Audit List

8/13/2019 Audit List

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3. Capacity Issues

(a) What products are made in which facilities?

(b) What are the capacity bottlenecks and what is their capacity?

i. Look for active bottlenecks as potential candidates. These are resource pools that currently

impede flow and can be identified either by inventory building in front of them, or by blocking

at an immediately proceeding process step due to an inventory limit between the steps.

ii. Does the capacity depend on product mix? If so, the capacity bottleneck(s) may float,

meaning that it may move depending on the mix.

iii. Keep in mind capacity bottlenecks always exist, are independent of throughput (volume as

opposed to mix by percentage), but may not be unique.

iv. Consider doing a quick stopwatch study if the firm is not forthcoming with capacity figures.

Capacity is often highly guarded by management.

(c) What is required to increase capacity in response to changing market demands?

i. Adding people (variable cost) may be easier than adding machines (fixed cost).

ii. How long to procure/install capacity bottleneck resources? How many suppliers? How much

training is required?

iii. Can unused capacity elsewhere be exploited?

iv. Are there space constraints in existing facilities? If so, the firm may need to purchase/lease/build

a new building.

v. Can/will the firms raw material suppliers support an increase in capacity?

(d) How is capacity allocated to customers? For example, job scheduling, prioritizing of customers,

etc.

(e) Are capacity bottlenecks well maintained and reliable? Are there programs in place to reduce

setup times on capacity bottlenecks?

(f) How does this firm manage idle periods? Do they sometimes allocate capacity to items which

customers may not want, just to keep workers busy? Are idle periods used for training?

(g) What is the firms capacity to take and process customer orders? This should not be the capacity

bottleneck!

(h) How much does capacity depend on labor content versus machine content?

Human capacity is vague and more volatile than automation, but can be more flexible. Service

industries tend to have higher labor content.

(i) Does the firm use standards, and if so how are they set?

i. Two uses: Workforce planning and incentivization

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ii. Some adjustments are reasonable, e.g. for fatigue and team meetings.

iii. Standards must not depend on throughput, or more generally on factors out of the control of

workers!

iv. Do political factors influence the setting of standards? Look for throughput-based incentives.

v. Are the production standards balanced with quality metrics such as defect rates and customer

satisfaction?

vi. How are the workers tracked and compared against standards?

Consistent outliers should be treated more seriously than temporary outliers.

(j) Does the firms capacity structure allow production to be synchronized with real-time demand?

i. Toyotas practice of Heijunka (level mixed production) is the best example.

ii. A firm may be able to produce multiple products in a single facility, but how many can they

produce simultaneously?

iii. How large are setups between products?

iv. Are production resources, including logistical systems, flexible enough to accommodate a

changing mix?

4. Cycle-Time Issues

(a) What is the financial impact of reducing cycle-time?

i. What would be the market response to shorter cycle-times?

ii. When inventory is tightly held, i.e. there is a maximum limit on inventory and it is being

bumped against, then throughput-driven revenues may increase.

(b) What is the critical path and how long is it?

i. Assess service times and waiting times for each path.

ii. Ideas for identifying: time stamp jobs as they flow through the process, survey customers,

estimate work-in-process inventories and apply Littles Law, walk the process backwards to

assess which steps are holding things up.

iii. Do not assume that the capacity bottleneck is on the critical path!

iv. If you see lots of inventory, then by Littles Law we know that cycle-times may be large if the

items are slow-moving.

(c) Which activities on the critical path are most important to customers? Are any non-value add?

What fraction of cycle-time is waiting versus processing?

(d) If you see idle resources, ask how much variability there is, and what its sources are? Perhaps the

firm is holding excess capacity to absorb variability.

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(e) Is there any obvious restructuring that can be done?

Parallelizing, pre-processing, and reordering of steps.

(f) How does the firm reduce cycle-time?

Safety capacity, limiting variety (focus), variability reduction, scheduling, etc. Can capacity be

dynamically adjusted (e.g. temp workers and flexible schedules) to meet surges in demand?

(g) How much expediting of orders is there? This is a red flag for cycle-time problems.

(h) How large are order backlogs? This is inventory that cannot be physically observed! Orders may

wait a long time until being released to the production/service facility.

(i) How does the firm manage customer anxiety over queues? Is jockeying permitted? Do customers

perceive queues as fair?

(j) Do customers balk and renege? What is the financial impact of the resulting lost sales? This may

not be directly observable, but if it is then an intelligent firm will track it.

(k) Does the firm understand that increasing capacity will have a bigger effect on cycle-time behaviors

than increasing storage space? Of course, both actions may be financially viable.

(l) Can the firm pool/unpool resources together?

i. For example, a firm may have two different phone numbers that cannot be shared by operators,

or the firm may segment the flows of work to different resource pools that could be combined

for operational improvement.

ii. By pooling, a firm can either reduce cycle-times or reduce (labor) costs. But to provide

priority service to a customer segment, resources may need to be unpooled/dedicated.

iii. Problems with pooling: lines appear too long, tasks are too enlarged for worker skills, cen-

tralized fulfillment may be less personal.

iv. Problems with unpooling: increase in cycle-times, non-priority customers may be mistreated.

5. Inventory Issues

(a) Why is this inventory being held? Are there management controls to limit inventory (kan-

bans/WIP caps)?

i. Uncertainty : SAFETY-STOCK

Uncertain demand over long and/or unreliable supplier lead-times.

ii. Fixed costs : CYCLE-STOCK

Replenishment in batches to amortize fixed costs, such as ordering paperwork, transportation

costs, production setups, etc.

(b) Does the firm partner and build relationships with suppliers, or does the lowest bidder always

win?

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i. Do the firms Kaizen-together? Sophisticated firms will share practices and data with suppli-

ers. Low price cannot be achieved without low cost! Quality is a joint effort.

ii. How many suppliers for each part?

iii. How far away are suppliers? Relationships with local suppliers may be deeper.

(c) What causes variability in the demand that you see?

Quantity discounts, promotions, bad service to customers, salesforce compensation, bullwip dis-

tortion/snowballing forecast error, seasonalities, etc.

(d) What is the impact of variability on inventory performance?

i. Stockouts =Lost sales, backorders

ii. Too much inventory!

iii. Are target fill rates and service levels set intelligently to trade these off ? Is actual fill rate

and/or service level tracked?

iv. Are costs of excess traded-off with costs of shortage?

(e) What information is shared between members of the supply chain? Do you know end demand in

real-time?

(f) What inventories in the supply chain are managed by suppliers for the customer, i.e. are vendor-

managed inventory (VMI) practices being used?

i. If so, how are risks and wealth shared?

ii. What do VMI contracts look like?

(g) What is being done to pull inventory levers?

i. 2 (demand variance)

ii. L(mean lead-time)

iii. var[L] (variance in lead-time)

iv. forecast error

v. transaction/ordering costs

vi. pool inventories

vii. Does the firm try to optimize inventory management practices, e.g. by optimizing batch sizes

(Q) and reorder points (R)?

(h) In what ways does the firm pool inventories (of safety stock)?

i. Virtual centralization

Linked by information system

ii. Specialization

Each product stocked in only one location

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iii. Component commonality

One component fits all!

iv. Product substitution

Red satisfies mauve and pink demand

v. PostponementStock generic, customize-to-order

(i) What are the costs of operating the firms warehouses/distribution centers?

i. Facility

ii. Material handling/transportation equipment

iii. Information systems

iv. Labor

v. Packing materials

(j) What warehouses/distribution centers does the firm operate? What function(s) do they serve?

Are they necessary?

i. Break bulk (pallets cases single units)

ii. Break truckloads (merge/sort/repack)

iii. Geographic/local market presence

iv. Hold inventory more cheaply than downstream

v. Pool safety stock

vi. Reduce LT to downstream customers relative to direct sourcing

vii. Consolidation of ordering/transaction costs

viii. Control of order fulfillment/replenishment

(k) What fraction of goods flowing through the warehouse/distribution center are cross-docked? What

is the average cycle-time of goods in the facility? Are there plans/opportunities to do more cross-

docking?

6. Organizational Issues

I recommend further coursework in organizational behavior/structure, but we did touch on some topics

as they relate to operations management.

(a) How does the firm learn about and solve (quality) problems?

i. Where are problems detected versus fixed? (Jidoka-Quality at the source.)

ii. How is management informed? (Andon-cords pulls to stop the line.)

iii. How is the root cause identified and fixed? 5 Whys, supplier partnerships, interaction with

product design teams

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iv. Are there standard operating procedures enforced and reviewed? These embody the knowl-

edge of the firm and provide a foundation for improvement. Problems can be isolated by

identifying deviations from standard procedures.

v. Is there a culture of continuous improvement, or is there friction between management and

workers?A. How many suggestions per employee?

B. What percentage of workers are in teams?

C. How much training do workers receive?

D. What is the status of labor unions?

vi. How large is the firms rework/repair area, and is inventory allowed to build there?

vii. Is the product/process designed to be foolproof? For example, screws are made square to

avoid insertion into round holes.

(b) How are workers organized?

i. Craft, teams/cells, assembly line? Factors to consider: quality, job variety, cross-training,

worker skills, cost of tooling, boredom, etc.

ii. You must take into account how task times would change to determine which has superior

capacity and cycle-time performance. For example, if handoffs are time-consuming then craft

becomes more beneficial, but if workers can lower task times through specialization then an

assembly line may be preferable.

iii. Consider bucket-brigades if craft requires too much tooling or job enlargement, but an as-

sembly line would be unproductive because of too much blocking and starvation or would be

too expensive/difficult to construct.

(c) How are workers paid?

i. Piece rate, hourly with pay grades based on experience/skills/speed, bonuses.

ii. Be careful with team incentives for assembly line workers that experience a lot of blocking

and starvation!

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Operational Audit Questions: A Short-List

Business Process Management

1. How easily can the firm adjust capacity and cycle-time in response to a changing marketplace? What

is the financial impact?

2. Does the firm maximize value-add on the critical path?

3. How does variability affect cycle-times, process inventory, and idleness?

4. How does the firm react to customer queueing behaviours, e.g. pooling? Waiting, reneging, balking

5. How does the firm learn about and solve problems?

6. Does the firm sensibly organize and incentive capacity? Craft, cells, assembly lines

Inventory Management

1. Why is the firm holding inventory? Cycle-stock, safety-stock

2. Is cycle/safety-stock being held in sensible locations along quantities on the supply chain?

3. What causes demand variability and what is its impact on inventory performance?

4. What information is shared between members of the supply chain? Supplier partnerships, bullwhip

distortion

5. How are links of a supply chain coordinated? Vendor-managed inventory (VMI), incentives/contracts

6. Are inventories being pooled?

7. Are the firms warehouses/distribution centers providing competive capabilities?

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