Linking Systems to Strategy Linking

Systems
William L. Berry to Strategy
Ohio State University, USA, and
Terry Hill
London Business School, UK 3
Received September 1991
Many firms make large investments in processes and manufacturing Revised February 1992
infrastructure, such as control systems, without an adequate understanding of
their markets. Few appreciate the need for the link to be made. They see
manufacturing investments and agreements on markets to be independent sets
of decisions. However, as these investments are both large in terms of costs
and time-scales, getting it right is critical to the short- and long-term prosperity
of a business. Many companies make costly mistakes owing principally to the
fact that their manufacturing strategies have not been developed to reflect key
differences in their markets. Without a strategy, investments in manufacturing
lack context and subsequent coherence. The result is a reactive response by
manufacturing which typically fails to alert firms to the trade-offs involved and
the binding nature of the decisions being made.

No Strategy, Poor Systems

Companies are understandably concerned about manufacturing's corporate role
in an increasingly competitive environment. Recognizing the size of the function
and the magnitude of its strategic contribution, CEOs are looking for
improvements in manufacturing as an integral part of a total corporate response.
Manufacturing's failure to develop a set of coherent responses designed to
support the business results in a strategic vacuum. To meet corporate
expectations and CEOs' demands, manufacturing has, in the past, resorted
to investing in a series of panaceas. Transferring solutions rather than
understanding the problems and issues involved has often proved costly and
inappropriate.
One area of investment which characterizes these features is that of
manufacturing planning and control (MPC) systems. As a large infrastructure
investment and as a critical function in the management of manufacturing this
provides a classic example of the panacea-driven approach which has
characterized past decisions. Material Requirements Planning (MRP), Just-In-
Time (JIT) and Optimized Production Technology (OPT) are recent illustrations.
Bought more for their apparent benefits than business fit it is not surprising
that previous research[!] reported that 62 per cent of the MRP· applications
studied cost as much as $5 million yet failed to realize their full benefits as
the following specific company examples illustrate:
Company A
Company A is a medium-sized US manufacturer of high quality, domestic International Journal of Operations
& Production ~lanagement, \bl. 12
furniture. Manufacturing comprises few operations and uses relatively simple No. 10, 1992, pp. 3-15. © ~!CB
process technologies to make high volume standard products which result in University Press, OIH-3577

© Emerald Backfiles 2007

 UOPM low work-in-process inventory. The need to provide short lead times in key
12,10 market segments has led the company to invest in high levels of finished goods
inventory.
In the past the company controlled manufacturing by central scheduling and
manual shopfloor control supported by visual checking and verbal communication
between departments. In order to achieve improvements in equipment utilization,
productivity and order tracking in the manufacturing process, the company
4 installed a computer-based, shopfloor control system with automated order
tracking, queue control, despatching and capacity planning features at an overall
cost of about $0.75 million. However, the real area for improving overall business
performance was to support sales growth by fulfilling customer orders more
quickly while keeping finished goods inventory under control. This meant
improving the master production scheduling function in order to better reflect
actual sales mix in plant schedules, and so avoid imbalances in finished goods
inventory, characterized by current inventory shortages and excess stock. The
investment in the shopfloor control system was not only unnecessary, but the
increase in papenvork raised overheads and took supervisory and management
effort away from the key area of master production scheduling.
Company B
Company B, a European manufacturer of telecommunications switchgear,
undenvent a series of product changes fuelled by new product technology
improvements in the market, moving from the use of electromechanical to
electronic components. While the old product components were made-in-house
using a range of batch processes and final assembly lines, the company decided
to purchase the new product technology in the form of components.
Beset with several dimensions of manufacturing change, the company retained
its previous MRP system as a tested and proven device. However, it failed to
realize that the manufacturing task had moved from the control of a broad range
of complex internal processes, and the corresponding control of work-in-process
inventory, to key issues of vendor scheduling and component inventory
management. As a result, resources were not switched to vendor scheduling,
and the correct purchased parts were not brought in on time. Also, while the
old system reflected tight controls on work-in-process inventory, the new system
had little work-in-process inventory but required much higher levels of purchased
parts inventory. Consequently, pressure was placed in the wrong areas, shortages
increased, and the control system was unable to cope with the new demands.
Company C
Company C, a UK agricultural equipment manufacturer, had for many years
produced a standard line of tractors in high volume for stock, using line processes.
After a substantial drop in sales volume, the firm responded with a variety of
new products offering a broad range of options produced in low volume to specific
customer orders. To support the shift in marketing strategy, new investments
were made in batch manufacturing processes. The new manufacturing task
involved the scheduling of small batches of components and assemblies for
particular customer orders in functionally-oriented, process centres.

© Emerald Backfiles 2007

 Not recognizing the changed nature of the manufacturing task and wishing Linking
to minimize overall investment, the firm decided to retain its previous Systems
manufacturing planning and control system which was designed to support the to Strategy
production of standard products on a repetitive, line production process. As
a consequence, substantial difficulties were encountered in planning and
scheduling the low volume, product option components, both on internal
processes and suppliers. The system was unable to integrate forecasts, customer
orders, and master schedule information for the low volume product options 5
and provide reliable delivery promises to customers. The result was lengthy
manufacturing cycles, simultaneous shortages and excesses in inventory, and
poor customer service.

Company D
Company D, a UK aerospace company manufacturing a wide range of products
for both the original equipment and spares markets, decided to invest in a
comprehensive, MRP system with standard computer software for both
requirements. This included master production scheduling, time-phased material
planning, capacity requirements system planning, and shopfloor control. Given
the complexity of the data base, training and system running-time requirements
and support, the investment exceeded £5m, with an installation time of 2112
years, and significant overall running costs. After installation, subsequent analysis
recognized that large parts of the system were not required to plan and control
the spare parts business. Sixty per cent of the original database investment
and a large part of current running costs were attributable to this part of the
company's activity, but were not necessary or appropriate for its effective control.
What was required for this make-to-order, low volume, intermittent business
was simplified master scheduling, material planning and shopfloor control
modules without a requirement for the order tracking, queue control, and priority
despatching features essential for the OEM part of the business.

From Panaceas to Policy

The examples show how companies may invest in planning control systems
which, though sound in themselves, do not fit the needs of a business. However,
the outcome is not only an expensive and time-consuming mistake but, more
importantly, firms believe that the planning and control problem has been
resolved. The consequence is that the company may not only have lost market
opportunity, but may lose out altogether.
How can companies, therefore, improve the relevance of their systems
investment? The approach is twofold:
• Link markets to processes to manufacturing planning control systems.
• Recognize the different decision-making functions in MPC systems and
their different roles within specific businesses.
Typically, manufacturing is reactive in corporate strategy making which reinforces
the strategic vacuum/panacea syndrome explained earlier. The problem is,

© Emerald Backfiles 2007

UOPM therefore, how to get the manufacturing dimensions into this debate at the right
12,10 time and the right level. The key is to analyse a company's markets not only
in terms of the marketing perspective but also in terms of those dimensions
which manufacturing needs to provide. The concept of order-winners and
qualifiers helps differentiate the manufacturing task and hence signal the nature
and extent of both process and infrastructure investment[2]. This procedure
is illustrated by the framework and arrow directions in Table I. The steps concern
6 the principal stages which embrace the corporate marketing decisions on the
left and the facets of manufacturing strategy on the right. In tum, the arrows
illustrate the iterative nature of the debate and the need to forge the essential
links between objectives, marketing and manufacturing.
Businesses need to make different choices of process depending on market
requirements. As shown in Figure 1 there are a number of basic processes
which may be used to meet the needs of different markets. Companies typically
select a process to reflect order winners and anticipated volumes. The choice
having been made (e.g. Al and Bl in Figure 1) then the associated point on
the numerous business dimensions and investments (see A2 and B2) results.
One critical trade-off concerns manufacturing planning and control system design.
These systems are a key element of manufacturing infrastructure and comprise
functions at three different levels within a business (see Figure 2)[4]:

Production/operations strategy
1 2 3 4 5
Corporate Marketing How do Process Infrastructure
objectives strategy products/ choice
services win
orders in the
market-place?

Growth Product Price Choice of Function

Survival markets and Quality various support
Profit Delivery: processes Operations/
Return on Speed planning and
investment Reliability e control
Other financial Demand process choice
measures increases Process
Colour ge positioning ass ce
uct/service Capacity: and control
range Size Systems
innovation Design Timing engineering
Leader versus leadership Location Clerical
follower Technical Role of procedures
Table I. alternatives support inventory in Payment
Framework for supplied the process
Reflecting systems
configuration Work
Production/Operations
Strategy Issues in structuring
Organizational
Corporate Decisions
[2, p. 33; 3, p. 38]
structure

© Emerald Backfiles 2007

 Linking
0 Project
Systems
to Strategy
0
A 2 ,,.._ ________ _
Jobbing

Batch 7

82 -c-------------
Continuous
processing

Low Al High Figure 1.

volume The Engineering,
Manufacturing and
Changing dimensions of the various manufacturing
and business implications Business Dimension
Phases Involved in
Process Choice

• overall business direction;

• detailed material and capacity planning;
• execution systems.

Whereas most companies recognize the levels involved, what is not appreciated
is that the principal functions within each level need to be designed to meet
the requirements of individual businesses. Only in this way can companies select
the particular functions they need and then design the relevant parts of the
system in a way which supports the manufacturing process and, in tum, enables
manufacturing to support better key differences in its markets.
As illustrated earlier, the failure to appreciate this leads companies to make
inappropriate investments in systems (e.g. Companies A and D) or to miss
opportunities for sound investments under changing market conditions or to
support process reinvestments (e.g. Companies B and C).

Reasons for Failure

So, why do system failures occur? The reason is not the system itself but the
failure to design and fashion the MPC functions to the needs of a business.
The four principal reasons for these failures are described below, and are
illustrated by the company examples given earlier.

Inappropriate Investment
An underlying theme throughout has been the need to recognize that whereas
an MPC function may be sound in itself, it may not be relevant to the needs
of a business. As an example the investment in the shopfloor control system
in Company A would actually impair overall performance.

© Emerald Backfiles 2007

 UOPM
12,10 Demand Production
planning planning

Overall
business
direction

8 Master
production
schedule
IMPS)

Detailed Material
capacity 1-------.i requirements
planning planning
IMRPI
Detailed
material and
capacity
planning
Material and
capacity plans

Figure 2.
A Simplified Review of Shopfloor
Purchasing Execution
control
the Manufacturing systems systems
systems
Planning and Control
System Functions

Original Investment Made Inappropriate by Market Changes

Given the dynamic nature of its markets, Company B failed to recognize that
its system design needed to reflect market change and switch its emphasis from
shopfloor control to vendor scheduling.

Systems Need to Reflect Process Reinvestments

Whereas Company C recognized the need to reinvest in the hardware of
manufacturing, it failed to recognize the necessity for reinvesting in its systems
and software as an integral part of manufacturing's total support, a failure which
undermined overall business performance.

Attempting to Resolve Diverse Manufacturing Problems with Single Solutions

Often companies cope with diverse manufacturing situations by implementing
single solutions which result in the inadequate support of the systems' needs
of individual processes. Company D's failure to separate out the different needs
of its OEM and spares businesses led to the implementation of a single but
expensive solution to meet the demands of two different businesses.

© Emerald Backfiles 2007

 Applying Concepts Not Solutions Linking
The key to designing MPC systems which fit the business is to link: Systems
to Strategy
Markets Processes

~/ MPC
9
systems

To do this, companies need to use the concepts explained in Table I and Figures
1 and 2 and not rely on the easy but inappropriate option of applying standard
solutions. This final section builds on these earlier concepts, provides the
principles on which effective systems need to be built, and illustrates their use
through company examples.

Match MPC Systems and Markets

Company E is a market leader based largely on creating new products and
meeting customer applications in the packaging industry. Following rapid growth,
competitors entered the market and introduced price competition. In order to
match past sales growth and profit levels, the company identified a major new
market segment in which to sell its existing products.
In MPC system terms this required changes in the master production
scheduling (MPS) function. While the existing market characteristics were:

• make-to-stock products;
• delivery speed supported by finished goods;
• low product variety; and
• high production volume;

the new markets comprised:

• make-to-order products;
• delivery speed achieved through rescheduling;
• high product variety; and
• low production volumes.

Table II provides the conceptual basis for understanding how different types
of MPS systems can be designed to reflect the particular needs of a business.
In this case the company moved from a make-to-stock (MTS) master production
scheduling system to a two-type MPS system to meet both the Make-to-Stock
and the Make-to-Order (MTO) characteristics of the existing and the new
markets now supplied.

© Emerald Backfiles 2007

UOPM
12,10 Strategic variables Master scheduling approach
MTO ATO MTS
I I
Markets:
Product: type Special :: Standard
10 range Wide - Predetennined
and narrow
Individual product volume per
period Low -- High
Delivery: speed Difficult :::- Easy
reliability Difficult - Easy

Manufacturing:
Process choice Jobbing/low -- High volume
volume batch batch/line
Managing changes in sales and mix Through order Through \VIP Through FG
backlog or FG inventory
inventory
Table II. Meeting delivery speed Through Reduces Eliminates
Linking Manufacturing requirements rescheduling process lead process lead
Strategy to the Design requirements time time
of the MPS

Matching Process Change by System Change

Faced with more frequent product design changes, a wider product range, and
shorter customer lead times, Company F, a microcomputer equipment
manufacturer, found its choice of manufacturing process to be increasingly
inadequate. This company's original choice of batch processes with functional
layouts and scheduled under MRP had led to 75-day manufacturing lead times,
large inventory holdings and a high incidence of obsolete stock.
With a need to achieve short lead times, lower inventory levels and the
elimination of the costs associated with inventory obsolescence, the company
undertook a series of manufacturing investments with regard to set-up
reductions, cellular layout, and a simplified shopfloor control system. The result
was a pull system for shopfloor control responding directly to demand, and
manufacturing in small order quantities. The outcome was rapid design changes,
low inventory, short four-day lead times, lower overhead costs and the elimination
of obsolete stock.
The general features of a pull type of shopfloor control system which needed
to be made at Company F to meet the changes in the manufacturing process
are summarized in Table III. This table illustrates how strategic manufacturing
variables need to be linked to shopfloor control system alternatives as well as
the general features of pull and push types of shopfloor control systems.
Markets - Processes - MPG Systems
The major theme throughout has been to stress the need for companies to
link markets, processes and MPC systems. To illustrate this, two companies

© Emerald Backfiles 2007

 Strategic variables Shopfloor control approach Linking
Push type I Pull type Systems
to Strategy
Markets:
Product: type Special Standard
range Wide Narrow
Individual product volume per period Low High
Accommodating demand versatility: 11
total volume Easy/incremental Difficult/stepped
product mix High Low
Delivery: speed Achieved by schedule Achieved through
change finished goods
inventory
schedule changes More difficult Less difficult
Manufactun"ng:
Process choice3 Jobbing/low volume High volume
batch batch/line
Source of cost reduction: overheads Low High
inventory Low High
Table III.
Changeover cost High Low Linking Manufacturing
Organizational control Centralized Decentralized/ Strategy to the Design
3
In jobbing, the shopfloor control is handled by the operator (shopfloor based) of the Shopfloor
Control System

have been selected to represent the way in which this can be accomplished.
To help in the explanation, both companies in these examples represent "pure"
forms of both process and systems design.
Company G manufactures customized hydraulic products in low volume on
a make-to-order basis. The appropriate manufacturing process choice is batch
with long manufacturing lead times, complex routeings, the sharing of processes
and the need to manage capacity. In this company, the material planning approach
is based on a time-phased MRP system as shown in Table IV.
Company H, on the other hand, produces a narrow range of motorcycles,
in high volume, with limited product change or enhancements. The relevant
process choice is high volume batch and line processes, and the opportunity
to reduce both set-up times and batch sizes. For this situation, the relevant
material planning design comprised a rate-based material planning system as
shown in Table IV.
These two examples represent companies with different markets, production
processes and system designs which have been appropriately developed to
provide a coherent approach to each business. Table IV illustrates the concepts
underlying this critical linkage and demonstrates design alternatives each
appropriate to different business conditions.

Systems Design for Complex Markets

The last two companies were classed as "pure" because they represent classic
examples of different manufacturing situations. Most companies, however, do
not enjoy this level of clarity.

© Emerald Backfiles 2007

 UOPM Strategic variables Material planning approach
12,10
Time-phased
I Rate-based
Markets:
Product: type Special Standard
range Wide Narrow
12 Individual product volume per period Low High
Ability to cope with changes in
product mix within a period High potential Limited
Delivery: schedule changes Difficult Easy
speed Through Through
scheduling/excess inventory
capacity

Manufacturing:
Process choice 3 Batch Line
Table IV. Source of cost reduction: overhead No Yes
Linking Manufacturing inventory No Yes
Strategy to the Design
of the Material a In jobbing, shopfloor control is handled by the operator
Planning Approach

Where this is so, the key to resolving the complexity typical of most organizations
is for a company to simplify the control task by identifying differences required
by the market, and then reflect these in the process and infrastructure investment
which it makes.
Company I, a materials-handling equipment manufacturer, was confronted by
a changing market where price sensitivity and product customization were both
increasing. The first step was to reflect these market requirements in the design
of the manufacturing process. The next was to feature these within its MPC
systems design.
One characteristic of Company I was similar to Company G's markets and,
therefore, its process and system responses needed to be developed in the same
way. As the company's markets required a broader range of optional features
to be produced in low volume, the company reorientated its MPC system to
provide assemble-to-order master production scheduling, time-phased materials
planning, and a push type of shopfloor control system for one portion of the plant.
The other principal market requirement was for lower prices. To reduce costs
the company needed to standardize as much of its product as possible thus creating
high volume in its component manufacturing with the attendant opportunity to
achieve low costs. To support this aspect of the market requirements, the company
installed manufacturing cells to produce high volume, standard components and
supported this process with a rate-based material planning and a pull type of
shopfloor control system. This part of its business was, therefore, similar to
Company H. Figure 3 provides a way of illustrating this and shows the relative
parts of its processes that correspond to Companies G and H.

© Emerald Backfiles 2007

 Linking
Systems
MTO ATO MTS to Strategy

13

Time phased Rate based

Push Pull

--CompanyG Figure 3.
=Company H Linking Business
-company I Characteristics to the
Other feasible combinations Design of MPC
Systems

Conclusion
Why don't panaceas work? Solutions presuppose that market requirements and
hence corporate characteristics are the same. What you can be sure about in
business today is that nothing is further from the truth. This article illustrates
the critical need to link markets and manufacturing strategy. In tum,
manufacturing strategy comprises a coherent set of responses in terms of
process and infrastructure investment which essentially need to reflect the
characteristics of a company's markets both today and tomorrow. The critical
interrelationship of these aspects is clearly demonstrated by Table AI which
provides an overview of the market-process infrastructure linkage. This
framework is illustrated by Companies G and H and offers a comprehensive
way to review a company's response and allows it to identify the necessary
changes in order for its MPC system (as one part of manufacturing strategy)
to support the business better.
References
1. Schroder, R.G., Marerial Requirements Plan11ing: A Study of Implementation and Pradice,
American Production and Inventory Control Society, Falls Church, VA, 1981.
2. Hill, TJ., Ma11ufacturing Strategy: Text and Cases, Richard D. Irwin, Homewood, IL, 1989.
3. Hill, T.J., Manufacturing Strategy: The Strategic Management of the Ma1111facturing
Functio11, 2nd ed., Macmillan, Basingstoke, UK, (in press).
4. Vollmann, T.E., Berry, W.L. and Whybark, D.C., Manufacturing Pla1111ing and Control
Systems, 3nd ed., Richard D. Irwin, Homewood, IL, 1992.

© Emerald Backfiles 2007

 (") i;7
0 C"
3-
'E I'!>
~>
(") !""'
0
3
'O
"'en::i.
0
;:l

Manufacturing strategy

Manufacturing Manufacturing planning and control system

Company Market Order winners Task Features Master production Material planning Shop-floor control
characteristics and qualifiers scheduling

Company G Customized Design capability Reducing Batch Make-to-order Time-phased Push system
products Delivery speed process lead manufactunng assemble-to-Order material Priority
Wide product time Long process Customer planning scheduling of
Delivery
range reliability-Q,Q To manufacture routeings orders Material is shop orders
Low volume to engineering High precision Anticipated particular to
Quahty-Q System
per product specifications work orders customer orders supported by
Price-Q and quality Forecast High despatching and
Make-to-order standards Accommodate orders
delivery and obsolescence production
Initial vs repeat Delivery Used for rough risk controller
orders design changes
reliability is with reliable cut capacity personnel
Extra materials
Future order critical deliveries planning due to needed for Capacity
call-offs long lead time requirements
Labour cost scrapped items
impact on
equals 60 per Trade-off: planning by
delivery
cent shorter lead work centre
Customer order Order tracking
Control of actual time vs raw
promising
costs against material and status
budget inventory information
Scrap and rework
order priorities:
first orders,
normal scrap
allowance

© Emerald Backfiles 2007

 First order
processing
uncertainties
(process
unknown, time
estimates)
Process and
product
uncertainties

Company H Narrow product Price To provide a low High volume batch Make to stock Rate-based material Pull system
range Delivery speed cost and line planning
Manufacture to Kanban containers
Standard products (through manufacturing production forecast
support process JIT flow of material
finished goods Level production
High volume per capability Low raw material,
product inventory in Short set-up times
distribution To support the Three month frozen component and
Seasonal demand Small batch sizes planning horizon WIP inventory
divisions) marketing
Sales from finished Quality - Q activity with Low cost Manufacture to
goods inventory high delivery manufacturing replenish
Delivery reliability speed through
at distributors Low labour cost distribution
-Q finished goods
Introduction of new High material cost inventories
Basic design and inventory
products Inventory reduction
peripheral
Changing product design changes (raw material,
mix -Q components and
\VIP)
Overhead reduction
(low MPC
costs)
Note: Q denotes a qualifier, i.e. a capability required for the company to enter and remain in its market. Q,Q denotes an order-losing sensitive qualifier, i.e. a capab1hty
which if not supported leads to a rapid loss of business.

© Emerald Backfiles 2007

Reproduced with permission of the copyright owner. Further reproduction prohibited without
permission.