2004 Northeast Supply Chain Conference
Lean Supply Chain Design
by Michael J. Cote, C.P.M.
© SUPPLY MANAGEMENT SOLUTIONS
(978) 549-7884
1
Mcote@imaginesms.com
What will we learn?
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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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Supply Chain Management
What is the difference
between managing supply…
and managing a supply chain?
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Explore Supply Chain
End-user Sourcing RFX
Request for Quote
Request for Proposal
Request for Information
Request for Deceit
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Which would you select?
Our End-User RFQ
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
The game begins …
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.
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We Request a Cost Breakdown
Cost Driver Analysis
Laptop A
Laptop B
$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)
$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)
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Which would you select?
Laptop A = $1203
Laptop B = $1257
Sub-tier supply chain material value
Laptop B has $26 more in material value
Could 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 profit
Is 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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What have we learned?
End-user Sourcing RFX
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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We want value not fat!
How do supply chains
create value?
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Value Chain Analysis
What is a value chain?
Linked set of custom-value creating activities
Vertical in nature (supply chain)
“Value” is anything the customer is willing to pay for…
Value Chain Analysis
Margins = perceived value (what are customers willing to pay for
the “value-add?”)
Competition (RFQ) establishes worth or value
Center of gravity – primary value adding activity
Margins = Cost of value add (labor & equipment) + Profit + Waste
Value Chain
Lumber
Pulp
Paper
Retail
Cost - $.05/lb
Sell - $.15/lb
Margin - $.10
Cost - $.15/lb
Sell - $.30/lb
Margin - $.15
Cost - $.30/lb
Sell - $.35/lb
Margin - $.05
Cost - $.35/lb
Sell - $.45/lb
Margin - $.10
*Note: The margins and costs are for demonstration purposes only and do not reflect true industry costs.
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Supply Chain Management
Who designs the value-creating
supply chain?
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Supply Chain Design
The Typical Supply Chain…
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Supply Chain Design
Sources of Supply
Sourcing Strategy
Lead-time
Σ of supply + …
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= Cost
15
Supply Chain Design
Logistics Network
Logistics Strategy
Lead-time
Σ of supply + logistics + …
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= Cost
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Supply Chain Design
Information Flow
Information Strategy
Lead-time
Σ of supply + logistics + communications + …
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= Cost
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Supply Chain Design
Product Design
Production Strategy
Lead-time
Σ of supply + logistics + communications + production …
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= Cost
Supply Chain Design
Customer Distribution
Distribution Strategy
Lead-time
Σ of supply + logistics + communications + production + distribution…
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= Cost
Supply Chain Design
Who designs the supply chain?
Center of Gravity
Design and Mfg engineers.
Supply Managers.
Logistics Managers.
OEM Supply Chain Team
Who is responsible for this mess?
Lead-time
Σ of supply + logistics + communications + production + distribution + waste = Total Cost
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Lean Supply Chain Design
How can we use Value Stream
Mapping to eliminate or reduce waste?
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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Value Stream Mapping
Costs of
Warehouse
Manufacturing
Non-Manufacturing
Material
Received
Communicate
Need – Get Price
Communicate
Need – Get Price
Inspect
Issue Order
Pay for
Parts
Put into
Warehouse
Supplier Ship
& Deliver
Material
Received
Waste
Eliminated
Inventory
Cycle Counts
Issue Invoice
Kit
Material
End-User
Approval
Deliver
Kit to Floor
Track & Chase
Shortages to
Kit
Deliver Shorts
To Floor
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Deliver
Material Floor
Confirm
Price
File paper
work
Savings
15 People
40K sq ft
70% Less
Inventory
Pay for
Parts
22
Supplier Ship
& Deliver
Purchase Card
Lean Supply Chain Design
How to improve responsiveness and
reduce inventory?
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Pushing Inventory into the Supply Chain
Traditional Manufacturing Material Flow
Total Value of Inventory in the Supply Chain = $50 Million
Lead-time = 4-6 weeks
Customer
Orders/Forecast
Forecast +buffer
Forecast + buffer + buffer + buffer
Forecast +buffer + buffer
MRP/ERP
Your Supply
Partner
Sub-tier
Supplier(s)
Part(s) Build
up until needed
Kits waiting for
shortages
Parts
Kitted for
Manufacturing
Build to Forecast
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Manufacturing
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Shipment
Inventory Pull through the Supply Chain
Supplier Stocking Programs and Demand Pull
Total Value of Inventory in the Supply Chain = $15 Million
Lead-time = 1 week
Customer
Orders/Forecast
Match Cycle Time
Requirements
Forecast
MRP/ERP
Your Supply
Partner
Part(s) Pulled
For use
Sub-tier
Supplier(s)
Replenish
Information on
Kanban Pull
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Kanban
Min/Max
VMI
Manufacturing
Supplier
Kanban
Shipment
Extended Material Pipeline with Triggers
25
High Impact Parts Delivered More Frequently
Mathematics of Inventory Management
Drivers = 20% of Inventory Parts = 80% of Inventory $
Before
Delivery Frequency
In Weeks
Baseline
13
New Frequency
10
8
6
4
3
2
1
After
Inventory
Total
$
100
$
82
$
69
$
57
$
45
$
38
$
32
$
26
on Hand in Millions
Drivers
Other
Turns
$
80 $
20
4
$
62 $
20
5
$
49 $
20
6
$
37 $
20
7
$
25 $
20
9
$
18 $
20
10
$
12 $
20
12
$
6 $
20
15
Increase Frequency
to once every two
weeks
$-Millions
Sales
$
400
$
400
$
400
$
400
$
400
$
400
$
400
$
400
Lean Lesson – Deliver parts more frequently
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Supply Chain Management
How do we optimize the supply
chain?
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Supply Chain Management
Sourcing Strategies
May the Source be with you…
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Power Converter, Inc.
Supply Chain Design Issues
C
E
Wire
$1.00
A
Copper
Power Converter, Inc.
(Final Assembly
And test)
$3.10
Average Sell
Price 10.00 USD
G
B
Iron
$.10
Transformers
Average PCI Costs
$4.05 Materials
$1.00 Labor
$1.00 Overhead
$6.05
Magnetic Core
Castings
$.05
$1.00
$1.00
D
F
Wire
$1.00
Transformers
$3.00
Other
Components
From
Distributors
Current supply chain Issues:
Magnet Cores have a 5 month lead-time
Transformers are dual sourced because of past late deliveries from supplier F
Sources
Links
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Customer
40% USA
35% Europe
15% Asia
Power Converter, Inc.
Eliminate waste in the structure of the supply chain
G
Magnetic Core
Castings
Iron
$.05
A
$1.00
D
Copper
F
Wire
$.10
Transformers
$1.00
PCI Costs
$2.80 Materials
$1.00 Labor
$ .90 Overhead
$4.70
Power Converter, Inc
US.
(Final Assembly
And test)
Power Converter, Inc.
Europe
(Final Assembly
And test)
2. Sole source transformers to F – Reduces cost of
transformers & wire (economies of scale)
Customer
40% USA
35% Europe
15% Asia
3. Additional distribution/FAT center in Europe with
common sources (lower overhead)
Other
Components
From
Distributors
$1.00
Links
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Average Sell
Price 10.00 USD
$2.80
Supply chain improvements:
1. Negotiate an agreement with G to stock cores
Sources
22% Total Cost
Reduction
30
Lean Supply Chain Design
What did we learn?
Some Tips for the
journey…
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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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Tips for the Manufacturing Buyer
Lean Supply Chain Design
Lean it out!
Select or develop lean sources
Eliminate 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 chain
Outsource non-core competencies – Not core business
Compress – balance freight, cost of value, quality
Collaborate to reduce total costs
Focus on the customer
Delivery Frequency!
Deliver only cost drivers more frequently
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Tips for the Non-Manufacturing Buyer
Select Lean Designed Supply Chains
Ask for cost break down in your RFX
Use a two-step RFX process
Step 1 – Ask “what value is available?” first
Step 2 – Request quote for the value wanted
Provide supply chain accurate information on your needs
All supply chains have a target market– make sure you are in it!
Take the supply chain approach
Reduce 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
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Lean Supply Chain Design
Questions
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2004 Northeast Supply Chain Conference
Lean Supply Chain Design
by Michael J. Cote, C.P.M.
© SUPPLY MANAGEMENT SOLUTIONS
(978) 549-7884
36
Mcote@imaginesms.com