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Lava Rock Bicycles: improve efficiency and effectiveness of each manufacturing subprocess

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Lava Rock Bicycles, headquartered in San Miguel, California builds bikes for novice to mid-level cyclists, triathletes, and world-class athletes interested in cross-training. Lava Rock is beginning its 6th year of business. It continues to grow its product line and target customer market and it recently became a public company by issuing shares of stock in the NASDAQ exchange.

Each bike is made of a frame, a seat, a set of handlebars, gears & shifting system, brake system, aero bars, 2 wheels, and 2 tires. The selling price varies by model and specific components used to build the bike. Variable costs commonly include:

component parts, packaging, etc.
production labor
sales commissions (percentage or per unit basis)
other costs allocated on a per unit basis
Lava Rock produces 3 models of bikes (mid-level triathlon (Kona model), entry-level triathlon (Hilo model), and mid-level road cycle (Paris model)). The mid-level models have a greater profit margin but lower sales volume than the popular entry-level triathlon bike. Its bikes are sold directly by Lava Rocks and through independent distributors (typically bike shops and mail-order companies).

Lava Rock Bicycles tries to produce approximately the same number of bicycles it expects to sell in a given period of time. However, it cannot always accurately predict the market. If it manufactures too few cycles, it loses sales. However, because each cycle model improves each year, when Lava Rock Bicycles manufactures too many bikes, it may not be saleable. Lava Rock Bicycles may have to sell its products at a discount or even at a loss to liquidate its inventory. To reduce inventory costs, management is considering implementing a "Just In Time"(JIT) inventory management.

Goals for the next year are to grow the business to other regions, increase profit margin, and expand its product line.

Operations deals with how the company is performing. Operations may be refined into different manufacturing processes such as design, materials procurement, assembly, testing and so on.

A VP of operations has asked you to make a presentation at the weekly status meeting on how to improve the efficiency and effectiveness of each manufacturing subprocesses individually and as a whole.

She states that to drive performance, you will need to examine accounting-based data on material, labor, and overhead costs. These types of information are not disclosed in financial reports for lenders and owners. Rather cost information relates to how to operate now and moving forward. External reports are more backward-looking about how an entity DID operate. While there will be a strong relation between operation profits and profit per the external financial statements, the way that profitability is measured can vary greatly especially since profits on an external financial report are defined according to strict definitions. Nevertheless, the VP of operations finds the relation between operation profits and profit per the external financial statements most useful. You are to present your findings and recommendation at this meeting.

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Solution Preview

HOW TO IMPROVE THE EFFICIENCY AND EFFECTIVENESS OF EACH MANUFACTURING SUBPROCESSES AND HOW TO IMPROVE THE EFFICIENCY AND EFFECTIVENESS OF THE MANUFACTURING PROCESS AS A WHOLE

Plant overall equipment effectiveness (OEE) levels of 85 percent are generally accepted as "world class" for discrete manufacturers. Unfortunately, there is no universally accepted method of calculating total plant OEE. Many options are available to the plant on how to compile the numbers. The method presented here includes a way of calculating line or process OEE, which can then be used to calculate overall plant OEE.

Calculating line or process OEE
If all machines were perfectly balanced in terms of production rates and capacities, calculation of line OEE would be simple. But perfectly balanced production lines are rare and do not represent the real picture in most plants. In addition, most plants do not contain a straight line process with a part traveling from one machine to the next in perfect harmony with all other machines. Processes are usually complicated, with machines in series and parallel, and they usually include side processes. It is possible to directly calculate line or process OEE without calculating individual machine OEE.

Line or process OEE in theory treats the whole line or process as a single machine with a set ideal cycle time equal to the cycle time of the constraining machine or machines. For example, if three machines in series have cycle times of 3 sec, 2 sec, and 4 sec, respectively, the cycle time of the process is equal to 4 sec, the cycle time of the constraining machine. The line as a whole could not produce more than one product every 4 sec. The key to the process is maintaining a high degree of availability, performance efficiency, and quality on the constraining machine.

Typically there is some surge in the process between machines. If the surge can handle minor stoppages of the machines that are not constraining the process, it does not affect the overall production rate of the line or process. If the surge cannot compensate for stoppages of the other machines, the constraining machine will be starved for materials or blocked downstream and unable to process additional materials. In all cases, monitoring the availability and performance efficiency of the constraining machine (or machines) provides a good picture of the overall performance of the line.

In terms of quality rate, there are two theories of accounting for product defects. The first theory contends that quality defects upstream of the constraining machine affect the output of the line or process only if they starve the constraining machine for material. Quality defects at or downstream of the constraining machine do affect the potential output of the line or process and should be counted against the quality rate.

Quality experts and the "concept of zero" state that any quality defect is unacceptable and we should attempt to penalize our performance indicators for all quality defects whether they are upstream or downstream of the constraining machine. This concept is valid, but some quality defects do cost more than others. When resources are limited, more severe quality issues should be addressed before those of less severity. Quality issues downstream of the constraining machine are more severe than those upstream and therefore should be of higher priority.

The following steps represent a method for calculating line or process OEE. They have been used on processes with as many as 57 machines, with multiple side streams and two simultaneous constraining operations. They can be adapted to any plant.

1. Carefully map all the steps of the manufacturing process. Mark all machines, transfer points, and material handling operations. Map them into a graphic output. Sometimes this procedure has already been done in the form of a process flow sheet.
2. Where it makes sense because of product mixes or warehousing of interim products, separate the entire process into subprocesses. The criteria for segregation into subprocesses vary from plant to plant. Typically, it may mean segregation by groups of machines that constitute a production area, by machines that are closely coupled, or by the production of subassemblies. For example, it may make sense to separate a process for making a final assembly into several subassembly lines and a final assembly operation, especially if the subassemblies are warehoused, sold separately, or sometimes outsourced.
3. Make separate drawings for each line or process. Mark the capacities (or ideal cycle times) of each production machine and transfer (material handling) operation. Locate the constraining operation. Take into account the fact that multiple machines may be performing the same operation or that multiples of the component being manufactured may be required for the final product.
4. Treat the entire operation as a single machine and use the formula for a single machine OEE calculation with modifications as detailed in the succeeding steps.
5. Availability for the process or line equals the availability of the constraining machine operation as a whole. If multiple machines are performing the constraining operation, the availability of the line is equal to a weighted average of those machines. The weighting of the average is proportional to the capacity of each machine.
6. Performance efficiency for the process or line equals the performance efficiency of the constraining machine. Again, if the constraining operation is several machines, the performance efficiency of the line or process equals a weighted average of the machines performing the operation. Total parts run is equal to the total parts produced as measured at the constraining operation.
7. Quality rate for the ...

Solution Summary

The comprehensive solution includes a detailed section on plant overall equipment effectiveness (OEE) levels. The concept is carefully explained and then a plan of seven steps is given to use to assess efficiency and effectiveness in operations.

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