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Professor Richard L. Nolan, William Barclay Harding Professor of Business Administration (Emeritus), Harvard Business School and Philip M.
Condit Professor of Business Administration, University of Washington, and Professors Karen A. Brown and Subodha Kumar, University of Washington, prepared this case. Thomas Schmitt, University of Washington, also contributed. HBS cases were developed solely as the basis for class discussion. Cases were not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management.
Copyright © 2006 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to http://www.hbsp.harvard.edu. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, R I C H A R D L . N O L A N
K A R E N A . B R O W N S U B O D H A K U M A R
Esterline Technologies: Lean Manufacturing
“. . . if a pilot touches it, looks at it, talks to it, or reacts to it chances are it’s made by Esterline.”1
Robert Cremin,2 Chairman, President, and Chief Executive Officer of Esterline Technologies had been with the company since 1976. In nearly three decades with Esterline, he had served in virtually all of its major operating areas. His recent positions included COO and Senior Group Vice President.
When he was appointed President and CEO in 1999, he set the Bellevue, Washington-based company on a new course, with a strategic focus on developing and manufacturing highly engineered custom components for aerospace and defense markets.
Esterline closed the year 2005 with revenues of $835 million and income from continuing operations of $51 million; compared to 2004 with revenues of $614 million and income from continuing operations of $29 million. (See Exhibit 1 for the detailed Esterline financial statements.) By the end of 2005, Esterline had 34 business units and employed 7,500 people. Facilities with decentralized responsibility for engineering, production, marketing, and sales, were located in 11 states3 and five countries4 outside of the U.S. According to analysts’ reports, 2006 revenues were likely to exceed $1 billion.
Lean manufacturing was an essential part of Esterline’s strategy, but IT was not seen as strategic.
Nevertheless, the role of IT in lean manufacturing at Esterline was a continuing debate. Some within the company argued that enterprise IT systems were essential to successful performance, and others believed that they interfered with efforts to remove waste and simplify processes.
1 Esterline 2004 Annual Report, p.15.
2 HBS MBA, class of 1965.
3 These included Washington, California, Wisconsin, Michigan, Illinois, Arkansas, North Carolina, Virginia, New York, Massachusetts, and Idaho. The heaviest concentration of facilities was in California.
4 These included the United Kingdom, Germany, France, Mexico, and China.
Bob Cremin had strong views on the role of IT. At one point, in discussions with his seven- person corporate team, he quipped: “Sometimes, I’d just like to throw all of the computers into Puget Sound.”
He continued: “People tend to over rely on IT. IT systems are complex, and people can get on
‘automatic’ just following the dictates of the system. Lean manufacturing pushes decisions down to people directly engaged in producing products. Incremental changes are key to innovation and continued improvement. This requires trial and error, and overly-structured IT systems often interfere with process innovation.”
The Restructuring and Transformation of Esterline
By 1995, Esterline was a multi-industry conglomerate with revenues of $350 million. When Cremin became CEO in 1999, he and his corporate team narrowed the company’s focus to key industries and technologies. They sold 12 non-aligned companies, temporarily shrinking the corporation’s annual revenues to about $155 million. This allowed them to reduce their industry mix from 10 markets down to two: commercial aerospace and defense. In Cremin’s words, “This cleared up confusion in the marketplace and made it easier to raise funds and grow.” In 2004, Esterline exited its last non-core business.5 Thirty new acquisitions6 made between 1999 and 2005 strengthened Esterline’s targeted market-product position. Cremin described two examples of recent acquisitions
“One of our most recent acquisitions (in 2004) was Leach Holding Corporation, which makes high- performance electro-magnetic relays, solid-state switching devices, and power distribution assemblies, primarily for aerospace applications. Leach has added $120 million to Esterline’s revenue. On December 16, 2005, we acquired Darchem Holdings, a UK company manufacturing thermally-engineered components for both aerospace and defense applications. Darchem will add $70 million to our revenue.”
In 2005, the company was in a solid financial position, and had just achieved Tier-1 supplier status with two of its important customers: Boeing to produce the 787 overhead panel control cockpit system, and Airbus to produce the sensor suite for the TP 400M turboprop. As Cremin observed,
“Achieving Tier 1 status is like getting a Ph.D. -- everyone knows what that means. It means you can handle the next biggest thing; you can be trusted, you're reliable, and you have financial strength.”
Cremin summarized: “At the strategic level, we accomplished our turnaround by stressing internal new product development, supplemented with targeted acquisitions. At the tactical level, lean production methods have been the cornerstone of our success.”
Lean Policy Deployment
Prior to 2000, Esterline had instituted process improvement efforts7 with mixed success. As Cremin reflected back on these early efforts, he observed that they had been oriented toward implementation of specific tools, and that Esterline had not given enough authority and ownership to
5 See Esterline 2004 Annual Report, p. 8.
6 All but one of these acquisitions were still part of the Esterline family in 2006. According to Cremin, the one acquisition Esterline did not retain would have required a substantial investment that was not in line with corporate financial strategy.
This business was sold at a profit.
7 Examples included TQM (Total Quality Management), QFD (Quality Function Deployment), and 5-S.
employees at the operating level. Moreover, employees had tended to focus too narrowly on isolated process steps, sometimes making local improvements that had unintended negative effects on downstream operations. More recent initiatives to improve processes were placed in the hands of employee teams, who could choose from a broad menu of tools they deemed appropriate for a particular problem. They were trained to think systematically and to view an entire process as an integrated set of activities. Cremin offered the following observations:
“Many companies talk about lean manufacturing8—we live and breathe it. For us, lean isn’t just an approach for manufacturing. It’s a way of thinking about how we do business for the long term. It’s an approach that can help us dramatically lower costs, improve quality, and build credible competitive barriers to entry.
For lean to be successful, management must create an environment that honors the true value people bring to the business. We develop employees who understand our lean philosophy: a strategy to engage people more and more in the business, to encourage their ideas, and put their ideas to work. By investing in training and actively involving our employees, we have developed some very creative ways to eliminate waste, identify and fix quality problems, and standardize tasks for continuous improvement.
Making our people a responsible part of a manufacturing team and giving them authority to change their own work for the better has been critical to our success. That is why I continuously travel to all of our locations and talk directly to our workforce on the importance of advancing Esterline’s capability as a lean enterprise. During these visits, I make it clear that lean does not eliminate jobs—it creates capacity and opportunities.9 And, I emphasize my philosophy that change is more likely to occur if employees do not have their hands tied by inflexible IT systems.”
Performance measurement supported the implementation of lean initiatives. Each business unit was charged with setting annual goals. Three of these goal areas were set by the corporation: 1) profitable growth, 2) return on investment, and 3) aggressive lean implementation. Each unit was allowed to set two additional goals of its own choice. Percent on-time delivery was often included in the metrics business units chose for themselves. Employees received monetary rewards based on their business unit’s achievement of annual goals.
In 2000, Cremin hired Tom Heine into the position of Director of Organizational Effectiveness10 within his small corporate team to give visibility to lean manufacturing. Heine was charged with creating and facilitating internal networks to share best practices across business units and offer principles employees could apply to fit the unique needs of their products and industry segments. In addition to this internal lean network, Esterline also instituted a series of training programs in the areas of basic lean techniques and change management, reinforced unit employment of formally trained lean practitioners and periodically conducted corporate-wide lean seminars and workshops with external experts to serve as a catalyst for senior management to continue to stretch their lean thinking.
8 The term lean manufacturing was first coined by Womack, Jones, and Roos in their ground-breaking book “The Machine that Changed the World.” “Lean” concepts were spawned from Toyota Production System, and involve systematically removing non-value-added waste (in Japanese, muda) from processes. Muda may include waiting, overproduction, inventory, conveyance, rework, or unnecessary motion.
9 Esterline Annual Report, 2004.
10 Heine had held similar positions at Honeywell and other companies prior to his move to Esterline.
Frank Houston, who had led the lean journey at Korry Electronics in Seattle, one of Esterline’s business units, was named Corporate Group Vice President in 2005. This new assignment gave him administrative responsibility for nine business units in the avionics and controls segment, Six of these were in the U.S., one in China, one in Germany, and one in the U.K. One of his roles was to oversee lean system implementation at the Esterline business units for which he was responsible.
In keeping with Esterline corporate culture, Houston shied away from mandating that a location or team use a particular lean manufacturing tool set. Employees were free to choose the tool set that worked for them. Simplifying product flow and level-loading work across process elements were at the heart of all of Esterline’s lean efforts. During a discussion at corporate headquarters, Houston illustrated Esterline’s lean philosophy by drawing several diagrams on conference room flip charts.
The first, depicted in Figure A, below, emphasizes the results the company had realized through simplification of process flows.
Figure A Results of Simplified Flow: Frank Houston’s Flip Chart Drawing
Strong Performance Batch
Simplified Flow
Weak Performance
Delivery Quality
Responsiveness to customers Lean inventory
ROI
Houston highlighted the performance metrics shown at the bottom of Figure A. “When we simplify the flow, we can offer more on-time delivery, improve conformance quality, and respond more quickly to changing customer needs. When we better serve our customers along these three dimensions, higher-level metrics such as inventory turnover and ROI also improve.” Exhibit 2 shows Esterline’s inventory turnover history.
Figure B Frank Houston’s Flip Chart Contrasting Batch Production and Simplified Flow
Figure 2: Frank Houston’s Flip Chart Contrasting Batch Production and Simplified Flow
Houston then drew another figure on the flip chart, demonstrating how Esterline conceptualized flow simplification (Figure B). As Houston explained it, the upper part of the flip chart depicts a typical process architecture,11 where machines and people are organized by function and large batches of products move from one function to the next in what is often called a ‘jumbled flow.’ As Houston explained, “This was the historically-embedded architecture at Esterline. It gave a supervisor the advantage of managing a group of employees and machines with similar capabilities and it maximized utilization of employees. We justified this approach because we felt it gave us the flexibility to allow many different types of products to flow through the system, taking different
11Process architecture refers to the way employees, machines, technology, work stations, and other resources are configured in an organization.For more information about process architectures in lean environments, see Hyer, N.L. and Brown, K.A.
2003. Work Cells with Staying Power: Lessons for Process Complete Operations. California Management Review, 46:1, 27-52.
12-week flow: Jumbled Flow with Batch-and-Queue Scheduling Machines and people are organized by function.
Function 1 Function 2 Function 3 Function 4
Function 5 Function 6 Function 7
1-day flow: Linear flow for product families. Some machines and people are taken from functional units and redeployed into cell configurations. These serve product families whose members have similar processing requirements.
Cell for Part Family A
Cell for Part Family B
paths as their processing needs might dictate. Unfortunately, it created long lead times because batches tended to move sluggishly through the process as they were handled multiple times and waited in long queues behind other batches. The complexity of the ‘batch and queue’ architecture led us to need the support of IT systems like MRP12 to track the progress of parts through the system.”
The lower portion of Houston’s diagram, shown in Figure B, depicts a simplified flow in which machines and people needed to produce a family of products are removed from their functional homes and arranged sequentially. Houston noted that the new cell arrangements had been implemented with positive results in many of Esterline’s business units.
Tom Heine, Director of Organizational Effectiveness, emphasized that cells were part of a more comprehensive lean manufacturing strategy. In a presentation, he highlighted the lean tools, concepts, and workshops Esterline offered to its business units:
o Change Management
o Basic Leadership Skills Training o Basic Team Skills Training
o Technical tools of lean13 including:
o Value Stream Mapping o Standard work
o Kaizen o Heijunka o One-piece flow o TAKT time
o Mistake proofing (poka yoke)
o Set-up reduction and quick changeover o 5-S organization methods
o Kanban methods of moving inventory o Six-sigma processes
o Visual management
o Total Production Maintenance (TPM) o Jidoka
o Co-location of equipment
Integrating Lean Thinking with Esterline’s IT Systems
In the 1980s, Esterline had attempted to implement a standardized enterprise IT system across all of its business units. Unfortunately, the ‘one size fits all’ approach had not met the wide-ranging needs of subsidiaries. In Cremin’s words,
“It was hard to find an IT solution. One that worked well for a plant that focused on mass-producing few items had limits when applied to plants that made quantities in small batches. And, an IT system that worked well for manufacturing components fell short when applied to a process-flow plant.”
12 MRP stands for Material Requirements Planning. Often considered the precursor of modern enterprise-wide systems such as ERP (Enterprise Resource Planning), MRP systems were developed in the 1970s to support batch-oriented systems. Files included within a typical MRP system include inventory records, bills of materials for products, customer orders, forecasts, and lead times for component acquisition and production. These data are then combined to determine production schedules, component ordering plans, production tracking information, and recalculated inventory levels.
13 The Appendix is a glossary providing definitions of these terms.
Disappointing experiences with these sorts of mismatches had fueled the debate about adoption of enterprise IT systems. In general, ERP14 (Enterprise Resource Planning) systems are designed to standardize information entry and create central data repositories for information sharing across the organization. ERP advocates have claimed numerous advantages of ERP adoption, including improved customer service, better inventory accuracy, reduced setup times, higher quality, and improved cash flow. Skeptics argue that most of these advantages could be achieved through process simplification and lean production methods, without relying on complex computer systems.
Frank Houston aligned himself with the skeptics “The challenge is to simplify systems so they don’t need to be tracked with complicated IT systems.” He further explained the conflict with another flip chart diagram, shown in Figure C, below.
Figure C Houston’s Flipchart Highlighting Conflicts Between Lean Concepts and Enterprise IT
No MRP
Less need for computer
Lean Concepts IT Issues
Jidoka Problems fixed immediately.
No need for complex problem tracking.
No need for complicated Corrective action system (CAS)
VMI* Simple
Min/Max
*Vendor-managed inventory
No MRP
Less need for computer
Lean Concepts IT Issues
Jidoka Problems fixed immediately.
No need for complex problem tracking.
No need for complicated Corrective action system (CAS)
VMI* Simple
Min/Max
*Vendor-managed inventory
Houston explained Figure C as follows: “The term jidoka refers to systems that make it easier to identify and correct errors in real time. Before lean, we used to set aside problems such as bad parts or production errors, literally leaving them on a shelf for days or weeks before correcting them. We needed a database to keep track of these errors, and another database to record corrective actions. We also used to need an MRP system to plan and track material movements within our system. We’ve handed much of this responsibility to our supplier partners, whom we trust to deliver what we need based on their own visual inspection of stock room inventories. We call this ‘vendor managed inventory’ or VMI.”
14 ERP has become a generic term describing enterprise IT systems from a range of providers, including SAP, Oracle, Epicore, Ramco, AXS-One, Intentia, Sage, and others.
Esterline had recently adopted an IT strategy that allowed individual business units to make their own decisions about ERP.15 If managers at a particular site wished to purchase and install a system of this type, they were given several options from which to choose and allowed to select the one that best fit the needs of their industry type and strategy. Cremin explained the strategy: “Manufacturing personnel run the plants the way they need to. An IT system is a supporting tool, not a tool to control or limit lean manufacturing.”
Esterline’s Korry Plant
Korry Electronics, a home-grown division of Esterline founded in 1937, produced high- performance lighted displays and controls for the commercial and military aircraft industries, and had annual revenues of about $100 million. Korry’s four strategic business units included switches and annunciators, interface products, control and display systems, and optical products and systems.
The company was located near Seattle’s Space Needle on the northern edge of the downtown area. It occupied three leased buildings totaling 150,000 square feet, which were separated by busy streets. A tunnel, once used by a previous governmental tenant to transport county prisoners from one location to the next, connected some parts of the facilities underground. Korry employed 560 people and had two major production areas, one dedicated to parts fabrication and the other to assembly.
Korry’s lean-manufacturing efforts began in the mid 1990s while Frank Houston was president of the unit. The idea of rearranging the process architecture into cells represented a serious challenge because Korry had thousands of customers and a high mix of products, many of which were produced in low volumes. In some respects, the existing functionally-oriented shop had seemed like a logical design. However, employee teams began to identify product families with similar assembly requirements, and were able to pull some equipment out of functional areas and into cells.
Descriptive information about two of Korry’s cells (Cell #1 and Cell #2), and a bench-build area is presented in Exhibit 3.
In concert with the creation of cells in the assembly areas, plant managers and employees implemented 5-S systems to create order in the shops, and instituted a kanban system for controlling parts flow through the plant. Additionally, the materials group made ‘point-of-use’ parts storage a priority -- parts were taken from the central storage area and distributed to work areas where employees could access them more easily.
Process improvements made in the early 1990s produced successes and challenges. There was some quality improvement because employees at adjacent process steps now communicated directly with each other in the cell configurations. The shop was neater and cleaner. But, productivity gains did not reach the levels managers had anticipated, and some orders were still late. Korry continued in its lean efforts, adding value stream mapping to its tool mix in 1999. The process mapping activity helped employees to understand product flows, uncovered bottlenecks, and revealed other opportunities for workflow improvement. Moreover, simplified process flows were reducing the need for MRP control in some cells.
In 2004, several of Korry’s key production people attended a seminar by Richard Schonberger, a respected expert on world class manufacturing and lean methods. Michael Taylor, Senior Production manager, described an ‘aha’ moment from the seminar. “Dr. Schonberger asked how many people had inventory turnover goals for their employee teams. All of the material people proudly raised their hands. Then, he told us this was a misplaced goal because it is a lagging indicator and not an
15 Although there was latitude for manufacturing IT systems, Esterline did standardize across business units for financial and HR reporting systems.
action measure useful at the operating level. It would just lead to the wrong behavior – people will feel motivated to sacrifice customer delivery in order to keep inventory low. The real goal is on-time delivery to the customer, and the best way to achieve that is to level load production and get parts on kanban. This really woke us up. We had been so focused on the tools that we had not thought systematically about the elements of the House of Lean. If you look at it, the House of Lean shows level loading as the base, the thing you should start with. We had skipped that step.” (See Exhibit 4, House of Lean.)
Armed with a new awareness about level loading, Taylor and his colleagues, with support from Korry president Gary Dytrt, began in earnest to find ways to introduce heijunka or level loading into the plant. The first obstacle was the MRP system, which was designed with batching as its underlying logic for master scheduling. Batching led to ‘feast or famine’ work schedules for operators and did not allow for level loading. The lean group enlisted help from Korry’s programming staff to write a computer program (later known as Cerebellum) that would support a kanban material flow and scheduling system for Cell #1, which assembled high-volume products with regular order frequency.
These included indicator lights for aircraft such as the Apache helicopter and the F16 fighter.
Before the Cerebellum scheduling system was introduced, all work in Cell #1 had been done based on customer pull, which usually involved large, infrequently-ordered batches. The new Cerebellum scheduling system used customer forecasts and simulation to find an average expected demand for each product over a four-to-six week period, then produced a level schedule that created an even flow. Korry sent smaller ‘transfer batches’ to customers as work was completed, so finished goods inventory still stayed low. As Korry gained experience with heijunka level loading, the practice was extended to suppliers, who subsequently became accustomed to sending more frequent shipments of standard kanban quantities. More recently, Korry had begun extending level-loading to the demand side by offering discounts to customers to order in smaller batches over longer time horizons.
Cell #2 assembled integrated switching products for man-machine interfaces, which customers ordered infrequently and in small numbers. Given the relative uncertainty of demand for this product family, Korry managers found that the Cerebellum system was not a good fit. Instead, they enlisted the help of master schedulers, who applied their experience and judgment to make level- loaded scheduling decisions. Level loading was one of several lean manufacturing efforts implemented in Cell #2. Results for on-time delivery, shown in Exhibit 5, offer evidence of the resulting improvements.
The Bench-build Assembly Area was sometimes called the ‘catchall cell,’ although it was not actually organized as a cell. It produced parts for which volumes were very low and orders quite infrequent. An example was a panel for a DC-3 aircraft. Parts produced in the catchall cell did not lend themselves well to level-loading and were scheduled according to customer order quantities using traditional MRP methods.
To support the cells, Korry’s lean staff members, Cary Gammon and Allison Eiford, worked with the materials group to revamp the material delivery system. Although they had thought they were following best practices when they created the point-of-use storage system in 2002, they discovered that operators were then spending 30% of their time ordering, managing, and retrieving inventories and only 70% of their time adding value to products. Moreover, ‘musical parts’ games had begun to emerge when operators who had run out of parts borrowed them from other locations. As Gammon described it, “If one line ran out, they’d borrow parts from another line, and they’d go borrow parts from yet another line, and so on. Pretty soon, I’ve got three lines down. So then I start expediting.
And I can’t find the materials.”
In 2005, Korry moved all inventory back into the central storage area and created a regularly scheduled route for a ‘water spider’ to deliver parts on an hourly basis to work areas. Gammon likened the water spider’s role to that of a bus driver with a scheduled route16. Gammon went on to note: “We carry much less total inventory now. We know how much we have because we can see it in the stockroom. Now I know when I’m really out of material. For parts related to Cells 1 and 2, we set a minimum point for each part for four day’s worth of work. We don’t have to stop lines anymore.”
An additional enhancement was the design of workspaces so that each type of material had its place in a gravity-feed bin. This made it easy for the operator to know where to reach for parts, but also offered visual control to the water spider, who could easily see which parts needed to be replenished.
Once Korry had the time-based material delivery system running effectively in the plant, the materials people extended the concept out into the supply chain. Korry’s previous system involved sending orders to suppliers only when parts were needed. The revised system involved sending an order every Thursday, regardless of the quantity needed. If there was nothing in the order, it still went out, but with zero as the quantity requested. Suppliers learned to expect an order every week, and if nothing arrived, this meant the system had failed and they knew to call Korry to find out what was wrong. As Michael Taylor observed, “Everything is based on rhythm and timing.”
During benchmarking visits to other companies following lean practices and the Toyota Production system, Korry officials had seen operators using flat panel screens for schedule displays.
It seemed like a good idea, so Korry implemented this ‘best practice.’ However, they soon realized that having a schedule on a computer put pressure on employees, who somehow felt it implied “big brother is watching.” Plus, seeing several days’ production targets out in front of them gave them a sense that they would never be finished.
As Michael Taylor noted, the flat-panel displays “imposed a sense of measurement anxiety for operators.” Additionally, when employees could see demand five to six weeks in advance, they tended to pick the jobs they most liked and did those first. Additionally, they noted when a part showed up several times on the schedule, they grouped all of the orders together in one, large batch.
The MRP system could not anticipate these ad hoc adaptations, and parts shortages often resulted. In 2005, Korry abandoned the computer-based schedule displays in favor of simple white boards on the production floor. With the removal of computer-displayed schedules, employees and line coordinators worked together to create daily schedules based on specified TAKT times. They updated the schedule manually throughout the day, and cell team members felt more ownership in production goals. Additionally, Korry eliminated a computer-based system for tracking production problems and handed the responsibility back to operators, who wrote them on white boards in the production area where they could be used for team meetings. Although production schedules and problems were no longer displayed on the screens, cells 1 and 2 continued to use computer displays to depict assembly instructions and bill of material requirements. This allowed operators to easily switch from one product to the next and have easy access to documentation.
Inspection was another area that had served as an obstacle in Korry’s early lean efforts. In the interest of keeping inspection independent from assembly, Korry had kept this function as a separate entity. But, it created a bottleneck in the process and sometimes negated flow improvements made in the cells. Cary Gammon offered further insight: “We realized that certain tests were objective. You put it in a go/no-go gauge and it’s either good or bad. The operator can do this and correct the
16 Experts seem to disagree about what is a ‘real’ water spider. Some insist on a strict interpretation of the role at Toyota, where the water spider, or mizusumashi is someone who is available, on-call, to solve shortage problems. Others maintain that a water spider is a material specialist who delivers parts on a regular route and schedule. Some have likened the difference between the two practices to the difference between and on-call taxi cab and a scheduled bus. Common usage seems to favor flexibility in the definition of the term.
problem right away. So, we don’t need to send them to inspection for this. Other inspection criteria are more subjective, for example, the configuration of parts. Different customers get different configurations of electronic terminals. We’ve now brought the inspector into the flow of the cell, and these people handle the configuration right there.”
By the end of 2005, lean manufacturing initiatives had improved Korry’s performance on several dimensions. Data from the Switch and Annunciator Strategic Business Unit (SASBU), which represented 58% of Korry’s sales, are presented for the years 2000 through 2005 in Exhibit 6.
IT at Korry
The role of IT in the lean manufacturing environment had been an ongoing subject of discussion at Korry, just as it had been at Esterline’s corporate headquarters. In 1998, Korry executives hired a team of consultants to help them determine the type of enterprise system they should acquire. The consultants interviewed employees, examined the manufacturing processes, and made recommendations. Employees enthusiastically endorsed a system that would provide them with a wide range of enterprise capabilities, and Esterline spent $1 million to purchase a state-of-the art IT solution for Korry. As one Korry official noted retrospectively, “Asking employees what they wanted a computer system to do was like putting kids in a candy store.” In 1999, three months into the implementation process, Korry executives realized they had made the wrong choice. The system was too cumbersome to support the lean manufacturing practices in place there, and it was too inflexible to allow Korry to adapt and change its processes over time. With Cremin’s approval, Korry abandoned the installation project and returned to its legacy MRP system, which ran on HP 3000 technology. The MRP system supported long-range planning and production orders to suppliers.
Additionally, Korry used it to schedule production in the ‘catch all’ cell, the fabrication shop, and other low-volume, high-variety areas of the plant. In order to keep the old system running, Korry employed a staff of skilled programmers, who worked to upgrade and patch the system for the next six years. By 2006, there was no longer support available for the underlying hardware and operating system that underpinned MRP. Korry officials had to make a decision about what type of hardware and software to acquire as a replacement. They did not want to repeat the mistake they had made in 1998.
Korry’s Future Challenges
Although the IT and MRP questions loomed large for Korry, three other issues , all linked with Korry’s lean strategy, were subjects of continuing discussion: 1) the design and disposition of the fabrication shop, 2) potential use of lean methods for office operations, and 3) IT interfaces with suppliers and customers.
The Fabrication Shop Korry’s fabrication shop produced components for parts needed in the assembly area. Activities within the functionally-organized shop included forming, milling, drilling, and laser cutting. For example, the shop performed these activities to customize Nightshield® plastic filters that allowed aircraft cockpit and ground vehicle crews to see control consoles with night-vision goggles. Korry had made the decision to keep this highly-technical work within its own walls, rather than outsourcing it. Gary Dytrt, Korry President, noted that the short turnaround and easy communication afforded by an on-site facility ensured high quality and allowed the Korry plant to ramp up quickly as existing products were changed and new products were introduced. A typical turnaround time was two to three days, in comparison to the several weeks it would take to receive parts fabricated overseas. The decision to retain fabrication in house ran against general industry
trends to outsource to China and other low-wage countries. Korry officials knew they would need to revisit their decision in the future.
An additional issue for fabrication was lean manufacturing. To effectively implement lean methods in this batch-oriented area, Korry would need to institute heijunka level loading. This would be difficult with the functional layout, but some Korry managers had begun looking into the potential to apply ‘group technology’ concepts by finding part families with common processing requirements.
If they could identify families, they could pull some equipment into cells. This would be a major undertaking, however, because many of the functional areas had large pieces of equipment (in lean terminology, ‘monuments’) that would not be appropriate for cells. Korry would have to build or purchase smaller ‘right size’ equipment for the cells. As of 2006, process architecture changes for fabrication were not viewed as a priority. However, reductions in set up times, and visually-based scheduling systems had made significant contributions in this area, where productivity had been improved by up to 40%, and lead times had been reduced from an average of four weeks, down to one week.
Lean Methods for Office Operations Lean methods had proven their effectiveness in Korry’s plant operations, but there appeared to be even greater potential in the company’s administrative offices. Manufacturing represented only a small percentage of Korry’s cost structure, with office overhead representing a much larger proportion. As Frank Houston observed, “The back office represents the next frontier of lean.”
The manager of Korry’s customer service department, Annette O’Neal, began introducing lean methods in the early 2003. The customer service department processed quote requests and orders from customers and transmitted them to the shops for production. Employee teams applied 5-S methods to organize the workspace, including ‘desk maps’ that specified standard positions for various work materials. (The maps enabled employees to work more efficiently, and also enabled co- workers to find things when someone was absent from work.) By the summer of that year, teams had created value stream maps for high-volume process families, identifying bottlenecks, rework problems, and duplicated efforts. They re-arranged the work flow in 30% of the office in November of 2003, and by February of 2004, they had implemented the process in the entire department.
Average processing time initially went from three days to one day with the new program. By the end of 2005, the department could promise a customer same-day service if it received an order by noon.
The work team continued its improvement efforts into 2006, establishing monthly goals and emphasizing key performance metrics. Although the new system was much more efficient than the old one, no employees lost their jobs. This was because Korry’s growth had increased the volume of work for the department.
Given the success of lean methods in the customer service department, Korry officials began to consider other potential office operations. Some operations, such as contracts, were located in separate areas from customer service but involved activities that were closely intertwined with customer service. And, there were undoubtedly other opportunities. The first success had grown from a grass-roots effort, but Korry managers knew they needed a cohesive strategy for continued implementation. They were concerned that not all departmental managers would embrace the lean philosophy as enthusiastically as Annette O’Neal had.
IT Interfaces with Customers and Suppliers Customer interfaces for order placement varied widely. Most customers sent Korry 12-month forecasts, as well as weekly, firm orders. Each customer had a different way of communicating. Some used web links. Others send faxes or emails.
Some placed telephone calls, and some had the capacity to link directly to Korry’s MRP system. Most notably, Boeing and Airbus, Korry’s two biggest and most powerful customers, each used different communication mechanisms for placing orders. As Michael Taylor observed: “We just deal with it.
We don’t think we can expect that all customers use the same ERP system. After all, they’re the customers.” Korry had similarly diverse communication interaction mechanisms with its suppliers.
Given Korry’s plan to implement a new ERP system of some type, officials wondered if it was time to mandate standard communication links for suppliers. With Korry’s new status as a tier-one supplier for Boeing and Airbus, and with the pressure to adopt a new ERP system, questions about interface standardization had become urgent and important.
Exhibit 1 Esterline’s Financial Statements
Esterline Technologies Corporation
Annual Income Statement [Standardized; USD Millions]
12 Months 12 Months 12 Months 12 Months 12 Months
Ending Ending Ending Ending Ending
28-Oct-
2005 29-Oct-
2004 31-Oct-
2003 25-Oct-
2002 26-Oct- 2001
Restated
Normal Restated
Normal Restated
Normal Restated
Normal Restated Normal
28-Oct-05 28-Oct-05 28-Oct-05 28-Oct-05 28-Oct-05
Revenue 835.4 613.6 549.1 421.7 413.2
Total Revenue 835.4 613.6 549.1 421.7 413.2
Cost of Revenue, Total 573.5 418.6 376.9 285.9 261.4
Gross Profit 261.9 195.0 172.2 135.8 151.8
Selling/General/Administrative
Expenses, Total 137.4 118.8 105.3 79.1 67.6
Unusual Expense (Income) NA -3.4 0.1 NA NA
Total Operating Expense 753.6 559.2 497.3 378.8 336.7
Operating Income 82.3 50.4 49.1 42.9 71.8
Interest/Investment Income,
Non-Operating 4.1 2.0 3.5 1.8 4.1
Interest Income (Expense), Net
Non-Operating -14.1 -15.4 -8.5 -5.3 -3.6
Gain (Loss) on Sale of Assets 0 3.4 0 0 0
Other Non-Operating
Income (Expense) -0.5 0.5 0 0 4.6
Other, Net -14.6 -11.5 -8.5 -5.3 1.0
Income Before Tax 67.7 39.0 40.6 37.6 72.8
Income Tax - Total 16.3 9.6 12.5 9.1 26.6
Income After Tax 51.4 29.4 28.1 28.5 46.2
Minority Interest -0.3 0 0 0 NA
Net Income Before Extra.
Items 51.0 29.4 28.1 28.5 46.3
Accounting Change 0 0 0 -7.6 -0.4
Discontinued Operations 7.0 10.2 -5.3 -25.2 -9.3
Total Extraordinary Items 7.0 10.2 -5.3 -32.8 -9.7
Net Income 58.0 39.6 22.8 -4.3 36.6
Exhibit 2 Inventory Turnover for Esterline, 1966-2006
Schonberger & Associates, Inc.
0 1 2 3 4 5 6 7 8 9 10
1954 1958 1962 1966 1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 Year
Esterline
Inventory Turnover
Turns
Exhibit 2 was provided by Richard Schonberger, who is conducting a multi-year study of inventory turnover statistics for several hundred firms around the world. His data are drawn from public sources, including annual reports and 10K documents.
Exhibit 3 Description of Cell #1, Cell #2, and the Bench-Build Area at Korry Electronics
Cell #1 Cell #2
Bench-Build Area (catch-all ‘cell’) General
description of cell role
Discrete indicator lights and switches for aircraft
Panels and keyboards for man-machine interfaces in commercial and military aircraft and military ground vehicles
Panels and keyboards for man-machine interfaces in commercial and military aircraft and military ground vehicles Volume and Mix High volume (tens of
thousands per year), low mix
Low volume, high mix Very low volume, high mix, infrequently ordered
Number of parts produced in cell
Fewer than 30 variations of the product. Batch size range: from 2 per month to 12,000 per month
About 7 unique products, with order sizes ranging from 18 per month to 60 per month.
About 60 different products, with order frequency ranging from twice per year to once every 3 years.
Number of employees
Ranged from 2-4, depending on volume
2-3, depending on volume
2-3 depending on volume.
Scheduling system
Cerebellum level loaded production schedules based on projected demand.
Material needs communicated by kanban signals. Material usage assessed with post-production MRP backflush system. MRP extended level loading into the supply chain.17
Not enough volume for Cerebellum. Master schedulers leveled the work load. Kanban was used to communicate some material needs.
Other material needs were communicated via MRP. Backflushing was used to assess material usage post-production.
Customer requests determined order quantities and due dates, Material requirements were exploded via MRP, which drove the
schedule. Little or no use of kanban.
How the cell responded to need for flexibility
Cell could be run from three pre-specified configurations with two, three, or four employees.
Each work station was a cell designed for one person to produce a single type of part.
Operators rotated from one station to the next, producing a mix of products each day.
Batch production methods, with each product taking a slightly different route.
Operators often had to walk to other areas for equipment and tools.
17 Some production was still scheduled via the MRP system because not everything had yet been converted to Cerebellum.
Cell #1 Cell #2
Bench-Build Area (catch-all ‘cell’) Source of
information about drawings and process documentation
Flat panel screen at work station for most drawings and
documentation. Some standard work instructions were displayed on laminated flip charts at work stations.
Flat panel screen at work station for most drawings and documentation.
Some standard work instructions were displayed on laminated flip charts at work stations.
Drawings, work orders, and documentation printed from computer files and placed at work station as needed. Some limited use of flat panels.
Parts delivery method
The “water spider”
made parts deliveries on an hourly basis.
The “water spider” made parts deliveries on an hourly basis.
Kits were prepared in materials area and delivered in batches.
Communication with vendors
Kanban cards with bar codes were placed in rack when materials are needed. Cards were scanned, and orders went through MRP system and on to vendor. Vendor communication by fax or email.
Kanban cards with bar codes were placed in a rack when materials were needed. Cards were scanned, and orders went through MRP system and on to vendors. Vendor communication by fax or email.
Kanban cards were not used for infrequently ordered parts. Orders went directly into the MRP system. Vendor communication by fax or email.
Performance gains associated with this cell
After the cell was created and level loading implemented, delivery performance remained at 100% on time. Productivity improved by 30%.
Average throughput time went from 10 days to 1 day.
After the cell was created and level loading
implemented, delivery performance went from 50% to 100% on time.
Productivity improved by 30%. Average throughput time went from 20 days to 2 days.
Performance in this area had not substantially changed. Average throughput time was 25 days and on-time delivery performance was about 65%.
Productivity was low because of the amount of idle time associated with staffing for delivery performance in an area with variable demand.
Exhibit 4 House of Leana
The House of Lean offers a pictorial view of the elements of lean production system and their interdependencies. Pascal Dennis, author of Lean Production Simplified, provides the following introductory explanation:
“The foundation of the lean system is stability and standardization. The walls are just-in-time delivery of parts of products and jidoka, or automation with a human mind. The goal (the roof) of the system is customer focus: to deliver the highest quality to the customer, at the lowest cost, in the shortest lead time. The heart of the system is involvement: flexible, motivated team members continually seeking a better way.” (pp. 18-19)
a Reprinted Lean Production Simplified: A Plain-Language Guide to the World’s Most Powerful Production System, by Pascal Dennis. Copyright © 2002 Productivity Press (www.productivitypress.com).
Exhibit 5 Percent On-time Performance History for Cell #2 at Korry
On-time Delivery History: Cell #2
0 20 40 60 80 100
2004, Q3
2004, Q4
200 5, Q
1
200 5, Q
2
2005, Q3
20 05, Q4 Quarter
On-time Delivery Perc ent
Product A
Product B
Product C
Product D
Exhibit 6 Korry Electronics: Performance Data for Switch and Annunciator Strategic Business Unit (SASBU)
Warranty Costs as a Percent of Sales 0.30%
0.20%
0.06% 0.06%
0.01% 0.02%
0.00%
0.05%
0.10%
0.15%
0.20%
0.25%
0.30%
0.35%
2000 2001 2002 2003 2004 2005
Scrap Costs as a Percent of Sales
1.30%
1.70%
0.30%
0.47%
0.70% 0.69%
0.00%
0.50%
1.00%
1.50%
2.00%
2000 2001 2002 2003 2004 2005
Prime Inventory Value as a % of Sales - SASBU 9.80%
7.70%
6.50%
5.00% 4.89%
0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
12.00%
2001 2002 2003 2004 2005
Sales ($000) per Direct/Indirect Employee
284
331 338
389 403 433
121 142 137 155 156 169
0 100 200 300 400 500
2000 2001 2002 2003 2004 2005
Direct Indirect
Appendix : Glossary of Lean Terminology (alphabetical)18
o 5-S Organization methods: 5-S refers, in general, to creating orderliness and cleanliness in the workplace. The 5-Ss represent the following Japanese words and their translations19:
o Seiketsu: Neatness, cleanliness o Seiri: Eliminate clutter
o Seiso: Clean equipment o Seiton: Orderly storage o Shitsuke: Discipline
Several English translations have been created to convey 5-S concepts. One example from Dennis, Lean Production Simplified, is Sort, Set, Shine, Standardize, Sustain.
o A3 Thinking: From a purely literal standpoint, this refers to the European A3 paper size, which is equivalent to the U.S. 11” by 17” size. From a practical perspective, it refers to a report on one A3-sized, landscape-oriented paper document. These documents communicate a story about a situation, problem, plan, or strategy with words and pictures in a standard format. A3 thinking involves conceptualizing issues in a structured way that clarifies problems and solutions.
o Backflush: A term associated with an MRP system modification that offers an adaptation useful in lean manufacturing. Backflushing refers to the assignment of materials to a product after the product has been assembled. It reduces the need for cumbersome tracking and material assignment during the assembly process.
o Co-location of equipment: Equipment needed to produce a family of products or parts is arranged into co-located configurations so that process steps can be performed with minimal transportation and waiting time. An example of co-location is a cell or assembly line.
o Heijunka: A Japanese word referring to level-loading. Products flow through the system on a regularly scheduled basis, rather than in spurt-like large batches scheduled infrequently. This means that the product mix for a cell, scheduled over time, might appear as ABCD, ABCD, ABCD. In a batching system, the antithesis of heijunka, the schedule might appear as AAAAAAAAAA, BBBBBBBBBB, CCCCCCCCCC, DDDDDDDDDD. Frequent changes from one product to the next require operators to reduce setup times associated with such changes.
o House of Lean: The "House of Lean" is a pictorial representation of lean manufacturing developed by Taiichi Ohno, disciple Fujio Cho from Toyota. The diagram has become one of the most recognizable symbols of modern manufacturing. The diagram of a house is used to convey the structural dependence of each component: the foundation (e.g., leveled production-- heijunka), pillars (e.g., Just-in-time), and roof (Best quality, lowest
18 For more information on these terms and an expanded vocabulary set, see Dennis, P. Lean Production Simplified. Productivity Press, 2002.
19 Hiroyuki, Hirano, Putting 5S to Work, 1993.
cost, shortest lead time, best safety, high morale). The house is strong only if all of the components are strong.
o Hoshin Planning: A comprehensive planning system, somewhat aligned with concepts from Management by Objectives (MBO), that includes a short-term (one year) and a longer-term (three to five years) process. Relies on standard planning processes and A3 thinking.
o Jidoka: Creating defect-free processes by narrowing the range of variability in a process, creating mechanisms to identify and contain defects, and providing timely feedback so the worker or team can take appropriate countermeasures.
o Kaizen: A Japanese word referring to the philosophy and practice of continuous improvement. Organizations practicing lean concepts often hold what are known as
‘kaizen events’ in which groups of operators work to eliminate waste in their processes.
o Kanban methods of moving inventory: Kanban is a Japanese word meaning ‘sign’ or
‘card.’ In the context of lean manufacturing, it refers to visual systems for communicating information about production needs. Kanban signals may come in many forms, including empty, transportable bins (when the bin is empty, this is a signal for ordering more from an upstream process) and cards that are moved from one part of the plant to another.
Simple kanban systems can reduce or eliminate the need for complex MRP scheduling and tracking.
o Lean Auditing. Lean auditing relies on the idea that ‘you get what you measure.’
Organizations that have been most successful in lean methods have instituted systems for regularly assessing work unit effectiveness in applying standard work, 5S, visual management, and other lean tools, as appropriate to the situation.
o Mistake proofing (poka yoke): This refers to efforts to make it impossible to produce a defect or do something the wrong way.
o One-piece flow (or single-piece flow): This involves moving products through a process one at a time, based on customer demand rates or ‘pull,’ and is the antithesis of batching.
o Pull: Refers to a material flow discipline in which no one in a sequence of process steps produces anything until a downstream customer places an order for it.
o Setup reduction and quick changeover: Reduced machine setup times allow process operators to quickly change from one product to the next, supporting heijunka practices.
SMED (single-minute exchange of dies) is an example of setup reduction approach used in fabrication work.
o Six-sigma processes: Six-sigma is a term coined by Motorola to describe a rigorous statistical process for ensuring conformance to specifications and narrowing variances.
The use of statistical charts to monitor process performance is at the heart of such systems. The original concept has been expanded to include an entire toolkit of methods for improving processes, some of which are similar to those prescribed by lean manufacturing advocates.
o Standard work. This concept, first described by Frederick Taylor in his 1911 classic primer, The Principles of Scientific Management, and later integrated into the Toyota Production System, involves identifying and documenting the best and easiest way to do
a job. Operators then follow the process consistently, but continue to cooperate in analyzing it for further improvement.
o TAKT Time: Originally based on a German word for rhythm or beat, TAKT time ps used to set the pace of production on a line based on customer demand rate. TAKT time is calculated as (minutes available to work in one day/customer demand quantity for one day).
o TPM (Total Productive Maintenance): A system that moves away from traditional
‘firefighting’ approaches to equipment repair, and places more routine maintenance responsibilities (e.g., cleaning, lubricating, adjusting) into the hands of operators. The purpose of TPM is to create a culture of shared responsibility for the effective operation of machinery and improve machine effectiveness (e.g., reduced downtime, longer mean time between failures, enhanced capacity). Effective, consistent machine operation is essential to stable production.
o Value stream mapping: A process flow diagramming system adapted from Toyota and promoted by the Lean Enterprise Institute (www.lean.org) in books such as “Learning to See.”20 Value stream mapping offers advantages over traditional flow charting methods because it incorporates both information and material flows, and it helps in identifying sources of waste such as waiting at bottlenecks, low yield rates, and slow setup times.
o Vendor-managed Inventory: Suppliers are given the responsibility to directly replenish parts and components to customer stockrooms or shop floor point-of-use locations, based on visual inspection of inventory levels or shared knowledge about demand.
o Visual management: Visual management involves making it easy for employees to know how the system is performing and what they are expected to do. Pictures are better than words in offering information about production status, inventory levels, on-time delivery, machine availability, etc. Kanban is an example of a visual management tool.
o Zone Control: People at all levels of the organization are encouraged to think in terms of the ‘zones’ they control in the organization, and to consider the control mechanisms that allow all of the interconnected zones to work together effectively to avoid sending defects downstream.
20 Mike Rother, John Shook, Jim Womack, and Dan Jones, “Learning to See,” Lean Enterprise Institute, June 30, 2003.
