It's not an easy time to be a manufacturer. Especially this week, as various economic indexes show that consumer confidence may be in free fall, while wholesale food, energy and medicine costs have soared, pushing inflation up at the fastest pace in a quarter century. The Labor Department reported earlier today that wholesale inflation jumped by one percent in January, more than double the increase that analysts had been expecting.
Perhaps that's one good reason why manufacturers should look to other areas to preserve the bottom line. One such area might be in equipment management - specifically the lifespan of a company's equipment. Why? Because regardless of the product they are manufacturing, equipment declines over time, reducing the quantity of finished products a manufacturer can create. Maintenance must then be performed to return the equipment back to an optimal state.
Anxiety over equipment maintenance only increases when manufacturers make multiple products on deteriorating equipment. In these scenarios, some items produced in the same batch are likely to be defective. Until now, researchers have only considered this deterioration problem with regards to the manufacturing of one product, and focused only on how much to produce in order to offset the amount of products that will be defective.
In reality, however, firms typically make more than one product. Even more importantly, these products often vary in terms of their quality (e.g., high-end vs. low-end). This means that each product has a different impact on the deterioration of the equipment. For example, semi-conductor manufacturers make computer chips that vary in their speed and quality. High-speed (high-end) products contaminate the equipment more than low-speed (low-end) products, thus accelerating the deterioration process.
A potential answer to the problem of equipment maintenance comes from researcher Burak Kazaz, associate professor of Supply Chain Management in the Whitman School of Management at Syracuse University. Kazas asks the simple question, "in each state of equipment deterioration, which product (e.g., high-end computer chips or the low-end) should be produced.’
"We expect a high-end product to earn more revenue than a low-end product. However, a high-end product will also speed up the deterioration and will have fewer yields than a low-end product," says Kazaz. "The manufacturer’s trade-off is to produce a high-end product and earn higher revenue but increase the risk of the machine deteriorating more rapidly. Or produce a low-end product and earn lower revenue and have fewer risks of process deterioration."
Kazaz’ research, recently published in IIE Transactions and co- authored with Thomas W. Sloan of the University of Massachusetts at Lowell, introduces the concept of ‘critical ratio’ of revenues – that is, a comparison of the revenues of each product at various stages in the lifespan of the equipment to determine the best production policy.
"The critical ratios enable a manufacturer to evaluate the ‘reservation price’ of a product," explains Kazaz. "In other words, they allow a manufacturer to determine the minimum revenue it needs to earn to justify the production of one item over another."
Kazaz' work is important because it helps determine what products can be manufactured at various stages of deterioration, and when to switch from one product to another. His findings could shed light on decisions regarding product mix, pricing, and process technology.
And that could help manufacturers save money in a critical economic cycle.