Project Management Institute

Project management for manufacturers

the final frontier

by Kelly McGowan

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GENERAL MANUFACTURING is an industry in which project management is not always elevated to the global level that it should be. Unless a clearly identifiable, well-defined project exists, as in the construction of a new facility or the design of a new product, project management is not yet recognized as a process or structure for the management of the organization. So what are the opportunities for project management with manufacturers?

Radical shakeups in the manufacturing industry require traditional managers to regroup and relearn the basics.

Manufacturing has gone through some radical shakeups in the past 10 years. Manufacturers, especially those that are suppliers to Original Equipment Manufacturers (OEMs), have been required to make some difficult changes to the way they do business. OEMs require ISO or QS 9000 certification from their suppliers, and noncompliance means being removed from the vendor list. Leading consultants like Eliyahu Goldratt have created certified “Jonahs” to teach organizations how to increase their efficiency with better inventory and capacity management. Often-used terms in manufacturing include bottlenecks, continuous improvement, theory of constraints, just-in-time, zero defects, and enterprise resource planning. Compliance certification is certainly a major project in itself. Although there are numerous goals and objectives that are accomplished through the process of industry certification, 1 feel that by examining the path this trend has taken, we can see an opportunity that might not be so apparent for creating a project management structure within these manufacturing organizations.

Taming Inventory. One of the first major trends to surface was a concentration on reducing inventory: in other words, reduce inventory because it costs way too much to buy it, finance it, store it, hire additional people to figure out where it is, and possibly lose it.

A VP of operations recently told me that expeditors in many organizations are being considered nonvalue-added positions. 1 am aware of an OEM that has not only farmed out to a third-party distribution firm the storage and shipment of finished goods, but also uses a third-party firm that manages their raw materials, organizes it into production packets and ships to the OEM their work in process every two hours. With increased efficiencies in inventory, or “materials management,” manufacturers could achieve significant cash flow improvements and allow them to stay competitive with their domestic and foreign competitors.


Kelly McGowan's project management experience includes mainframe installation, cabling, database implementation, and software release cycle management. She currently manages a timeline of over 1,500 activities for a company in Grand Rapids, Mich.

The second trend to pick up speed is for manufacturers to increase the efficiencies of resources, better known as “capacity management.” This includes not only people but also equipment. With the help of the same experts who have led the way to better inventory controls, the standards have definitely been raised when it comes to delivery and quality required by OEMs. Machine rates have been scrutinized, normal work schedules challenged, and quality control departments have worked diligently to develop new and better processes.

One of the underlying benefits that have emerged during this time is that new and strong partnerships have been formed between the OEMs and their suppliers. Relationships between Tier 1 suppliers and Tier 2 suppliers and down the supply chain have also strengthened. Customers have figured out that in order to have a good supplier you must be a good customer, so everyone works together as a team to accomplish common goals. 1n addition, customers are trimming down vendor lists and enjoying the benefits of not having to maintain so many suppliers. 1 am convinced that the financial rewards have been so significant that it will lead the stakeholders to look for the next phase of improvement.

1f the improvement in inventory management has benefited direct material costs and improvement in capacity management has benefited direct labor costs, what is left is that “black hole” most commonly known as “overhead.” 1 am encouraged that overhead will become the final frontier in the manufacturer's battle to beat out its foreign and domestic competitors.

The ABCs. Over the past few years, a fairly small but significant chapter has been appearing in the accounting textbooks introducing ABC accounting. ABC stands for “activity-based cost” accounting; at this time only a handful of organizations are using the practice in full implementation. Although many CEOs and stockholders would support the reporting results of ABC accounting, many educators are not spending much time on the topic, primarily because implementation requires very sophisticated processes of gathering the data, storing the data and reporting the data. What ABC accounting attempts to do is to attribute as much indirect labor and materials to jobs as possible. 1 doubt the overhead line item will disappear altogether, but the goal is to get it as low as possible by assigning the costs to a specific job.

ABC accounting utilizes cost drivers that when calculated can attribute anything from the lights to the engineering costs to specific jobs that are produced. Certainly some applications are easier to identify as a cost to a job. Design work and quality control are two examples that come to mind. But what about those general management functions that are not so easily defined: the amount of time a purchasing person spends purchasing materials or components for a specific production, or the janitor's time to clean? marketing's time designing promotional material? And what about indirect materials? The first remark 1 always hear when discussing this is “You mean you think we are going to have to account for our pencils and pens?”

Improvement in inventory management has benefited direct material costs; improvement in capacity management has benefited direct labor costs. What is left is that black hole most commonly known as “overhead”—the final frontier in the manufacturer's battle to beat out its foreign and domestic competitors.

1f activity-based cost accounting is the next wave of continuous improvement, 1 believe that the most effective approach to implementation is utilizing strong project managers and fostering a commitment to the project management organizational structure. Normal everyday types of activities will need to be identified and processed as projects and tasks, with both time and materials attributed to the activity. The general management population is going to require a transition into understanding and utilizing the very basic project management concepts, including scope, time, risk, quality, and procurement. Time- and event-tracking tools will increase in functionality, and consultants will need to switch gears a bit because the project management community will need to train the general management population.

There are dozens of reasons why this theory will not come to fruition. Requiring documentation of maximum efficiency from the white-collar world will simply not fly. 1t has been suggested that such an implementation would stifle creativity. However, most if not all service firms have had to attribute their activities to a specific job or task since their inception; this is their direct labor line item, and how they bill the client. So far, the most compelling argument is that such an implementation would require far too much administration and reporting. 1t would require additional personnel not only to set up the structure and define the cost drivers, but the maintenance would be challenging as well.

While this argument has merit, we must also remember that there was a time when we thought such organization and collection of information from the production arena would be overwhelming—yet the changes have taken place anyway. There are a few software packages and consulting firms that are set up for ABC accounting; however, as we have seen Enterprise Resource Planning software organizations develop sophisticated Materials Resource Planning and Capacity Resource Planning components; they can and will integrate full-blown ABC accounting functionality as well as integrated project management into their ERP systems.

PRODUCTION PERSONNEL of manufacturers who have been involved in the efficiency improvements over the past 10 years have paved the way to this next step. 1n addition, those manufacturing facilities, and especially those individuals who have been on the front lines getting their PMP® certification, are going to become intolerant with administrative inefficiency and waste. The next wave of improvements will require close evaluation of the overhead line item. As project managers, we should be ready. images

This material has been reproduced with the permission of the copyright owner. Unauthorized reproduction of this material is strictly prohibited. For permission to reproduce this material, please contact PMI.

PM Network May 1999

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