October 2008 Edition

SHOP MANAGEMENT

A ‘Little’ Law Goes a Long Way Toward Improvement

Using Little’s Law that shows a relationship between works-in-progress, throughput, and cycle time, a shop produced dramatic improvements

Fitting into the right niche can mean the difference between success and failure. Imagine a room full of baseballs. The interstitial space between the balls is pretty small – not a lot of room between the spheres of influence to find a market. But, if that same room were full of weather balloons, the "markets" between them expand.

Arc Technologies, San Marcos, CA, is an example of a job shop that transitioned to a mature full-service precision components supplier by finding a niche and making it work.

The key to Arc’s success is the implementation of robust business processes that came about when board members sought a synergy between the company and improved management.

The company has grown from a small shop comprised of two people and one machine to a multi-million dollar organization with two locations, 80 employees, 60 machines, and 39,000 ft² of floor space.

As the company grew, its operations management became a critical element of its business since its production and supply chain systems demanded more efficient control. Recently, the company saw a 25 percent increase in throughput without additional people or machines, by implementing an operations management approach called the Factory Physics framework. With it, Arc increased its revenue by 22 percent in a year.

Arc serves the medical device, laser, semi-conductor, aerospace, and data-storage industries. In August 2007, the company was acquired by Arc Holdings, a new corporation owned by Arc Technologies’ President Jonathan Friedman, board members Jeff Bell and Robert Gerth, and Chris Nelson, Arc Technologies’ founder and former owner.

“We were able to plan our capacity in a way that let us grow 20 percent without adding capacity...”

In January 2008, Arc Holdings opened a new location in Minnesota called Arc Precision, which specializes in medical devices. Demand for the company’s products was driven by increasing demand, great industry dynamics, and the large base of device companies in the Midwest. Arc Precision produces instruments for orthopedics and surgery implantation, components for the dental industry, and parts for assisted breathing devices.

The Space Between

Arc’s business model specializes in a high product mix – more than 5,000 part numbers in the last five years, small- to medium-volumes, and engineer-based collaboration with its customers.

Friedman said focusing on the market space in between small machine shops and large contract manufacturers offered the company high growth potential.

"We want to help companies move from small volumes up to larger volumes, and we can help transition them to a contract or overseas manufacturer if necessary. In a business environment in which customers demand innovative products, Arc is positioned to increase product-to-market speed and reduce lead time variability as demand increases," Friedman said.

In a high-precision machining industry, such as medical devices, technologies face rapid changes. Doctors, patients, and healthcare professionals demand better technologies, and device companies must respond quickly.

Arc built itself around serving the demand for increased product velocity and the ability to ramp up and down with agility. This business model provides value to Arc’s laser, semi-conductor, data-storage, and aerospace customers.

A barrier-to-entry to the medical device market from a contract manufacturer’s standpoint is the ability to handle the high variability of customer demand. Most large contract manufacturers are built around a business model of large, long-running orders. Manufacturers anticipate these large orders due to long-term commitment and high predictability.

Instead of following that model, Arc addresses customer needs by embracing small volume orders. Arc created a dedicated prototype department to handle a large volume of short run, non-repeat orders. In both of Arc’s facilities, the prototype department works with the production department, transitioning short running prototype jobs to long running production orders. To coordinate this communication and activity, high-quality operational management is a key to success.

A Strategic Partnership

Arc board member Jeff Bell, also is a board member of Factory Physics Inc., Bryan, TX, a strategic partner with Arc. Factory Physics helps Arc work with partners to deliver parts on-time while reducing both cost and inventory across the supply chain. This strategic partnership was a part of the plan by Friedman and Bell when they acquired Arc. Bell said it creates a win-win situation for both the company and its customer partners.

"We work collaboratively with our customers to understand their demand patterns so we can align resources to meet their needs," Bell said. "Factory Physics lets us plan capacity, inventory, improve service, and reduce cost."

"One example is how we partnered with our top medical customer. They shared their demand pattern and we planned a mix of capacity and inventory to be able to deliver their kanban pulls on request. In the second month of implementation, they received a 100 percent service level from us. We were able to plan our capacity in a way that let us grow 20 percent without adding capacity in terms of equipment or people. It was a real win-win," he said.

Continuous Improvement

Factory Physics principles and applications provide a practical approach that helps Arc plan and manage the three buffers in manufacturing: capacity, inventory, and time. Its principles lets a company design and implement the operation logistic design – the optimal buffer portfolio – that works best for its markets and products. This is complementary with tactical operations improvement tools such as Lean and Six Sigma.

Arc targets the middle market in-between job shops and contract manufacturers, the demand variability its customers present. The company recognized that establishing strong customer partnerships and expanding manufacturing capabilities were not enough; it also needed to develop effective operational systems.

Friedman said that operational systems and policies must account for variability in both demand and operational performance in order to target the middle market with success.

By applying the Factory Physics framework to its operations systems, Arc understands which operation processes cause variability and how they influence flow and stock through the plant. Understanding its current operations systems lets Arc identify opportunities in the existing manufacturing and supply chain operations and design effective new systems where necessary.

"Excellence in operational management isn’t magic, it’s about understanding the underlying science behind production and supply chain systems," Friedman said.

Continuous improvement is not just a buzzword at Arc, it is built into every operational process.

"Every week, Arc’s management team meets to review the operational results from the previous week," Friedman said. "The weekly meetings are a checkpoint in understanding what is working well so it can be repeated and identify what needs improvement. Every week, fresh ideas are discussed and implemented."

The weekly meetings let the management team evaluate its operational processes and accelerate continuous improvement efforts and practices.

"It May Be Little, But It’s The Law"

A primary principle in the Factory Physics framework is Little’s Law: WIP=TH×CT. It shows a relationship between work-in-process – WIP, throughput – TH, and cycle time – CT. The law applies to almost any company.

By applying the law to individual product stations and lines, management at Arc gains understanding and control of the flow through the entire shop. Wally Hopp, one of Friedman and Bell’s professors at the Master of Management and Manufacturing program at Kellogg / Northwestern University, is known for saying, "It may be ‘little,’ but it’s the law."

Arc’s planning department also uses a process called Virtue Queue Scheduling to organize the company’s workflow with individual jobs’ expected cycle time and throughput. This lets the production manager identify opportunities in decreased cycle time and increased throughput. This allows management of production deployment.

Arc increased its sales by 22 percent compared to same quarter sales of the previous year

"Flexible buffers in operations systems are cost-effective and efficient since they apply when and where needed, as opposed to fixed buffers," Friedman said.

Understanding practical relationships such as Little’s Law, lets Arc plan and manage its workflow. It makes the company’s value streams Lean, meeting demand with minimal buffering costs.

Putting this production scheduling tool in motion let Arc gain control over works-in-progress, which results in better on-time delivery. Other benefits include decreased company costs and better inventory-control across the supply chain.

Good News All Around

Since implementing the Factory Physics framework, Arc increased throughput by more than 25 percent with no new capital equipment or personnel. It cut its cycle times by 40 percent. Arc saw about a seven percent cost reduction based on improved supply chain efficiencies.

Arc’s process implementation let the company handle a greater variety of customer demands and provide higher quality products and services. Through the increased scalability that comes from better shop floor control, the positive word-of-mouth referrals of its customers, and a focused sales effort, Arc increased its sales by 22 percent compared to same quarter sales of the previous year.

Partnering with Factory Physics let Arc offer assets to its customer-partners as a means of reducing costs and variability. Friedman said supply chain integration was feasible only when close partnerships exist between a shop and its customers, since integration involves information sharing and cross-company collaboration.

Although Arc has grown to a mature full-service precision components supplier, its roots remain in its dedication to quality customer service.

The company does not aspire to become a large contract manufacturer, instead focusing on the middle market space in between job shops and contract manufactures. With its improvement effort in operations management, and dedication to exceeding customer expectations, Arc sets a new standard for itself for customized products and services in manufacturing.

"Although the economy is struggling, we’re growing and finding new business," Friedman said. "The tight link of our market niche, and our operational structure to deliver to that niche, has put us in a good position." Factory Physics Inc.

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