slides for chapter 9. the cost of logistics can be enormous “if you're thinking that...
TRANSCRIPT
Slides for Chapter 9
The Cost of Logistics can be enormous
“If you're thinking that it's gotten a lot more costly lately to transport and warehouse your manufactured products, you're exactly right. Total costs for business logistics in the United States were up 10.4% in 2010, reaching $1.2 trillion. That total accounts for 8.3% of the U.S. gross domestic product.”.
Source: “Recovery Not Reaching Supply Chain Yet” Industry Week, July 20, 2011
A Telling Example of finished goods inventory in the Car Industry
Courtesy of Professors Howard, M and Graves, A:2004
“An accountant sees inventory as an asset, a controller sees it as a liability, a production supervisor considers it a safety net, while a
materials manager finds it a tightrope. One common aspect to inventory, though, is that everybody agrees that holding it can be
costly. The following are a dozen ways to reduce inventory, suggested by supply chain consulting firm Cornerstone Solutions:
1. ................................ Reduce demand variability2.................................. Improve forecast accuracy3.................................. Re-examine service levels4. ................................ Address capacity issues5. ................................ Reduce order sizes6. ................................ Reduce manufacturing lot sizes7. ................................ Reduce supplier lead times8. ................................ Reduce manufacturing lead times9. ................................ Improve supply reliability10. ............................. Reconfigure the supply chain11. ............................. Reduce the number of items12. ............................. Eliminate questionable practices”
An overly simplistic view of managing inventory
Industry Week: September 2008 Issue 9, p7
Inventories
3 TYPES
RAW MATERIALS INPUTSi i
W.I.P. PROCESSES i iFINISHED GOODS OUTPUTS
Stock
Stock Stock
Stock Stock Stock
$$$$$$$$$$
Traditionally, manufacturing companies have more capital tied up in inventory than in fixed assets
The Bullwhip Effect
The concept has its roots in J Forrester's Industrial Dynamics (1961). In periods of rising demand, down-stream participants will increase their orders. In periods of falling demand, orders will fall or stop in order to reduce inventory. The effect is that variations are amplified as one moves upstream in the supply chain (further from the customer). The alternative is to establish a demand-driven supply chain which reacts to actual customer orders. (JIT).
At its factories, Dell keeps just three days of inventory on hand, vs. 45 for many of its competitors. Dell is such a formidable elephant that it demands that suppliers set up their own warehousing space near its two U.S. factories, in Austin and Nashville. When Dell needs to replenish an item, suppliers have 90 minutes to deliver. …. That has proved highly advantageous to Dell, which operates in an industry where components lose 1% of their value each week.
Inventory Management at Dell
Fortune Oct. 2004, Vol. 14 Issue 8, p84
The Complete Materials Flow Process
Purchasing
Receiving
Storage
Retreival
Conversion Process
Packaging
Transporting Finished
Goods
Warehousing
Retailing
Clearly, not all of these stages will be relevant for all firms. The task for the firm is to focus on areas in which it can add value by itself and then to subcontract and/or form alliances for the other areas.
Raw materials/ components Inventory
Work-in- Process
Inventory
Finished Goods
Inventory
Stages of Inventory
Process
T H E S U P P L Y C H A I N
Materials management - a decade on, little has changed!
Nowhere has the contrast between Western and Japanese manufacturing been more evident than in materials - or
inventory - management. This area has also been one of the great areas of organizational learning by the West in terms of
how it has tried to emulate some of the Japanese practices that have underpinned Japan’s success in key industries.
BROWN (1996) Strategic Manufacturing for
Competitive Advantage
A B C
E1
E2
g
H
? ??X
A
A C
DE
?No!
The way we describe it:
The way it really is :
The Supply Chain Metaphor may be Inappropriate
Focusing Operations
Outsourcing can become quite circular in effect - one of the clients of Octel Network Services, a firm in Dallas that operates more than 1 million electronic voice 'mailboxes', is Electronic Data Systems, a large computer-services company - EDS was bought by HP in 2008. EDS, in turn, has a 3.2 billion US Dollars contract to run Xerox's computer and telecoms networks, a deal that involves some 1,700 of Xerox's employees transferring to EDS. Xerox itself provides invoicing and billing services for Motorola, which in turn designs and makes parts of Octel's voice-messaging systems and thus the circle is completed.
Focusing Operations
Focus can mean that the firm becomes a virtual organisation, employing far fewer people then before but achieving similar business goals. For example, TopsyTail, a small Texan company sold 100 million US dollars of its hair-styling equipment between 1991 and 1997, although it has virtually no permanent employees of its own. Almost all of the firm's activities - design, manufacturing, marketing, distribution and packaging - is handled by subcontractors.
In 2009 they became no.1 in TV advertising on US Infomercials.
Focusing Operations:
Boeing says it can't supply a full list of subcontractors that are working on the project, but industry analysts estimate
that their numbers are greater than the 900-plus that contributed to the 777, which began construction in 1990.
Boeing spokesperson Loretta Gunter confirms that the processes used to construct the two planes are markedly different. "We have fewer first-tier subcontractors on the 787 than we did on the 777 because each is providing
bigger components," she says. "Likewise, many of them are contracting out bigger jobs to their subs.“
Boeing's new manufacturing template has captured the imagination of the aerospace industry. Recently officials from Airbus told analysts that the company will up its
outsourcing to become more competitive.
Source: How Many Small Businesses Does It Take To Build A Jet? Fortune, Jul/Aug2007, p42-45
Developments in Buyer-Supplier Relationships
Time
Nature of Relationship
Traditional
Stress
Resolved
Japanese
Lean
(After Lamming 1987; 1993)
ABC Analysis
Disadvantages Of High Stock Levels:
* Storage Costs * Interest Is Tied Up - Therefore, A Loss On Capital * Obsolete Stock * Less Money Is Available For The Business * Prices Fall On Held Items * Deterioration, Theft, Damage
Disadvantages Of Low Stock Levels:
* Failure To Satisfy Customer Demands - this can be fatal! * Costly Emergency Procedures To Fix the Problem –
these can be varied * Higher Replenishment Costs To Replace Inventory
D= Annual Demand rateCo= Variable Ordering CostCh= Variable Holding Cost
EOQ= 2 D CoCh
D = 1,000 units / yearCo = $50 per order; Ch= $5 per unit per year
So the EOQ number becomes: 2 (1,000) (50)5
= 20,000 = 141.42
The EOQ Economic Order QuantityFormula
MRP: Materials Requirement Planning
MRPII: Manufacturing Resource Planning
ERP: Enterprise Resource Planning
MRP, MRPII, ERP
Time
success
complexity
1960s
The Critical Gap
Development of MRP/MRPII/ERP
The Basic MRP Questions:
1. How many products are to be made?2. When do these products need to be made?3. What is the finished product composition in terms of materials and components?4. What are the numbers and types of components and materials currently in stock?A figure is determined (by subtracting the answer to question 4 from the answer to question 3) to then ask:5. How many items have to be ordered from suppliers? 6. What is the lead time for suppliers and, consequently, when
do orders have to be placed?
Tricycle
Handle Rear Axle Front Assembly
2 wheelsSeat
Assembly
Axle supports
Wheel Front axleSteeringcolumn
Front axle Front axle
0
1
Levels of Products - an Example
2
MRP and MRPII
Routing
Capacity Requirements
Tooling
Manhours
MRP
MRPII
Business Planning
Master Production Schedule(MPS)
Capacity Requirement Planning
Check Planning - OK?
Purchasing Shop-Floorcontrol
Purchasing
Sales Planning
Production Planning
Check Rough- Cut CapacityPlanning - OK?
Materials Requirement Planning(MRP)
YES
IF NO
NOT OK
FEEDBACK
PLANNING
EXECUTION
MRP’s Sequence
Customerorders
Bills ofmaterial
Productstructure
Purchaseorders
Demandmanagement
system
Masterproductionschedule
MRPsystem
Material plans
Forecastdemand
Inventoryrecords
Leadtimes
Work orders
Inputs Outputs
Linkages within the MRP system
* Reduced stock levels* Higher stock turnover* Increased customer service with fewer delays caused by shortages of materials* More reliable and faster quoted delivery times* Improved utilisation of facilities as materials are always available when needed* Less time spent on expediting and emergency orders
Potential Benefits of MRP
* Planning and implementing MRP can take years - although “off-
the shelf” software packages are available in reality, each firm must have an individual, tailored approach if the system is to be successful.
* Data entry and maintenance take up much time - even if the
reports are ‘exception reports’ - detailing changes from the last MRP run, this will still take up much time.
* Data integrity is essential - this calls for an holistic approach
which involves all major functions within a firm: this should present an opportunity; often, it will be the cause of failure - the inability to provide accurate forecasts of supplies and sales; engineering data which is incorrect and so on.
1. Company has a formal monthly Sales and Operations planning process chaired by the Managing Director.
2. Company has a Business Planning process that is fully integrated with its operating system.
3. All functions within the company use a common set of numbers to drive the business.
4. There is a single data base that drives all material and capacity planning
5. System supports daily planning buckets and may be run daily (i.e. MPS, MRP and CRP).
MRP Ratings – the ABCD analysis
6. Company has the appropriate levels of data accuracy to support business excellence a) Stock records 98 % - 100 % b) Bills of Material 98 % - 100 % c) Routings 98 % - 100 %
7. The master production schedule is realistic in that there are no plans to produce that have dates in the past and that there are no overloads against critical resources.
8. Valid material plans exist for all components and ingredients of master schedule items.
9. Valid capacity plans exist for all work centres.
10. Company is committed to schedule achievement. It achievesA) On time in full delivery to customers 98% - 100%B) Factory schedules on time 98% - 100%C) Vendor Schedules on Time 98% - 100 %
MRP Ratings – the ABCD analysis (cont.)
11. Forecasts are updated at least monthly and customer order promising is directly related to the master schedule.
12. New product introductions and engineering changes are managed effectively within the common system.13. Company has a programme to reduce lead times, batch quantities, and inventory to gain competitive advantage. Results are visible.
14. Company has sufficient level of user understanding to support Business Excellence a) initial education of 80% of all employees b) a structured ongoing education programme
15. Company is working in partnership with its vendors through use of vendor scheduling and associated techniques.
MRP Ratings – the ABCD analysis (cont.)
16. Company is working in partnership with its customers through closer linkage and shares information.
17. Company monitors that it is improving its level of customer service and increasing inventory turns.
18. Company uses performance measurements as the mechanism for monitoring and improving all business processes.
19. Company uses such measurements to continually monitor and improve its competitive position in the market place.
20. Company is committed to continuous improvement to maintain competitive advantage
MRP Ratings – the ABCD analysis (cont.)
A Class 'D' user is typically one where either MRP is not operated or, if it is, no-one believes the MRP figures. Frequently the store man will have a manual record that anyone will refer to if they want to find out what is really in stock. Manual records and schedules are a dead give-away to poor data accuracy and a Class 'D' level of performance. Even if all the MRP II bits were in place, the lack of accurate data would render the output worthless. A Class "D" user uses
the MRP package as a (very expensive) typewriter!
A Class 'C' user may have a pretty good MRP system as was common in the '50s and '60s. The system will launch orders and progress chasers will
expedite them according to which customers shout the loudest. They can never be better than Class 'C' because they do not attempt to manage the MRP
according to the resources available. The lack of a managed master schedule and integrated capacity planning are class "C" indicators.
MRP Ratings – the ABCD analysis (cont.)
A Class 'B' user will have capacity resource management in place via a sales and operations plan and a managed master scheduling process but the failure to properly control all the elements of ERP / MRP II will typically be shown up by the necessity to have secondary priority information to get the 'hot' jobs through production.
A Class 'A' user will score 18 or more on the check sheet and will need neither shortage sheets nor progress chasers. Instead, production control and monitoring will typically be carried out using the output from the planning system. The 98% or better on time delivery to customers will soon become an accepted part of the company's culture. A missed shipment or even a stock error will become a major cause for concern instead of just a way of life.
Source: BPIC The Manufacturing Planning Resource: www. BPIC.co.uk 2004
MRP Ratings – the ABCD analysis (cont.)
Customer
Retailer
Physicaldistribution
Productionprocess
Purchasing
Humanresources
ERP
The Basic ERP System
Advantages of ERP Systems
1. Provides integration of the supply chain, production, and administration
2. Creates commonality of databases
3. Can incorporate improved best processes
4. Increases communication and collaboration between business units and sites
5. Has an off-the-shelf software database
6. May provide a strategic advantage
Disadvantages of ERP Systems
1. Is very expensive to purchase and even more so to customize
2. Implementation may require major changes in the company and its processes
3. Is so complex that many companies cannot adjust to it
4. Involves an ongoing, possibly never completed, process for implementation
5. Expertise is limited with ongoing staffing problems
Push system: System for moving work where output is pushed to the next station as it is completed
Pull system: System for moving work where a workstation pulls output from the preceding station as needed. (e.g. Kanban)
Key JIT Terms
Muda is a Japanese term for activity that is wasteful and doesn't add value
Mura is a Japanese term for unevenness
Muri is a Japanese term for overburden or excess
Key JIT Terms
The JIT Goal : Add Value Not CostDo The Following Add Value or Cost/Waste?
• Counting It
• Moving It
• Storing It
• Expediting It
• Searching For It (Part Or Tool)
• Accumulating It Into Larger Make/Move Quantities
• Taking It Out Of One Container And Putting It Into Another
• Inspecting It
The original seven muda 'deadly wastes' are:
1. Overproduction (production ahead of demand) 2. Transportation (moving products that is not actually
required to perform the processing) 3. Waiting (waiting for the next production step) 4. Inventory (all components, work-in-progress and finished
product not being processed) 5. Motion (people or equipment moving or walking more than
is required to perform the processing) 6. Over Processing (due to poor tool or product design
creating activity) 7. Defects (the effort involved in inspecting for and fixing
defects)
Inventory Hides Problems!
Major Benefits of JIT
lMPROVED REDUCED* Quality *
Inventory * Productivity * Lot Sizes* Service * Lead-
times* Capacity * Unit Costs* Standardization * Design Time* Transport Systems * Space* Flexibility * Energy
Changing the plant to just-in-time was one thing; then Autoliv had to persuade suppliers, some of them 1,500 miles away, to change with them. Autoliv built a transfer dock in Indiana where shipments from suppliers in the East could be collected and loaded onto identically packed semis to make the trip to Ogden seven times a day. The trucks are evenly spaced and arrive like clockwork every 72 minutes, always bringing the same items in the same order at the same time. For every truck that comes in, three tugs deliver to the factory floor. Autoliv only keeps parts buffers amounting to two days' production on-site.
An Example of JIT :
“Elite Factories” Fortune, 6th September, 2004.
The Partnership Approach
Sako (2002) suggests that three types of trust need to be in place:Contractual trust - which is the adherence to formal, legal promisesCompetence trust - that either side is capable to provide what has been promisedGoodwill trust - which borders on 'ethics': trusting that appropriate behaviour will ensue
“Relationships” at Kmart!
From September 2001, the report says, they operated a programme called - almost comically - Project Slow It Down. Payments to suppliers were systematically delayed or reduced, suppliers were denied access to computer records of accounts payable and were deceived about why they were not being paid.
Financial Times 29th Jan. 2003, p19
The Partnership Approach Has Always Been a Problem for Some Companies
Back in 1994, Business Week noted how: "GM's relations with its suppliers remain the worst in Detroit....An electronics supplier tells of a $30 part he developed jointly with GM. He says that after he slashed the price to $15, the GM purchasing agent demanded more cuts, citing a $9 bid from a Chinese company that had never made the part in question... One parts maker that does $600 million in business with car makers says it is focusing its efforts on selling to GM's rivals" August 8, 1994 p26
But Toyota's cost-cutting program -- dubbed CCC21, or Construction of Cost Competitiveness for the 21st Century -- has been a remarkable success by any measure. With just one year to go, the plan is on track to save the auto maker some $10 billion over its five-year time frame. Not only is CCC21 sourcing components more cheaply but Toyota has also improved the parts' quality.
Business Week “A 'CHINA PRICE' FOR TOYOTA” 21st Feb. 2005
Toyota’s Obsession with Waste
CCC21 team disassembled the horns made by a Japanese supplier and found ways to eliminate six of 28 components, resulting in a 40% saving. No part has been too mundane to escape the Watanabe squad's notice. His favorite example: interior assist grips above each door. There once were 35 different grips. Now, Toyota's entire 90-model lineup uses just three basic styles. Toyota gearheads call this process kawaita zokin wo shiboru, or "wringing drops from a dry towel."
Business Week “A 'CHINA PRICE' FOR TOYOTA” 21st Feb. 2005
Toyota’s Obsession with Waste cont..
Materials Usage Under MRP/JIT
level of inventory
Time
Levels of stock measured in hours, rather than days/weeks
Inventory holding level
Deliveries are more frequent than under EOQ approaches; stock levels are reduced; some delivery quantities are larger than others, but the exact amount is delivered in each case to avoid storage and other non added-value features in materials management. To achieve this good supplier relations must exist
materials are immediately used in the process
Seven Keys To JIT
1. Management Will 2. Informed and Committed Workforce 3. Flexible Manufacturing Practices 4. High Quality (Right First Time) 5. EDI/Web Interface 6. Commitment to Innovation 7. Choosing the Right Partnerships and Developing Them
• Smooth flow of work (the ultimate goal)
• Elimination of waste
• Continuous improvement
• Eliminating anything that does not add value
• Simple systems that are easy to manage
• Use of product layouts to minimize moving materials and parts
• Quality at the source
Core Ideas in JIT
Benefits of JIT Systems
• Reduced inventory levels
• High quality
• Flexibility
• Reduced lead times
• Increased productivity
Benefits of JIT Systems (cont’d)
• Increased equipment utilization
• Reduced scrap and rework
• Reduced space requirements
• Pressure for good vendor relationships
• Reduced need for indirect labor
Key Points
For many years, inventory management was one of the major contrasts between the Japanese and Western approaches to manufacturing, although there is evidence that many Western firms are improving in the area of inventory management
Key Points
“Quick-fix" purchasing formulas (such as EOQ) do not provide any strategic advantage for the firm.
The EOQ formula is based on the following assumptions:
1. All costs are known and do not vary - demand for an item is also similarly known and will not vary. 2. As a result of point 1, both the unit cost of an item and the reorder costs are fixed and do not change according to quantity.3. There is only one delivery for each order - this is fine on an as-required basis for JIT but under the EOQ approach this ‘one delivery’ means that the buyer will incur stock-holding costs until the materials are actually required and then decline over a period of time. The delivery will not necessarily act as a driving force to speed up its use and even if it did it might merely encourage forcing a material onto a work area before it is required. This will create a bottleneck and act to increase work in process. (from Brown 1996)
Key Points
Material Requirement Planning (MRP), Manufacturing Resource Planning (MRPII) and ERP (Enterprise Resource Planning) can be powerful means of controlling inventory . However, MRP should not be used to 'push' materials through the production system; rather, MRP is a management planning system whereby all components can be planned in advance for a particular time period.
Key Points
A vital feature of Just in Time is the buyer-suppler relationship. The 'traditional' buyer versus supplier approach makes little sense: instead, the manufacturing firm must concentrate on focusing on key suppliers and forming strategic partnerships with them.
Key Points
Just in Time is part of world-class, strategic manufacturing. However, JIT is not simply about inventory reduction; it is a complete shift from traditional 'push' approaches based around production of large batches (made to stock). Instead a 'pull' system based upon 'make to order' for customers becomes the focus of production
Challenges to JIT for the 2000’s
Is JIT sustainable -
- Pollution?
- Transportation?
- Traffic gridlock? (e.g. Japan)
- Terrorism?