Theory of Constraints Handbook - James Cox Iii [237]
100 percent on-time delivery
This was accomplished with a 20 percent reduction in inventory
Case Study 2: LeTourneau Technologies, Inc.
The LeTourneau Technologies, Inc.™ (LTI) companies include some of the world’s leading innovators in manufacturing, design, and implementation of systems and equipment for mining, oil and gas drilling, offshore, power control and distribution, and forestry. LTI has two main manufacturing facilities (Longview, TX and Houston, TX) that are similar in terms of capability, product complexity, and size. One can see the dramatic differences between the two comparable campuses of Longview and Houston in the following information. To be very clear, the type of manufacturing is very similar in terms of both complexity and scale.
Beginning in 2005, the market began to take off for all LTI business segments. What is important to understand is that LTI has been through these boom cycles before. All previous times, however, LTI’s inventory and expenses have dramatically risen at a similar rate as revenue along with deteriorating service levels. What is unique about this particular case is that the Longview facility using ASR (as well as a partial implementation of DBR) was able to dramatically control inventory and expenses while maintaining excellent service levels in the boom cycle.
FIGURE 12-11 Total revenue versus inventory.
Additionally, what should be noted is that all boom markets eventually end. One can see in the graphs in Fig. 12-11 that in 2008 the markets began to cool off. When those boom times are over, ASR minimizes exposure to inventory liabilities. The bottom line is that no matter what kind of economic times a company finds itself in, good inventory practices that minimize inventory exposure while maintaining service levels is always the right strategy.
This first graph in Fig. 12-11 shows Total Revenue versus Inventory from 2001 to 2008 from the Longview campus only. Note that beginning in 2005 there was rampant growth. Revenue grew by a factor of greater than 300 percent (over $400 million). Over that same period, inventory rose only by 80 percent (approximately $80 million).
This second graph in Fig. 12-11 shows Total Revenue versus Inventory from 2001 to 2008 from the Houston campus only. Note that at the beginning of 2005 there was the same rampant growth curve as observed in Longview. In this case, however, inventory ended up growing at nearly the same rate as revenue. There is about a six to nine month lag, but it is pacing at the same rate. Why is there a lag? As is typical with most MRP implementations, the plant is building to forecast.
Now, as can be seen in both graphs, when the market begins to turn at the beginning of 2008, LTI is exposed with a huge amount of inventory liability. In fact, due to the nature of forecasting and long lead times, there is a risk that the inventory will actually grow beyond revenue in the short run without massive course correction in the form of PO and MO cancellation or delay. This is a classic effect of traditional MRP driven environments.
It is very important to note that the people in the Houston facility are smart, professional manufacturing personnel. They simply did not have the tools and new approaches at their disposal to replicate what happened at Longview. The graph in Fig. 12-11 is not an indictment of those people; it is proof that traditional MRP represents a huge liability in the volatile and variable manufacturing environments that tend to be today’s rule rather than exception.
For more on LTI’s case study, see Chapter 14.
Summary
By bringing together rules, vision, and technology, ASR provides a practical real world solution to the MRP conflict found in so many companies today. ASR still allows the company to utilize its formal planning system and finally realize the ROI expected when the system was first implemented. The current ERP system is not ripped out and replaced. Instead, the components of ASR leverage all the good work done to date. The five components of the ASR approach