : -------30000---------------- 60000
Once you have done that, you must analyze each item and any cost.
-Firstly examine any item and ask yourself the following question: What service is provided to the customer? How much is the customer prepared to pay for this service? What benefit do I gain from this cost?
By asking questions in this way, you will notice that certain costs are unnecessary.
What is more remember your competitive advantage. If your advantage is quality, you must set up a very precise total quality management tending to zero defects. If your advantage relies on low price, you must find all the ways in order to reduce the costs along the assembly line.
In short, you cannot satisfy yourself in just implementing the standard pattern. You must show creativity in order to maximize your competitive advantage.
-Secondly examine the price of each item. As long as a cost is profitable for you, you can increase it (see possibility production frontier and law of decreasing yields). Remember that when profits are only minimal, a simple fall in turnover may transform this cost into a loss.
-Thirdly: As in FW 12, apply to these costs the following golden rules:
1-Equipments: Whenever I can, I rent. If I can't rent, I buy second hand on the international market. You would be surprised to find just how many machines are for sale for peanuts!
2-Staff: I only hire people on open-ended contracts. I try to use temp agencies.
3-Globally: I assemble instead of buying or recruiting. I only use an equipment or a service and pay for it when I need it.
If you apply these golden tips, you will halve the costs of your operations.
Go to www.myownbusiness.org . Click on "course" and then on "Session 6: Location and leasing". It is the good analysis with a quiz about the advantages and disadvantages of leasing. The analysis mainly considers the building and office but it can be extended to the equipments.
In any business, the operations cover the process of producing the good or the service. It is your first task, because before selling, you have to produce or to assemble.
Once the product is well described, you have to schedule and organize its manufacturing process. You may use Gantt chart, critical path analysis and PERT.
Beware of the four major causes of failure: Technical failure, Bottleneck, huge inventories of final goods; huge inventory of raw materials. Always get the validation of an engineer.
If the manufacturing process appears too complicate or expensive , follow the new industrial trend and focus on the idea to assemble rather than to produce.
Maybe you could find a new process better adapted to your resources and capacities.
Once your manufacturing process is defined, establish the grid costs and separate the starting costs and the running costs. Then, analyze carefully this grid cost and once again use creativity.
DO IT YOURSELF
-your manufacturing process. If you are planning to start industrial manufacturing, describe the production process with drawings, and show them to a consultant engineer.
Do not hesitate to ask detailed estimates from some big suppliers. It can give you useful ideas. Do not hesitate also to visit the plants of your competitors!
-Your costs. You had made a first rough assessment with your first sketch. You have now to go to the specifics. All your figures must be based on the pro forma invoices that you have collected (see FW12).
What is more, contact the suppliers and ask their conditions for selecting the best one. Price is not the only criterion. Focus also on the guarantees regarding the functioning.
2-Go to your business plan:
Open your Plan ware folders and put on a spreadsheet the grid cost of your manufacturing process.
Click on Contact