© S UPPLY M ANAGEMENT S OLUTIONS 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 1

Lean Supply Chain Design

by Michael J. Cote, C.P.M.

2004 Northeast Supply Chain Conference

(978) 549-7884 [email protected]


What will we learn?


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!


What is the differencebetween managing supply…

and managing a supply chain?

Supply Chain Management


End-user Sourcing RFX

Explore Supply Chain

Request for Quote

Request for Proposal

Request for Information

Request for Deceit


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…


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 …


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


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?


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!


How do supply chains create value?

We want value not fat!


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


Who designs the value-creating supply chain?



Supply Chain Design

The Typical Supply Chain…


Supply Chain Design

Sources of Supply Sourcing Strategy

Lead-time

= CostΣ of supply + …


Supply Chain Design

Logistics Network Logistics Strategy

Σ of supply + logistics + … = Cost

Lead-time


Supply Chain Design

Information Flow Information Strategy

Σ of supply + logistics + communications + … = Cost

Lead-time


Supply Chain Design

Product Design Production Strategy

Σ of supply + logistics + communications + production … = Cost

Lead-time


Supply Chain Design

Customer Distribution Distribution Strategy

Σ of supply + logistics + communications + production + distribution… = Cost

Lead-time


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


How can we use Value Stream Mapping to eliminate or reduce 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…


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


How to improve responsiveness and reduce inventory?



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


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


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


How do we optimize the supply chain?



Sourcing Strategies


May the Source be with you…


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


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


What did we learn?

Some Tips for the journey…



What did we learn?


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


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


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


Questions




by Michael J. Cote, C.P.M.

2004 Northeast Supply Chain Conference

(978) 549-7884 [email protected]

© S UPPLY M ANAGEMENT S OLUTIONS 1 Lean Supply Chain Design by Michael J. Cote, C.P.M. 2004 Northeast Supply Chain Conference ( 978) 549-7884 [email protected].

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