MTConnect Challenge
PROVEN PERFORMANCE BIDDING (PPB)
Robert C. Hansen
R.C. Hansen Consulting, LLC
970-490-1720
970-481-3145 c
May 29, 2013
PROVEN PERFORMANCE BIDDING (PPB) by Robert C. Hansen
Section 1 Abstract:
The 2012 Modern Machine Shops ‘Top Shops’ (TS) Survey results demonstrate that TS on average produce 80% more parts (at lower cost), had 39% shorter delivery time, and 75% less scrap than ‘Other’ shops. Shops with MTConnect and Real-time Performance Monitoring (RPM) would more easily address late ‘change-orders’ from the customer (more Flexibility) hence, less waste and ‘less reactive’ alternate plans if changes are necessary.
“What IF?” a significant amount of DOD new/similar parts could automatically be manufactured by the Best Available Top Shop(s)? This would eliminate/mitigate concerns for overruns, delivery delays,change-order cost gouging and ensure low waste while building sustainability/profitability for the providers!And elimination of broken contracts?
The concept is to move to PPB by requiring bidders to have implemented MTConnect and RPM for the Flow-lines producing the part. The bidder would need to be able to provide historical manufacturingperformance data showing demonstrated results while producing ‘qualified/similar parts’. Bids would be awarded via a Decision Table.The amount would be: ‘rented’ Flow-line time (based on submitted operating expenses), + a TS average profit margin + Materials + Delivery costs. Successful Bidders will be Top Shops.
PPB methodology is based on demonstratedFlow-line performance.
Section 2. Proposed Idea:
Achieve ‘Top Shop’ Collaborative Excellence in the Department of Defense (DOD) Manufacturing Supply chain for over 70 percent of ‘replacement/similar’ parts within 3 years using PPB purchasing guidelines.
PPB is simply a new way to have bidders quantify their actual performance capability of manufacturing parts based on previous ‘like part’ performance using historical Real-time Performance Monitoring (RPM) data. The Modern Machine Shop ‘Top Shops’ TS 2012 Survey results clearly indicate that TS manufacturing performance is not only a competitive advantage (making higher profits/machine, with shorter delivery times and significantly less waste resulting in two times customer growth rate) but also is advantageous for the Buyer (lower price, quicker delivery, less ‘fire-fighting’ for change-orders). By selecting Bidders on Proven (Flow-line) Performance, the ‘Top Shop’ is automatically selected. With MTConnect capability and RPM on-line, the customer and supplier can work together to optimize the ‘Win-Win’ successful Bid.
DOD (Buyers) would specify the part and the functional/reliability requirements as well as the requested delivery requirements such as lot sizes, delivery location and frequencies.
Bidding Strategy: The phase onepurchase order(s) would be for a portion (10%) of the total volume and up to 5 Bidders will be awarded successful contracts. The Proven Performance PPFlow-line statistics of the successful bidders during the manufacture of each phase one 10% will be used to award the rest of the total volume which may be proportioned to the top 2 or 3 performers in thephase two(remaining volume) purchase order.
DOD would qualify that Bidders must have MTConnect capability for the product Flow-line (including Legacy machines) and be able to provide appropriate Flow-line Overall Equipment Effectiveness OEE data history for the part or ‘similar part’ for bidding purposes. (A Bidder can be initiating MTConnect and RPM and bid using expected performance without history however, the phase two contract can only be awarded to a fully implemented product Flow-line).
DOD would ask Successful Bidder(s) to share access to Flow-line RPM on-going progress data for the manufactured order (collaborative manufacturing/conformance assurance and validation of next time bidding).
The successful Bidder(s) will be the highest score from a Decision Table awarding points for Price(Importance 60%), Shortest Delivery(Importance 20%), Flexibility/Change-order Accommodation(Importance 10%) and Lowest Scrap/Waste(Importance 10%).
Bidders would be informed of the Decision Table Importance factors to be used in their bids. Bidders would bid by identifying the Flow-line(s) to be used and show/declare:
1)The work station(s) that is the constraint and Flow-line OEE* (How well the Flow-line system ran that part or a ‘qualified part’ relative to ‘Perfect Production’ for the total scheduled time). *Flow-line OEE is the OEE of the Constraint minus all downstream quality (scrap/waste) losses. If a constraint is improved, the ‘next constraint’ might become the system limiter.
2)The Bidders computedOEE of a ‘given’DOD ‘test’ part rate assuming one hour of 100% UPTIME and 100% Quality (common to all Bidders to benchmark Bidders ‘Ideal Rate’ relative to other Bidders)
3)Bidders Flow-line rental rate. (Total/Annual Flow-line Operating Expense minus Material Cost divided by total Flow-line operating/scheduled hours)Note to Bidders: The computed scheduled hours of Flow-line production × the rental rate will be multiplied by a factor of 1.189 (18.9% Average margin increase for TS). This value will be your Flow-line rental bid. Bidders can also submit a separate ‘Seasonal Option’ margin percent for consideration for situations of normal seasonal downturns (available capacity) in their location. ‘Seasonal Option’ bidders are not eligible for phase two contracts however, the production statistics can be used for future bids.
4)Total Material expense for units ordered including all Scrap allowance.
5)Total Material expense for units ordered excluding all Scrap allowance. Note to Bidders: the difference between line 4 and line 5 divided by line 5 will be the Material waste/scrap percent for your bid.
6)Delivery price of the order to the given location. Note to Bidders: Your complete bid price will be the sum of line 3 (overall rental bid), line 4 (Total Material expense including waste/scrap) and line 6 (Total Delivery expense).
7)From the Flow-line data historyfor the part (or with this orders’ RPM history), Bidder is to list in sequence, the OEE and the scrap/waste percent by individual work station(when producing the part ordered) and the number of parts required from that work station for the finished part.Note to Bidders: This information will be used collaboratively to develop a Flow-line OEE value stream map for Bidder use to apply continuous improvement for this and future bids.
8)Typical weekly Operating time of the Flow-line (# of shifts per week and shift duration),
9)Planned Delivery time, (Planned time for the lot sized order(s): Time from placed order to delivery date in days) Note to Bidders: The Planned Delivery time bid is to reflect your intended production operating plan for producing this order.
10)Change-order decision tree, (Bidders, provide a paragraph for each item below describing ‘How you currently use MTConnect and RPM to handle and update changes?’Include the estimated change-order expense/deliveryimpact,if any,for the following conditions:)
- Identify any previous contract change-order performance (contract #’s)
- For an increase in order quantity of 1 to 5 times current bid volume.
- For a change to location of a hole dimension at 60% of total parts
- For an addition of a hole in the part at 60% completion of total parts
- For a different paint color in the part at 60% completion of total parts
These 10 requirements can be used to develop the necessary information for the Phase one Decision Table for each Bidder. E.g. a simple example would be:
OEE is ‘How well does the process run when scheduled it to run?’ One hour of Flow-line perfect production (100% OEE) would be 100 % Runtime × Ideal Rate × 100% Quality. Answer 1 would be the Bidders capability of producing relative to 100% OEE. Note that all scrap/waste is an OEE ‘loss’ and is already included in the difference between reported OEE and 100%. An easy way to validate OEE is to divide the actual amount of good product made by the theoretical maximum amount for the work schedule executed (ideal rate × Total scheduled time).
Asking for the Bidder to compute what OEE a ‘given’ test part rate would be in their system relative to one hour of perfect production provides the information to reverse-compute the Bidders actual ‘Ideal Rate’ for their system. The Theoretical ‘perfect factory’ Flow-line rental hours would be the order quantity divided by the Bidders Ideal Rate. This is the theoretical minimum time the order could be produced. Dividing Theoretical ‘perfect factory’ Flow-line rental hours by the submitted actual Flow-line OEE determines the expected Flow-line rental hours for the Bid. Understand that while OEE metrics are important, the PPB approach is focused on Throughput of the Flow-line and the associated related rental rate.
The Flow-line rental portion of the bid would be the actual Flow-line expected hours × the Flow-line rental rate × the TS average margin.
Next, the total Material cost including scrapand the Delivery expense are added to the bid to arrive at the Cost Of Goods COGs Bid. The phase one price bid would be a fixed bid. Poor performance would result in lower profits and excellent performance would act as a bonus as well as the reward for a portion of the phase two contract.
The scrap/waste percent information could be computed by dividing the difference in material costs with scrap included and without scrap by the cost of material with scrap excluded.
The information about waste/scrap by work station can be jointly used by the DOD and the successful Bidder to monitor the actual Flow-line part manufacture for proactive intervention if needed.DOD could request an auto alert whenever a scrap percent exceeded a pre-set value.
The typical operating time is used to determine the calendar time required to manufacture the order. Answer 8 is needed to determine the amount of ‘non-scheduled’ time (for weekends etc.)to be added to the rental hours to compute and validate the estimated planned Delivery days.
Answer 10 allows for the Bidder to outline guidelines they would apply to determine the impact to costs and delivery should a change-order be required after starting manufacturing. The Buyer would rank the Bidders by degree of ‘Flexibility’ and ‘Friendliness’ regarding change-orders. Actual performance in this area would be used for future bids and adjustments for phase two contract awards. Answer 10 b) is needed to quantify phase two capability and delivery rate.
PPB would be very beneficial to DOD (and all customers) in terms of lower (best) pricing, delivery time, and flexibility as well as rewarding/promoting lower waste/scrap amounts. PPB would be very beneficial to manufacturing across many industries. PPB provides the compelling reason to move ordinary organizations toward TS data driven analysis by combining MTConnect and RPM in a way that supports/rewards Manufacturing Excellence,ME. Note that OEE ‘Hidden Factory’ performance already exists in average organizations and PPB would push decision makers to move toward ME in a profitable way. Moving United States Manufacturing from ‘good’ to ‘great’ provides global sustainability for those with the vision/passion to do it. As MTConnectgrows globally,‘ordinary’ US manufacturing will be at a disadvantage if PPB is not implemented rapidly across many different industries/suppliers prior to foreign producers.
Section 3. Technical Requirements:
There are very few (if any?) unsolved technical requirements needed to engage PPB.
MTConnect is a reality and already used by approximately 2 % of the USA manufacturing world. MTConnect and RPM can be implemented via new machines and on virtually all Legacy machines. A large spectrum of choices exists to have individual work stations collect and report real-time OEE statistics. Remote access and two-way communications between factory ERP systems and the shop floor (Legacy and new machines) can be provided by products such as the MEMEX Merlin firmware system (a complete MTConnect qualified, RPM reporting system in one package).
Most suppliers of OEE connectivity advertise ROI payback of less than 40 weeks.
What is poorly understood is ‘What is true OEE Flow-line analysis and how can it be used to Benchmark Performance between different Flow-lines?’ The education/guidelines to develop and use OEE value stream analysis already exists via ‘Financial OEE’ methodology at workshops and Advanced OEE consulting are available.
OEE Value Stream Analysis can be used for all categories of Flow-lines (V, A, T, and I). Perhaps the only areas where PPB might not apply would be for utility services.
DOD supply chain personnel responsible for procurement would need to become ‘Financial OEE’ educated in OEE value stream analysis and the PPG ideology. A trained group of PPB and OEE ‘Masters’ could be used to spread the methodology across the DOD.
Potential Bidders would also need OEE education and instruction on PPB. If this project is adopted, instruction booklets and Bidder guidelines could easily be developed and published for all stakeholders.Example cases could be generated and used as ‘practitioners guidelines’.
Having DOD take the initiative to develop Financial OEE education within a group of the supply chain procurement department would leverage consistent, collaborative mentoring for all PPB Bidders. The mentoring concept is similar to the actions that LEAN manufactures (such as Toyota) use to extend ‘Best Practices’ upstream with their suppliers so that mutual benefits result from the broader application of ME. DOD could coach TS best practices upstream with Bidders.
Section 4. Benefits:
This is a Win-Win-Win for the entire country!! DOD incurs lower (best) pricing, improved delivery, increased flexibility while causing the engagement of ME throughout a large spectrum of industries. Manufacturing in general moves more quickly toward TS performance which actually increases profits, improves throughput, drives higher quality, and solidifies sustainability and improves global competitive advantage. The average consumer will benefit as more suppliers reach ME and provide all goods at better prices and delivery across nearly all industries and products.
The Modern Machine Shop 2012 survey results should be used as the benchmark for all shops to benchmark against. As TS and ‘Other’ shops on average have the same number of machines, same staffing and same pay, one can conclude that the opportunity to be a TS exists in nearly every shop. As time passes, TS performance will continue to improve, however this proposal suggests that the 2012 TS statistics be used as the benchmark guideline/Goal for ordinary shops to achieve as they engage this journey. The survey can already be a ‘self-test’.
Why bid via PPB versus low bidder?Again, the survey shows that TS on average, produce 80% more parts, have 39% fewer days between order and delivery, have 75% Less non-compliance (scrap) and 12% higher OEE. The percent increase in OEE actually leverages significantly greater increases in profits for the factory, especially when the Flow-line effectiveness is used to make and sell more parts. (Refer to my book “OEE: A Powerful Production/Maintenance Tool for Increased Profits” published by Industrial Press, 2001.)
Also, TS are more likely to do Continuous Improvement (80%), Value Stream Analysis (75%), Theory of Constraints (150%) and Benchmarking (44%). TS can do what they say they can do! This is ‘Proven Performance’ in action! Contract conformance would be high. The TS survey included 357 shops over 16 industries and nearly one half were job shops environments.
Value Adding:
For the DOD.Let’s assume that 70% of all DOD parts are identical, nearly identical or essentially the same (qualified part, QP) as a previously made part. Think of a savings of >12% on those parts, higher on time delivery, and minimal (zero?) legal action events for contract violations. The amount of DOD (tax payer) dollar savings would be staggering! And with better delivery, less waste/scrap, the DOD could reduce inventories and have improved just in time delivery. With multiple TS suppliers, risk of supply interruption is minimized.
The Bidding strategy also has benefits: multiple, acceptable suppliers for phase one and to a lesser degree, phase two. Actual experience regarding Bidder ‘Flexibility’ (in phase one) can be used to avoid frustration, change-order price gouging and partinterruptions in phase two.
For the Manufacturer. Being ‘pushed’ toward MTConnect and RPM provides the ‘Data’ which if analyzed properly, (and perhaps with mentoring from DOD PPB Masters) would drive each organization on their specific roadmap towards ME much more quickly. Achieving TS statistics would result in more successful bids, faster delivery and material savings. This sustains higher profits now and in the future. Job security is improved. Spin off technology benefits would be the linking of energy usage with work station activity. With this information, all non-constraint work stations could be optimally scheduled to reduce peak demand for the Flow-line.