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 overly simplistic view of managing inventory
“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 variability
2.................................. Improve forecast accuracy
3.................................. Re-examine service levels
4. ................................ Address capacity issues
5. ................................ Reduce order sizes
6. ................................ Reduce manufacturing lot sizes
7. ................................ Reduce supplier lead times
8. ................................ Reduce manufacturing lead times
9. ................................ Improve supply reliability
10. ............................. Reconfigure the supply chain
11. ............................. Reduce the number of items
12. ............................. Eliminate questionable practices”
Industry Week: September 2008 Issue 9, p7
Inventories
3 TYPES
RAW MATERIALS
i
W.I.P.
i
FINISHED GOODS
INPUTS
i
PROCESSES
i
OUTPUTS
Traditionally, manufacturing companies have more
capital tied up in inventory than in fixed assets
Stock
Stock
Stock
Stock
Stock
$$$$$$$$
$$
Stock
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).
Inventory Management at Dell
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.
Fortune Oct. 2004, Vol. 14 Issue 8, p84
The Complete Materials Flow Process
Process
T
H
E
S
U
P
P
L
Y
C
H
A
I
N
Stages of
Inventory
Purchasing
Receiving
Storage
Raw materials/
components
Inventory
Retreival
Conversion
Process
Packaging
Transporting
Finished
Goods
Warehousing
Retailing
Work-inProcess
Inventory
Finished
Goods
Inventory
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.
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
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
Lean
Japanese
Resolved
Nature of
Relationship
Stress
Traditional
(After Lamming
1987; 1993)
Time
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
The EOQ Economic Order Quantity
Formula
D= Annual Demand rate
Co= Variable Ordering Cost
Ch= Variable Holding Cost
EOQ=
2 D Co
Ch
D = 1,000 units / year
Co = $50 per order; Ch= $5 per unit per year
So the EOQ number becomes: 2 (1,000) (50)
5
=
20,000
= 141.42
MRP, MRPII, ERP
MRP: Materials Requirement Planning
MRPII: Manufacturing Resource Planning
ERP: Enterprise Resource Planning
Development of MRP/MRPII/ERP
complexity
The
Critical
Gap
success
1960s
Time
The Basic MRP Questions:
1.
2.
3.
How many products are to be made?
When do these products need to be made?
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?
Levels of Products - an Example
Tricycle
Handle
Axle
supports
Rear Axle
Wheel
Front
Assembly
Front axle
0
2 wheels
Steering
column
Seat
Assembly
Front axle
1
Front axle
2
MRP and MRPII
MRPII
Routing
Capacity
Requirements
MRP
M anhours
Tooling
MRP’s Sequence
Business Planning
P
L
A
N
N
I
N
G
Sales Planning
Production Planning
Check Rough- Cut Capacity
Planning - OK?
NOT OK
Master Production Schedule
(MPS)
Materials Requirement Planning
(MRP)
E
X
E
C
U
T
I
O
N
Capacity Requirement Planning
IF NO
Check Planning - OK?
YES
Purchasing
Shop-Floor
control
Purchasing
F
E
E
D
B
A
C
K
Linkages within the MRP system
Customer
orders
Bills of
material
Product
structure
Purchase
orders
Demand
management
system
Master
production
schedule
MRP
system
Material plans
Forecast
demand
Inventory
records
Lead
times
Work orders
Inputs
Outputs
Potential Benefits of MRP
*
*
*
*
*
*
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
*
Planning and implementing MRP can take years - although “offthe 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.
MRP Ratings – the ABCD analysis
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 (cont.)
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 achieves
A) 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
The Basic ERP System
Customer
Retailer
Human
resources
ERP
Purchasing
Physical
distribution
Production
process
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
Key JIT Terms
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
The JIT Goal : Add Value Not Cost
Do 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
Quality
Productivity
Service
Capacity
Standardization
Transport Systems
Flexibility
*
*
*
*
*
*
*
REDUCED
Inventory
Lot Sizes
Lead-times
Unit Costs
Design Time
Space
Energy
An Example of JIT :
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.
“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 promises
Competence trust - that either side is capable to provide
what has been promised
Goodwill 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
Toyota’s Obsession with Waste
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 cont..
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 90model 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
Materials Usage Under MRP/JIT
level of
inventory
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
Levels of stock measured in hours,
rather than days/weeks
Inventory
holding level
Time
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
Core Ideas in JIT
• 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
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 asrequired 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?