A Flexible Supply Chain for All

1. A Flexible Supply Chain for All APICS - Orange County Thomas Murray CPIM, CPM, PMP, CIPC info@nimbus-sourcing.com

2. What to do about forecasts? Sales & Operations Planning can be a great help, but often customers are unable or unwilling to share an accurate forecast. Garbage in equals garbage out. However one does Demand Planning, anything that pulls one closer to the customer is a good thing. Assuming one cannot have unlimited inventories, the problem is not with forecasts. The problem is really with ….. Long lead times.

3. What to do about long lead times? What often happens is Operations reacts to changes in forecasts by changing the supply quantity already ordered, but before the change in supply actually occurs, new changes to the forecast create more supply changes, which take another long lead time to change inventory levels. Besides the frantic expediting and de-expediting by Purchasing or the equally frantic changes to Production Planning, the main result is inventory always being far out of balance with demand.

4. Bull Whip Example With a 3 month lead time, Supply Planners never get it right.

5. The Flexible Supply Chain • Proactive and creative leadership from Operations is required. • Operations should not be passively reacting to changing and incorrect forecasts. • Operations should create a supply chain that is flexible enough to adapt quickly to changes in demand. • The key is to create supply chains with as short lead times as possible.

6. 1. Value Stream Mapping • Create a value stream map from the very beginning of the supply chain to the very end. • Start by mapping the flow of material and information from the raw material supplier and the sub-contractor all the way through to one’s own factory doors, through one’s own plant, and onwards to the customer’s door. • Include every link of the supply chain: logistics, Customs, information flow, etc.

8. 1. Value Stream Mapping • The simplest example of information flow is what happens when your company’s system realizes there is a supply need? • How long does it take for a too low inventory level to trigger a demand need in the MRP system? • How long does it take before your company’s Buyer notices it, creates an approved PO, and communicates it to the supplier?

9. 1. Value Stream Mapping • What does the supplier do with the PO? • Do they have raw material on hand? • How long does it take to issue an order to their raw material supplier and actually receive the raw material? • What if the supplier has to work with subcontractors? • The movement of information can be the slowest part of all the value chain links.

10. 1. Value Stream Mapping • Related to information flow is money flow. • Do suppliers require a down payment with every new order, as is common in China? • Does one have to set up a Letter of Credit with the bank? • Does everyone along the way need approvals from their finance managers and other upper management, before anything can be done?

11. 1. Value Stream Mapping • The Future State • Creating a future state value stream map lays out the priorities to cut out the greatest waste in the shortest time. • This tool alone will give a supply chain professional the greatest result for effort spent. • A short lead time is the foundation of a flexible supply chain. The shorter the better.

12. 2. Blanket Orders • Blanket orders are commitments to order a certain yearly quantity that can be shipped at customer specified times throughout the year. • This usually allows the customer to gain a quantity price break and some flexibility in delivery time. • They greatly help the supplier plan for production inputs like shortening the lead time to acquire raw materials.

13. 2. Blanket Orders, An Example • A blanket PO determines a given quantity to be shipped within a 12 month time frame. • Generally, there is also a rough shipment plan given at the time of the blanket PO. • For example, a PO for 120,000 widgets to be shipped within the 12 months of 2012, at a tentative quantity of 10,000 a month.

14. 3. Supply Pipeline • A supply pipeline is simply ordering smaller quantities more often. • This is what will allow companies to significantly lower inventory levels. • It is equivalent to the idea of small lot sizes in lean manufacturing.

15. 3. Supply Pipeline • Imagine a pipeline of small diameter from which issues a relatively small quantity of supply every week. • Suppliers will ship weekly an amount that coincides with one’s demand requirements for that week. • This alone will lower inventory of any input from several months to one week, plus any safety stock, which will also be correspondingly lowered, too. • The cost savings of this strategy to lower inventory is tremendous.

16. 3. A Supply Pipeline Example

17. 3. Supply Pipeline • Objection: weekly shipments from overseas will significantly increase the cost of shipping. • Answer: the savings from much lower inventories far outweighs any shipping costs. • Just smaller warehousing, insurance, and obsolescent write-off requirements would cover the increase in shipping costs. • But the biggest advantage is being able to take all of the capital that is tied up in large inventories and use it to invest in the company’s future.

18. 4. Time Fences • Time fences can help with the mechanics of a supply pipeline. • The key to a successful supply pipeline is being able to make changes to incoming supply quickly. A short lead time is the biggest help. • But we also need to build disciplined flexibility into this process. • Using a disciplined approach will prevent expensive chaos in the supply chain.

19. 4. Time Fences, An Example • Taking our blanket PO example of 120,000 widgets a year with a tentative shipping schedule of 10,000 a month. You have created a supply pipeline with the supplier of planned weekly shipments of 2,500. • Let us assume the supplier has a 6 week production lead time. No changes are possible until after week 6. • The supplier’s ability to make changes to his production schedule for your 2,500 a week demand, depends on the usual suspects: production capacity, raw material availability, etc.

20. 4. Time Fences, An Example • So, you and the supplier negotiate time fences when changes can be made and by how much. In this example, it might be no changes through week 6, ±10% in week 7, ±20% in week 8, all the way to ±100% by week 12. • Assuming the start of a new blanket PO, in week 1, 2,500 are planned to ship in week 6, in week 2, between 2,750 and 2,250 can ship in week 7, between 3,000 and 2,000 can ship in week 8, etc.

21. 4. Time Fences • Drawback: You are giving up the freedom to order whatever you want whenever you want it. Of course, your freedom to do so is countered by the reality of what your supplier is willing to do and how much you want to pay for the privilege. • Benefits: By being a good customer and helping your supplier be able to plan production better, you will get lower cost and more stable supply.

22. 5. Supplier Staging • The supplier holds a month or so worth of inventory at a local warehouse, the closer the better. • In the case of offshore suppliers, using their warehouse, anywhere in North America would be fine. It would still only be a few days away by truck. • It is critical that one understands that there is a cost of holding extra inventory, whether it is on the supplier’s account or one’s own account. Someone has to invest in the extra inventory and pay the costs of warehousing and delivery.

23. 6. Late Customization • Customize one’s products as late in the production process as possible. • This will allow the supply process to be more flexible in dealing with sudden spikes or drops in demand. • The risk of not having the right inventory is much lower and restricted to the fewer inputs that create the customization at the end of the production process.

24. 7. Lean Manufacturing • A flexible supply chain works best when one’s own production process uses the principles of lean manufacturing, which would build flexibility into the system. • In addition, lean manufacturing lowers the biggest waste of all, the waste of unnecessary inventory, including production input inventory (raw materials), WIP inventory, and final goods inventory.

25. 8. Take Control of Logistics • Taking control of logistics, whether domestic or global means all quotes from off-shore suppliers should be FOB their port, or ex works for domestic suppliers. • The most obvious benefit is by combining all one’s shipping volume, whether inbound or outbound, one can negotiate with a 3PL for a lower freight rate all across the board. • Besides shipping costs, the supplier most likely is adding “shipping and handling” charges, making shipping a profit center for them.

26. 8. Take Control of Logistics • Logistics is a far too critical link in the supply chain to not have full control. With CIF one’s port (or in the case of domestic suppliers, pre-pay and add, etc.) pricing, this link is controlled by the supplier. • It is clear that with CIF pricing it is in the supplier’s interest to use the cheapest and slowest shipping options possible. • Another great benefit is one has far more visibility to where shipments are when one controls the logistics function.

27. 9. Streamlining the Import Process • An out of control import process can easily make a 4 week process take twice as long. • Getting CTPAT certified can lessen the chances of Customs inspecting your shipment. • Using a great freight forwarder can decrease the delays in deconsolidating LCL loads, and organizing quick transport from the port to where it is required. • Having one’s own Customs broker on staff can prevent delays in submitting the necessary documents and have greater visibility to the Customs clearance process.

28. 10. Understanding the Supply World • Understand what one is purchasing. Even if one is not an engineer, one should at a minimum understand the material it is made of, how it is produced, and the cost drivers that drive the purchased price. • One should know as much as possible the potential supply base for the required items, including one’s suppliers’ competitors. Sourcing should be a never-ending process. • One should understand the nature of the raw material markets. What are the world market prices and trends for the key raw materials?

29. 10. Understanding the Supply World • Understanding one’s suppliers is crucial. One should understand the upper management and the company culture. Understand their strengths and weaknesses, their financial strength, the nature of their equipment, and their management/quality systems. • This requires many on-site visits by different departments of one’s company, first with a factory audit and then to understand the decision makers and how they think. • The most important thing to understand is if the supplier is truly interested in creating a partnership. Suppliers can have the best plant and technology, but with a bad attitude it means very little.

30. 11. Managing Risk • One should understand the entire supply chain, link by link within the value stream map. This is vital to manage risk along the supply chain. • We need a robust, rather than a lean, supply chain. One should understand all the risks possible and separate them into varying levels of possibility and levels of seriousness.

31. 11. Managing Risk • Do not purchase more than 60% from any one supplier or from any one country and region. • The remaining 40% would be split between two other suppliers that are in completely different parts of the world. • If possible, have one of those back up suppliers in one’s own country and the other half a world away. • For example, one could have 60% coming from a supplier in China, 25% coming from India (or Mexico, Brazil or Poland, etc.), and 15% coming from a US supplier (who is not sourcing it from China or India themselves).

32. 11. Managing Risk • These other suppliers should not only have just made tooling, acceptable samples, etc., but are actual suppliers. • In that way, if the main supplier goes out of action, the other two can increase their existing supply volume to make up as much of the suddenly missing volume as fast as possible.

33. 11. Managing Risk • There will be objections that this will increase the cost of one’s inputs and going against the trend of having as few suppliers as possible. • Consider it to be like paying for an insurance policy. The cost of insurance raises the cost of one’s car or house, too, but most people would not do without. • In a similar vein, one should set up and contract with one’s 3PL for space on several shipping routes. This would help in case of ports being out of action.

34. 12. Partnering with Suppliers • Partnering with one’s suppliers is critical to create a flexible supply chain. • Many companies talk about it, but not many actually take it seriously. • Partnership requires two sides to place equally great importance on the relationship. • Supply and demand are equally important. They are two sides of the same coin.

35. 12. Partnering with Suppliers • Treating one’s suppliers as partners will not only make one’s life easier, but will save a lot of time and money. • Partnering means that one side will solve problems for the other, without the other even knowing there was a problem. • It means mutual planning and integrating each other into the supply chain and being flexible in making doing business easier for both.

36. 12. Partnering with Suppliers • The alternative is a transactional relationship with the attitude that any particular order may well be the last. • Everything starts with attitude and attitude is created by the upper management, the decision makers. A buyer or salesman may have the right attitude, but if the decision makers do not back the attitude up with actions, it will fail. • The decision makers of both sides need to get to know each other and understand each other’s business with frequent face to face meetings.

37. 12. Partnering with Suppliers • Trust means that each side knows that the other side wants them to succeed. • The foundation of a successful partnership is to understand and support the idea that both sides must make money. • There is a great amount of give and take. If one side starts to think that they are always on the short end of the stick, the relationship will fail.

38. 12. Partnering with Suppliers, Examples • Value stream mapping the entire process from raw material through the supplier’s plant to delivery, requires a partnering attitude. • The supplier and the subcontractors must be open enough to allow one to dig down into the details of how orders are processed and all the other steps a value stream map will unveil. • If approached as a means of improving the supplier’s own supply chain and production process, most will be open to it. If not, find another supplier.

39. 12. Partnering with Suppliers, Examples • Blanket orders and time fences help the supplier better plan their own production and scheduling. • If one understands the issues the supplier-partner faces, the supplier-partner will try to understand the issues one may face in dealing with the end customer. • One can always ask help from a partner in emergencies, but business should be generally conducted in a calm and disciplined way. • Emergencies should be rare.

40. 12. Partnering with Suppliers, Contracts • The idea of partnering does not mean that contracts are not necessary or that not everything should be written down. • Lawyers are sometimes necessary in long-term supplier contract negotiation, but they often will derail the best attempts of creating the partnership, because they simply are not relationship type people.

41. 12. Partnering with Suppliers, Sourcing • If possible, try not to find suppliers that could possibly be competitors, too. • In some cases, this may be difficult, but generally try to find contract manufacturers who have the equipment and expertise to make the production inputs one requires, but do not make any final products themselves.

42. 12. Partnering with Suppliers, Sourcing • Try to find suppliers that are of comparable size to one’s own company. This greatly improves the chances of creating a partnership between equals. • If one’s order volume is very small in the eyes of the supplier, one will never get the supplier’s attention let alone the partnership attitude from them. • If one’s orders are very large and represent a high percent of the supplier’s production capacity, they may not have the ability to handle larger than expected spikes in demand. Nor may they have the capability to survive sudden drops in demand, too. Generally, I would consider order volume in the range of around 25% of the supplier’s total capacity to be ideal.

43. A Flexible Supply Chain for All • By mapping out every link in the supply chain, including the movement of things, money, and information, and by gathering intelligence and knowledge of all the aspects influencing this movement, one takes the first step on this path. • Then, taking control of the logistics and planning for risk across the supply chain allows one to start constructing the pipeline. • By partnering with the right suppliers the flexible supply chain can be built. • Improving one’s own operations with lean manufacturing, streamlined import process, late customization, etc. will make a world class flexible supply chain a reality.

44. A Flexible Supply Chain for All • A flexible supply chain will allow the supply operations professionals a fighting chance to match the ever changing forecast and poor demand planning. • But combined with an excellent Sales & Operations Planning process, the company would achieve world class status. • When supply can change as quickly as demand, then the sky is the limit.

45. Questions? APICS - Orange County Thomas Murray CPIM, CPM, PMP, CIPC info@nimbus-sourcing.com