© s upply m anagement s olutions 1 lean supply chain design by michael j. cote, c.p.m. 2004...
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© SUPPLY MANAGEMENT SOLUTIONS 1
Lean Supply Chain Design
by Michael J. Cote, C.P.M.
2004 Northeast Supply Chain Conference
(978) 549-7884 [email protected]
© SUPPLY MANAGEMENT SOLUTIONS 3
What will we learn?
How to reduce cost and lead-time in a supply chain?
How do supply chains create value?
Who designs a supply chain and how?
How to eliminate waste?
How to improve responsiveness and reduce inventory?
How “lean thinking” can optimize a Supply Chain?
Tips on improving your supply chain!
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What is the differencebetween managing supply…
and managing a supply chain?
Supply Chain Management
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End-user Sourcing RFX
Explore Supply Chain
Request for Quote
Request for Proposal
Request for Information
Request for Deceit
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Our End-User RFQ
Which would you select?
Laptop A = $1203
Laptop B = $1257
In our RFQ we told suppliers what we wanted…
We received a price.
We should be asking…
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We Request a Cost Breakdown
What happens when we request suppliers give a cost breakdown to give us insight into the design of the supply chain?
A. Give it willingly because we are the customer!
B. Are somewhat reluctant because they know we are lying when we promise we won’t give the information to their competitors.
C. Provide slightly (in)accurate information to win the business.
D. Tell us we’ll freeze in hell before they give us that type of information.
The game begins …
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Laptop A
$450.00 CPU 220.00 Case 52.00 LCD $722.00 Cost Drivers (80%) 124.00 Other Material (20%) $846.00 Total Material 120.00 Labor (Value Add) 220.00 Overhead (Non-Value) 17.00 Profit (Market Value)$1,203.00 Total (Bid)
Laptop B
$450.00 CPU 245.00 Case 75.00 LCD $770.00 Cost Drivers (80%) 102.00 Other Material (20%) $ 872.00 Total Material 120.00 Labor (Value Add) 130.00 Overhead (Non-Value) 135.00 Profit (Market Value)$1,257.00 Total (Bid)
We Request a Cost BreakdownCost Driver Analysis
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Which would you select?
Laptop A = $1203 Laptop B = $1257
Sub-tier supply chain material valueLaptop B has $26 more in material valueCould it be more? (Depends on overhead costs in supply chain)
Overhead (No-value add or waste)Laptop A has $90 more waste!How much in sub-tier?
But…Laptop B has $118 more profitIs Profit Value?Opportunity for negotiation?Which company has long term viability?
Now which would you buy? Which supply chain will you select?
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End-user Sourcing RFX
What have we learned?
We select products that are the result of their supply chains.
We are the only source of money in the supply chain.
Price = Value + Waste
Most supply chains are fat and ugly!
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Value Chain Analysis
What is a value chain?Linked set of custom-value creating activitiesVertical in nature (supply chain)“Value” is anything the customer is willing to pay for…
Value Chain AnalysisMargins = perceived value (what are customers willing to pay for the “value-add?”)Competition (RFQ) establishes worth or valueCenter of gravity – primary value adding activityMargins = Cost of value add (labor & equipment) + Profit + Waste
LumberCost - $.05/lbSell - $.15/lb Margin - $.10
PulpCost - $.15/lbSell - $.30/lb Margin - $.15
PaperCost - $.30/lbSell - $.35/lb Margin - $.05
RetailCost - $.35/lbSell - $.45/lb Margin - $.10
*Note: The margins and costs are for demonstration purposes only and do not reflect true industry costs.
Value Chain
Value
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Who designs the value-creating supply chain?
Supply Chain Management
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Supply Chain Design
Sources of Supply Sourcing Strategy
Lead-time
= CostΣ of supply + …
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Supply Chain Design
Logistics Network Logistics Strategy
Σ of supply + logistics + … = Cost
Lead-time
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Supply Chain Design
Information Flow Information Strategy
Σ of supply + logistics + communications + … = Cost
Lead-time
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Supply Chain Design
Product Design Production Strategy
Σ of supply + logistics + communications + production … = Cost
Lead-time
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Supply Chain Design
Customer Distribution Distribution Strategy
Σ of supply + logistics + communications + production + distribution… = Cost
Lead-time
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Supply Chain Design
Who designs the supply chain?
Design and Mfg engineers.
Supply Managers.
Logistics Managers.
OEM Supply Chain Team
Who is responsible for this mess?
Center of Gravity
Σ of supply + logistics + communications + production + distribution + waste = Total Cost
Lead-time
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How can we use Value Stream Mapping to eliminate or reduce waste?
Lean Supply Chain Design
Price = Value + Waste
Send an RFVSM (request for value stream mapping)
(If you believe suppliers will respond to this you also believe in Santa Claus)
Work with suppliers map their processes and eliminate waste…
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Material Received
Inspect
Manufacturing Non-Manufacturing
Put intoWarehouse
KitMaterial
Value Stream Mapping
DeliverKit to Floor
Costs ofWarehouse
Track & ChaseShortages to
Kit
InventoryCycle Counts
Deliver ShortsTo Floor
Material Received
DeliverMaterial Floor
Savings15 People40K sq ft70% LessInventory
Waste Eliminated
CommunicateNeed – Get Price
Issue Order
Supplier Ship& Deliver
End-UserApproval
ConfirmPrice
File paperwork
Issue Invoice
Pay forParts
CommunicateNeed – Get Price
Supplier Ship& Deliver
Pay forParts
Purchase Card
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How to improve responsiveness and reduce inventory?
Lean Supply Chain Design
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Pushing Inventory into the Supply Chain
Your SupplyPartner
PartsKitted for
Manufacturing
Manufacturing
Shipment
Sub-tierSupplier(s)
MRP/ERPForecast + buffer + buffer + buffer
Build to Forecast
Part(s) Buildup until needed
CustomerOrders/Forecast
Traditional Manufacturing Material Flow
Forecast +buffer + buffer
Kits waiting forshortages
Forecast +buffer
Total Value of Inventory in the Supply Chain = $50 MillionLead-time = 4-6 weeks
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Inventory Pull through the Supply Chain
Your SupplyPartner Kanban
Min/MaxVMI
Manufacturing
SupplierKanban
Shipment
Sub-tierSupplier(s)
MRP/ERPForecast
Replenish
Extended Material Pipeline with Triggers
Part(s) PulledFor use
Information onKanban Pull
CustomerOrders/Forecast
Supplier Stocking Programs and Demand Pull
Match Cycle Time Requirements
Total Value of Inventory in the Supply Chain = $15 MillionLead-time = 1 week
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High Impact Parts Delivered More Frequently
Mathematics of Inventory Management
Drivers = 20% of Inventory Parts = 80% of Inventory $
Delivery Frequency Inventory on Hand in Millions $-MillionsIn Weeks Total Drivers Other Turns Sales
Baseline 13 100$ 80$ 20$ 4 400$ New Frequency 10 82$ 62$ 20$ 5 400$
8 69$ 49$ 20$ 6 400$ 6 57$ 37$ 20$ 7 400$ 4 45$ 25$ 20$ 9 400$ 3 38$ 18$ 20$ 10 400$ 2 32$ 12$ 20$ 12 400$ 1 26$ 6$ 20$ 15 400$
Increase Frequency to once every two
weeks
AfterBefore
Lean Lesson – Deliver parts more frequently
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Sourcing Strategies
Supply Chain Management
May the Source be with you…
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Power Converter, Inc.
Copper
Wire
Sources
Wire
IronMagnetic Core
Castings
Supply Chain Design Issues
Transformers
Transformers
Power Converter, Inc.(Final Assembly
And test)
Customer40% USA35% Europe15% Asia
Links
Other Components
FromDistributors
Current supply chain Issues:Magnet Cores have a 5 month lead-timeTransformers are dual sourced because of past late deliveries from supplier F
$.10
$1.00
$1.00
$.05$1.00
$3.00
$3.10
AB
C
D
E
F
G
$1.00
Average PCI Costs$4.05 Materials$1.00 Labor$1.00 Overhead$6.05
Average SellPrice 10.00 USD
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Power Converter, Inc.
Copper
Sources
Wire
IronMagnetic Core
Castings
Transformers
Power Converter, IncUS.
(Final AssemblyAnd test)
Customer40% USA35% Europe15% Asia
Links
Other Components
FromDistributors
Supply chain improvements:1. Negotiate an agreement with G to stock cores
$.10$1.00
$.05 $1.00
$2.80
A
$1.00
PCI Costs$2.80 Materials$1.00 Labor$ .90 Overhead$4.70
Average SellPrice 10.00 USD
G
FD
Power Converter, Inc.Europe
(Final AssemblyAnd test)
2. Sole source transformers to F – Reduces cost of transformers & wire (economies of scale)
3. Additional distribution/FAT center in Europe with common sources (lower overhead)
Eliminate waste in the structure of the supply chain
22% Total Cost Reduction
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What did we learn?
Some Tips for the journey…
Lean Supply Chain Design
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What did we learn?
Price = Value + Waste
End-user buyers select and fund supply chains
Manufacturing supply chain teams design supply chains
Partner with sources in the supply chain to eliminate unnecessary waste
Improve responsiveness and reduce inventory by pulling inventory through the supply chain & pushing information
Increase frequency of deliveries of high impact materials in the supply chain
Optimize the structure of your supply chain with a holistic view and do it early in the design process
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Lean Supply Chain DesignLean it out!
Select or develop lean sourcesEliminate Duplication!
Move from “buying” to allowing suppliers to manage delivery
Let Demand Drive the Supply Chain!Allow consumption not forecast drive the supply chain
Optimize!Eliminate waste in the supply chainOutsource non-core competencies – Not core businessCompress – balance freight, cost of value, qualityCollaborate to reduce total costsFocus on the customer
Delivery Frequency!Deliver only cost drivers more frequently
Tips for the Manufacturing Buyer
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Ask for cost break down in your RFX
Use a two-step RFX processStep 1 – Ask “what value is available?” first
Step 2 – Request quote for the value wanted
Provide supply chain accurate information on your needsAll supply chains have a target market– make sure you are in it!
Take the supply chain approachReduce costs over the long term by selecting a supply chain and developing it…
Don’t jump from one to the other (quote-to-quote)
Use the quoting process to benchmark and select long term partners
Tips for the Non-Manufacturing Buyer
Select Lean Designed Supply Chains
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Lean Supply Chain Design
by Michael J. Cote, C.P.M.
2004 Northeast Supply Chain Conference
(978) 549-7884 [email protected]