Bernd KALUZA*
Herwig WINKLER*
Michael SLAMANIG*
Helmut BLIEM *
DEVELOPING A CONCEPTUAL FRAMEWORK FOR PLANNING RAMP-UP COSTS
Due to the fact that an efficient execution of production ramp-ups strongly impacts the economical success of a new product, ramp-up management shifted into the centre of scientific and practical interest in recent years. Despite great efforts, many important problems could not be solved so far. One of the unsolved problems concerns the planning and controlling of ramp-up costs. Up to now ramp-up costs are often insufficiently planned and controlled. Adequate methods and/or instruments are still missing. In this contribution we develop a key metric system to improve the planning of ramp-up costs by reducing complexity within the ramp-up planning process and increasing transparency.
We demonstrate how this key metric system can be systematically built. Used consequently, this approach helps to increase the quality in planning ramp-up costs as well as the planning reliability.
Keywords: Ramp-up Management, Key metric system, Cost planning, Cost analysis
INTRODUCTION
Shorter product life cycles, an increasing diversification of demand as well as the increasing intensity of global competition have forced companies to strive for
a more rapid and efficient introduction of new products. The execution of production ramp-up which is determinded as the period between the end of product development and full capacity production thereby strongly impacts the economical success of a new product.
In recent years a lot of of research activities have been conducted on the analysis and solution of different problems within ramp-up management. Despite these great efforts, many important problems could not be solved so far. According to an international study conducted by the University of St.Gallen, in 2004 almost 60 percent of all ramp-ups carried out in the European automotive industry missed there technical and/or economical aims [2, p. 64]. One of the unsolved problems within ramp-up management that drives this alarming figure concerns the planning and controlling of ramp-up costs. We define ramp-up costs as the sum of all costs incurred during the ramp-up period with the exception of investments which are allocated directly to the product via depreciation [5, p. 445]. Short spell before launching a new product there is no scope left which may lead to a disproportionate increase of ramp-up costs in case of trouble shooting.
Up to now ramp-up costs are often insufficiently planned and controlled. This is due to the fact that the conventional methods of cost planning used in a well-known volume production environment are not appropriate to meet the specific requirements of a production ramp-up [5, p. 432]. In order to avoid cost explosion during the ramp, ramp-up costs have to be planned carefully. This necessitates adequate methods and/or instruments. Specific methods and/or instruments supporting the process of planning and controlling ramp-up costs are entirely missing [6, pp. 18-22].
FUNCTIONAL REQUIREMENTS TO AN INSTRUMENT For Plannig and Controlling Ramp-up costs
Due to the specific problems associated with the planning of ramp-up costs, an adequate instrument has to fulfil a set of functional requirements. The main goal of the instrument is to assist and coordinate the cost planning process of a ramp-up by providing all the cost information required. In order to achieve this objective the complexity of the planning process has to be reduced by increasing cost-transparency within the ramp-up. Cost-transparency is reached by identifying and defining the main processes within the ramp-up phase. Main processes could be the pilot production, the manufacturing start up as well as the qualification of the employees. Knowing the ramp-up processes helps to reveal the causes of ramp-up costs, their drivers and the correlations in between them [7, p. 61]. Thus a better understanding of the ramp-up and the costs incurred within the single processes is created.
According to this the first functional requirement an adequate instrument has to fulfil is to provide relevant cost information in order to establish a detailed and comprehensible basis for planning and decision making. In addition changes in the design parameters of the ramp-up can be analyzed in consideration of their effects on ramp-up costs. Changes during the planning process may occur because of top-down budget-constraints which result in restrictions concerning e.g. the ramp-up capacity, the product design and/or functionality as well as the ramp-up production volume.
The second functional requirement is to provide support in coordination. Reducing planning complexity by dividing the whole ramp-up into its single processes necessitates coordination in order to bring the functional plans like the production cost plan and the logistics cost plan together to one coherent overall ramp-up cost plan [7, pp. 30-31]. Thus coordination contributes to systems thinking as several tasks and problems within the ramp-up cost planning process are not treated independent anymore but rather in their overall context.
The third functional requirement we identify is the capability of supporting communication and learning processes within ramp-up cost planning. Besides the qualification and motivation of employees, ramp-up specific know-how is one of the main factors for improving the quality in planning ramp-up costs as well as the planning reliability [6, p. 31]. Problems concerning ramp-up specific know-how could be traced back to two basic deficits [4, p. 510]. These are on the one hand deficits resulting from insufficient communication and coordination within the planning process. On the other hand deficits arise from a lack in transforming implicit ramp-up know-how into explicit structured knowledge. Therefore an adequate instrument has to ensure that the quality in planning ramp-up costs is being improved by enhancing the level of communication and knowledge exchange. In order to reach this target cost-planning-knowledge has to be collected, structured and provided. If this specific knowledge base is continuously extended with the experience and expertise gained in new ramp-up projects, planning complexity will decrease whereby planning reliability will increase [7, pp. 75-76]. Thus it could be avoided that similar basic errors in planning and decision making are not committed every time.
The fourth functional requirement for an adequate instrument we identify is the possibility to simulate alternative scenarios. Nevertheless it is impossible to anticipate all effects of decisions on ramp-up costs [9, p. 650]. This is due to the fact, that the ramp-up is characterizes by a high degree of uncertainty. There is uncertainty in the final product and process design, the volumes produced in the different stages of the ramp, the capacity required during the ramp-up and the reliability of the equipment as well [3, pp. 184-185]. Even though this uncertainty can not be eliminated, some of the potential consequences of decision can be forecasted by using simulation techniques. A simulation model does not instruct a decision maker what decisions should be made, but clarifies what would happen in case of making a decision in a given situation [8, p.16]. Thus the planning risk is minimized and wrong decisions can be avoided at the outset.
CONCEPTIONAL DESIGN OF THE INSTRUMENT for planning and controlling ramp-up costs
According to the considerations outlined before, it is imperative to design a model which represents both the causes of ramp-up costs and their effects on ramp-up costs. Therefore we will follow a four step approach: First of all, relevant processes within the ramp-up project have to be identified. Second, relevant cost drivers for each of the ramp-up processes have to be determined in order to transfer them into key metrics in the third step. Fourth, these key metrics have to be set in a hierarchical order, so that they can be concatenated to a key metric system.
Differentiation of the ramp-up phase and ramp-up costs
In the first step the main ramp-up processes of the specific ramp-up project have to be identified and/or designed. Before starting with process identification the ramp-up phase and the ramp-up costs have to be differentiated. The ramp-up phase represents a specific period within the product life cycle which is located at the end of product development and the beginning of full-scale production. Differentiating the ramp-up phase therefore may cause difficulties because of the smooth transitions in between the consecutive life cycle periods [7, p. 62]. Furthermore ramp-up time and design largely depends on the industrial sector and therefore on the product innovation as well as the innovation of processes needed to produce. The differentiation of ramp-up costs possesses similar problems. In reference to process identification two different situations can be distinguished. In case of disposability of detailed documentation of former ramp-up projects, processes can be defined by adapting former processes with the use of available process-data and/or process-maps. In case of planning a ramp-up without the possibility of reverting to former material, processes have to be defined from scratch. Furthermore ramp-up processes need to be categorized into two different process-types: successive and simultaneous processes. Successive processes take place when the achievement of one project objective e.g. a milestones or a quality gates activates another process. Simultaneous processes are defined as when the operation of several processes occurs at the same moments of time. In the ramp-up phase for instance employees are trained during pilot production. It is worth noting that planning a ramp-up always calls for Process Engineering.
Subsequent to process-identification activities within the single processes have to be detected and differentiated. This step is of particular importance for the planning and controlling of ramp-up costs because the ramp-up costs are determined by the length and intensity of the underlying activities. The entire ramp-up process can be distinghuised into different subprocesses. In this connection it is assumed that certain activities appear in each of the ramp-up subprocesses and therefore can be bundled. Some sample categories fot these bundles could be: Production Planning, Production, Quality Management and Logistics [5, p. 446]. After identifying and assigning activities to the particular ramp-up processes, the corresponding costs have to be tracked. In order to cope with this task utilizing the concept of activity based costing (ABC) may be helpful. ABC is a method of allocating costs to products and services and seeks to identify CER to objectively assign costs. Ramp-up costs have to be directly assigned to the product and therefore can be solely caused by the product [5, p. 445]. The result of this first conception step is a structured set of activities including the corresponding ramp-up costs and their types of costs. This set can be regarded as conceptual framework for the following steps.
Identification of relevant cost drivers within ramp-up
In a further step the activities have to be analyzed in order to identify cost drivers which significantly influence the corresponding ramp-up costs. These main cost drivers represent relevant parameters for the planning process. Such a cost driver could be the innovation or complexity level of a new product [7, p. 98]. It is essential to consider the low information level as well as the low number of source of information which characterize early stages of the planning process. Similar to the proposed procedure in step 1 cost drivers can be identified in two different ways. On the one hand, cost drivers can be deduced with the application of empirical cost analysis in the case that detailed cost-data from earlier ramp-ups are existent. On the other hand, cost drivers have to be designed theoretically because cost-data is often not sufficiently available. The number of cost drivers identified should not exceed a specific quantity in order to avoid that the instrument becomes overdesigned and therefore unmanageable [7, pp. 99-100]. In addition the time and effort of the acquisition of data has to be taken into consideration. As a rough rule of thumb “twenty is plenty” can be used as clue. As a result an activity-based set of the most relevant cost drivers is created.
Transferring cost drivers into key metrics
After identifying a manageable amount of cost drivers they have to be transferred into key metrics in the next conception step. In order to provide the cost-information required for supporting the planning and controlling of ramp-up costs the quantification of the parameters is a necessary precondition. For example the before identified cost driver “complexity level of the new product” can be quantified by using the key metric “Number of components within the new product compared to the forerunner product”. For this reason the possibility is created that changes within the planning process as well as their monetary effects can be assessed. However it is impossible to quantify all of the cost drivers. This is due to the fact that some of the cost drivers like the availability of purchased items or production facilities at a certain point in time can hardly be measured. Nevertheless it is essential to incorporate some of them into the key metric system as they seriously influence ramp-up costs. Thus besides quantitative parameters the key metric system should also include relevant qualitative parameters, so-called soft factors.
Creating a key metric system
In the last conceptual step the key metrics have to be set in a hierarchical order so that they can be concatenated to an integrated key metric system. At the top of the key metric system the aggregated planned resource use of each process are situated which in turn is determined by its underlying bundled activities. By multiplying the aggregated planned resource use per process by the corresponding factor prices the result are the ramp-up costs for each process. The result of summing up all process- and activity-based ramp-up costs is the total ramp-up costs at a certain planning stage. The resource use within the bundled activities thereby is influenced by a specific number of key metrics which are situated at the lowest hierarchical level within the key metric system. At this level relations in between the single key metrics exist as the variation of one key metric effects changes in other key metrics. For example reducing the number of pre-products manufactured within the pilot-production leads to a decrease of the training level of employees within the production [1, p. 4579]. In order to provide CER from the lowest to the top-level of the key metric system the interactions between the key metrics as well as their effects on the resource use have to be identifyied [7, pp. 100-104]. The relations thereby can be either mathematical or qualitative-logical, whereas the strength of the relations can be indicated by their senitvity.
By uncovering the CERs analysis-chains are created which provide detailed informations on ramp-up processes, the underlying activities, ramp-up costs and their drivers as well as their interdependencies.
BENEFITS OF IMPLEMENTING THE INSTRUMENT
By following the four step-approach outlined before, the complexity of the ramp-up planning process can be strongly reduced by identifying the causes of the emergence of the ramp-up costs as well as the effects of planning changes on the ramp-up costs. Transperency increases as the problem of ramp-up cost planning is decomposed by considering the whole ramp-up phase as a set of successive and simultaneous processes and subordinate activities. These activities are in turn determined by a set of several related cost drivers. Thus the information required for decisions during the planning of ramp-up costs is concretised. Furthermore the number of unknown causes and impacts on the ramp-up costs is limited, even though a certain level of fuzziness still persists. Due to an intensive and permanent examination of the ramp-up, its processes, costs, cost drivers and their interrelations during and after the conception stage, learning processes can be achieved [7, pp. 75-76]. In order to maintain the operativeness of the instrument, new insights in the form of modifications and/or extensions e.g. additional cost drivers or relationships have to bee permanently In addition the communication and coordination level is high because of the permanently incorporated. Thus the communication and coordination level between the people involved into the ramp-up cost planning is kept high. The benefit out of the simulation abilty depends on how the instrument is programmable implemented. Simulating and therefore anticipating the effects of changes within the planning process on the ramp-up costs is essential but may be exhausting and extensive in case of not having any computer-aided support. A visual illustration of the involved key metrics as well as their relations can significantly accelerate the process of transferring the required information.
CONCLUSION
Due to the specific problems associated with the planning of ramp-up costs this paper has provided a conceptional design of a key metric system in order to increase the quality in planning ramp-up costs as well as the planning reliability. After defining the functional requirements to an adequate instrument supporting the process of planning and controlling ramp-up costs, we have demonstrated how to develop such an instrument in a four step approach. The basic idea behind this approach was that ramp-up costs are future resource use within different ramp-up processes. These processes are determined by its underlying bundled activities. The resource use within the bundled activities thereby is driven and influenced by a specific number of key metrics. Between these key metrics interdependencies exist. The conception of an instrument which helps understanding the emergences of ramp-up costs and therefore provides the required cost-information calls for a systemetical approach in order to identify and analyse the ramp-up phase, its processes, activities, costs, cost drivers and interdependencies. An useful approach has been accomplished within this paper. Results from an implantation within the automotive sector show that the instrument is able to meet the requirements. Even though a lot of problems within the planning of ramp-up costs are still undissolved, our approach makes a practical contribution to a more effectively and efficiently ramp-up management.
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* Department of Production/Operations Management, Business Logistics and Environmental Management, Alpen-Adria-Universität Klagenfurt, Austria.
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B. Kaluza, H. Winkler, M. Slamanig, H. Bliem
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Developing a conceptual framework for planning ramp-up costs
Logistyka 1/2007