'Little's Law' Delivers Big Growth

Arc Technologies is a rare example of a mom-and-pop machine shop that has successfully transitioned to a mature full-service precision components supplier. The key to Arc's success is the implementation of robust business processes. The company has grown from a small shop comprised of two people and one machine to a multi-million dollar organization with two locations, 80 employees, 60 machines and 39,000ft2 of floor space. Most recently, the company has seen a 25% increase in throughput without adding any additional people or machines by implementing an operations management approach called the Factory Physics framework.

Arc Technologies was founded in San Marcos, CA in 1986. The company serves the medical device industry, as well as the laser, semi-conductor, aerospace and data-storage industries. In August 2007, the company was acquired by the newly-formed Arc Holdings Inc. Then, in January 2008, a second location, Arc Precision, which specializes exclusively in medical devices, was opened in Minnesota. This new location, opened in response to increasing demand, produces instruments for orthopedics and surgery implantation, components for the dental industry, and parts for assisted breathing devices, among other products.

Collaboration

Jonathan Friedman, current Arc Technologies president, began in sales for Guidant/Boston Scientific, selling implantable pacemakers and defibrillators. He recognized the market for medical devices and healthcare equipment and that the healthcare industry is constantly innovating. Doctors, patients and healthcare professionals are always demanding newer, better technologies. Answering that demand, Arc has built itself around rapid product velocity and the demand for a machining supplier to have the ability to ramp up and down quickly.

Specializing in high product mix – over 5,000 unique part numbers in the last five years – small to medium volumes, and offering engineer-based collaboration with their customers, Friedman argues that focusing on the market space in between small machine shops and large contract manufacturers offers high growth potential.

Arc has two locations, 80 employees, 60 machines and 39,000 ft2 of floor space.

"There is an empty space in between the small job shops and the large contract manufacturers. We want to help companies move from small volumes up to larger volumes, and we can help transition them to a contract or overseas manufacturer if necessary. In a business environment in which end customers are constantly demanding innovative new products, Arc is positioned to assist in increasing productto- market speed and reducing lead time variability as demand scales," Friedman says.

A barrier-to-entry to the medical device market from a contract manufacturer's standpoint is the ability to handle the high variability of customer demand. Most large contract manufacturers are built around a business model of large, long-running orders. These large orders are relatively easy for manufacturers to handle due to long-term commitment and high predictability.

As opposed to contract manufacturers, Arc addresses customer needs by embracing small volume orders. Arc has a dedicated prototype department to handle a large volume of short run, non-repeat orders. In both of Arc's facilities, the prototype department works closely with the production department in order to transition short-running prototype jobs to long-running production orders. To coordinate all of this communication and activity, excellence in operations management is one of the keys to success.

Practical Approach

As a strategic partner to Arc, Factory Physics Inc. helps the company work with customer partners to deliver parts on time while reducing both cost and inventory across the supply chain. An Advisory Board member of Factory Physics, Jeff Bell has 15 years of experience in implementing supply chain solutions. Bell believes that the implementation of the Factory Physics framework creates a win-win situation for both the company and its customer partners.

"We work in collaboration with our customer partners to understand their demand patterns so we can align resources to meet their needs. Factory Physics enables us to strategically and quantitatively plan capacity, inventory, and time to improve service and reduce cost. One example at Arc is how we partnered with our top medical customer. They shared their demand pattern and we planned a mix of capacity and inventory to be able to deliver their Kanban pulls on request. In the second month of implementation, they received service levels of 100% from us. We were able to plan our capacity in a way that allowed us to grow 20% without adding capacity in terms of equipment or people. It was a real win-win," Bell says.

Factory Physics principles and applications provide a practical scientific approach that helps Arc plan and manage the three buffers in manufacturing – capacity, inventory and time. Use of the practical science of Factory Physics principles enables companies to design and implement the operations logistics design, or optimal buffer portfolio, that work best for their markets and products. This is completely complementary with tactical operations improvement tools such as Lean Manufacturing and Six Sigma.

Since Arc targets the middle market, the high variability in demand is very much present among its customers. Arc recognizes that establishing strong customer partnerships and expanding manufacturing capabilities are not enough; it also needs to develop more effective operations systems.

Understanding the Factory Physics principles enables Arc to identify opportunities in the existing manufacturing and supply chain operations and design effective new systems where necessary. Continuous improvement is not just a buzzword at Arc; it is built into every operations process.

"Every week, Arc's management team meets to review the operational results from the previous week. The weekly results meetings are a checkpoint to understand what is working well, so it can be repeated and identify what needs improvement, so resources can be focused on the opportunity. Every week, fresh ideas are discussed and ideas are implemented," Friedman says.

The weekly results meetings allow the management team to quickly and thoroughly evaluate their operations processes and accelerate their continuous improvement efforts and practices.

Framework

A primary principle in the Factory Physics framework is called "Little's Law." Application of Little's Law represents a fundamental element of Arc's Factory Physics implementation. Little's Law states that work-in-progress equals throughput times cycle time (WIP = TH x CT). Little's Law is generally applicable to any company's situation. By applying the law to individual product stations and lines, Arc effectively understands and controls the flow through the entire shop. As Wally Hopp, one of Friedman and Bell's professors at the Master of Management and Manufacturing program at Kellogg/Northwestern University used to say, "It may be ‘Little,' but it's the Law."

A variety of medical device components.

Arc's planning department utilizes a process called Virtual Queue Scheduling to systematically organize the company's workflow with expected cycle time and throughput of individual jobs. This process enables the production manager to identify opportunities in terms of decreasing cycle time and increasing throughput, effectively managing production deployment. By doing so, Arc has gained more control over WIP, which results in higher reliability of on-time delivery. By implementing Virtual Queue Scheduling, Arc successfully has decreased costs and inventory across the supply chain.

In the short time since implementing the Factory Physics framework, Arc has increased throughput by over 25% with no new capital equipment or personnel. Moreover, it has cut its cycle times by 40%. As a result, Arc successfully delivered about a 7% cost reduction based on improved supply chain efficiencies.

Arc's successful implementation of the Factory Physics approach enables the company to handle a high variety of customer demand and provide higher quality products and services. This is absolutely critical to Arc's medical device customers in particular. Through the increased scalability that comes from better shopfloor control, the positive word-of-mouth referrals of their customers, and a focused sales effort, Arc has increased their sales by 22% over same quarter sales last year.

Continuing Quality

Although Arc is no longer a mom-andpop machine shop, its roots from that chapter in its history remain in the dedication to quality customer service. Friedman and others on the Arc staff regularly meet with customers to discuss how to improve the quality of their parts and reduce costs. The company is perhaps contrarian regarding its decision not to aspire to become a large contract manufacturer, but instead focus on the middle market space in between mom-and-pop machine shops and contract manufactures. With its business partner, Factory Physics, Arc has improved its operations and set a new standard for customized products and services in a manufacturing industry.

"Although the broad economy seems to be struggling, we are growing and taking on a lot of new business. I believe the tight link of our market niche and our operations structure to deliver to that niche has put us in a good position. I am excited for what the future will bring," Friedman concludes.