ZXG779 Hightech5 Deepdivedx 2 2-10-02

PIT_ZXG779_hightech5_deepdivedx_2_2-10-02.
ppt
CONFIDENTIAL
Improving operational
performance to enable profitable
growth
CLIENT 2 – High Tech Industry

Date
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PIT_ZXG779_hightech5_deepdivedx_2_2-10-02.ppt
EXECUTIVE SUMMARY
Client 2 has created significant value to its owners over the past years by growing fast and successfully
expanding its manufacturing capacity to meet steadily increasing customer demands. Client 2 has set
aggressive growth and profitability targets also for the future
However, despite fairly good manufacturing operations Client 2’s current product quality and delivery
performance are not sufficient to achieve its growth aspirations in domestic and in export markets
Consumers consider Client 2’s quality and delivery performance as unsatisfactory and there is a significant
gap to global best practice. The total value of the cost for these shortcomings exceeds 130 Million RMB
based on Year 4 financial operation. The performance gap is due to shortcomings in manufacturing
operations and supplier management.
After having studied the Client 2’s Location 1 manufacturing facilities and conducted numerous interviews
with related departments we find the issues located in 4 areas:
• The overall production control system/process drives variability in manufacturing and procurement and
does not provide adequate delivery to customers
• The process for managing and developing key suppliers and their quality does not assure proper
component quality and availability of key components
• The system for managing performance does not translate the top level targets to all levels of the
organization, and lacks quantitative robustness
• No clear, structured system to drive continuous improvement and problem solving exists to attack high
priority operational performance issues
2
EXECUTIVE SUMMARY (CONTINUED)

Therefore, Client 2 needs to launch 3 initiatives to reduce/eliminate the shortcomings in
manufacturing and supplier management:
• First, Client 2 needs to fix the internal quality system by conducting rigorous problem solving and
introducing policy deployment. This action should be followed up by systematic continuous improvement
• Second Client 2 needs to redesign its production and scheduling system starting by implementing a
leveled pull system to reduce variability in the system as prerequisite for stable operations and good
quality and delivery performance
• Third Client 2 needs to develop its suppliers to ensure long term sustainable component quality and
delivery. This can only be done after Client 2’s own processes and systems are in place
McKinsey is uniquely positioned to support Client 2 in this most critical effort as: McKinsey has helped
numerous clients to develop performance management and policy deployment systems and continuous
improvement and problem solving processes globally and in Market C. McKinsey has in depth experience
in production system design and scheduling, with highly experienced experts. McKinsey has helped
numerous clients to develop advanced supplier development systems. Working together with Client 2, we
can ensure the capture of benefits and accelerate the pace of improvements
3
IMPROVING QUALITY
Client 2’s current situation and aspirations for the

future
Issues blocking Client 2 from achieving its targets
– Area 1: Production and scheduling system
– Area 2: Components quality and supplier

management
– Area 3: Quality performance management and

policy deployment
– Area 4: Continuous Improvement
Initiatives to improve current quality performance
How McKinsey could help
4
CLIENT 2 HAS GROWN FAST AND CREATED SIGNIFICANT VALUE
Sales revenue Market value

HKD, Billion HKD, Billion
150%
145%
285%
Others
Desktop
Year 1 Year 2 Year 3 Year 4 Jan Sep Jun
Market Year 1 Year 2 Year 4
share in X X+3.8 X+7.5 X+14.6
Market C
(desktop)
Percent
Source: Client 2 annual report, website

5
CLIENT 2 HAS SET VERY HIGH ASPIRATIONS ALSO FOR THE FUTURE
Revenue projection, RMB 100 million
Year 4-7
CAGR=61%
151% Internet services 94
IT services 83
Handheld devices 144
Component /contract 40
manufacturing
153%
Enterprise IT 50
161%
Consumer IT 70
Year 4 Year 5 Year 6 Year 7
* All sales figures offset internal transactions

Source : Client 2 analysis
6
CLIENT 2 HAS SET VERY HIGH ASPIRATIONS ALSO FOR THE
FUTURE (CONTINUED)
Year 4-7
Profit projection, RMB100 million CAGR
Percent
Year 4 Year 5 Year 6 Year 7
Consumer IT 68
Enterprise IT 44
Component/ 51
contract
manufacturing
Handheld
-219
devices
IT services 915
Internet
21
services
Total X X+5.2 X+10.5 X+26.3 56
Source: Client 2 analysis 7

IMPROVING QUALITY

future

management

policy deployment
8
HOWEVER, CURRENT PRODUCT QUALITY AND DELIVERY

PERFORMANCE ARE NOT SUFFICIENT TO ACHIEVE VERY HIGH GROWTH
AND PROFITABILITY ASPIRATIONS
Aspiration area Issues

• Maintain the leading • Current product quality level not
position in home PC market sufficient to convince consumers
to build brand loyalty and
repurchase Client 2 brand
• Build a truly leading position • Client 2 so far has not been able
in business user market to capture high share of the
business customer segment
compared to international
competitors as quality and
delivery performance is key
competitive factor in this market
• Build export business
• Current product quality and
delivery performance is
insufficient to build successful
export business
9
CLIENT 2 LACKS BEHIND THE "LOCAL HEROES" IN OTHER Outperform

s Client 2
MARKETS, PARTICULARLY IN WHETHER CONSUMERS
WOULD REPURCHASE CLIENT 2 BRAND
Brand performance
Have considered Have purchased Currently use or Would pur-
funnel Aware of brand
the brand the brand own the brand chase again
Percent of PC owners
(N=242)
Conversion to
Awareness Current Installed base
Brand/home market level Consideration 1
Purchase ownership level
Brand 1, Market A 100 95 59 92 52
Brand 2, Market B 100 89 61 76 41
Brand 3, Market B 100 81 46 88 33
Client 2, Market C 100 78 26 78 16
Brand 4, Market B 100 50 7 57 2
Brand 5, Market D3 94 68 50 85 27
Brand 62, Market E 85 29 24 6 *
Brand 8, Market E 79 65 32 17 44
Brand 9, Market E 78 66 44 26 32
Brand 10, Market B 77 83 17 68 8
Brand 11, Market E 70 55 31 12 40
Brand 12, Market E2 65 59 19 7 *
Brand 13, Market B 46 63 16 78 4
1Is one of several, two or three, or the only brand in the respondent’s consideration set
2Current and past user base sizes was <20; not meaningful to investigate differences in retention, i.e., currently own
3Location 2 not included in research; Market D defined as Brand 5’s top performing market among eight researched
10
CONSUMERS RELUCTANCE IS DRIVEN BY UNSATISFACTORY
CLIENT 2
QUALITY PERFORMANCE
Funnel drivers
Percentage points
Have considered Have purchased Currently use or Would purchase

Aware of brand
the brand* the brand own the brand again
Conversion to Conversion to
consideration purchase
Consideration drivers Relative strengths/ Purchase drivers in Relative strengths/
in order of importance weaknesses** order of importance weaknesses**
• People like me are likely 7 • People like me are likely 7

to own this brand to own this brand
• Approachable 5 • Caring 7
• Quality 0 • The brand delivers -3

what it promises
• Is a PC company I would • Is a PC company I would
3 -1
consider investing in like to work for
• Provides good value 5 • Provides a lot of additional 8

features/functions
*Is one of several, two or three, or the only brand in the respondent’s consideration set
**Measures the difference between Client 2’s actual attribute rating and its expected score; eliminates halo effect in
attribute ratings
11
CONSUMERS RELUCTANCE IS DRIVEN BY UNSATISFACTORY
QUALITY PERFORMANCE CLIENT 2
Funnel drivers
Percentage points
Have considered Have purchased Currently use or Would purchase

Aware of brand
the brand* the brand own the brand again
Conversion to Conversion to
ownership commitment
Ownership drivers in Relative strengths/ Commitment drivers Relative strengths/

order of importance weaknesses** in order of importance weaknesses**
• People like me are 7 • Is recommended by 15

likely to own this brand my fiends
• Is a PC company I -1 • Exclusive 3
would like to work for
• The brand delivers -3 • Uniqueness 7
what it promises
• I know I can expect to
• Uniqueness 7 get consistent -1
performance from this
• Trustworthy • brand
Its products are durable -5
-9
and last a long time
*Is one of several, two or three, or the only brand in the respondent’s consideration set
**Measures the difference between Client 2’s actual attribute rating and its expected score; eliminates halo effect in
attribute ratings
12
CONSUMER PERCEPTION IS SUPPORTED BY CLIENT 2’S HIGH

CUSTOMER RETURNS AND DELIVERY GAP VS. BEST PRACTICE
Customer returns
5 Even though Client 2

has built a good
Estimate Best
on practice
manufacturing base,
warranty its quality and
returns* delivery performance
On-time delivery**: are lacking behind
international best
19% practice
Client 2 Best Gap

practice
*Based on estimated customer warranty returns of XXX,000 this year and average volume of ~X million
units sold
**Includes only planned delivery, actual on time delivery should be even lower
13
IN ADDITION, CLIENT 2’S PRODUCT QUALITY VARIES SIGNIFICANTLY
Incoming component pass rate*
98%
96%
94% Average
92% pass rate
94%
90%
88%
86%
Jun May
High variability in
Assembly first pass rate* each step, makes
98% the whole
96% system/chain
instable and
94% prevents achieving
Average
92% pass rate high consistent
90% 93% quality as a whole
88%
Jun May
Inverse customer reject rate within 90 days**

100%
95% Average
90% 94%
85%
80%
Jun May
*Data of Location 1 factory
**Enterprise PC
Source: Client 2 data, McKinsey analysis 14
IMPROVING QUALITY

future

management

policy deployment
15
IN THE LEAN ASSESSMENT WE DETECTED SEVERAL

IMPROVEMENT AREAS FOR CLIENT 2
Level Schedule
Continuous Improvement 5 Continuous Flow JUST-IN-TIME
PEOPLE
Change Readiness 4 Takt Time
3
Management Style Pull System
Inventory Management 1 Abnormality Detection
TPM Line Stop & Call
AUTONOMATION
Visual Management Problem Solving
SUPPORT SYSTEMS
5S Man/Machine Separation
Standard Operations Cell/Line Layout

Skill Building Plant Design
FLEXIBLE MANPOWER SYSTEMS
16
THE IDENTIFIED SHORT COMINGS CAN BE TRANSLATED INTO FOUR

AREAS OF IMPROVEMENT
Areas of improvement
1
Lean assessment
Production
• Detected quality problems on the shop floor level affecting Client and scheduling
2's current product quality and delivery performance system
– Variability in production system
– Lack of targets and visual displays 2
– No continuous improvement organization Component
quality and
supplier
management
3
Supplier and supply chain management assessment* Quality perfor-
mance manage-
• Detected quality problems in the support systems affecting Client ment and policy
2's current product quality and delivery performance deployment
– Low component quality
– Long supplier lead times 4
– Shortages of components
Continuous
improvement
*R&D not included

Source: Client 2 data, McKinsey analysis
17
THE FOUR IMPROVEMENT AREAS SIGNIFICANTLY AFFECT CLIENT 2’S

QUALITY AND DELIVERY PERFORMANCE Client 2 Examples
Effect From Assessment
1 Current production and • Daily line shutdowns for lack of
Production and scheduling system causes volume
scheduling high variability in the • Late deliveries due to late
system production. This leads to components
component shortages and
stock outs of finished goods
2
Quality issues are found later
Component • Lack of automatic inspection in
than desired as there is no
quality and processing
formalized abnormality
supplier • Prevalence of component
detection approach in place,
management defects reaching customers
which translates back into
supplier management
3
Lack of presence of clear
Quality
goals on floor hurts focus of • Few quality measures posted
performance on floor
management workers, staff, and supervision
toward addressing biggest • Difficulty in getting information
and policy on quantitative measures
deployment quality issues
4 Lack of CI functions slows

Continuous progress on improvement and • No dedicated CI personnel
improvement hurts robustness of efforts • Few documented formal
(CI) improvements were observed
Source: Interviews, diagnostic assessment 18

1 PRODUCTION AND SCHEDULING SYSTEM

Current Client 2 State World class state
Production • Production scheduling • Production scheduling is
Scheduling causes variability in leveled buffering impact to Effect of shortcomings
production, delivery production and purchasing,
and ordering enabling pull purchasing • Long non-stable
and stable production lead times from
environment suppliers
• Shortage of
Production • Lines are semi-well • Lines are well balanced to components
Pace balanced to standard customer-demand based • Stock outs of
line speed TAKT time finished goods for
• If demand shifts, lines • Lines are frequently customers
shut down early or run rebalanced as customer
overtime to demands shift, minimizing
compensate down time and overtime
Component • Component ordering based

• Component ordering
scheduling on Pull signals
based on forecast and
manual systems • Lead times from suppliers
• Lead times from short (given leveled
suppliers long scheduling), allows good
response to customer
changes
19
CLIENT 2 PRODUCTION VARIABILITY IS VERY HIGH CAUSING

INSTABILITY IN THE WHOLE PRODUCTION SYSTEM
Production fluctuates
4-Week moving average
greatly over time
is not that variable
The moving
average for
production is
fairly stable,
which should
enable level
production
0
June 1
Feb 1
July 1
April 1
May 1
Mar 1
Source:Client 2 database, McKinsey analysis

20
HIGH PRODUCTION VARIABILITY AT CLIENT 2 CAUSES MAJOR ILLUSTRATIVE

PRODUCTION DISRUPTIONS ALSO FOR SUPPLIERS
Forecast
Output
Client 2
Actual
Time
Overcapacity
High volatility in
Capacity volume causes un-
Utilization
stable operations at
Supplier supplier, low quality,
non reliable
delivery, and in the
Underutilized end high cost
Time
21
CLIENT 2’S ON TIME DELIVERY IS FAR BELOW BEST PRACTICE AND

VARIES A LOT
On time delivery (first half of year 5)*
Best practice
100
95
90 Client 2’s on time

delivery is
85 significantly lower
percent
than industry best

80 practice and varies
a lot as one result of
the unstable
75 production system
70 Jan Feb Mar Apr May Jun

Months
*On time delivery is only measured for planned deliveries, which indicates that the real on time delivery is even
lower
Source:Client 2 database, McKinsey analysis
22
IMPROVING QUALITY

future

management

policy deployment
23
2 COMPONENT QUALITY AND SUPPLIER MANAGEMENT
Current Client 2 state World class state Effects of shortcomings

Component • High component reject • Suppliers guarantee
quality rates sufficient components
testing (reject rates <1%)
• High customer reject

rates
• Supplier (component) • Suppliers are held to very
quality is a primary driver high standards and are • High in process repair
finished goods quality responsible for few finished rate due to insufficient
problems goods problems component quality
• Increasing production
Supplier complexity by splitting
• Quality management • Strong internal quality
management batches due to
practices are insufficient practices provide expertise
and different suppliers for
so little confidence exists for assisting suppliers with
development the same component
in ability to help suppliers quality improvement
to improve quality • Inflexibility due to long
supplier lead times
• Supplier evaluation and

selection rather • Supplier evaluation based
subjective lacks true on quantitative measures
weight for quality issues which are tracked, quality is
key area of evaluation
24
CLIENT 2’S CURRENT INCOMING COMPONENT REJECT RATE IS VERY

HIGH COMPARED TO BEST PRACTICE
Rejected parts in incoming components test (Apr-Mar)
Best practice <1%

• Sufficient quality
testing, and
quality improve-
rd
py
AM
r
er
he ox
su i s k
d
M
H ard
to
te oar
ment should be
O
ca
w
op
B
ia
d
c
R
Po
-R
ad
rb
Fl
al
et
done by suppliers
ar
R
rn
C
Vi
ot
In
M
Source: Client 2 quality control, McKinsey analysis

25
CURRENT SUPPLIER MANAGEMENT/RATING SYSTEM IS INADEQUATE

Client 2 observations Possible effect to Client 2
• Very few quantitative scoring criteria • Supplier performance can’t be
System tracked and benchmarked against
historical performance
• No scoring standards to ensure that • Performance standards not objective
all scoring parties using the same
measure
• Activity taken on suppliers between • Action is reactive; real-time problem
rating cycles is not as formalized as elimination is not well developed
rating system
• System appears to assess every type • Suppliers may not be focused on
of supplier in the same way specific areas important to their
supply (e.g., delivery for commodity
components, quality for function
critical components, cost for high
value components)
• Price competitiveness is only XX% on • System does not reflect the real
Scoring form (typically 20-50%) evaluation mechanism as we
observed the price is a very important
• Variety of quality factors, each with a lever
small overall rating or weight
• Major quality issues may have limited
impact on overall score
• Internal accountability for supplier • No one really drives the improvement
Accountability problems appears fragmented efforts required
26
CURRENT SUPPLIER MANAGEMENT SYSTEM DOES NOT TRANSLATE

INTO LESS CUSTOMER REJECTS FOR CERTAIN COMPONENTS
Open box
rejects
(DPPM)
Mother board Biggest quality

issues
Component
rejected by
Hard disk CD-ROM customers do
not correlate
with the
incoming
components
Internet rejected,
Power which should
Floppy card be a driver to
Visual card evaluate
Box suppliers
RAM Radiator
0
0 Component
reject rate
*Component rejects are measured in testing and expressed in percent of batches of incoming components
rejected
(%)*
Note:Assuming that 5% rejected components per batch incoming gives the outlined middle axis
Source:Client 2 component databases; McKinsey analysis
27
IMPROVING QUALITY

future

management

policy deployment
28
3 QUALITY PERFORMANCE MANAGEMENT AND POLICY DEPLOYMENT
Current Client 2 State World class state Effects of shortcomings
• Current quality • Detection of quality issues • Client 2 can’t really

measurement is not starts from the customer rejects fix its quality issues
detecting key component which is the starting point to without being able
to detect the ones
problems customers are systematically eliminate these
consumers care
rejecting issues most
• Targets like quality levels • Performance targets are clearly • Shop floor doesn’t
are not clearly communi- broken down into each layer of take enough
cated towards the shop the organization to give ownership and
targets might slack
floor and people feel quantitative measures to all
disconnected levels
• Hardly any performance • Big display boards used to • Quality performance

measures displayed on display all key performance difficult to track and
the shop floor measures including quality evaluate without
target display and
against the target
communication
29
CLIENT 2 IS NOT SUFFICIENTLY DETECTING THE QUALITY ISSUES
CUSTOMERS CARE MOST
Open box
rejects
(DPPM) Biggest quality
issues
Mother board
Performance
on internal
CD-ROM
Hard disk quality rejects
of key
components
does not
correlate
Power closely with
Visual card actual initial
Floppy Internet card defects found
by customers
RAM Radiator Box
0
Internal
0
failure of first
pass rate
(DPPM)
Source: Client 2 component databases; McKinsey analysis

30
THE IMPROVEMENT ON INTERNAL FIRST PASS RATE IN

MOTHERBOARDS DOESN’T TRANSLATE INTO LESS CUSTOMER
REJECTS One-pass (DPPM)
Open box (DPPM)
Motherboard quality performance

DPPD/DPPM
0
Months
Source:Client 2 quality database, McKinsey analysis

31
SHOP FLOOR PEOPLE FEEL DISCONNECTED FROM THE OVERALL

BUSINESS TARGETS OF CLIENT 2
We feel that the ties

We are weak in using between the shop floor
quantitative measures and the management
as primary way to are not very tight.
manage our business.
We have the
The goals and targets
impression that our
of the company are
feedback to outside
currently not very well
the plant don’t really
translated to the shop
lead anywhere
floor
Client 2 needs to think about more efficient

ways of communication to break down its
company targets like quality and customer
rejects to shop floor level
Arguments mentioned in various interviews with manufacturing, product development and process engineering
32
IMPROVING QUALITY

future

management

policy deployment
33
4 CONTINUOUS IMPROVEMENT
Current Client 2 State World class state

• Current 6Sigma program • Systematic process driving
does not sufficiently drive continuous improvement and
for systematic continuous problem solving including
improvement and problem setting targets, defining
solving to improve quality roadmaps and assigning clear Client 2 does not
responsibilities to effectively have a strong
improve quality system to drive
fast, high impact
• No continuous • Permanent improvement team quality improvement
improvement organization in place driving improvement
in place with dedicated cycles as change leaders and
change leaders driving build next generation of line
prioritized efforts managers
34
THE TOTAL VALUE OR "COST" OF THE INSUFFICIENT QUALITY PRELIMINARY

EXCEEDS RMB 130 MILLION ESTIMATE
RMB millions
130 +
??
??
130
??
Direct Lost profit Lost profit Lost profit Total cost

cost due to contribution contribution of quality
of quality stockout in home in enterprise
and late PC (gross PC (gross
delivery profit margin) profit margin)
*Material, rework based on desktop and laptop volumes in Year 4

Source: McKinsey analysis
35
IMPROVING QUALITY

future

management

policy deployment
36
CLIENT 2 SHOULD LAUNCH THREE MAJOR INITIATIVES
Key issue Major causes Priority Proposed actions Rationale
B Production and Stabilizes operations

Production system with
scheduling system and builds basis to
high variability driving
(needs to coordinatedimprove product quality
long supplier lead
Client 2 cant with i2 effort) design and customer delivery,
times
likely achieve its and supplier lead times
high aspirations, C Component quality
Inefficient supplier
unless current and supplier
evaluation and Critical for long term
insufficient management
management (and success as most
component and development) system quality problems can
in process be tracked back to
quality and Inefficient quality components (success
delivery performance A Quality performance in steps 1 and 2
performance are management system management, policy prerequisite for 3
significantly and lack of policy deployment and
approved deployment, visual continuous Most urgent and basis
management improvement needs tofor all other initiatives
be integrated with Ensures sustainability
Lack of continuous 6Sigma effort of above actions
improvement process
Source:McKinsey analysis
37
CLIENT 2 SHOULD START WITH QUALITY IMPROVEMENT EFFORT

Month
8 9 10 11 12 1 2 3 4
Task
(A) Quality performance
management, policy
deployment and
continuous improvement
– Set company level
targets for improvement
and break down to line
level
– Install big whiteboards
for visual performance
display
– Set up continuous
improvement (CI) team
– Collect quality data and
prioritize
– Run root cause problem
solving
– Implement improved
performance
measurement
– Set up management
feedback loops
38
CLIENT 2 SHOULD START WITH QUALITY IMPROVEMENT

EFFORT (CONTINUED)
Month
8 9 10 11 12 1 2 3 4
Task
(B) Production and
scheduling system
– Select pilot line
– Level production to take
time based on monthly
customer demand
– Pilot leveled schedule
– Develop pull system for
internal material flow
based (coordinate with
i2) on current practice
– Pilot pull system
(C) Component quality and
supplier management
– Review current
evaluation system
– Develop new score card
system based on best
practice
– Deploy new
measurement system to
suppliers
– Launch pilot
39
A. STEPS IN IMPROVING QUALITY PERFORMANCE MANAGEMENT AND

ESTABLISH POLICY DEPLOYMENT SYSTEM AND CONTINUOUS
IMPROVEMENT PROCESS
Step Who Timing
Set company level targets for quality BU head and production 2 weeks
improvement and break down to manager
organization
Install big white boards for line Production manager, Line 2-3 weeks
performance including product / managers
component quality
Set continuous improvement process BU head, CI-team 2-3 weeks
and team
Top management, CI team 3-4 weeks
Collect quality data and prioritize
problems, set targets and develop
roadmap
Production manager, quality 3-4 weeks
Run problem solving cycles to solve managers, production team
prioritized problems
Production manager 1-2 months
Implement improved measures and
coordinate with related departments
to fix outside manufacturing quality
problems
Establish management feedback
Top management, CI team On-going
loops
40
ESTABLISH POLICY DEPLOYMENT SYSTEM BY CASCADING TARGETS

THROUGHOUT THE ORGANIZATION AND ESTABLISH FIRM
ACCOUNTABILITY AND STRUCTURE REVIEWS FOR
PERFORMANCE AGAINST TARGETS
Company management
Plant management
Plant targets Target

Target • Quality Internal
Target
• Delivery and
~~~~~
• Cost supplier
~~~~ related
~~~~~
Department targets
Logistics Production Purchasing QA
Target Target Target Target • Quality

Target Target Target Target
Target Target Target Target • Delivery
• Cost
~~~~~
~~~~
~~~~~
~~~~
~~~~~
~~~~
~~~~~
~~~~
• Internal/
~~~~~ ~~~~~ ~~~~~ ~~~~~ external
41
WITHIN THE PLANT ALL TARGETS ARE TRANSLATED INTO THE

"LANGUAGE" OF EACH HIERARCHY LEVEL - USING UNITS OF
MEASUREMENT THAT CAN BE UNDERSTOOD AND WORKED WITH
COMPANY TARGET
1. Quality Improvement
2. Cost Reduction
3. Reduction of Lead Time
Quality Plant Department Supervisor

Improvement
1. Rework Product A -10% Mother- Rework personnel - 8%
Cell A Std. Time Part A14 - 7%
Costs board
Product B -14% Time for rework - 25%
assembly Std. Time Part A16 - 9%
Targets for Product C - 15% Material Cost - 12%
First pass rate + 5%
Plant
Manager
2. Cost of Product A - 8% Compo- Rework personnel - 15%
customer nents Time for rework - 15%
returns Product B -11% assembly Line 1 Std. Time checkp. 1 - 7%
Material Cost - 20%
Product C - 12%
Std. Time checkp.2 - 14%
Final Rework personnel - 10% Std. Time checkp. 3 -15%

assembly Time for rework - 10% First pass rate + 4%
Targets for Material Cost - 20%
Department
Line B
Manager Std. Time for rework -18%
First pass rate + 10%
Targets for
Supervisor
42
VISUAL DISPLAY BOARDS SHOWING QUALITY, COST, AND DELIVERY

PERFORMANCE FOR WORK TEAMS ARE EFFECTIVE WAYS TO
COMMUNICATE PERFORMANCE.
Line 4: team information
Team A Team B Key process indicators
Quality On-time delivery Line availability
Top ten problems Date Concerns C/m Changeover Break-

time record down
Supervisor: Jonathan
Team meeting schedule Problem solving activities

Mon Team A Team B Subject Causes
Jul Actions
Aug Target . .
Sep . .
Oct
Nov . .
Dec
43
CONTINUOUS IMPROVEMENT TEAM – THE AVANTGARDE OF THE

COMPANY
1. Identify the most important issues

related to quality, cost and service
CI Manager 2. Prioritize the issues
3. Establish small groups tackling the

CI group Func. most important issues
leader expert
4. Set targets and measurements for
small groups
CI
member 5. Small group lead root cause
problem solving
• CI manager has cross functional expertise and proven 6. Develop countermeasures and
change management record follow up
• CI group leader, enthusiastic young manager, future
leadership potential, normally works in CI for 2 years then 7. Iterate step 5 and 6 until final
moves back into the line solution
• Functional specialist is long term member of CI group, has
deep expertise in change management,e.g. (lean
manufacturing, 6 Sigma) 8. Start with step 1 again
• CI team member are shop floor workers/supervisors,
normally work in CI for one year, do execution
44
ROOT CAUSE PROBLEM SOLVING IS REQUIRED TO TACKLE

DIFFICULT ISSUES
Problem Problem
Why? 5-Why
approach
Why?
Why?
Why?
Why?
Quick fix Permanent

solution
Quelle: McKinsey 45
THE IMPROVEMENT TEAM IS CONNECTING BACK TO MANAGEMENT TO

ENSURE STAYING IN LINE WITH OVERALL COMPANY TARGETS…
Every 6-12
months
• … Feedback helps Take

management set stock Set • Targets are
objectives for the targets cascaded top to
next cycle bottom...
• …Results are checked Check

through KPIs progress
• …and are translated
• Monthly improve- Make
into objectives/themes
ment reviews: changes
for the permanent work
management tracks groups
progress and gives • Actions are defined
advice/help ("correct") and implemented
and anticipates future during bi-monthly work
problems sessions...
46
AND TO ENSURE INTEGRATION OF IMPROVEMENT EFFORTS INTO

THE BUDGET
Result assurance Process assurance
Improvement plan
Action 1
Ambitions 1999 2000
Budget
Roadmaps The process

improvement
1 2 3 4 5 cycle has to be
integrated with
the budgetary
KPIS cycle
ROCE
Monthly reviews
Monthly reviews
47
INTERNATIONAL EXAMPLES SHOW THAT CONTINUOUS
IMPROVEMENT CAN HAVE TREMENDOUS IMPACT ON
PERFORMANCE EXAMPLES
CI RATE
COMPANY YEARS (per year) PERFORMANCE DIMENSIONS
QUALITY
Motorola 12 68.0% Defects/million

Xerox 10 16.0 Defects/100
Toyota 6 6.4 Defects/100
COST
Nucor 5 7.0% Cost/tonne
GE Lighting 6 8.0 Cost/unit
Ford 5 5.5 Cost/vehicle
LEAD TIME
Kodak 5 20.0% Order-to shipment time
AT&T 6 8.8 Concept-to-manufacturing time
Levi Strauss 5 9.7 Order-to-shipment
48
B. STEPS IN STARTING A PRODUCTION AND SCHEDULING SYSTEM
Step Who Timing
Develop system design by Production manager, 2-3 weeks

leveling production to external resource
monthly customer takt time
Coordinate/ integrate with Production manager, Ongoing

i2 effort) production team
Pilot leveled schedule on Production manager, 4 -6 weeks

one line production team
Develop pull system for Production manager, 3 weeks

internal material flow area managers,
scheduler
Pilot pull system Production manager, 4-6 weeks

production team
49
CLIENT 2 CAN STABILIZE ITS PRODUCTION BY LEVELLING ACCORDING
TO CUSTOMER DEMAND
Daily Production
(Units)*
June 1
Feb 1
July 1
April 1
May 1
Mar 1
Define customer demand Level Production

• Define customer demand according to • Level schedule with making all major
average demand over 1 month products as frequent as possible
• Create inventory buffers to cover peaks • Build stable production order at least for
for selected products and components major products
• Define make to order and make to stock
products according to volume (rule of
thumb: top 5 – 10 make to stock)
*Sample calculation based on Client 2 production data from Feb to July 2001
Source: McKinsey analysis 50
IN A TAKT-BASED SCENARIO, INVENTORY LEVELS SHOULD ESTIMATE

STAY BETWEEN 3-9 DAYS*
Daily Estimated Finished Goods Inventory

(Days of Supply)**
10
9
Leveling and
8 small lot
7
production
should allow takt-
6
based production
5 to maintain small
inventory levels
4
while generating
3 high on-time
2 delivery rates
1
0
0 0
June 1
Feb 1
July 1
April 1
May 1
Mar 1
*Based on daily production from Feb-June; does not include any weekend production
**Assumes build-to-stock standard models make up ~70% percent of total order volume
Source:McKinsey Analysis, Client 2 production database
51
LEVELED PRODUCTION SHOULD ENABLE PULL ORDERING ILLUSTRATIVE
FROM MANY SUPPLIERS, IMPROVING Electronic
COMPONENT AVAILABILITY information flow
Materials flow
• Website
• Fax
• EDI Material
requirements Planning
Forecast planning process
capacity
plan
Leveled
Master
production
Supplier A schedule
Supplier B
Client 2 Customer
Pull system Manufacturing process

Material pulled by
Client 2 as required
Supplier C 52
IMPACT OF PRODUCTION SYSTEM REDESIGN DISGUISED

PC EXAMPLE
Throughput time Production reliability*

Hours Percent
32.6 >95
-61% 125%
12.6 40
*Poor performance partly due to being a new line (3 months)

53
C. STEPS FOR LAUNCHING COMPONENT QUALITY AND SUPPLIER

MANAGEMENT SYSTEM
Step Who Timing
Revise current supplier Purchasing manager 1 month

measurement system to closer
reflect quality and delivery
performance to customers
Deploy new measurement Purchasing department 1 month

system to suppliers leaders
Pilot new measures with Production manager, 2-4 months

suppliers quality manager,
purchasing manager
Select initial suppliers for shop BU manager, purchasing 3 weeks

floor support (at their plants) manager
Launch and pilot initial Supplier support/ 2 months

support/development efforts* development manager
*Only should begin after efforts to improve and document internal systems have been completed
54
UPFRONT CLIENT 2 SHOULD THINK ABOUT ITS SUPPLIER

MANAGEMENT AND DEVELOPMENT APPROACH FOR THE FUTURE
Plan
Do
Supplier
development
Revise current Supplier A holistic, multi-
supplier management management stage approach to
Act supplier
management and
Check
development,
should help
• Review current • Establish close, • Plan and improve supplier
evaluation criteria effective implement quality and
• Review historical communications improvements delivery
supplier link with prioritized ranging from spot performance while
performance suppliers fixes to system minimizing
• Improve development component cost
performance • Create true
metrics and partnerships where
dialogue with appropriate
suppliers
• Identify priority
opportunity areas
and improvement
approach
55
CLIENT 2 NEEDS TO REVISE ITS CURRENT SUPPLIERS AND
ITS SCORING SYSTEM TO IMPROVE COMPONENT QUALITY
An approach can be taken to assess the procurement function’s supplier

management and development activities against world-class standards and
develop plans for improvement Score
Supplier Development Supplier Management

5 Performance Measurements
Quality Systems 4
Development Communication
1
Value Analysis Supplier Quality Manual
Demand Management and

Capacity Planning
Shop Floor
Technical Support
Supplier Kanban
Problem Solving
56
A REVISED PERFORMANCE METRICS SYSTEM NEEDS TO BE DEVELOPED

Output
Area Metric
Vendor A Quality Report
Customer/ • Customer • DPHU
Vendor quality status

PPM Tracking Report
PPM
field complaints (defects per Target
• Failures 100 units)

• Customer Delivery Tracking Report
Delivery
returns Target
Client 2
• Quality • First pass yield
• PPM (parts TOP 5 PROBLEMS
Problem
• Delivery per million) History
• Schedule
• Cost • Lead time
D-Base
• Price
Supplier • Scrap • Percent of Price – 20% Service – 30%
Annual assessment
1. Annual price 1. On-time delivery
volume reduction
• Quality • PPM (parts 2. New product/

price
2. Delivery accuracy
per million) 3. Technical

Supporting expertise
Quality – 40% Innovation – 10%
infrastructure
1. Part failures 1. $ cost savings
generated
2. Corrective action 2. $ cost savings
reports implemented
Qualitative Lean Assessments 57

POSSIBLE PERFORMANCE METRICS PIT_ZXG779_hightech5_deepdivedx_2_2-10-02.ppt
EXAMPLE
Cost Quality Delivery Innovation

• Annual price • Defects per • Percent on-time • Number of cost-
reductions million • Number of incomplete savings ideas
• First-year • Warranty costs bids implemented
annualized cost per product • Number of expedited • R&D investment
• Labor rates • Number customer shipments levels
• Burden rates "things gone • Parts per million late • Number of design
• Scrap rates right" shipments improvement
• Tooling costs • Parts rejected • Variance to delivery/dock changes
• Engineering • Number of parts schedule • Uniqueness of
change costs requiring rework • Off-load rate design
• Raw material • Number of • Lead time • New product devel-
price and customer product • Number of manifests due opment lead time
availability complaints • Number of supplier visits
forecasting • In-transit damage to manufacturing
• Price relative to levels locations
market index • Bar code • Number of parts on
• Labor accuracy capacity verification
productivity • Number of over program
• Price risk shipments • Level of safety stock
management • Invoice/shipping
document accuracy
• Number of incorrect
shipments
• Satisfaction survey
results
Criteria
• Direct • Operational • Specific • Strategic
Source:McKinsey PSM Practice 58
CLEAR SUPPLIER PERFORMANCE EXPECTATIONS ARE NEEDED

Internal use to
rate vendors and
solve problems
2-way feedback
Supplier Client 2
• Quality • Quality
• Cost • Cost
• Delivery • Delivery
Customer Supplier
behavior relationship/
impacts supplier Provide specific fact-based relationship performance
operation • Enables faster problem detection impacts quality,
• Supports problem solving cost, and delivery
• Evaluates suppliers
• Focuses resources where needed
59
QUALITY IMPROVEMENT THROUGH IMPROVED SUPPLIER

MANAGEMENT TYPICAL
RESULTS
Component Component lead times*

defects days
Percent
20 7
-95% ~ - 75%
1 1-2
*Excluding imported or other component with special requirements

Source:McKinsey Analysis, Client 2 production database
60
IMPROVING QUALITY

future

management
– Area 3: Quality performance measurement and

policy deployment
61
CLIENT 2 SHOULD START WITH QUALITY IMPROVEMENT EFFORT

Month McKinsey support
8 9 10 11 12 1 2 3 4
Task
(A) Quality performance
management, policy
deployment and
continuous improvement
– Set company level
targets for improvement
and break down to line
level
– Install big whiteboards
for visual performance
display
– Set up continuous
improvement (CI) team
– Collect quality data and
prioritize
– Run root cause problem
solving
– Implement improved
performance
measurement
– Set up management
feedback loops
62
CLIENT 2 SHOULD START WITH QUALITY IMPROVEMENT

EFFORT (CONTINUED) McKinsey support
Month
8 9 10 11 12 1 2 3 4
Task
(B) Production and
scheduling system
– Select pilot line
– Level production to take
time based on monthly
customer demand
– Pilot leveled schedule
– Develop pull system for
internal material flow
based (coordinate with
i2) on current practice
– Pilot pull system
(C) Component quality and
supplier management
– Review current
evaluation system
– Develop new score card
system based on best
practice
– Deploy new
measurement system to
suppliers
– Launch pilot
63
ENDPRODUCTS FROM POTENTIAL PROJECT

Initiative End products McKinsey value added
Quality management, • Comprehensive system of targets and measures for • Brings deep expertise in policy
manufacturing and quality performance management deployment and change
policy deployment
and continuous
• Process roadmap for continuous improvement program management programs will
and feedback loops speed up change process
improvement • Workshops on visual management and problem solving on significantly
the shop floor to put problem solving process in place and
handover rollout to Client 2
• Leveled production schedule for pilot line • Brings unique knowledge and
approach on production
• Line out of internal pull system and material flow and systems design and pull
inventory levels
Production and systems
• Pilot for one pilot line for selected components roll out plan
scheduling system • Training workshops for production planners • Work hands on with Client 2
employees to ensure optimal
knowledge hand over
• Brings global expertise in
• Diagnosis on current supplier evaluation system building supplier management
• Blueprint for new score card system and purchasing strategies to
• Workshops on strategic supplier management and ensure application of true best
development practice approaches and
highest impact for Client 2
Component quality
and supplier
management
64

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CLIENT 2 – High Tech Industry

This report contains information that is confidential and proprietary to

EXECUTIVE SUMMARY (CONTINUED)

Client 2’s current situation and aspirations for the

Issues blocking Client 2 from achieving its targets

– Area 1: Production and scheduling system

– Area 2: Components quality and supplier

– Area 3: Quality performance management and

– Area 4: Continuous Improvement

Initiatives to improve current quality performance

How McKinsey could help

CLIENT 2 HAS GROWN FAST AND CREATED SIGNIFICANT VALUE

Sales revenue Market value

Source: Client 2 annual report, website

Year 4 Year 5 Year 6 Year 7

* All sales figures offset internal transactions

Total X X+5.2 X+10.5 X+26.3 56

Source: Client 2 analysis 7

Client 2’s current situation and aspirations for the

Issues blocking Client 2 from achieving its targets

– Area 1: Production and scheduling system

– Area 2: Components quality and supplier

– Area 3: Quality performance management and

– Area 4: Continuous Improvement

Initiatives to improve current quality performance

How McKinsey could help

HOWEVER, CURRENT PRODUCT QUALITY AND DELIVERY

Aspiration area Issues

CLIENT 2 LACKS BEHIND THE "LOCAL HEROES" IN OTHER Outperform

Have considered Have purchased Currently use or Would purchase

• People like me are likely 7 • People like me are likely 7

• Quality 0 • The brand delivers -3

• Provides good value 5 • Provides a lot of additional 8

QUALITY PERFORMANCE CLIENT 2

Have considered Have purchased Currently use or Would purchase

Ownership drivers in Relative strengths/ Commitment drivers Relative strengths/

• People like me are 7 • Is recommended by 15

CONSUMER PERCEPTION IS SUPPORTED BY CLIENT 2’S HIGH

5 Even though Client 2

Client 2 Best Gap

Inverse customer reject rate within 90 days**

Client 2’s current situation and aspirations for the

Issues blocking Client 2 from achieving its targets

– Area 1: Production and scheduling system

– Area 2: Components quality and supplier

– Area 3: Quality performance management and

– Area 4: Continuous Improvement

Initiatives to improve current quality performance

How McKinsey could help

IN THE LEAN ASSESSMENT WE DETECTED SEVERAL

Inventory Management 1 Abnormality Detection

TPM Line Stop & Call

Visual Management Problem Solving

Standard Operations Cell/Line Layout

THE IDENTIFIED SHORT COMINGS CAN BE TRANSLATED INTO FOUR

*R&D not included

THE FOUR IMPROVEMENT AREAS SIGNIFICANTLY AFFECT CLIENT 2’S