Operational Performance in the Aero Engine Industry

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1 Operational Performance in the Aero Engine Industry Dr. Christoph Skudelny Hannover, 1 September 2004

2 This document is exclusively intended for selected client employees. Distribution, quotations and duplications even in the form of extracts for third parties is only permitted upon prior written consent of A.T. Kearney. A.T. Kearney used the text and graphs compiled in this report in a presentation; they do not represent a complete documentation of the presentation. 2

3 Summary GEO/Factory of the Year is A.T. Kearney s proven operations benchmarking competition with more than 600 participants in 12 years Compared to other industries, typical Aero Industry companies rank around the average and show improvement opportunities in agility and economics There are two important agility areas: Manufacturing flexibility and flow Launch Management Management has more than enough techniques and tools available for operational improvement. Success is more an issue of doing things right than doing the right things Constraint in break through improvement is to orchestrate four success factors 1. Transparency, Communication and Measuring 2. Consequence and Perfectionism 3. Change Management 4. Project Management 3

4 GEO Benchmarking Results Agility Management Manufacturing Flexibility and Flow Launch Management Improvement Success Factors 4

5 GEO/Factory of the Year is A.T. Kearney s operations benchmarking competition comparing supply chains form supplier to customer. GEO is a global benchmarking competition A.T. Kearney runs GEO/Factory of the year since 1992 on a yearly basis A total of more than 600 companies did participate The competition covers all operations relevant performance areas and includes the external and internal interfaces GEO is suited for mid sized and large factories comparing the pure operations or a business unit GEO Award by the way why don t you participate? 5

6 GEO evaluation follows a proven scheme in the dimensions Management Practices and Business Success. Strategy and Direction Setting Integrated Processes Supplier Integration Operations Strategy Performance Management Product & Process Development Manufacturing Processes Customer Integration Performance Results Customer Satisfaction Quality Economics Value Creation Supply Chain Integration Agility Enabling Resources Organization & HR Capital Management Knowledge Management IT & Process Technology Innovation Management Practices Business Success 6

7 Operations in the Aero Industry show a typical profile in both dimension (1/2) Management Practices GEO Performance Supplier Integration Operations Strategy Performance Management Product & Process Development Manufacturing Processes Customer Integration Performance Management Product & Process Development Supply Chain Management Organization & HR Supply Chain Integration Capital Management Knowledge Management IT & Process Technology Resource Management Top Quintil Average Aero Industry 7

8 Operations in the Aero Industry show a typical profile in both dimension (2/2). Business Success GEO Performance Value Creation Customer Satisfaction Quality Economics Agility Innovation Top Quintil Average Aero Industry 8

9 GEO Benchmarking Results Agility Management Manufacturing Flexibility and Flow Launch Management Improvement Success Factors 9

10 Operations need to support a high service level in a complex environment. Changing Political Environment Agility Demand Shorter Product Lifecycles Fast Changing Market Trends More Complex Productions Networks Demand Fluctuation Global Competition 10

11 Operations can support agility demands in three dimensions. Improved Forecasting (exact detailed) Forecasting process IT-Systems Chaos algorithms Expert systems Good Luck! More Inventories (in all levels) Expensive! Decoupling from market (finished goods) Decoupling from suppliers (raw material) Decoupling of internal processes (WIP) Higher Flexibility (fast agile) Process stability Chance! Labor flexibility Shorter flow time One-piece-flow Outsourcing of capacity tips Set-up time "0" 11

12 Inventories compensate for lacking flexibility and forecasting. Reason Unpredictable incidents Lacking forecasting Lacking flexibility Demand noise Lacking forecasting Lacking flexibility Seasonal demand fluctuation Lacking flexibility 100% Other Security stock Cyclical stock Demand noise and unpredictable incidents remain 85% Security stock reduced due to agility Base stock determined by order lot size 60% Order/lot sizes Lacking flexibility Base stock Standard flexibility and demand planning Standard flexibility with advanced demand planning High flexibility with advanced demand planning 12

13 Reduced capital deployed in inventories impacts asset productivity (ROCE) two fold. Inventory holding cost reduce profit Inventory volume increases capital deployed ROCE = Profit Revenue x Revenue Capital Revenue = x yield Capital turns -20% Inventory reduction Example 3% Revenue yield 33% Inventory vs. Capital deployed 5% Inventory holding cost vs. inventory value +43% Capital yield 13

14 GEO Benchmarking Results Agility Management Manufacturing Flexibility and Flow Launch Management Improvement Success Factors 14

15 Several factors drive the complexity of the launch task. Complexity of launch Launch readiness Ramp up steepness Product 3 Non standard factor Product 1 Product 2 t t t How big is the task How mature are product and processes How many products to be produced Maturity of new technologies (product and process) Product dimensions Level of customization Learning curve (Engineering and Operations) Catalogue build up Engineering change performance Supply chain performance Factory preparation Launch program Order re-slotting Timeline for CDF 15

16 In the Automotive Industry, a gated process adjusts ramp-up according to levels of maturity, ensuring both quality maturation and speed. Quality maturation driven gateway process Launch parameters Demand Supplier capability Quality maturation RFT Volume (units) Past Planning/ experience target setting Gateway #1 Review of parameters Target ramp-up speed Actual ramp-up Gateway #2 Revised ramp-up target Original ramp-up target Applied approach Maturity progress is monitored with quality gates Deviations are addressed with corrective actions Volume increase after successful passing of gate only 1 st 2 nd 3 rd 4 th 5 th Frozen time span Weeks RFT: Right first time 16

17 In Aerospace Industry, ramp up curve is given and launch quality finally shows in the amount of non standard effort. Complexity of launch Launch readiness Ramp up steepness Product 3 Non standard factor Product 1 Product 2 t t t * Non standard effort Max capacity Delivery date at risk Launch actual (typical) Launch as planned Prototypes first versions early versions mature versions t 17

18 Six main levers determine the amount of non standard work. 1 Steady 2 innovation Product maturity 3 Process maturity 4 Production schedule Complexity of launch Launch readiness Ramp up steepness l t t t Non standard effort 5 E+M 6 E+M capacity productivity E+M: Engineering and Manufacturing 18

19 Four of the six levers are accessible during a running launch Lever Steady innovation Product maturity Process maturity Production schedule M and E capacity M and E productivity Characteristics Given Only long term accessible Accessible Focus area Accessible Learning curve Given and fixed Overall target Accessible Focus area Accessible Focus area 19

20 GEO Benchmarking Results Agility Management Manufacturing Flexibility and Flow Launch Management Improvement Success Factors 20

21 Aero Industry operations have special requirements and constraints but no road block to become world class. Aero Industry Characteristics Agility Service Level On timeness Backlog Lead time Mandatory quality level Small batch sizes High number of technologies Flow Times Flexibility Inventory levels Min. flow time Turn rates Labor flexibility Asset flexibility Control System Exotic technologies Extensive documentation Skilled workforce Long reordering times Long in-house value chain 21

22 There are more than enough techniques and tools available why is it so hard to break through? Improvement Tools and Techniques Kanban Pull Production Six Sigma Constraint Management Kaizen TQM Lean Asset Productivity Sweat Box CIP OAE Success is more an issue of doing things right than doing the right things 22

23 Constraint in break through improvement is to orchestrate four success factors. Improvement Success Factors 1 Transparency, Communication and Measuring 2 Consequence and Perfectionism 3 4 Change Management Project Management 23

24 1 Full transparency in technical and economic progress for all stake holders is key. Actions Set up of cockpits room Definition of baseline Commitment of measurable targets Visualization of KPIs and actions Kosten Example Shopfloor- Improvements Maßnahmen Visualization of progress milestones Weekly Flash-Meetings in cockpit room Cockpit White Board Bestände Jan Feb Mar Apr Termine Liefertreue KW Qualität Produktivität KW Materialverfügbarkeit KW Nicht produktive Zeiten Mo Di Mi Do Fr Liefertreue Lieferanten 1) KW Datum Maßnahme Datum Maßnahme Wo Wo Bis wann Bis wann Erstdurchläufer Rückläufer Nacharbeit Datum Maßnahme Wo Bis wann No standard -> no improvement KW Trend Ziel Jan Feb Mar Apr KW

25 2 Consequence and perfectionism distinct the Implementers from the Planners. Consequence is about Following issues up Following issues up Following issues up Making one step rather than two Awarding Zero tolerance for non performance Failure culture Interest in solution and progress Delegation Just doing it Perfectionism is about Passion Continuous improvement Always chasing the better Seeking and eliminating the constraints World class orientation Staying hungry 25

26 3 Intensive communication enables winning a critical mass of people for the new world. Old World Publish success stories Award "Pioneers" Include associates in solution finding process Make The New attractive New World "Pioneers" Leaders Majority Change organization and processes Distract The Old Pulling all rational, emotional and political levers helps moving the balance in favor of The New 26

27 4 Progress in implementation requires consistent management. Milestone Reviews Weekly flash -meetings 4 Success Factors Project Management 20 day plan 20 day plan 20 day plan Benefit... Top Management involvement Clear and exhaustive definition of deliverables Progress measuring and visualization Result Controlling Plan Actual Ist... No excuses Immediate issue and risk handling 27

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