PRODUCTION ACTIVITY CONTROL FOR SMALL AND MEDIUM SIZED ENTERPRISES, SMEs WITH LESS THAN 500 EMPLOYEES

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1 PRODUCTION ACTIVITY CONTROL FOR SMALL AND MEDIUM SIZED ENTERPRISES, SMEs WITH LESS THAN 500 EMPLOYEES Neil Towers, Manchester Metropolitan University INTRODUCTION As part of research, at the Crewe campus into production planning and control for Small and Medium sized Enterprises (SMEs) this paper describes the principles used by management to plan in the short term using Production Activity Control (PAC) systems. It reviews how operational activities service business demands in an SME and proposes the use of easily understood disciplines, controls and management information for effective shop floor control. As part of this research 20 manufacturing SME s are invited to take part in a survey of short term production planning. PLANNING AND SHOP FLOOR CONTROL Scheduling for shop floor control has become a focus against all sources of waste in manufacturing and supply. The lead time through the shop floor is typically much greater than the processing time. Long queue times result in greatly increased inventory costs from the resultant excessive work-in-progress and consequential reduced flexibility in response to ever increasing detailed demands from customers. This is particularly relevant for small businesses with their different attributes and characteristics. The great strength of a small and medium sized enterprise with less than 500 employees (SME s) is their ability to identify and exploit a business opportunity. The skills and attributes of an SME are constantly focused on searching out new opportunities in the marketplace. This very basic survival instinct is driven by the need to stay one step ahead of the competition. Normally, sooner rather than later the competition from larger and better resourced companies will seek to eliminate the activity of an SME and command the market place for itself. Hence the need for the SME to be looking over its shoulder at the competition whilst looking into the future for their next new product introduction and maximising their competitive advantage through flexibility and adaptability. The influence of SME s has been steadily increasing in the UK economy since the 1980 s. By 1990 manufacturing businesses with less than 200 employees accounted for nearly a third of the UK employment total [8]. Supply of goods from supplier through producer to customer using SME s has become an integral and important part of any market place. In an environment of increasing product design, reduced product live cycles and enhanced customer expectations, attention has understandably been drawn to shop floor control systems. The reason is straightforward: create an efficient and effective shop floor control system then financial benefits of improved cashflow and reduced costs, as well as satisfying customer expectations, will follow.

2 Much has been written about the statutory and financial control of a small and medium sized enterprise, an SME [3]. However, fewer studies have investigated the operational controls associated with the production of goods and services, or addressed the need for logistics, operations and production activity controls and their associated disciplines within the context of the SME in a supply chain. The recognition of the existence of any of these activities is central to developing a planning and control process that communicates relevant information to support the operations activity of the enterprise [4]. THE VICIOUS CYCLE An empirical investigation was undertaken at Crewe over a 19 month period and published in 1997 [6]. The illustrative case study was based on a wholesale business that supplied a wide variety of packaging materials and adhesive tapes. These products were divided into 9 product types covering a total of approximately 300 different items at any one time. The composition of each of the groups was regularly changing at a rate of 20% of each product range per annum, although there was some stability of regular repeat items. In the early stages of the study when there were no significant short term activity controls, the study suggested that the sole objective of the SME was to seek to achieve sales by supplying from stock through maximising service levels with that stockholding. But the skills resident in the operation were based on selling and marketing the products rather than seeking to operate the business effectively. For instance, there was no stock monitoring system in the business. Each year the stock records on the financial software package would be reset to 1 less than a million to allow for invoicing. Identify business opportunity Seek to maximise sales by supply from stock Maximise service levels by stock holding Reduces flexibility and adaptability to respond to new business opportunities Reduced profits Constraint on business May increase sales revenues but Higher stock levels Wider range of stocks Obsolescence/Poor systems to monitor stock holding Increased stock management costs Order although in Stock Figure 1: The Vicious Cycle of Shop Floor Control

3 This approach to shop floor control created instances where customer orders were satisfied by supplying new product when stock existed in the storeroom. Obsolescence and waste became a key issue. This lack of monitoring and controlling the business s activity became a constraint on the business, contributing to reduced profits. Most importantly it seriously undermined the greatest strength of this business; its ability to respond quickly to customers orders. It also unnecessarily consumed management time in resolving daily supply problems instead of releasing time to develop new ideas which could then be converted into new products. The outcome was a Vicious Cycle of activities which is shown in Figure 1. PRODUCTION ACTIVITY CONTROL AND SMEs The model shown in Fig.1 highlights the fact that the SME firm must identify precisely the business environment within which it is operating and the nature of the supplier, producer and customer mechanisms required. These key characteristics help identify the need for particular functions of manufacturing control systems as well as their impact on effective implementation and operation [5]. Tactical issues relating to the generation of detailed manufacturing plans that meet the predicted and forecasted customer supply demands are necessary. They must define what is needed within the future planning horizon. Operational production management system issues take the tactical schedule outputs and manage the manufacturing system to meet those requirements. Production Activity Control (PAC) describes the principles and techniques used by management to plan in the short term and to control and evaluate the production activities of the manufacturing organisation [2]. PAC architecture is a self contained series of tasks which control a specific cell within a factory. The aim of PAC is to reduce complexity and uncertainty in task execution and improve the co-ordination of decision making. With an SME their size should help them to deal with PAC more easily, but in a study by Stahl [7] it was found that the SME was constrained by a lack of access to knowledge and skills. It found that they lack the capacity to define real training needs and they were unable effectively to plan, organise and implement training. Further, the external training market did not meet the specific needs of an SME and the tight financial margins and small number of employees made it very difficult to attend off site training programmes. Larger companies with greater access to technical resources, such as dedicated vendor planners, buyers and supervisors are better able to manage the PAC process. Not surprisingly the cynical view is that the larger company, normally the customer has the planning skills but is dependant on the smaller company, the supplier who has to deliver against short term plans with limited knowledge and operational planning skills. The planning process in both large and small companies may be the same, but the SME s effectiveness is constrained by shortcomings in understanding and executing basic planning discipline and control. Bauer et al.[1] developed a planning and control framework into a set of rules and guidelines for managing an operation of complex systems. It divides the operational level into two elements; Production Activity Control, as described above and Factory Co-ordination.

4 Factory Co-ordination operates as a factory wide activity which has as it s primary role ensuring new products are introduced into the factory in the correct cell as well as dealing with factory wide scheduling, dispatching, monitoring and moving of product. It is responsible for co-ordinating the flow of work between different work centres or cells and uses two principles; that of goal setting and distributed responsibility. The co-ordination of the production activities across all of the factory cells is integrated with goal setting as the means to manage its own PAC. Autonomous groups within the factory are organised around each product group and are given distributed responsibility for managing the production of each product family. Factory co-ordination combines a product based production environment with well defined product families and control tasks that integrate each cells activities. THE VIRTUOUS CYCLE A key requirement in any operation is to distinguish the particular business environment that is applicable for each product or customer grouping. Whether the customer is being serviced on a make-to-order, make-to-stock or assemble-to-order basis, it is critical to recognise which situation exists and what decisions need to be taken. From these decisions will follow a different approach to servicing the order. For example a make-to-stock demand is concerned with replenishing a stock level in anticipation of forecasted orders. The key here is to concentrate on the accuracy of the forecast and the benefits from the cost of cash that is held as stock. Alternatively, a make-to-order environment requires attention on lead time from receipt of order to time of supply. With an SME with its limited access to resource understanding this decision process can save much unnecessary effort from being wasted. Applying the idea of PAC to the Vicious Cycle model transforms the operation into an effective business unit. Developing and implementing simple, basic and easily understood mechanisms and systems improves controls of the key activities of the operation. The acquisition of these techniques is not undertaken at a high financial cost. In our research which continued to June 1998 we found that avoiding the introduction of too sophisticated computer and manual systems too early in the life cycle of a business was done to the benefit of the SME. These sophisticated systems clouded the two basic issues of introducing clearly identified disciplines for controlling warehouse or shop floor activity and providing easily compiled management information. Through reorganising the stockholding into a layout that reflected the product groupings and introducing formal stock recording and regular monitoring procedures brought control into the operation. These disciplines, although simple to follow must be rigorously enforced and the information used for reporting must be relevant to the activity. The following chart showed the monthly stock valuation over a 36 month period for the same business. It had been growing in turnover at approximately 10% per annum over the same period and had introduced those controls described above in early 1996.

5 Figure 2: Effective SME Shop Floor Control M O N T H L Y S T O C K V A L U A T IO N 8 0, , , , Jun-95 Sep-95 Dec-95 Mar-96 Jun-96 Sep-96 Dec-96 Mar-97 Jun-97 Sep-97 Dec-97 Mar-98 Jun-98 Implementing production activity control into the operational control process produces the transformed Virtuous Cycle, which is shown below in Figure 2. Identify business opportunity Distinguish Business environment: Supply-from-stock or Supply-to-Order Invest in stock to service customer Reduces uncertainty of Supply or Purchase from manufacturer Lead time considerations Improve profit, customer satisfaction, business focus and management information Reduce waste/obsolescence etc. Improve cashflow Instil discipline and control Stock Holding Cost Stock Turnover Ratio Management Information needs Customer Service performance Figure 2: Effective SME Shop Floor Control SUMMARY Unlike larger organisations that have quarterly and annual production activity plans, the Small and Medium sized Enterprise is required to focus its plans on a daily, or at most, monthly planning horizon. By virtue of its size, the financial burden of unwanted work in progress and materials waiting longer than necessary within the production process impact to a far greater extent on an SME. It can impact on its capacity to be responsive to customer s changing demands. The access to limited resources and a lack of comprehension

6 of the need for long term partnerships constrains its ability effectively to service the needs of its customer/supplier relationship. The need to control and evaluate the production activities of the manufacturing organisation in the short term is arguably more relevant to an SME, because of the time frame in which it operates; that is hours and days rather than weeks and months. PAC provides the vital management information element within a production control system. But the research work in the area of PAC has not been applied to SMEs, yet SME s play a vital role in delivering supplies to producers and in turn to customers within the UK economy. What is not apparent is how SME s operating as an integral part of a supply chain network apply PAC. It is against this background that research at the Crewe campus is being developed. It will investigate to what extent the key features of PAC exist within a large company and assess which controls may be transferred or modified to suit SME s engaged in a similar partnership environment. It will identify the specific factors that contribute to successful manufacturing SME s operating in a supply chain partnership environment and will identify weaknesses in the patterns of control systems that need to be remedied. The research will be designed to assess the findings of the secondary research from published literature and determine its relevance to the targeted SME sector. From our findings so far the results have assisted to identify significant cost savings and provided a possibility for developing improved customer/supplier relationships leading to the potential for further business opportunities. We are currently searching for 20 small and medium sized UK based businesses in the manufacturing sector. Those companies will be part of a programme in which we will investigate the operations practices, systems and mechanisms employed as part of production activity control in response to their customers demands. We shall undertake a review of each operation and establish the extent of the transfer of those attributes identified in the secondary research. Then three of these SME s will be examined in more depth using a case study approach REFERENCES 1. Bauer, A. et al, Shop Floor Control Systems; From Design to Implementation, Chapman & Hall, Browne, J.et al, Production Management Systems- A CIM Perspective, Addison-Wesley, UK, Dewhurst, J. and Burns, P., Small Business Management, 3rd ed. MacMillan Press, Jordan et al., Production Activity Control for Small Manufacturing Enterprises, IFIP International Workshop on Knowledge based Reactive Scheduling, Athens, 1993, Elsevier Science B.V., p 29-38

7 5. Kohhar, A. and McGarrie, B., Identification of the Requirements of Manufacturing Control Systems: A Key Characteristics Approach, Integrated Manufacturing Systems; (03) 4 pp, Ritchie, R and Towers, N., Flexibility and Adaptability in the Management and Control of Manufacturing Enterprises, Small Business and Enterprise Development Conference, University of Sheffield, 19 th 20 th March Stahl et al., The Learning Organisation - A Vision for Human Resource Management, Brussels, European Commission, Storey, D., Understanding the Small Business Sector, Routledge, About the author Neil Towers is a Senior Lecturer in Production Management at the Crewe campus of Manchester Metropolitan University where he is course leader of the IOM Diploma programme and delivers short courses in materials management. He has 15 years manufacturing experience in operations and materials management at Lucas, GEC, BTR and Foden Trucks, as well as more recently with small manufacturing and wholesaling businesses. In the early 1990 s he successfully ran his own consultancy business and now researches the operation of Small and Medium sized Enterprises in supply chain environments and is studying for a PhD degree. n.towers@mmu.ac.uk