The manufacturer between craftsmanship and industrial production.

To offer several product variants or to cluster the manifold Customers needs?

On the one hand, craftsmanship: product **customization**.

The manufacturer aims to offer different products: each one different from another, because the producer points to give each Customer something unique, special, cut on his specific needs.

On the other hand, industrial production: work-cycles carrying out; operations ripetition.

The manufacturer aims to **standardization**: each part is different from another only because of the design tolerances.

Two opposite directions; the manufacturer often stands doubtful in the middle.

To dive into the deep topic, let’s consider the following exercise (…not only for expert engineers).

A manufacturer “M” offers the product “P” to Market in 3 variants:

“P1” at 100 $/pc;

“P2” at 115 $/pc;

“P3” at 110 $/pc.

All 3 variants can be manufactured by only one production Line; let’s name “L” that Line.

“L” is already installed and it is running since many years.

Batches of “P1” “P2” “P3” can be produced by fixtures changeover at the workstations of “L”; all fixtures are already paid back.

“P1” is the basic version of the product “P”: the Customer “C1” regularly demands it all year long; “L” can produce it without any kind of extraordinary effort and the awarded volumes are significant for the overall utilization of “L”.

On the contrary, the production of “P2” and “P3” implies hard efforts:

the related fixtures are hard to be installed; the design tolerances are strict and the quality requirements are higher in comparison with “P1”; the needed skills of the direct operators are wider.

About the **changeovers**, let’s assume that:

1) to set “L” from “P1” to “P2” and viceversa, totally 35 min are needed;

2) to set “L” from “P1” to “P3” and viceversa, totally 20 min are needed.

About the **Customers**, let’s assume that:

1) “P2” is demanded by “C2”, a Customer who demands low volumes until now; higher “P2” demand is expected in the next future;

2) the production of “P3” is for “C3”, a Customer who cannot increase the “P” sales.

About the **production Line**, let’s assume:

“L” output = 8,0 sec/pc

production efficiency = 85% (“P1”); 78% (“P2” and “P3”)

scrape rate = 0,5% (“P1”); 2,0% (“P2”); 1,0% (“P3”).

About the **production plant**, let’s assume the following organization:

work-days / week: 6

work-shift / day: 3

work-hours / shift: 8

breaktime (min) / shift: 60.

About the **production planning**, let’s assume that:

1) the Customers’ demand of “P3” is “seasonal” and planned in 4 months, 1 week/month;

2) the 4 weeks of “P3” production are planned during the “P1” production (in other terms, only the changeover “P1” <=> “P3” is currently planned).

Therefore, questions to be answered are the followings:

is it really profitable to produce “P3” as planned or is it better to stop that production?

If yes, is it better to produce “P1” (the highest efficiency & the lowest scrap rate) or “P2” (the highest sell-price) instead of “P3”?

First of all, let’s calculate the “P3” **changeover impact**:

4 months x 2 times(*) x 20 min x 60 sec/min = 9600 sec [lost time for changing “P1″<=>”P3”];

4 months * 1 week/month * 6 days/week * 3 shifts/day * (8-1) hours/shift = 504 hours [production time of “P3” instead of “P1” or “P2”]

The following alternative cases are possible:

A) “C1” does not purchase extra-volumes of “P1” & “C2” will not increase the “P2” demand;

B) “C1” purchases extra-volumes of “P1” & “C2” will not increase the “P2” demand;

C) “C1” does not purchase extra-volumes of “P1” & “C2” will increase the “P2” demand;

D) “C1” purchases extra-volumes of “P1” & “C2” will increase the “P2” demand.

Obviously, the case A forces the manufacturer to keep on producing “P1” “P2” “P3” as planned;

in that case, thinking to stop the “P3” production has no sense.

In the case B, the manufacturer can only produce “P1” instead of “P3”.

In the case C, the manufacturer can only produce “P2” instead of “P3”.

In the case D, the manufacturer can choose to produce “P1” or “P2” instead of “P3”.

Let’s calculate, in the cases B C D, the effect of the eventual decision to cut out “P3”.

Case B: no additional volumes are demanded by “C2”, but “C1” can purchase extra-volumes of “P1” (4 weeks production).

(9600 sec / 8,0 sec/pc) * 0,85 * 0,995 = +1014 pcs

+1014 pcs * 100 $/pc = +101.400 $/year [thanks to no changing; keep on producing “P1”]

[(504 h * 3600 sec/h) / 8,0 sec/pc] * 0,85 * 0,995 = 191816 pcs of “P1”

191816 pcs * 100 $/pc = 19.181.600 $

instead of:

[(504 h * 3600 sec/h) / 8,0 sec/pc] * 0,78 * 0,990 = 175134 pcs of “P3”

175134 pcs * 110 $/pc = 19.264.740 $

19.181.600 $ – 19.264.740 $ = -83.140 $/year

[because of “P1” lower price despite of higher output]

Then: +101.400 $/year – 83.140 $/year = -18.260 $/year

[loss for the production of “P1” instead of “P3”].

It is better to produce “P3” than “P1”.

Case C: “C2” demands additional volumes, which can be produced by 4 weeks of ordinary work, by the same calendar weeks planned for “P3”.

4 months x 2 times(*) x 35 min x 60 sec/min = 16800 sec [lost time for changing “P1″<=>”P2”]

9600 sec – 16800 sec = -7200 sec [lost time for changing “P1″<=>”P2” instead of “P1″<=>”P3”]

(-7200 sec / 8,0 sec/pc) * 0,85 * 0,995 = -761 pcs [loss on the “P1” production]

-761 pcs * 100 $/pc = -76.100 $/year [loss because of the longer changing “P1″<=>”P2”]

[(504 h * 3600 sec/h) / 8,0 sec/pc] * 0,78 * 0,980 = 173365 pcs of “P2”

173365 pcs * 115 $/pc = 19.936.975 $

instead of:

[(504 h * 3600 sec/h) / 8,0 sec/pc] * 0,78 * 0,990 = 175134 pcs of “P3”

175134 pcs * 110 $/pc = 19.264.740 $

19.936.975 $ – 19.264.740 $ = +672.235 $/year

[because of “P2” higher price despite of lower output]

Then: -76.100 $/year + 672.235 $/year = +596.135 $/year

[gain for the production of “P2” instead of “P3”].

It is better to produce “P2” than “P3”.

Case D: because it is better to produce “P3” than “P1” (result in case B) and it is better to produce “P2” than “P3” (result in case C), then it is better to produce “P2” than “P1”; therefore, the case D comes to the case C.

What has been calculated gives the doubtless evidence that, to be profitable, the manufacturer should keep on producing “P3” until the Customer “C2” asks for additional volumes of “P2”; in that eventual circumstance, it is better to stop the production of “P3” (no more supply to the Customer “C3”) in order to increase the production of “P2”.

That is valid even if “P2” implies double **scrap-rate** and 75% longer **changeover time** than “P3”!

(*) Each time, “L” must be set from “P1” to “P3” production, then back to “P1” after 1 week.

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