A " best practice" is a process, technique, or innovative use of resources that represents the state-of-the-art industry behavior.

University Degree Business and Administrative studies

Rudolph F. June

University at Buffalo (SUNY)

Department of Engineering and Applied Science

Principles of Engineering Management I

EAS 521 (Fall 2002)

Dr. Carl M. Chang

Abstract: A “ best practice” is a process, technique, or innovative use of resources that represents the state-of-the-art industry behavior. Firms making use of best practices in their supply chains can achieve significant improvements in cost, schedule, quality, performance, safety, environment, or other measurable factors that impact the bottom line in the organization. The role of engineering in the attainment of the benefits of utilizing best practice methods is critical. It is important to have engineers not only participate in these efforts, but play a lead role in their implementation.

Introduction

Supply chains are networks of logistic and manufacturing activities starting with raw material sourcing and ending with the distribution of finished goods to markets. A complete supply chain usually involves several companies and several production/warehouse facilities.

The role of an engineer in the supply chain spans the many tasks beginning with project approval and ending with the building of the first production unit. Early efforts to define the supply chain of manufacturing ( similar to where I am employed ) focused on the business processes that began with securing materials for production and ending with the logistics required to deliver finished products to the consumer. This disregards an earlier , crucial set of activities that are extremely time consuming and costly, being the active process of designing the product to be built. It is here where the contributions of engineering can be found. Important to note is that several independent studies have shown that a very high proportion of the total costs of a new product program are incurred or committed during the engineering supply chain phase. This can add up to many hundreds of millions of dollars for a major manufacturing company. Businesses can gain tremendous benefits by making this phase shorter and more effective. Such benefits are both cost-related, such as reduced development cost, and revenue oriented, such as faster time to market.

I. Engineering Challenges in the Supply Chain

A European funded research project recently cast some interesting light on the problem of engineering contributions in the supply chain. This study concluded that in general, only a relatively small amount of an engineer’s time ( 11% ) can be considered productive. 89% of an engineer’s time is spent either waiting for information, exchanging information, or administering information. Any industry best practice that can promise to reduce the amount of time spent on non-productive activities has the potential to increase considerably, the capacity for a engineer to deliver productive work. Although administration, communication, and decision-making is essential to the quality of the production activities of an engineer, there remains a significant opportunity to eliminate unproductive time and maximize productive output.

II. Supply Chain Best Practices

Managing supply chain operations is critical to any company’s ability to compete effectively. The supply chain has traditionally been managed by a series of simple, compartmentalized business functions. It was driven by manufacturers who managed and controlled the pace at which products were developed, manufactured, and distributed. In recent years, customers have forced increasing demands on manufacturers for options, styles, features, and quick order fulfillment and fast delivery. Success for many companies now depends on their own ability to balance a stream of product and process changes with meeting customer demands for delivery and flexibility. It is critical that the companies wishing to remain competitive in their respective industries to be able to identify and implement industry best practice processes.

In 1996, a group of leading U.S. and international firms got together to form the Supply-Chain Council ( SCC ). The SCC took the reference model and helped develop, test, and finally release what was known as the Supply Chain Reference Model ( SCOR ). By 1997, SCOR represented the culmination of 12 months of extensive work by 70 world-class manufacturers from diverse industry segments. One of the key points of the model allows companies to use best practice information to prioritize their activities. This information would consist of the combination of quantitative metrics with qualitative practices and allow correlation of specific business practices to the resulting measurable outcome.

Best Practice – Supply Risk Assessment Analysis

Supply risk exists in virtually every organization, however, few purchasing organizations perform rigorous assessments and create plans to mitigate risk Even an unfortunate incident is very possible and the effects can cause significant damage to the organizations entire supply chain.

Risk, as related to a supply chain, is characterized as anything that impedes the introduction of a new product or an event that could disrupt production. The risk assessment process outline a 10-step procedure beginning by identifying the materials or services that will be tracked on a quarterly basis. A manager would then be appointed to conduct the risk assessment, prepare a scorecard, and make a report. Third step would involve diagramming the complete project from its inception to deployment. The next would involve reviewing the eight factors considered in risk assessment, namely design, cost, quality, availability, legality, manufacturability, supply base/environmental.

The fifth step involves gathering data for each risk factor from suppliers of industry data. Once the necessary data is compiled, the next step requires the risk assessment manager, as well as other specialized engineers to assign a risk score by compiling what they have compiled versus the criteria. It is here that the role played by engineers is critical. The technical ( and business) expertise of specialized engineers is required to assess the integrity of the collected data and assign a risk score. In addition, engineers assigned to participate in this project have the biggest responsibility in conducting the impact analysis ( step seven ). This step also involves the opportunity by the risk assessment manager to change the initial risk assessment based on the results of the impact analysis, the risk reduction plans, and summary score based on the eight factors described. The score card is updated by the findings of the report and the conclusions drawn. The main issues are listed for each risk factor, as well as a plan of action, a timeframe for resolution, and a manager to carry out the plan. Step nine requires the manager to assigned to each risk item to continually monitor the risk factors’ progress towards achieving negligible risk, before the date set forth in the action plan. The last step involves the collaboration of all necessary people to determine when to cease performing the risk assessments. When the expectations of the action plan are met and the risk assessment manager has determined that the risk has become negligible, then the process is complete.

The risk assessment process described here has been very successful by heightening the awareness of the potential problems in the supply chain. Some of the key benefits that I identified in performing the process include identifying alternate sources for raw materials. Sometimes it is not always possible to accurately predict growth. Meeting customer demands is critical and finding out that the supplier is incapable of satisfying your need for raw materials in a timely manner during a growth period can easily be the difference between success and failure. The same holds true for the technology being purchased. Knowing ahead of time whether the supplier is flexible or capable of redesigning a product to meet customer needs is important to know before commitments are made. I don’t really see any shortcomings with this type of risk assessment process. I do think that it is critical to have the right people, especially from the engineering group of the company, to determine the scores in that they would probably have the best qualifications to determine the validity of much of the data that would be collected.

The Dell Computer corporation implemented a supply chain risk assessment project similar to the one described above. Previously, it had no formal method to evaluate supply chain risks. The goals it had hoped to accomplish included developing tool/cost models to assess the degree of supply chain risk introduced by various product decisions, increasing awareness of supply chain management activities across the organization, and insure overall supply chain costs and risks were addressed when decisions were made. After completing the assessment it had 1) identified $3.5 million of unrecognized supply chain risk for a single product line 2) expanded the role of the supply chain manager to more effectively leverage supply chain expertise during the product development cycle 3) developed and institutionalized risk assessment models that injected supply chain consideration into the decision-making process.

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Lockheed Martin Tactical Aircraft Systems ( LMTAS ) is a defense contractor located in Ft.Worth, Texas. It has developed a risk assessment process to help program managers in programs such as the F-16 aircraft development. Their risk assessment process helps identify, quantify, analyze, evaluate, and manage supply chain risks that, if unattended, could cause major program delays and higher costs. LMTAS orients the process into two components, namely, the probability of failure to achieve a particular out come and the consequence of failing to achieve that outcome. Each supply chain component is assigned a five tiered risk rating ( low, minor, moderate, significant , or high ) and a risk scoring matrix is developed from this matrix. A risk prevention activity is planned for high, moderate and low risks, as required. A risk plan is then made as a management tool to ensure that the risk are being addressed in a timely manner. The process helped LMTAS identify and mitigate risk areas and also clearly identify the best suppliers.

Raytheon Missile Systems Company ( RMSC ) is a manufacturer of a variety of guided missile systems, located in Tuscon, Arizona. RMSC established their risk assessment process as a proactive method to predict potential problems and risks in their supply chain, and mitigate the risks by controlling the process, developing strategies, and addressing issues early. In the past, RMSC used a reactive method, which often led to crisis management and insufficient time to implement the optimum solution. The risk assessment process that was developed identified, analyzed, and prioritized using various tools to address differing aspects ( i.e, process analysis, supplier delivery, etc. ). Prioritization is achieved by determining the probability and consequence in order to calculate a risk factor for every identified risk. The company then develops a mitigation plan to reduce the risk areas which are tracked and reported weekly. Since implementing a risk assessment program RMSC significantly improved customer satisfaction as reflected in its 85% award fee rating across all programs.

Best Practice – Standardization

Standardizing is an important step in lowering costs while still meeting customer needs. The best practice process described here focuses on strategic sourcing improvement efforts aimed at understanding and reducing non-value added pert proliferation among the type of companies with mainly autonomous business units. It involves a six-step process that identifies and analyzes parts that serve similar purposes in an effort to understand the physical and price differences in parts that are not justified by the functionality of those parts.

Standardization has long been practiced throughout certain industries as a way to reduce costs and inventory, as well as enhance supply chain management in genera;. A standardization process creates leverage with suppliers, improves service level of suppliers, and improves product and part reliability. It usually is a challenge however, for manufacturers ( such as where I work ) particularly in decentralize companies where a high degree of autonomy is found amongst personnel. In addition, many large manufacturing companies are organized into divisions and subdivided into plants tha operate as profit and loss centers. With each manufacturing facility being responsible for their own balance sheet, the practice of operating the best way known how versus maintaining a standard, often becomes priority. The standardization process is a multi-step process that begins with identifying possible parts based on total spend, trend, number of suppliers and inputs from sourcing, product development, corporate division, and plant levels. The next steps would entail physically examining similar parts. The visual comparison of the parts has a very dramatic effect in that being able to see the sheer number of parts that perform similar functions sends a messageee about the potential for standardization.

The next step is where engineering has a large impact. They would be called upon to brainstorm with the strategic sourcing team to determine what the possible cost drivers might be. They gather data n cost drivers such as raw material choice, design, use of non-standardized materials, over-specifying, machining processes, amongst others. The parts are then clustered so that the items with similar characteristics and functions can be reexamined. Once this is done, all data related to cost, dimensions, volume usage, etc is recorded. Groups of parts are often re-clustered and analyzed along different combinations of parts and variables to detect underlying patterns, relationships and outliers. After the analysis is complete, the data gathered is summarized in both graphic and tabular form. An analyst works with engineering to understand what the supply manager will be looking for The analyst and engineers would then meet with the supplu manager to discuss the data and relationships found, and to develop a plan for attaining cost savings. Lastly, the analyst and engineers support the strategic sourcing of the supply manager to achieve potential cost reduction.

It is important to understand that standardization carries with it benefits not directly tied back to cost savings. The process creates a medium for communication among engineers, identifies redundancy such as multiple parts of the same design with different item codes, and coordinates the efforts of multiple locations across the world. It can also increase the supplier’s opportunity to contribute ideas that will benefit multiple products, provide information to develop cost models, and facilitate training new people coming into a company regarding cost drivers and opportunities for negotiation and improvement. While the standardization process generates information, engineers must utilize that information for it to have any real benefit. In addition, if engineering is heavily involved, it can ultimately impact the design and use the information proactively in future products or model changes.

The industry best practice of standardization of parts helps parts suppliers rationalize their product lines, while allowing them to reduce overhead costs ( allowing them to be more competitive ), improve their operational flexibility ( resulting in better delivery ), and implement better product development practices to improve operations and quality. From a company’s standpoint, reduced purchasing costs, inventory/overhead floor space reduction, increased flexibility, and parts availability are all benefits realized from this process. While a delay in bringing about advanced parts or technology might be a shortcoming of standardization, the benefits far outweigh the drawbacks.

Edmonton Power Generation Inc. manages the production of electrical energy from coal and natural gas. Its three plants generate 1700 megawatts of power for the province of Alberta, Canada. Each plant ran independently of each other from the way inventory was reported to the entire management structure. The standardization process applied increased efficiency and productivity not only in the supply procurement area, but also enhanced the corporate work management system, as well as work and materials process.

Hoffman/Schroff, a division of Pentair corporation, manufactures a vast variety of sheet metal enclosures for electronics and electrical controls. Customers ordered either ‘ standard’ ( relatively speaking ) or custom products, which could only be built after all the materials and parts were ordered and received. The variety of parts and materials caused a logistics nightmare. Being a manufacturer of mass customized products didn’t allow them to completely standardize all products or raw materials, but a major opportunity to expand revenue and profits did exist. Hoffman standardized raw materials to the point where a steady flow of those raw materials would come into the plant and be used in one way or another. They also began to order standardized sheets only, where all sheet metal products could be made from only one sheet size. Its engineering and manufacturing processes created a faster turnaround time, consistently delivering products within weeks of receiving customer orders.

The Department of Defense faces an ever-increasing challenge of sustaining the readiness of its arsenal of weapons. As a mean to address their problem of non-availability of parts, the use of commercial-off-the-shelf ( COTS ) parts had been advocated. The standardization project that followed was to develop a database of parts and a readily available list of potential COTS replacement parts. As with standardization process described above, the analysis evaluated known product attributes, as well as performance characteristics of military spare and repair parts. The outcome of this project resulted in a database of military parts currently in use, an associated database of possible commercial equivalents, and a software interface to aid in the search and retrieval of this information. As mentioned earlier, the standardization process often yields results that are not just a reduction in cost.

Beyond the examples cited, most successful companies adopt some form of standardization. The benefits of doing so are easily recognizable.

Best Practice – Supplier Partnerships

Companies that work in close relationships with their key vendors are able to take advantage of their suppliers’ special competencies, leverage them to achieve significant operational, economic and productivity benefits. Supplier certification is a first step towards developing meaningful supplier partnerships. Top companies often certify supplier at different levels, reflecting the strength, depth and maturity of the relationship. Over time, performance reviews become part of a re-certification and on-going relationship management.

Technology greatly advances the benefits of world-class supplier partnerships. Communication tools such as extranets, electronic data exchange ( EDI ), common CAD/CAM platforms, and management software give each party instantaneous access to partner information. Both sides become almost fully integrated through technology. This link between company and supplier add particular value during new product development. Throughout production, partners can target unnecessary and redundant steps for elimination.

Extensive communication mechanisms are necessary to establish solid supplier partnerships. World-class companies often use cross-functional, cross-corporate teams to promote the exchange of objectives and ideas. Still yet, companies with high performing supply chains encourage interaction with key suppliers at all levels of the organization, particularly upper management. These companies have various tools in place to foster communications between CEO’s, plant managers, and quality assurance inspectors. In addition, top companies co-locate personnel, rotating employees, particularly engineers, at partner sites for months at a time. Participation in this strategy gives engineering personnel a deepened appreciation for the capabilities, needs, and objectives of their partners, which they then take this knowledge back to further enhance the process and design improvements efforts of the organization.

The benefits gained through the enhanced trust and communication of partnerships exceed those of a typical cost-focused relationships. The increased impact achieved through partnerships allows world-class companies to reduce their supplier base, often by 90 percent. With a smaller suppler base, companies can forge closer relationships with the remaining suppliers, leading to lower total costs, lower inventories, improved working capital and better products. This smaller supply base strategy also benefits the remaining vendors, who usually increase business volumes in exchange for lower unit pricing. Moreover, some companies reward and recognize partners with additional benefits like preferential bidding for new work, cash back for achieving performance –based objectives, and sharing of savings identified in cost-reduction efforts.

Daimler-Chrysler, manufacturer of automobiles both domestically and abroad, understands that there are vital components in the development of a productive and profitable relationship between a company and its supplier. In their transition from traditional to more progressive relationships, Daimler-Chrysler involves suppliers in product development and process improvement. For Daimler-Chrysler, this required substantial change, including partnerships that promote the unimpeded two-way flow of ideas. They have 400 partner engineers co-located at its facilities, facilitating the constant sharing of ideas and a greater understanding of strategies, goals, and capabilities. The idea of partnering with suppliers has helped Daimler-Chrysler remain competitive in the auto manufacturing industry.

Lockheed martin is a global enterprise engaged in the research, development manufacturing and integration of advanced technology systems for government and commercial customers. It has long engaged in the practice of partnering with suppliers. Through this practice, it has developed various levels of certification, each with increasingly stringent quality measures. Certified supplier benefit from reduced inspections, preferred procurement status, and increased visibility to other Lockheed units. The company has focused on measuring quality and has achieved impressive improvements in yield, backlog, cycle time, material returns, and waste.

As part of government reinvention, Anniston Army Depot ( ANAD ) is partnering with private sector suppliers. Partnering at ANAD involves developing supplier relationships to enhance system inefficiencies and increase capabilities. ANAD established numerous levels of partnerships which included co-production/ design efforts where ANAD contributes resources ( i.e., skills manpower, equipment, etc. ) to a program. As a result of these new partnership opportunities, the private sector partners have been able to establish operations within the ANAD fences in under-utilized facilities. This also allowed ANAD to increase facility utilization by 14% avoiding costs of $25 million.

GHSP, formerly known as Grand Haven Stamping Products, is a Tier One designer and manufacturer of mechanical and electro-mechanical assemblies for domestic and international automakers as Audi, Daimler-Chrysler, Ford, GM, Honda and Toyota. GHSP has a long history of operating in a lean manufacturing environment with stringent supply chain management practices, a necessity in the highly competitive automotive industry. As competitive pressures mounted over time, GHSP has experimented with various techniques to build their supplier relationships. One program required the suppliers to dial in via a modem to view some of the inventory, but still was insufficient. Another program required the suppliers to physically come into the plant and review GHSP’s inventory. GHSP concluded that the solution was to make a commitment to partnering on a closer basis. To accomplish this, GHSP installed a software package to give supplier real-time access into manufacturers’ inventories, which enables a collaborative vendor-managed inventory environment and just-in-time manufacturing. Since installing this program GHSP reports that relationships with its suppliers have improved. GHSP has reduced the cost of excess inventory on the floor, and reduced administrative activities including phone calls, faxes, and postage. It also has streamlined its processed and freed up the valuable time of its managers, engineers, and other employees from repetitive administrative tasks, allowing them to work on more strategic functions.

D. Best Practice – Cost Management

Managing the entire spectrum of costs associated with running a business is one of the most important jobs of an industrial organization. Unfortunately, far too many organizations confuse total cost reduction with purchase price reduction. Companies that engage in the best practice of cost management not only measure and see clearly all costs involved with producing and delivering a product or service, they also help suppliers do the same. They realize that suppliers will not make the long-term effort to seek out waste and reduce costs if they have nothing or little to gain. Companies that achieve a best practice in this area usually work closely with suppliers to closely examine all processes involved at both companies, and they attempt to reduce those costs.

Perhaps the best cost management program was pioneered by Chrysler ( prior to their merger with Daimler Benz ), known as SCORE . SCORE is an acronym for supplier cost reduction effort. At the heart of SCORE was the sharing of savings with a supplier when that supplier identified an area where costs could be reduced and proposed a method to realize that savings. Typically, engineers are given the responsibility for finding these savings through new design or retrofitting existing designs. Some of the other keys to the success of this program included support from top management, use of technology, supplier involvement, and a cross-functional approach. SCORE actually increased suppliers margins because they shared savings with their customers.

Harley – Davidson Motor Co. of Wauwatosa, Wisconsin has become known for translating process innovation into business revival. A significant contributor to this growth is a new-product cost management strategy, based on design for manufacturability. The company recognized that while 70% of their product cost was determined at the design function, the cost strategy went far beyond the function of product development. Their strategy was two fold, with the first linking cost management to corporate objectives, and the second validates and measures progress towards cost targets. Cross-functional integration was paramount in implementing this strategy. Cost analysts work with development team members, while design engineers worked closely with manufacturing personnel to understand cost constraints in conjunction with an understanding of how things would be made. This strategy has helped Harley-Davidson capture nearly 50% of the U.S. market for motorcycles, while achieving double-digit revenue growth.

Best Practice – Supplier Diversity

To comply with stricter government regulations demanding a diverse supplier base, a growing number of organizations have launched supplier diversity programs. Such programs are intended to provide equal contractual opportunities to historically underutilized but qualified suppliers such as small business minority or women-owned companies and leverage such opportunities to create a strategic sourcing advantage.

A supplier is considered a small business if it size is consistent with the government size standard specified in the Federal Acquisition Regulation 19.102. For example, in the mining, wholesale or retail trade, and manufacturing sector, a supplier is typically considered small if it employs 500 people or fewer. In such industries as finance , insurance real estate, construction, and transportation, small business standards are based on a company’s average annual receipts and have a broad range of $.5 million to $100 million. A minority or woman-owned business requires the business to be at least 51% owned by a female or an individual(s) who is/are socially and economically disadvantaged as defined by the federal government, and has its management and daily business controlled by such an individuals. Groups considered to be socially and economically disadvantaged include racial and ethnic minorities such as African, Hispanic, Native, and Asian Americans. In addition, to qualify for small business disadvantaged business status, The company owners net worth, excluding equity in the business and primary residence, may not exceed $750,000.

Suppliers whose business fall into the above described category are not recipients of a ‘ corporate welfare’ program, but are expected to meet the exact same standards as if they did not fall into this category. The expectations would include 1) a commitment to quality in everything from business philosophy to products and service creation 2) on-time delivery and 3) continuous improvement of process, products, and services.

As a result of implementing a supplier diversity initiative, companies can expect increased opportunities for federal government contracts by avoiding penalties that could be imposed because of a lack of ‘ good faith “ efforts at increasing small business diversity purchases and participation in diversity efforts. Other benefits include better quality products and services resulting from increased competition, more personalized service with greater flexibility because small business suppliers are typically smaller and more willing and able to adjust to a company’s business needs.

Most large companies have in place a supplier diversity initiative, be it large or small. The Marriott Corporation has a very successful supplier diversity program. In 1998, they increased their commitment with a goal of 55 of all purchases would come from minority or women-owned businesses. In 2001, they exceeded that goal, reaching 5.1% and $ 151 million in spending among over 330 diverse suppliers, which is a 136% increase from 464 million in 1997.

Burger King has also made a strong commitment to supplier diversity. They have increased their use of minority suppliers to 4.5% of its total purchases and has set an internal goal of reaching “ world class “ status ( 5% ) by the end of 2002. In the last two years alone its spending among minority and women owned businesses has increased 50%. Supplier diversity is not only publicly embraced by all levels of management, including the CEO, but the company has committed significant time and resources to it. Through Restaurant Services Inc. ( RSI ), Burger King’s exclusive buying contractor, they actively and aggressively seek out qualified minority and women-owned businesses.

As mentioned, most successful large companies recognize the need to make a conscientious effort to have a diverse group of suppliers. The Coca-Cola Company made a 5-year $1 billion commitment to increase the company’s minority and women-owned business contracting. In the U.S., Office Depot purchased $365 million of products and services from minority businesses. Ford Motor Company purchases more than %3 billion a year of goods and services through its supplier diversity program. In 2000, General Motors spent $4.1 billion with minority suppliers. The Phillip Morris family of companies purchased $1.5 billion from minority suppliers.

One of the most extraordinary examples is that of the Denny’s restaurant chain. A decade ago, the restaurant chain Denny’s was nearly synonymous with racism. After is settled a highly public $54 million class-action lawsuit, Denny’s took to transform their embattled company into a model for inclusion. Denny’s and its parent company Advantica, first sought to change the culture of the company through intensive diversity training. Their goal was to recognize the limitations of their own personal surroundings and to finds ways to reach out to people with entirely different cultural surroundings. Denny’s has made huge strides in supplier diversity. In 1992, none of its supplier contracts were held by minorities. This year, the company’s spending with minorities reached $100 million, which amounts to 17% of the company’s suppliers purchases. To put this in perspective, this is three to four times the level required by the National Minority Supplier Development Council ( NMSDC ) to reach “ world class “ supplier diversity status. This dedication to diversity has paid off. According to the latest study, African-American traffic in Denny’s restaurants increased to 61 million visitors in 2001 from 51 million in 1998. In addition, sales reached a record $2.23 billion, proving once again that companies can indeed benefit from paying attention to diversity.

Best Practice – Target Costing

Target costing is a process is a process whereby purchasing, design, manufacturing, and often suppliers work together to achieve a specific cost for an item. The simplest fotrmula for target costing that is widely used is

Target Cost = estimated selling price – desired profit

Unless an item is only being purchased for resale, the target cost that this formula yields is far too broad to be useful. The target cost must be broken down into its relevant cost elements, similar to a bill of materials. Elements of this cost include labor and manufacturing overhead, sales, engineering, purchasing materials and services, and administrative expenses.

The supply chain’s role in target costing tends to change over time. It usually involves the use of cross-functional teams and follows several steps to the goal. It starts with identifying the product or service characteristics desired by the customer. Team members may work with suppliers to assess their capabilities versus the company’s needs. The next couple of steps involve establishing the target selling price to the customer, and determining the overall target cost. This is where engineering tends to play a critical role. Product design is generally done by engineering whose responsibility it is to make sure that manufacturing design cost is kept as low as possible, while still achieving the desired results. The next step is to dissect the overall target cost into historic costs, market changes, and maybe working with suppliers to help in this process. After this is completed, engineers and purchasing agents in the company continue to work to identify and qualify suppliers. Engineering will also work with other team members on alternatives to meet target costs, trading off with different material or design parameters. It is during this step that current and future price, quality, and performance considerations are determined. The final step is a longer term process whereby target cost performance is continually evaluated. Some of the primary methods used to achieve target costs during this step include negotiations, supplier development, design changes ( engineering ), material changes, specifications, long term agreements with future price concessions, and ultimately product rollout. The target costing process ends when either the company discovers a way to satisfy customer requirements at the target cost or the product abandoned.

Lexmark International is a spin-off of IBM Information Product division developed 1991. Its primary product are printers. After Lexmark became an independent company, its management realized that the only way to survive was through repeat business of printers and supplies, carrying very high profit margins. Its management carefully studied the market environment, consumers’ taste, and their competitors’ tactics. It then decided target sales and set a target price. Their planning staff then establishes a target price. This strategy has worked very well for Lexmark. By 1999, its was the second largest printer company in the world and has been able to maintain an annual growth rate between 155 to 25%.

NPC is a polyester fiber plant located in the Pacific Rim. It produces two types of polyester fibers, namely cotton and silk. Although NPC was a leading player in the industry, it did feel competitive pressure from the collective minor players. NPC launched a globalization program to expand its business to Southeast Asia and China. Management was instructed to adopt an aggressive target costing program so that it could be competitive in both domestic and global markets. It decided to conduct a comprehensive review of its product costs and find ways to drive them down to specified target levels. To achieve this, NPC began to attack the quality problems that existed, imposed tighter control of the initial conditions at the beginning of their processes, and worked with suppliers to improve the purity of their materials. They also made several adjustments in their packaging and related materials. This target cost initiative drove all the major and minor improvements that resulted, and NPC was able to achieve an 18% overall cost reduction.

Target costing is still relatively new to the U.S.. It is adopted in response to extreme pressure on profit margins. However, companies that have even partially implemented target costing have reported benefits such as improved profits, more customer focus, better cost planning and control, and better teamwork in their supply chains.

Best Practice – Energy Efficiency

There are many energy efficient technologies both currently being practiced and under development. Energy efficiency can be improved through a variety of methods to enhance the supply chain process. Improved equipment and procedures for existing production methods to new and better production processes. Heat recovery technologies, high-efficiency motors and variable speed drives, and cogeneration are particularly attractive targets for government policies. It is in these endeavors that engineers can make a tremendous contribution. Most of the new designs or retrofitting of equipment become a direct responsibility of the engineering staff at most industrial companies. The costs and benefits vary widely. Minor operational changes, such as maintenance, are typically the cheapest, easiest to implement, least risky, but usually also yield the smallest energy and cost savings. Product equipment changes and energy add-on technologies involve larger investments, typically $100 thousand to tens of millions of dollars, and may not be justified by reduced energy costs alone. Potentially, the greatest increases in energy efficiency will not come from direct efforts to reduce energy consumption, but from pursuing other economic goals like improved product quality, lower capital and operating costs, or specialized products markets. Many projects undertaken for non-energy saving reasons yield energy efficiency gains as a secondary consequence. For example, steel makers have installed continuous casters more for the improved product yield that for the energy savings. Metal stamping plants have implemented new techniques for cushioning presses more for lower maintenance costs than energy savings. Glass producers adopted the energy-saving float process for the production flexibility that it yielded.

It is important to track energy savings to help insure that goals can be met and to establish future goals. The results must be tracked against clear and accepted rules. It requires the means to measure the before and after of an energy improvement project and the ability to accurately record measurements or conditions. The reporting process also needs to be understood and accepted by all people involved in the decision-making process. Reviewing results annually ensures continuous improvement and encourages the

“ best practice “ to remain in effect. Processes are becoming more complex and energy dependent, having a significant impact on energy efficient opportunities. It is therefore critical that companies pursue these opportunities where they exist, if they wish to remain competitive.

Motor-driven equipment accounts for 64% of the electricity consumption in the U.S. industrial sector Cummins Engine Company manufacturers diesel engines for both passenger cars, trucks, and industrial moving equipment. In 1995 Cummins began its active involvement with a government program known as Motor Challenge. This involved replacing 296 standard efficient motors in their Columbus, Indiana plant with premium efficient motors. While their existing motors had been reliable, Cummins realized that their efficiency ratings were typical of motors available thirty years agao. The engineers at Cummins analyzed the cost over the motor’s life cycles and implemented one of the most aggressive programs in America to optimize energy efficiency. When it was all said and done they were able to save $200,000 per year, and adopt a proactive, positive corporate energy strategy that supports a good corporate image.

The U.S. Steel Group’s Edgar Thomson plant in Pennsylvania has implemented more than forty energy-saving technologies with an estimated annual savings of about $2 million. These projects included modifying natural gas pilots on boilers, insulating steam lines, repairing steam traps, recovering condensate, and repairing leaks in compressed air systems. Some of the key efforts involve a blast furnace burner monitor that uses an infrared camera to detect where the bulk of the heat is located, which had a tremendous impact of energy savings and maintenance costs.

One successful example of a waste heat recovery application is at Wabash Alloys, an aluminum recycler and provider of aluminum alloy, located in New York State. It utilizes an energy efficient kiln that heats scrap aluminum for reuse. This kiln enabled Wabash to reduce metal loss and emissions of volatile organic compounds and has reduced kiln energy use by more than half.

Summary

Large manufacturing organizations either succeed or fail of the effectiveness of their supply chains. For global companies, gaining a competitive advantage means having the right materials in the right place at the right time. Achieving this prerequisite operational excellence in today’s marketplace requires effective supply chain management. This means creating the right structure, executing flawlessly, and accurately responding to volatility. Achieving this best-in-class excellence means implementing a broad array of the supply chain best practices described in this paper. It is also important that a company’s engineering staff recognize the benefits of best practices measures and work diligently to attain them.

While so much focus on supply chain efficiency using best practice management is important, sight cannot be lost of the customer and competition pressures to provide greater quality to products and services. Therefore, supply chains must be prepared to effectively balance the scale between cost focus and value focus.

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