Tuesday, July 07, 2009

To be Vertically Integrated or not to be Vertically Integrated?

One thing that is pretty noticeable when touring any of the major automotive assembly plants (GM, Ford, Toyota, Nissan or Honda) is the lack of sub-assemblies being built on or near the final assembly line. Except for a parallel engine final assembly line which consists mainly of pre-mounting hose and framing, the majority of non-painted frame components are all shipped in from the outside.

When observing the automotive assembly line in action, the associates on the line assemble components directly to the moving vehicle. There are no sub-assemblies like seats, steering wheels, instrument dash boards, etc being built to the line. All these sub assemblies are delivered to the line ready for installation.

At first glance, this separation appears to make it easier to flow the final assembly process. So basically, automotive final assembly consists of delivering parts to the line, picking up parts as car passes by and installing the parts on the car. Please excuse my oversimplification; I am sure it is far more complex and challenging. Aisles are straight and wide given free access to deliver parts on both sides of the line. Is this assembly heaven?

But what about the inventory created by this separation? How far does the supply chain expand? What level of Muri (overburden) is created with the extra communication and coordination for this subassembly supply chain? If this concept works so great, why does Boeing have such difficulty in their supply chain?

By contrast, many assembly plants I am familiar are the opposite in that we are highly vertically integrated. Our assembly lines are not as straight nor do we have spacious aisles however we put as many of the subassembly processes closest to point of use as possible. This eliminates much of the WIP inventory and leadtime in the supply chain but we have our own challenges with this approach. As an example, we cut the material, shirr, sew and stuff a pillow for every casket all line side to our assembly line to the exact order by color, by fabric, by style within pitch. No inventory, no semi truck needed, and no computer system.

During the early days of automotive manufacturing, Henry Ford was extremely vertically integrated all the way back to the iron ore mines. He believed in controlling as much of the supply chain as possible to reduce the cost (waste) as possible. Over the years, the automotive companies retracted from this thinking thereby expanding their supply chain. I guess if you can find someone who can produce it cheaper than you can; it made perfect financial sense to let them make it for you so you can focus your attention on your core competencies.

But isn’t manufacturing suppose to be a core competency of a manufacturing company?


Tim McMahon said...

There are trades-offs both ways. Consider times when business is slow like our current economic times for some industries. You would probably like to bring more of your supply chain internally so you have more business. Also, you have more options to innovate. The opposite is also true - when companies are busy they often like to farm out parts of their supply chain so they can focus resources so called core competencies.

Mark Welch said...

Like any process, one has to do the math to determine which is best for a particular situation. This shows that simply going and benchmarking another organization's practices without verifying whether or not it works for one's own company is simply "corporate tourism." And, it's one reason why some people think they can just copy Toyota's physical practices without understanding the "whys" and philosophy behind them and be successful (tools approach). Then when they don't get the results they expect they think Lean doesn't work... In the words of Mr. Spock, "Fascinating."

Andy Wagner said...

I think we can agree, some operations need to be separated.
You wouldn't want to machine engine blocks adjacent to finished body paint. Plastic molding requires ventilation systems excessive to that required for assembly.
Engine assembly is typically done at dedicated facilities because engines are largely common across several carlines. The engine final line turns a generic 4-cylinder into a configuration specific to the model it goes into.
This allows the engine line, running at a given takt time to maximize learning and improvement, while syncing the configured engines to the final assembly line.
Bottom line: don't check your brain at the door. Every situation requires evaluating for the specific circumstances.