TRANSFORMING STRATEGY & PRODUCT

FOR LONG-TERM PERFORMANCE

Prepared By: W.D.FERME C.Eng.

Fermeng Pty.Ltd.

CPA Australia Manufacturing Conference March 2006

LECTURE CONTENT

• SHAPING YOUR STRATEGY FOR DOMESTIC & GLOBAL MARKETS

• COST REDUCTION MEASURES THAT WORK ACROSS ALL BUSINESS LINES

• BUSINESS RATIONALISATION: ANALYSING & TRANSFORMING ASSETS & PRODUCT LINES FOR PROFIT GROWTH

• IDENTIFYING SYNERGIES & REMOVING NON-PERFORMING ASSETS TO ACHIEVE A LEANER, MORE PROFITABLE ORGANISATION

WORLD MANUFACTURING TRENDS

• INCREASING GLOBALISATION– China is going for 50% of the world manufacturing market– Global Industries:Automotive, Electronics, Pharmaceuticals– 75% of the Value of Public US Companies:Intangible Assets– Manufacturers downstream to Services– Overt & Covert Protection: USA Steel & Machine Tools– Product Platforms becoming crucial for survival– Takeovers, Mergers & Strategic Alliances– Companies turning into Virtual Organisations– Manufacturers Power to Giant Retailers:Price Pressure

• TECHNOLOGY ACCELERATION– Technology is copied more quickly– Increasing Product Complexity: More IT in Products– Shorter Product Life Cycles– More Product Variety & Customisation– Soaring Product Development Costs– Material technologies range increasing– Environmentally designed Products

• MANUFACTURING IS TIME-BASED– Lean Manufacturing Principles– Supply Chain is a source of major competitive advantage– Increasing Quality Requirements:ISO Standards– Outsourcing of Functions including R & D & Production– Companies locating closer to Markets– More Advanced Manufacturing Technology: Automation/IT

BusinessEnvironmental

Analysis(Driving Forces)

- Economic - Technological

- Politicall / Legal - Socio-Cultural

Porter's IndustrialAnalysis

Five Forces - Barriers To Entry

- Industry Rivalry - Power of Suppliers

- Power of Buyers - Threat of Substitutes

Critical SuccessFactors ( CSF )Of the Industry

Opportunities &Threats

To this Industry

STRATEGIC ANALYSIS PROCESS

External Environment

Internal Analysis

- Firm versus CSF's - Current Strategy - Resources - Organisational Structure - Controls - Leadership - Culture - Financial Performance

SWOT Analysis

- Strengths & Weaknesses

- Opportunities & Threats

Conclusions

StrategicRecommendations

ImplementationPlan

Internal Environment

Strategic Formulation

Core CompetencesAlways 2 - 3

Figure 3

Value-ChainAnalysis

RIVIERA GROUPWorldwide Operations

• Builder of Luxury Motor Boats– 30 to 60 Feet Long & Customised

• Based in Coomera, Queensland

• 2005 Sales $315m ( 70% Exports ) – $262,500 Sales per Employees– Value-Added $160,000 per Employee

• 1200 Employees( 200+Apprentices )

• Global Operations with One Brand– 30 Countries with 50 Dealerships– 8 Retail Partnerships in Australia/NZ

• Integrity part of Company Values

• Has Alliances: NV Design, Genmar

• Wide use of CAD/CAM/AMT

PRODUCT PLATFORMS

• The goal of developing a diverse customer base and, as a consequence, a multiplication of products and be economically efficient is achieved by the platform approach.

PLATFORM for a TOASTER• 1.Create a Platform Team• 2.Voice of Customer/QFD• 3.List desired Offerings:

– 2/4 Slice Household Model– 4 Slice Commercial Model

• 4.Market segmentation– First Time Purchasers ( Inexpensive )– Second Time Users ( More Affluent )– Large Family & Commercial Users

• 4.List Design Options– Different Layouts for each member

• 5.Determine Platform Options– Components that could be shared

• A. Electrical Control Board• B.Heating Elements

• 6.Compare Platform Design Options

TYPICAL AGRICULTURAL EQUIPMENT

MANUFACTURER

• Develop Families of “Global” products, with as many models as possible in each Family

• Use Product Platform Road maps

• Standardise Sub Assemblies & Components

• Adapting & Improving Product Development Methodologies

• Investing in a Variety of Configurations

PRODUCT PLATFORMSROAD MAP

• Technology, Platform & Product-Line Plans can be clearly documented by using Road Maps:

Product A A1 A2 A3

Product B B1 B2

Technology a b c

Year 2006 2007 2008 2009

TRACTOR FAMILY SPECIFICATIONS

Tractor

Family

1 2 3 4

Rated Engine KW

30-55 60-90 90-125

135- 210

Market

Trend Units

Down Level Up Up

No. of

Functions

Moderate

High Very

High

High

Diesel Eng. 3 Cyl 4 Cyl 4 Cyl 6 Cyl

Gear Box Synch 3 Speed

4 Speed

Full

Axle Concepts

FWD FWD FWD FWD

PRODUCT PLATFORM BENEFITS

• Greater Ability to Tailor Products

• Reduced Development Cost & Time

• Reduced Manufacturing Cost

• Reduced Production Investment

• Reduced Systemic Complexity

• Lower risk• Improved Service

LEAN MANUFACTURE

• Leading Approach in Australia• Based on Ford & Toyota Philosophies• Success in application has been in two

manufacturing Modes: Batch & Line Production

• Applying Lean Manufacture no guarantee for Survival

• Mainly applied in Large/Medium Companies

• Basically applied in Manufacturing • Basically the old Industrial Engineering

Approach• Like all investments it needs to be

justified• USA Consultants introduced Value-

Stream Mapping

PHILOSOPHY LEAN THINKING ROOTS IN

TOYOTA • Doing it all for the Customer

• Leveled Production

• Pull System’

• Continuous Flow Production

• Takt Times

• Multi-Skilling/Work Cells

• TQM/Kaizen/Set-Up Reduction

• TPM/ 5S Methodology

• Poka Yoke

• SPC/Visual Controls

• Standardised Work/ SMED

LEAN = LEAD-TIME COMPRESSION

• Value is only added to Products between 0.05% to 5% of Total Lead-Time

• Productivity Increases– For every Quartering of Lead Time,

Productivity Doubles & Costs Reduce by 20%

• Boston Consulting Group

• Prices can be Increased– Electrical Components

• Time advantage 2: 1 Price Premium 59%

– Locks• Time Advantage 3: 1 Price Premium 25%

• Risks Fall– Faster Response to Customers– Less Inventory of Products/Parts

LEAN MANUFACTURING IMPLEMENTATION

RESULTS• Lean Achievers – Basis: Inventory

Turnover Trend, most recent 10 or more years.

• Results for 1,080 + Companies in 27 Countries & 35 Industries:

- Clear Sustained Improvement- Only 34%

- Same but Lapsed last 5 – 7 Years – 14%

- No Pattern or Decline – 52%

- Dr.Richard J.Schonberger, Sept.2004

LEAN MANUFACTURE IN SMALL TASMANIAN

COMPANIES

• Increase in Net Profits• Reduction in Inventories• Batch to Flow Manufacture• Major Increases in Productivity• Major Machine Utilisation

Increases• Plant Layout to Cells• On-Time Deliveries Improved• SMED Savings• Working Capital Reductions• Rework Reduced

– Creative Innovative Company Program Report 4, 23-8-05 by Dr.J.Blakemore, Sydney

RATIONALISATION• In an business era of “Stick-to-the-

Knitting and Strategic Focus, rationalisation is a constant task.

• Methodologies:– Financial Analysis– Value-Added Measurement– Core Competences– 80/20 Rule

• Types of Rationalisation:– Customer – Product– Organisation– Manufacturing– Vendors– Distribution

CUSTOMER RATIONALISATION

• The costs of marketing, selling & distribution expenses have been increasing rapidly in recent years

• Many of these expenses do not relate to individual products or product lines but are associated with:– Individual Customers

• Companies need to understand the cost of selling to & serving their diverse customer base

• Customer Profitability– Most profitable 20% of customers

generate about 80% of total profits– Middle 70% of customers break even– Least Profitable 10% : Dump!

CUSTOMERS X & Y

Customer X Customer Y

Gross Margin $166000 $159000

Marktg/Tech supp $7000 $54000

Travel/Customer $1200 $7200

Dist.Sales Catalog $100 $100

Service Customers $4000 $42000

Handle C/Orders $500 $18000

Warehouse Invty $800 $8800

Ship to Customers $12600 $42000

Total Activity $26200 $172100

Operating Profit $139800 ($13100)

Profit % 43.7% ( 4.2% )

PRODUCT RATIONALISATION• Variety Reduction Program

– 1.Fixed versus Variable Parts– 2.Combination of Parts– 3.Multifunctionality/Integration Modularity– 4.Range of Dimensions– 5.Trends

• Where to Use:– Fixed & Variable and Combination

techniques to change the configuration method for the Parts & Production Processes

– Multifunctionality/Integration technique to simplify & optimise the systems & specifications

– Trend & Range techniques for establishing dimensional/volume values that incur minimal costs

A B C D E

E F G

H I

PARTS

PRODUCT

Sub-Assembly

COMBINATIONTECHNIQUE

PRODUCT RATIONALISATION

- COST REDUCTION– Total Costs=V Costs + F Costs + C Costs

– V ( Variety ) Costs

• Variety of Part Types & Production Process Types

• Expenses for Retooling, metal dies & equipment

• Skills Training

• Opportunity Loss-related costs

– F ( Function ) Costs

• Material Costs

• Processing Costs

• Assembly Costs/Shipping & Packing Costs

• Inspection Costs

– C ( Control ) Costs

• Design

• Ordering Costs

• Item Control/Quality Control Co

Mass Prod Special-Order

V Costs 20 – 30 % 20 – 30%

F Costs 50 – 70% 40 – 60%

C Costs 10 – 30% 30 – 40%

SUPPLY CHAIN MANAGEMENT ( SCM )

• Supply Chains contain between 30 to 60% of a companies costs.

• Companies are now competing on their supply chain performance

• Companies are creating an integrated supply chain: Suppliers to Customers

• Inventory Turnover Ratios ( Sales/Inventory) in Australia average about four ( USA about 9 )

• Carrying Cost of Inventory is about 25% of Value

• Companies should use Value Analysis with suppliers to reduce purchase costs

• Use the ABC Analysis to re-align their inventories with demand

• Supply Chain Technologies: EDI/Net/RF

SUPPLIER INTEGRATION• OPPORTUNITIES for:

– Materials Cost Savings– Reduced Inventory Levels– Higher Quality Service: Approved Suppliers– Reduced Expenditure on Administration

• STORES– ABC classification– Minimum Stocks, say 1% of Sales

• GOODS INWARDS– Received Parts on a JIT Basis

• VENDOR QUALITY– Minimum Inspection– Facilitate Continuous Improvement– Feedback on Total Performance

• PURCHASING– Reduce Number of Suppliers

• SUPPLIER DEVELOPMENT– Collaboration via People & Systems

• SUPPLY CHAIN TECHNOLOGIES– RF Data Capture/eSignatures etc.

REALIGN PORTFOLIO• FOCUS ON GROWING,

ATTRACTIVE MARKET SEGMENTS

• PORTFOLIO MANAGEMENT– Exit mature, unprofitable, Low Value-

Added & Non-Core Divisions

• ACCELERATE GROWTH– Allocate money & effort to Growing

Segments which can sustain a competitive future:

– Innovate on new Business Model– Improve the Geographical Footprint

• IMPROVE PRODUCT MIX & ADDED VALUE– Improve Product Mix

VALUE-ADDING MEASUREMENT

• These measures are used widely to measure the productivity of people & capital in Japan and can be linked to conventional financial measures.– People Productivity

• Value-Added per Employee

– Capital Productivity• Value-added per Total Assets

• Two Methods of calculating Value-Adding ( VA ): – Subtraction Method:

• VA = Sales – Materials & Services

– Addition Method:• VA = Labour Cost + Interest + Taxation +

Depreciation + Profit

CONCLUSIONS• 1.Manufacturing Companies to

cope with increasing change should have a current Business Plan.

• 2.A Product Platform gives a company the ability to introduce new products on an organised basis which minimises costs.

• 3.Lean Manufacture needs to be a focused activity to achieve benefits.

• 4.Company Rationalisation is mandatory in these fast moving times.

• 5.The realignment of a Companies Portfolio is an on-going task for all organisations.