30

LOGISTICS INFORMATION MANAGEMENT 8,3

Time-based manufacturing
logistics
B. Andries and L. Gelders
Order penetration point is important in the development of time-based management and control
systems

material flow. The producer is now going

through a subassembly standardization
programme to regain control over material
flow and lead times (both in design and
manufacturing).

Introduction
The customer is always right. The market has evolved
from a producer-driven market to a consumer-driven
market. Are these statements still valid? We may think
they are but lately important changes have occurred.
These changes have dramatic consequences for
marketing, R&D and production departments. In this
article we will try to describe the consequences from a
production (and distribution) point of view.
Let us have a look at the market. For the consumer it looks
like treasure island. More products and product varieties
are proposed, the availability of these products has
improved (available from stock, delivery at home, etc.)
and prices keep going down (due to increased global
competition). A few examples:
(1) Department stores saw their product mix triple in
the last ten years. Meanwhile they reduced the
service offered to the customer: now we have to
pack and weigh fruit and vegetables, cut and bake
bread, ... Competition in this segment clearly is
based on price, availability and diversity.
(2) Through our industrial contacts we see the same
trends:
In the lacquer industry the average order size
is reduced from tens of thousands to 1,000
units or even less. This is a consequence of
private labelling and specific promotion
campaigns.
National and European directives have forced
the pharmaceutical and chemical industry to
increase their product mix many times (due to
labelling and traceability requirements).
A producer of NC-machines who used to make
machines to order is now forced towards
engineering to order. This has increased the
number of parts and the complexity of the
Logistics Information Management, Vol. 8 No. 3, 1995, pp. 30-36 MCB
University Press Limited, 0957-6053

Competition has changed: while price is still important, it

is no longer crucial. In fact price can be seen as an order
enabler: you need a good price to be in the market but you
will not become the market leader because of your price.
Leadership will be achieved through other competitive
factors:

Quality: not only product quality but also service

quality (after-sales, customer complaints, order
tracing, etc.), packaging quality, quality of
paperwork (invoicing, reports, etc.).

Lead time and del ivery rel iabil ity. Both are
important and interrelated: surveys have
demonstrated that (industrial) customers accept
longer lead times if (and only if) delivery reliability
is assured.

Product diversity. We all know Fords slogan about

the Ford T: You can have it in any colour as long
as it is black. What worked for 20 years then
would not work for 20 minutes now.

Customization. Most cars today are produced on

order. Compaq is redesigning its product lines to
produce PCs on order. Benjamin and Wigand[1]
foresee a future where we will place orders
interactively through information superhighways directly to the producer. This opens the
door to full customization, both in product and
service.

Direct deliverability: (especially in consumer goods

and in JIT supplier contracts).

To choose the best mix of competitive factors according

to the type of industry and market will be one of the most
critical choices in the future. To adapt the logistics to the
new market will certainly be one of the key strategic
issues.

TIME-BASED MANUFACTURING LOGISTICS

Some companies initiated these changes while others

continued to fight with their old weapons on the new
battlefield. Blackburns[2] famous words should be
remembered: Speed kills, it kills the competition.
In the remainder of this article we will illustrate these
concepts theoretically and with a hypothetical case
based on our experience at the Centre of Industrial
Management.

The order penetration point

The OPP is the stage in the production line from where
production is on order (i.e. not based on forecast).
Production in front of the OPP is for general purpose and
based on forecast while every part produced or
assembled behind the OPP is dedicated to a customer
(Figure 1).
When the OPP is located closer to the end of the line,
customer demand is fulfilled from inventory. Inventory
replenishment and production planning are based on
forecasts of demand during lead time. The safety stocks
are high because they are proportional to uncertainty
about customer demand and production lead times. When

Figure 1. The order penetration point

Order penetration point
Production to
inventory

Buffer

Throughput

Production on
order

the OPP is moved to the beginning of the line, production

is on order. Inventory of finished goods is low (or nonexistent) but customer service is critical. Manufacturers
who assemble to order typically have their OPP situated
somewhere in the middle of the supply chain.
When deciding on the location of the OPP one has to take
two opposite forces into consideration: the delivery times
imposed by the market and the inventories. When a
companys order cycle time (i.e. the lead time from OPP to
customer) is longer than the market delivery time, this
company will tend to react by moving the OPP (its
inventories) downstream (i.e. closer to the market).
Raw material inventories are cheaper than end item
inventories. From an economical point of view it is
interesting to move the inventories upstream. But how far
upstream? The best solution is to locate the OPP at the
convergence point of the bill of materials (BOM). This
convergence point is located at the place in the supply
chain where the amount of parts, components, subassemblies or assemblies is the lowest. The exact location
of this point is dependent on the type of industry. There
are three basic types (Figure 2 and Table I).
Benetton is an example of a company that based its
strategy on the concept of the OPP location. Their
marketing strategy and product diversity is based
essentially on colour. So they changed their technology
and located the colouring step at the end of the production
chain. This allowed them to combine low inventories (low
number of non-coloured items) and short lead times. Both
are necessary in the unpredictable fashion world: low
inventories of standardized goods to cut costs and short
(colouring) lead times to be able to react to seasonal, local
and fashion-related sales fluctuations without having to
build up inventories.

A strategy based on the OPP and time

General concepts
Figure 3 illustrates the concept of a strategy based on the
OPP and time. The supply chain can be divided into three

Figure 2.

Materials flow in different types of bills of

materials

Material flow

We see that variety and availability have become

important factors in todays markets. But how do
producers have to adapt ? Both factors are contradictory
from a producers point of view: variety means that the
number of different products is high, while availability
means (traditionally) that you have to keep these
products in stock. When the number of different products
increases, the absolute number of products in inventory
increases and, hence, the inventory value (and cost). The
reliability of the forecasts will decrease with the number
of products to be forecasted. As a consequence, the
amount of unsold and obsolete inventory will increase
together with the stock-outs. Moreover, increased
diversity means production in small batches which
increases the proportional part of set-ups and lowers
overall productivity. This negative spiral of increasing
logistic costs and decreasing efficiency can be avoided.
The answer lies in the redesign of the logistic chain
towards responsitivity and lean production. The spiral
can be reversed by a good localization of the order
penetration point (OPP), a time-based strategy (TBS)
downstream of the OPP and the use of concepts like
commonality, load and throughput-oriented order release.

31

Converging
BOM

Diverging
BOM

Converging-diverging
BOM

32

LOGISTICS INFORMATION MANAGEMENT 8,3

Table I. Examples of different types of bills of materials

Type of BOM

Number of raw materials Number of end items

Explanation and example

Converging

High

Low

Audio-visual industry: lots of different parts assembled into a (relatively)

small number of end-items. The OPP is located at the end item inventory,
production is to stock

Diverging

Low

High

Converging-diverging

High

High

Process-industry (e.g. petro-chemicals). Small amounts of raw materials are

combined into large amount of end items. Production is (or should be) to order
A large number of parts is combined into a small number of assemblies
which can be combined into lots of different end-items. The automobile
industry is a typical example of such a BOM, but most of the industries with
a transition from process to discrete manufacturing can be classified under
this category too

Figure 3. A strategy based on the OPP and time

The nerve
centre
The reliable supply
channel

OPP

The expressway

Part 1
Part 3
Part 2

Material flow

distinctive parts, each with specific characteristics and

objectives. First, we will describe the different parts.
Control methodologies will be dealt with in the next
paragraph.
The expressway
Production is on order in this part of the supply chain.
Delivery reliability, responsitivity, throughput and speed
are the key issues. Lead time reduction here is translated
automatically into an equal reduction of delivery time.
The control methodology in this part of the chain must be
designed specifically for these characteristics.
The nerve centre
Within a time-based strategy, all control and production
management must start from this point: the performance
of the downstream part (the expressway) depends on the
material availability at this point.
The reliable supply channel
Delivery reliability is the key issue in this part of the
chain. Production here is based on forecasts. Both lead
times (because of forecast accuracy) and lead time
variability (safety stocks) are important.

Control and design parameters of the supply chain

In this paragraph we will describe the different parts in
further detail. For the sake of generality we will base the
descriptions on a converging-diverging chain (assembly
on order) as in Figure 4.
Both external and internal suppliers deliver subassemblies to the OPP warehouse (e.g. engines, bearings,
electronic components). These deliveries are characterized by known lead times, frequencies and reliability.
The sub-assemblies are then kitted in the warehouse
and assembled on the assembly line. The delivery time
for the customer is the sum of the lead time for planning
(you cannot release each order instantly) and the
assembly lead time.
However, let us look at this supply chain from a different
point of view. Goldratt[3] says that you should organize
the chain in order to utilize its bottleneck optimally. The
drum-buffer-rope (DBR) methodology is based on that
concept: the drum is the pace of the bottleneck, this pace
should be the pace of the whole supply chain. The buffer
is the WIP inventory in front of the bottleneck. It should
be dimensioned to avoid idleness on the bottleneck and
the rope is a prioritization mechanism which pulls

Figure 4. Converging-diverging chain

Order
preparation
point
Internal
suppliers
Warehouse

Assembly

Lead time

Assembly
lead time

External
suppliers
Delivery
lead times

Customer lead time

Total lead time

TIME-BASED MANUFACTURING LOGISTICS

materials towards the bottleneck. Now let us look at the

chain of Figure 4. Where is the bottleneck? Is it the
slowest (group of) machine(s) in the chain? Possibly, but
that would be in the hypothetical case of a market buying
all the goods produced. Most of the time (as Goldratt
pointed out in the Haystack Syndrome) the chains most
important bottleneck is the market. This brings us back
to the OPP because this is the place where the markets
demand enters the chain. Then the OPP transmits the
markets pace to the rest of the chain. The buffer at the
OPP will avoid idleness of the downstream part of the
chain and it pulls (rope) materials from the upstream
chain towards it.
We see that there are remarkable similarities in both
conceptual frameworks.

The production downstream the OPP

The control and planning of this part of the line depends
on the OPP. The objectives of the planning is to maximize
the service level while keeping the lead time beneath the
promised lead time (imposed by the market). This is only
possible under three conditions:
(1) A high VAT (value added time)/lead time value.
(2) A low coefficient of variation.
(3) A priority system based on due dates.
We discuss conditions 1 and 2.
VAT/lead time
The value added time is the sum of the processing times
of the value added steps. A production step is value
added if, and only if, the product undergoes a
transformation (that is valuable to the customer, the
production of scrap is not value adding) or when the
product (or service) is brought closer to the customer.
Strictly speaking, neither inspections nor internal
transport are value added because both can be avoided.
The ratio VAT/lead time is maximized by reducing the
queuing effect to its minimum. But one should be cautious
when increasing the fraction. Limited queues are
necessary to keep machine utilization at acceptable levels.
A realistic target level for VAT/lead time lies between 0.25
and 0.4. Queue time can be limited by:
reducing the number of process steps (through
combination of consecutive steps, design for
manufacturability, layout changes);
reducing lot-sizes (only possible in combination
with short setup times);
keeping WIP levels under a certain (low) level.
Both the first and second measures depend on processdesign or process-improvement programs (e.g. SMED).
We therefore refer to specialized literature. The amount of

33

WIP, on the other hand, is strongly dependent on the

companys release strategy (Figure 5).
The principles of this methodology are very easy to
understand (see also Wiendahl et al. (1992)). The
production lead time is directly proportional to the
amount of WIP (Littles law: lead time = WIP/
throughput). If WIP is kept low and constant then lead
times will be short and constant (and vice versa).
Moreover, with low WIP, control of material flow is
facilitated, priority rules are easier to apply, costs of nonquality are reduced, i.e. variation is reduced.
The consequence of reduced WIP on the production floor
is an increased backlog of orders in the planning phase.
But this has advantages too: customers order changes
have less influence on production, priorities can be
changed before order release.
The planning lead time can be calculated too (backlog/
throughput). This means that reliable approximations of
total lead times can be calculated and delivery dates
agreed on with the customer. Order tracking is simplified
by transparency both in planning and production lead
time. Local priority, scheduling and despatching rules
will have to be adapted to this methodology too
(depending on the type of production line).
Material flow variability
Material flow variability has a strong negative impact on
production lead times. Figure 6 shows the effect of
process time variability on a flow line of five machines,
the middle one being the bottleneck. The variation
coefficient ranges from 0 (deterministic processing times)
to 1 (exponentially distributed processing times).
Processing time variability is not the only type of
variation in production. We summarize the most
important below.

Figure 5. Lead time versus processing time variability

Lead time (%)
100
90
80
70
60
50
40
30
20
10
0
0

20

40

60

Coefficient of variation (%)

80

100

34

LOGISTICS INFORMATION MANAGEMENT 8,3

Figure 6.

Pareto analysis of end item demand for a

telecommunication company
Percentage of end item demand
100
90
80
70
60
50
40
30
20
10
0
0

10

15

20

25

30

35

40

45

50

Percentage of end items

Machine breakdowns influence the material flow in

different ways:
it reduces global capacity, directly in case of a
bottleneck machine, indirectly if it causes
starvation of a bottleneck machine;
it creates a lumpy material flow that results in WIP
concentration at some places and starvation at
other places; and
it increases the amount of WIP: companies with
unreliable machines tend to release more orders to
avoid starvation (raise the waterlevel to hide the
rocks).
Synchronization problems are caused by missing parts at
assembly stations. Many manufacturers solve this
problem by increasing buffer capacity at those stations
causing lead times to increase.
Customer order changes interrupts the processing of that
order. Customer changes have a highly disturbing effect
when the changes occur during the production phase of
the order (if the changes are accepted). It also originates a
negative spiral: planning will release more orders (i.e.
more WIP) to avoid idleness when customer order
changes are frequent. This increases lead times which
increases the probability of changes occurring in the
production phase. This spiral can be reverted into a
positive one. If WIP is kept low, most changes will occur
during the planning lead time, resulting in improved
material flow.
Material availability is without doubt one of the key
issues of the planning at the OPP: do not release an order
unless all parts are available. Some companies faced with
the problem of missing parts disassemble less urgent
orders (cannibalization) to obtain the necessary
components. The consequences of this policy on the
material flow should be clear. A better solution is to add a

throughput module to the planning software. This

module selects orders from the order list as a function of
the material availability and the due dates (among
others). A printed board (PCB) manufacturer in Belgium
improved its lead time performance dramatically after
installing a throughput optimizer which checked
component availability before release for its 2,000
different PCB types.
Bitran and Sarkar[4] classified variability in two different
categories:
(1) Service variability:
aggregation of products;
disruptions;
operator experience and training;
changes in machine setup; and
changes in raw materials performance.
(2) Arrival variability:
variations in market demand;
product design changes; and
unavailability of parts.
OPP inventory management and production upstream
the OPP
Key issues here are forecasts, inventory policies and cost
reductions. The first aspect is important for the
production in the supply channel while the second factor
determines the number of different components and the
quantity of each component to be kept in inventory at the
OPP. Both must be focused towards maximum material
availability at the OPP at reasonable cost (third factor). In
the remainder of this article we suggest solutions to those
problems.
The forecasts
The accuracy of forecasts depends mainly on three
factors:
(1) The forecast technique. The number of available
techniques is almost unlimited. We therefore refer
to specialized literature.
(2) The number of products to be forecasted.
(3) The forecast horizon. Forecast accuracy decreases
when forecast horizon increases. The forecast
horizon corresponds to the delivery lead time of
the supply channel.
We will come back to point (2) later. Point (3) is important
because little attention has been paid to lead time effects
on forecast accuracy until now. Most production and
inventory models (or lot-sizing models) are based on the
best trade-off between inventory and set-ups (e.g.
economic order quantity models). Lot-sizes increase when
setup costs are important, also causing WIP and lead
times to increase. Long lead times increase the forecast
horizon, hence, reducing forecast accuracy. Reduced

TIME-BASED MANUFACTURING LOGISTICS

35

forecast accuracy is translated automatically into an

inventory problem at the OPP. This increases costs and
reduces material availability at the OPP and overall
reliability of the supply chain. Lead time related costs
should be included in the lot-size calculations for the
supply channel. This could be done (in the short term) by
using a quadratic instead of linear relation between
inventory and lot-size. In the long term, SMED programs
should be initiated to reduce setup times and costs.

that inventory is held for only 10 to 20 per cent of end

items. This means that the end item demand and the
logistic costs determine whether a component will be
stocked or not. As a consequence of this policy there will
be two OPP in the line: one located before the assembly
stations and responsible for (e.g.) 90 per cent of turnover
and one situated at the beginning of the supply chain
(raw materials) dedicated to end items with low demand
(and long lead times).

Inventory policy at the OPP

The key aspect here is material availability. Three
questions remain to be answered:
(1) Which items/components/parts should be kept in
stock?
(2) Is it possible to reduce the number of different
items?
(3) How many of each item should we have in stock ?
Before answering the first question we should identify the
factors which determine whether a component will be
kept in stock or not. The demand at the OPP ? The cost of
the item? The supplier lead time? The service agreements
with the customer? The spare parts policy? All these
elements (and many others) are important in the
inventory policy, but we can rank them. The most
important issue is the material availability as a function
of the end product. We have mentioned that component
availability was a conditio sine qua non for order release.
This means that the only way to realize a short delivery
time is to keep the components in stock (or to work on a
JIT base with the suppliers). Question (1) can, thus, be
stated differently: for which end items do we want short
delivery times? Though this depends on the policy of the
company, we think that every company should consider
how far it is prepared to go to fulfill customer requests. Is
it rewarding to keep components in inventory for every
exotic product type ? Has the company any idea of the
cost of short delivery times for those products?
Techniques like activity-based costing help to provide
answers to these problems. These techniques attribute
logistic costs to the products which drive these costs,
providing arguments to remove components of slow
moving, high cost products from stock. Another valuable
tool is the Pareto analysis which highlights the important
segments of products from the great majority of less
significant items. As an example, Figure 6 shows
the Pareto analysis of end item demand for a
telecommunication company (here we see that 10 per cent
of the items are responsible for more than 90 per cent of
demand).

Another helpful technique to reduce OPP inventory is to

strive for standardization and commonality at that
point. Commonality is achieved by using common
components for different end items. Though
commonality is important in all parts of the supply
chain, it is at the OPP that the biggest returns can be
achieved. Let us take two different components with
comparable demand and value. If both components can
be replaced by one common component, inventory value
will be divided by 2. Moreover, reducing the number of
components in the supply channel reduces variability
and, hence, lead times.

One could say, as a general inventory policy, that no

components should be kept in stock for the last 5 or
10 per cent of demand (unless the component or end item
is needed for strategic reasons). In the case of the
telecommunication company, this policy would imply

The inventory value for each component depends on:

The requested service level. The service level of
the supply chains depends on the service level at
the OPP. The higher the service level the higher the
inventory value. Figure 7 shows the inventory
value as a function of the service level.
The replenishment frequency and the delivery
times of the suppliers and the supply channel. The
average inventory is function of the replenishment
frequency and the safety stock depends on the
forecast accuracy and, hence, on the delivery lead
times.
The delivery reliability also determines the
uncertainty at the OPP and, hence, the safety
stock. Great attention should be paid to supplier
evaluation and corrective actions.

Figure 7. Inventory value as a function of service level

Inventory value
35.00
30.00
25.00
20.00
15.00
85

87

89

91
93
Service level (%)

95

97

99

36

LOGISTICS INFORMATION MANAGEMENT 8,3

The last point of interest in this part of the chain is

production control. Production to forecast, focuses on
material availability and the (usually) large number of
parts makes this part of the chain especially suited for a
MRPII type of control. On the other hand, pull systems
can be utilized for components with stable demand
(especially those with a high degree of commonality). We
think MRPII production control combined with JIT
aspects for components with stable demand is the best
type of control for this part of the chain.

Conclusion
Increased product diversity, higher flexibility and quality,
faster response, and a competitive price are the
competitive factors of the supply chains of the 1990s.
Companies must be creative, both in their product
development and in production and distribution in order
to survive in the competitive market. Logistics
departments have to evolve and adapt to the new
requirements. The times are gone when we could release
the orders, watch the machine occupations and wait for
the orders to leave the chain. Total quality management
and business process re-engineering are the new
buzzwords and concepts of change, but neither will
succeed unless they are based on strong and modern
logistic foundations.

References
1. Benjamin, R. and Wigand, R., Electronic markets and
virtual value chains on the information superhighway,
Sloan Management Review, Winter 1995, pp. 62-72.
2. Blackburn, J.D., Time-based Competition The Next
Battle Ground in American Manufacturing, Business
One Irvin, Homewood, IL, 1991.
3. Goldratt, E.M., The Haystack Syndrome, North River
Press, New York, NY, 1990.
4. Bitran, G.R. and Sarkar, D., Throughput analysis in
manufacturing networks, European Journal of
Operations Research, Vol. 74, 1994, pp. 448-65.
Further reading
Karmarkar, U., Lot sizes, lead times and in-process
inventories, Management Science, Vol. 33 No. 3, March
1987, pp. 409-18.
Kenneth, A.W., JIT for America, The Forum, Milwaukee, WI,
1987.
Gelders, L., Mannaerts, P. and Maes, J., Manufacturing
strategy performance indicators and improvement
programs, International Journal of Production Research,
Vol. 32 No. 4, 1994, pp. 797-805.
Whybark, D.C. and Vastag, G., Global Manufacturing Practices,
Elsevier, Amsterdam, 1993.
Wiendahl, H.P., Glassner, J. and Petermann, D., Application of
load-oriented manufacturing control in industry,
Production Planning Control, Vol. 3 No. 2, 1992, pp. 118-29.

B. Andries and L. Gelders are at the Centre for Industrial Management, Leuven, Belgium.