CostCents

Production / Process Planning and Enterprise Cost Management

What is the difference?

A lot of people ask what the differences or similarities or links ares between Production / Process Planning and Enterprise Cost Management.  Do they work together and if so, how? Good question.

One framework to consider both within is the point at which they occur in the new product introduction cycle. Enterprise Cost Management can operate from conceptual design through launch and after during cost reduction activities. However, the profit improving changes identified by Enterprise Cost Management, whether before production begins or after, are changes that must be implemented in the future. Production Planning, on the other hand, is focused on finding the best way to implement a change once the change is identified and authorized. In other words, Enterprise Cost Management starts when design starts, whereas Production Planning, while a consideration in design, is more pertinent once design is finalized.

So, does Enterprise Cost Management support Production Planning beyond identifying the changes for product planning to implement? Yes. Production Planning seeks to contribute to profit by scheduling the factory floor in the most efficient way possible with goals such as minimizing inventory and maximizing throughout. It is supported by its own software solutions, which may be stand alone systems or part of another enterprise software category, such as Manufacturing Resource Planning (MRP).

Does anyone know the time?

However, in all cases, the primary input to a Production Planning System is time. Production Planning systems use the cycle time of each activity on the production floor to calculate throughput of activities and minimize throughput and inventory through optimization schemes and production philosophies, such as Theory of Constraints.  But, where do production planning systems get this primary input [cycle time]?  After all, how do you know the cycle time of activities in a factory, until you have completed the activities for a long enough period that they reach a steady state?

There are several possibilities:

1. Stop Watch - One possibility is to time the activities on each part or assembly action in each workcenter. This provides the most accurate cycle times as input, but is very time consuming.  Furthermore, you want your production  line to reach stead y state before timing the activities.
2. Standards - Another way is to approximate the time activities will take through “standards.” These are tables of times assigned to certain activities based on past experience. This is less arduous than timing with a stopwatch, but requires an expert to assemble the cycle times from standards. It is often far less accurate than timing, because standards average the time for activities across many different types parts or assemblies.
3. Expert Opinion - A more primitive, but faster method to estimate of cycle time is expert opinion.
4. Similar Parts – Another approximation would be to look at the historical times in the factory for activities on parts or assemblies that are believed to be reasonably similar and then extrapolate a new estimate for the new component from the historical cycle times.

All of these methods have their pro’s and con’s. None are that appealing.

A new way for providing cycle times to Production / Process Planning systems

If you are using and Enterprise Cost Management system, you have a new and better way at your disposal to generated cycle times to feed the Production Planning system. Good Enterprise Cost Management systems generate their costs by converting geometry and other non-geometric cost drivers to cycle time, mass, tool wear, and other physical costs. These are then converted from physical to financial costs by the accounting methodology employed by a factory. Let’s not focus on the final cost, but on the intermediate value of cycle time.

That’s right!  The Enterprise Cost Management generates cycle time as an intermediate byproduct of its costing calculation. Furthermore, the Enterprise Cost Management system calculates cycle time in a much more rigorous method than standards, expert opinion, or similar part comparison. It calculates cycle time using physics based mechanistic models for the processes covered by the Enterprise Cost Management system. There is no more accurate way to calculate cycle time that this, other than actually timing the activities with a stopwatch.

Using the cycle times generated in real-time by an Enterprise Cost Management system as the input to Process / Production Planning is an exciting opportunity to not only increase the accuracy of the planning software, but significantly reduce the time it takes to generate cycle times to feed the Production Planning software.

Just a note on Routings

Those of you who use Enterprise Cost Management systems already know that they can find the lowest cost routing of a part. So what is the difference between the routing generated by the Enterprise Cost Management system and the routing from the Production Planning system? The routing in the Enterprise Cost Management system is chosen assuming that there will be sufficient capacity on each of the machines to use the chosen routing. That’s a reasonable assumption considering that Enterprise Cost Management assumes that the part or assembly will be made in the future and that capacity is only fixed in the short term. I.E., the factory can always add capacity in the future. Capacity Planning is not the job of the Enterprise Cost Management system; identifying profit opportunity is. Capacity Planning is the job of the Production Planning system. That is why Process Planning exists. However, as discussed above, Enterprise Cost Management can greatly facilitate the capacity planning work of the Production or Process Planning system by feeding it the cycle time input it needs.

So how do I use them together?

So how do you use the Enterprise Cost Management and Production Planning systems together.  Easy: first use the Enterprise Cost Management system to identify cost saving ideas.  Then use the Enterprise Cost Management system to instantly calculate the cycle times for any machine or process of interest for any routing of interest.  Finally, input these cycle times into the Production / Process Planning system and optimize the production run as typical.   It is a simple process and allows each system to focus on what it does best while supporting the other.

Happy planning and profit hunting - Eric

Habeas Corpus Data!

One of the pillars of the US Legal system is the concept of Habeas Corpus - loosely that the court and legal council have the right to bring the prisoner before the court to determine if there is any basis for the prison holding the prisoner.  It's one of the major tenets that separates countries with a strong rule of law with protection for the individual form tyrannical regimes. 

Therefore, let it be resolved that today, the 31st day of January in the year of our Lord 2008, forthwith, henceforth, and with many other official sounding but confusing legalese English terms that I am saying to all customers of Enterprise Cost Management: Habeas Corpus Data! - Produce the body of the data [supporting your cost numbers]! (sorry if my Latin is wrong... maybe someone can comment and correct it.)

What I mean is this:  When an Enterprise Cost Management platform supplier engages a customer, the customer has an insatiable need to "match the number in the box".  Reason, logic, and common sense be darned - regardless of how good the Enterprise Cost Management supplier's cost models are, they must produce the same number as the customer's historical system or supplier quote produces ... or the number from the Enterprise Cost Management system must be WRONG!

OK, the number from the Enterprise Cost Management system may be wrong. But, how do we know?

A Typical Example of Habeas Corpus Data
Let's say you have a tube part that is made by a simple routing of:

1. Saw off the tube to the right length
2. Punch some holes
3. Put a couple bends in
4. Machine a couple holes
5. Paint it
6. Oh yeah, and don't forget the cost of the material.

Often the number the Enterprise Cost Management vendor gets from a customer is... the final cost:  $30.00.  And the Enterprise Cost Management system had better match $30!   But, the Enterprise Cost Management system says $40.  So the Enterprise Cost Management vendor says "OK, well $30 is interesting, but fairly irrelevant.  Are all processes $5 and the mater $5?... or what?"  Believe or not, the customer often has no clue.  They cannot produce the data.

No data? Then you have no right or basis to say whether the Enterprise Cost Management platform's number is wrong, whether the quote or historical number is wrong, or whether both numbers are wrong.  Habeas Corpus Data.

What Satisfies the writ of Habeas Corpus Data?

Cost at the individual process level is the bare minimum for a customer to be able to fairly question the ECM number.

What is truly useful and IS the responsibility of the customer as the partner of the Enterprise Cost Management vendor is to provide the Physical Data.  For example, let's say:

Cost_of_Labor = Labor_Rate * Cycle_Time

It is important to know what these numbers were at the time of the calculation of the historical cost number the customer is using as a benchmark.  You probably should know how the cycle time was calculated too, right? 

Historical numbers are notoriously stale and quite frankly, Labor Rate (or any accounting rate) is fairly meaningless for, at least, two reasons.
1.  The cost rate is part of accounting, which is just a human construct and can actually add noise and confusion to the analysis.
2.  The cost rate is probably out of date.

Often the customer gives the Enterprise Cost Management vendor yesterday's cost and today's Labor Rate, which leaves the Enterprise Cost Management vendor baffled as to why the Cycle Time they back calculate from these to numbers seems to be so far off from what the Enterprise Cost Management platforms models produce. 

What the customer should be asking is "can my Enterprise Cost Management platform match the physical resources consumed to make this part?"  This is a great question and a fair question.   Physical resources (time, mass used, tool wear, etc.) don't change with time and should only change supplier to supplier for real reasons, such as one supplier is inefficient, one supplier made the part in a different routing, suppliers have different machines, etc.

However, to do this the customer needs to observe Habeas Corpus Data. Customers should start to demand Habeas Corpus Data from the sources of their historical or benchmark costs, whether that is from an internal plant or from a supplier.  What is the minimum requirement to satisfy Habeas Corpus Data for an assembly or part:

1.   Material Cost
2.  The finished mass and rough mass (Material Yield) needed.
3.  The Good Part Yield (scrap) if substantial
4.  Processing Cost of each individual process.
5.  The Cycle Time and Labor Time of each individual process.
5.  If part specific capital tooling or expendable tooling is used, what is the tool life consumed to make one part and what was the capital cost of the tool
6. What where the specific accounting rates (material cost/mass, Labor Rate, OH rate, etc.) at the time the benchmark was calculated.

1, 4, and 6 are actually optional, if the customer is comfortable with the concept that:

Cost = Physical_resource_used * Rate_per_quantity_of_the_resource

Some supposed Enterprise Cost Management vendors try to defy Habeas Corpus Data by just curve fitting their "cost models" empirically to the final historical cost numbers of the customer.  But, this can be meaningless.  It is only telling the customer what he already knows.   The huge assumption made is that there is no bad data in the sample costs and there are no costs that are out of market (over or under priced).  There is no justification of WHY something costs what it does or whether it should cost this amount. 

That is why mechanistic models are a better method on which to base Enterprise Cost Management.  They give the ability to everyone to understand WHY something costs what it does.  Even without Habeas Corpus Data being satisfied, a mechanistic model will be:

• Directionally Correct
• Relatively accurate (provide very good % cost change between alternatives)
• Be within at least one order of magnitude of the final absolute cost number

If the customer wants the mechanistic model's cost number to be accurate to an absolute dollar amount, Habeas Corpus Data.

Concluding Arguments to the Jury

So, in conclusion, customer of Enterprise Cost Management need to be responsible and fair to the Enterprise Cost Management vendor.  Questioning a the results of of the Enterprise Cost Management system if very fair, but only if the customer can reasonably satisfy Habeas Corpus Data.  This is true whether you are implementing and Enterprise Cost Management platform or whether you are partnering with and Enterprise Cost Management vendor to develop models of new manufacturing processes.  You are neither helping the Enterprise Cost Management vendor, nor yourself if provide the Enterprise Cost Management vendor no data or data without sufficient mechanistic depth to satisfy Habeas Corpus Data.

As the old engineers saying goes "In God we trust.  All others must bring data."

Or, maybe more appropriately to the legal metaphor, "If the data don't fit, you must acquit!"

Sustainability, Granola Definition, Part 1

We are taking a break today from our "Anatomy of Cost" discussion to discuss "Sustainability."  Dr. Michael Lamoureux of Sourcing Innovation sent a note out to all of us in the enterprise software blogger nation asking us to address this topic.  When I asked, what does this [sustainability] mean, Mike indicated that this was precisely the question.  Apparently people are bandying the word about, and there is disagreement on a canonical definition.  Hmmmmm... well alright, I am going to give this a try.

Today's Definition of Sustainability

For the next couple of blogs only, I am going to consider sustainability in the 'go green,' save our planet, recycle and reuse sense.  I would like to discuss some other aspects of sustainability in future blogs.

Now, if you read on expecting some pretentious exhortation about how you should "go green" and how to "do well by doing good," you will be disappointed.  I am not educated enough on the general case for or against sustainability.  I'll leave it to the AlGorites and NPR to make that case to you.  I assume you believe it.

My purpose and duty as a instructor in Enterprise Cost Management, is to help you understand how to COST or value the PROFIT of sustainability in your product cost.  This sounds daunting, but I don't think so.

How Sustainability Affects Your Costs

Let's look at where sustainability impacts the Cost Statement (revenue affects of sustainability are out of bounds in this blog).  It affects the Cost Statement in the same way ANY cost does:

1.  Material Cost
2.  Labor Cost
3.  Direct Overhead Cost
4.  Amortized and Capital Investment Costs
5.  Period/Indirect Overhead

Material Cost
There is obviously more than one component of material cost.  First, we have the delivered cost of the material that includes the material composition, form affects, purchase volume effects, etc.   Obviously, choosing sustainable materials will affect this.  For example, using a biodegradable plastic may be more expensive than a non-biodegradable plastic for the same quality.  On the other hand, using a plastic that is recycled might be cheaper (but could impact product quality negatively). 

But, there is another potential cost as well: disposal.  For example, let's say you are using some RoHS or other restricted material in your product.  You may have a disposal cost per mass for the substance either enforced by a regulation body or invented by yourself to account for the detrimental qualities of the material and disincentivise its use. So your real material cost is:

Cost_Matl = Cost_Commodity + Cost_Disposal + Cost_of_secondary_effects

These are primary effects on material cost, but sustainability may also impose a secondary effect.  For example, if you work for a automotive company, fuel economy (an aspect of sustainability) may be very important to your firm.  In this case, weight is paramount and magnesium has better strength to weight than aluminum which has better strength to weight than steel.   In addition, the fuel economy group should have a $/kg value to fuel economy (e.g. the cost CAFE credits to offset the cost of your very cool mammoth SUV).  In this case, the  secondary effect of sustainability on material cost because of material choice is:

Material_Fuel_Econ_Cost_Effect =
              Mass_of_part * FE_Cost_per_kg *
             (My_material_strength_to_wgt_factor)

where all materials have a strength to weight factor relative to some benchmark.

But, enough of these equations.  My point here is not to tell you how to account for every last sustainability effect in material cost, but just to urge to account for it to begin with!  Good feelings and social conscience are a luxury for bloggers, not for the executive reporting to Wall Street.   If you want to sell sustainability to Wall Street, you will need to prove that it improves the bottom line. 

Next time, we will talk about how to sustainability calculate the Enterprise Cost Management  effect of:

• Labor Cost
• Direct Overhead Cost
• Amortized and Capital Investment Costs
• Period/Indirect Overhead

Enslave the whales! - Eric