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We have seenimplementation of improved

material flow capabilitiesthroughout a productionsystem generate returns of13x on average in the first

year of implementation.

The challenge is to definethe right operating model

and then to successfullyexecute the improvementeffort.

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The Aerospace and Defense (A&D) industry trend towards

increased visibility and emphasis on reducing program costs

and schedule overruns are driving companies to improve

their manufacturing operations. Inefficiencies that were

hidden by cost-plus pricing now have a direct impact on

the bottom line, especially as programs move from low-

volume development to rate production. To thrive in this

new environment, A&D companies must fundamentally

change the way they manage their production operationsand material flow.

Many A&D companies have adopted elements of the

Toyota Production System and lean manufacturing tech-

niques, yet have not been successful in meeting the cost

profiles and schedules demanded from their customers. This

article focuses on effective material replenishment methods

that we believe A&D companies should consider in their

efforts to slash costs and cycle times while boosting quality

and responsiveness to improve their bottom-line perfor-

mance. Based on our own recent experiences (see chart)

and experiences of companies in the A&D industry, we have

seen implementation of improved material flow capabilitiesthroughout a production system generate returns of 13x on

average in the first year of implementation. The challenge is

to define the right operating model and then to successfully

execute the improvement effort.

Introduction

Annualcos

tbenefit($millions)

Client investments ($millions)

70

60

50

40

30

20

10

0

0 1 2 3 4 5 6

y = 13.072x - 6.271R = 0.7831

Chart 1 (Annual cost benefit vs. client investment)

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Traditional approach to factory material flow

Many A&D companies that produce low-volume, highly

engineered products continue to deploy a decades-old

push model to control the flow of material in their

factories. The traditional model looks something like this:

The MRP system uses a bill of materials to generate

purchase orders based on a predicted build plan. Suppliers

fill the orders as best they can, despite multiple changesand priority shifts. The receiving department accepts

the materials whenever they happen to arrive and then

places them into the warehouse inventory. At some point,

another group assembles the materials into kits. Later, a

different group delivers the kits in large batches to the

production line. From there, the materials and partly

assembled components are pushed through the manu-

facturing process according to a production schedule that

may or may not align with actual customer demand.

However, specific problems can arise by following this

approach including:

A lack of visibility to supply chain constraints, what

material is in the factory, and whether the materials are

raw, kitted, or Work in Process

Numerous hands-offs with suppliers and between

different departments, with limited coordination. This

lack of coordination reduces accountability and increases

the risk of material shortages

Excess inventory throughout the supply chain and at

each internal process step. This buffer inventory takes

up space and ties up capital. It also hides operational

problems and inefficiencies

Conicting demands for materials. One of the most

common conflicts is whether to allocate scarce materials

to standard production or production of spare parts.

Conicts between production and sustainment require-

ments will only exacerbate the issue

The net result is usually high inventory costs, inefficient

internal and supplier operations, and a lack of production

system flexibility.

Push Push Push Push Push Pull

SIS

Receiving &

Stocking Kitting Floor Stock Assembly Testing Shipping

Cycle Time

Push

Suppliers

Customers

Inventory Buffers

Material Control System

Multiple Scheduling Systems

Chart 2 (Traditional push model for materials)

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A new vision

Factory material flow (FMF) has traditionally focused within

the four walls of the company. And, as noted earlier, there

is considerable room for improvement even within that

limited area. However, that is just the beginning. For many

A&D companies, even greater benefits can be achieved

by expanding the scope of material flow to include the

companys extended supply chain. A properly functioning

supply chain can dramatically reduce the amount ofinventory throughout the extended supply chain and in

the factory that must be stored and managed. It can also

significantly reduce the amount of handling that needs to

occur before the materials are ready for use. By synchro-

nizing material flow throughout the supply chain, as well

as within the factory, companies can dramatically reduce

costs while improving speed, quality, and flexibility.

The new approach to managing factory material flow is

based on a pull model in which materials are drawn

through the production system as they are consumed.

This approach can significantly reduce the amount of

excess inventory, while improving efficiency and cycle

time. However, it requires a finely tuned operation, a high

degree of collaboration with suppliers, and a clear material

replenishment strategy to make it work. Since operationalproblems can no longer be concealed with this model,

companies that implement a pull model can expect a

steady stream of process improvement opportunities to

continually boost their performance and competitiveness.

Chart 3 (New pull model for materials)

Receiving andStocking Kitting Assembly Testing Shipping

Customers

Suppliers

Suppliers

Single integrated scheduling and material control system

3PLs

Cycle Time

Pull Pull Pull

Pull Pull

Pull Pull Pull

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Process

es

Material Replenishment Strategy

Produ

ctionControl

PullReceiving Kit ting

Business Requirements

Policies and Procedures

P

lanning

MaterialsManagement

ProductionSupport

Vision

InternalTransportation

Technology

Peo

ple

Putting the pieces together

Improving factory material flow requires a clear vision and

material replenishment strategy. However, having the right

vision does not guarantee success. As the saying goes, the

devil is in the details. Too many companies do not focus

enough attention on the processes, technologies, and

people capabilities that make the vision real, which causes

their results to fall far short of expectations. The following

is a framework that shows all of the key elements andhow they should fit together.

Chart 4 (Framework for Improving Factory Material Flow)

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Improving factory material flow requires close attention to

each of the following elements.

Business requirements.Companies need to rene

business requirements that impact key processes in the

short, medium, and long term to provide the foundation

for the FMF vision. A lack of clarity in the definition

of requirements can lead to unknown bottlenecks or

constraints.Business requirements and activities aregathered from key stakeholders and customer data sources

to support each process. For example; Production Control

personnel must have the ability to identify critical shortage

items and issue shortage requirements direct to production

or shipping from the receiving dock.

Policies and procedures.This is where the rubber meets the

road. Having the right policies and procedures helps translate

the vision into action. These procedures are how manage-

ment will run the dayto-day business to meet customer

demand. A companys processes must be dynamic and have

the flexibility to adapt to changing customer requirements.

Processes.This revised approach to factory material

flow requires new and different business processes. That

means working in collaboration with your suppliers to plan

production and forecast demand for materials, instead

of generating orders and expediting when materials do

not show up on time. Examples include: combining the

receiving process with kitting and POU delivery so materials

dont sit around gathering dust (and tying up capital);

Requesting replenishment in small batches throughout the

production cycle, instead of placing a big request at the

end of the shift; Addressing production problems as they

occur, instead of putting them off until later (or never),

and; Scheduling downtime for maintenance to reduce

unexpected disruptions. These are just a few common

examples. The right answers will depend on the unique

needs of your business.

Technology. A pull model for material flow needs to be

synchronized across the business. This requires integrated

systems and information ow. Specically, the Enterprise

Resource Planning backbone should be seamlessly inte-

grated with the systems for shop floor management,

transportation management, and other systems. Few A&D

companies have achieved this level of integration within

their own four walls. Even fewer have established inte-

grated systems with their suppliers and customers.

People.When contemplating a fundamental shift in your

business, it is easy to focus all of your attention on systems

and processes. After all, those are tangible solutions to

tangible problems. However, in many cases, the most

important changes revolve around people. This new

approach to factory material flow requires new skills and

capabilities. Managers and staff who formerly spent their

entire day focused in one narrow area, such as receiving may

now be asked to expand their scope of expertise to include

kitting and delivery. That will require cross-training and

improved flexibility. The new approach also requires people

to change their mindset and behavior. In the old cost-plusenvironment, people were rewarded for maintaining the

status quo and not making waves. In the new performance-

based environment, the focus is on efficiency and continuous

improvement. Ignoring the people issues that are likely to

arise during a transformation is a recipe for failure.

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Keys to success

Although the ideal approach varies from company to

company, there are a number of effective practices that

are almost universally applicable. Here are just a few of the

lessons weve learned helping A&D companies and other

manufacturers in their efforts to address their material flow

challenge.

Create a single integrated scheduling system tosupport pull. The new vision for factory materials flow

requires close coordination within the factory and across

the entire supply chain. An integrated scheduling system

that is based on pull signals is the backbone that makes

such coordination possible.

Revise your factory layout. Under the pull model,

smaller batches are delivered more frequently. To support

this higher velocity, the production line layout must be

modified to maintain reliable and efficient replenishment.

At the same time, reduced inventory requirements should

enable a more compact operation with less distance

between stations.

Keep track of your supporting materials.When opti-

mizing their materials flow, many companies forget about

the containers and fixtures used for kitting and assembly.

If these supporting materials dont have an efficient return

path from the POU, they can bring the production line to a

grinding halt.

Focus on visibility.Many companies lose track of their

materials once they enter the receiving dock. They might

know the location of materials in the warehouse or factory,

but they dont know exactly where they are located or

what state of production they are in. A similar problem

exists for materials in the supply chain. Without visibility, it

is impossible to optimize your materials flow. Remember, if

you dont have visibility to it, you cant manage it.

Improve your kitting approach.In a high-velocity produc-

tion environment, it is necessary for companies to have

material visibility down to the component level in order to

maintain material flow. Business policies and procedures

need to be established and maintained to manage kits

that are issued to production with material shortages, in

addition to having the capability to replace a damaged or

nonconforming component to a specific kit.

3PLs.As customer demand increases, companies often

require outside support to address capacity constraints

and reduce cost. Third Party Logistics (3PLs) companies

can be leveraged to support logistics activities across the

value chain, including inbound logistics, yard manage-

ment, outbound logistics and d istribution, aftermarket

services for spare parts and returns, and manufacturing

support. Manufacturing support may include activities,

such as kitting, subassembly, inventory planning, and line

replenishment to the point of use. 3PLs have been success-

fully leveraged in multiple industries in both union and

nonunion environments.

Supply Chain Collaboration (SCC).Effective SCC can

reduce the time and expense required to bring new

products to market. It can lead to more efficient opera-

tions by reducing inventory, reducing the risk of cost

overruns, and delays in production and delivery, and it can

strengthen a companys ability to compete.

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Taking action

In todays challenging economic times, it is imperative

for A&D companies to demonstrate to shareholders and

government customers the ability to reduce cost, build

in quality, increase throughput, and have adaptive flexible

processes in place to meet changes in customer demand.

We believe the Factory Material Flow capability can help

you in you efforts to achieve such tangible results as:

Reduced inventory levels with greater balance

Increased material visibility

Improved production efciency and cycle time

Enhanced collaboration and integration with the supply

chain network

By embracing the FMF capability, companies can success-

fully lay the foundation for future growth. The following

four-phase approach should be considered as you

implement and improve your companies FMF capability:

Is your company faced with solving the Material Flow

Challenge? Deloitte has helped clients across a wide range

of industries use this approach in support of their efforts

to dramatically improve their processes and increase their

internal capabilities. Our services have helped our clients

achieve significant value creation and Return on Investment

(ROI).

Other common levels of improvements weve seen arehighlighted below:

Greater than 50% improvement in throughput

Greater than 50% reduction in cost of quality

Greater than 25% reduction in direct and overhead labor

Fixed asset utilization levels of 70% to 80%

5% to10% reduction in supplier cost

40% to 90% reduction in inventory

Assess

Gain insight into current operating practices and limitations related to material availability

and replenishment from supplier to POU.

Understand the current manufacturing capabilities and operational barriers, internal and

external, related to the production system.

Reconfgure

Establish the processes and systems necessary to ensure a balanced, visible, and uninterrupted

flow of material from the supply chain to the line to support production rates and product mix.

Dene exible, high-velocity manufacturing capabilities to convert customer-specic require-

ments into defect-free assembled products.

Implement

Deploy consistent and reliable material replenishment capabilities

to support lean/pull production system.

Deploy recongured lean/pull production system.

Conduct a phased rollout of the lean production model.

Sustain

Keep inventory levels in sync with changes in supply and demand.

Support culture change to maintain sustainability of lean/pull execution model.

Measure performance and continuously improve.

As used in this document, Deloitte means Deloitte Consulting LLP, a subsidiary of Deloitte LLP. Please see www.deloitte.com/us/about for a

detailed description of the legal structure of Deloitte LLP and its subsidiaries.

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Copyright 2010 Deloitte Development LLC, All rights reserved.

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operations, supply chain, and technology experience,

knowledge, and skills to help our clients in their efforts

to address their complex business problems. For more

information contact:

Lou Librandi

Senior Manager

Deloitte Consulting LLPllibrandi@deloitte.com

+1 215 327 1598

Doug Gish

Principal

Deloitte Consulting LLP

dgish@deloitte.com

+1 913 485 5466

Patrick Sim

Director

Deloitte Consulting LLP

pasim@deloitte.com+1 215 300 8418

Dan Haynes

Principal

Deloitte Consulting LLP

dhaynes@deloitte.com

+1 404 631 2155

Contacts

mailto:llibrandi@deloitte.commailto:dgish@deloitte.commailto:pasim@deloitte.commailto:dhaynes@deloitte.commailto:dhaynes@deloitte.commailto:pasim@deloitte.commailto:dgish@deloitte.commailto:llibrandi@deloitte.com