Lean Supply Chain Design by Michael J. Cote, C.P.M.

1. 2004 Northeast Supply Chain Conference Lean Supply Chain Designby Michael J. Cote, C.P.M. (978) 549-7884 Mcote@imaginesms.com

2. What will we learn?

3. 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!

4. Supply Chain Management What is the differencebetween managing supply…and managing a supply chain?

5. Explore Supply Chain End-user Sourcing RFX • Request for Quote • Request for Proposal • Request for Information • Request for Deceit

6. Which would you select? Our End-User RFQ • In our RFQ we told suppliers what we wanted… • We received a price. • We should be asking… Laptop A = $1203 Laptop B = $1257

7. 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? • Give it willingly because we are the customer! • Are somewhat reluctant because they know we are lying when we promise we won’t give the information to their competitors. • Provide slightly (in)accurate information to win the business. • Tell us we’ll freeze in hell before they give us that type of information. 

8. 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 Breakdown Cost Driver Analysis

9. 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? Which would you select? Laptop A = $1203 Laptop B = $1257

10. 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!

11. We want value not fat! How do supply chains create value?

12. Value 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 Cost - $.05/lb Sell - $.15/lb Margin - $.10 Pulp Cost - $.15/lb Sell - $.30/lb Margin - $.15 Paper Cost - $.30/lb Sell - $.35/lb Margin - $.05 Retail 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.

13. Supply Chain Management Who designs the value-creating supply chain?

14. Supply Chain Design The Typical Supply Chain…

15. Sources of Supply Sourcing Strategy Supply Chain Design Lead-time Σ of supply + … = Cost

16. Logistics Network Logistics Strategy Supply Chain Design Lead-time Σ of supply + logistics + … = Cost

17. Information Flow Information Strategy Supply Chain Design Lead-time Σ of supply + logistics + communications + … = Cost

18. Product Design Production Strategy Supply Chain Design Lead-time Σ of supply + logistics + communications + production … = Cost

19. Customer Distribution Distribution Strategy Supply Chain Design Lead-time Σ of supply + logistics + communications + production + distribution… = Cost

20. Who designs the supply chain? Supply Chain Design 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

21. 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…

22. Value Stream Mapping Manufacturing Non-Manufacturing Material Received Material Received Communicate Need – Get Price Communicate Need – Get Price Inspect Issue Order Pay for Parts Put into Warehouse Supplier Ship & Deliver Costs of Warehouse Supplier Ship & Deliver Waste Eliminated Inventory Cycle Counts Issue Invoice Purchase Card Kit Material End-User Approval Deliver Kit to Floor Deliver Material Floor Confirm Price Track & Chase Shortages to Kit File paper work Savings 15 People 40K sq ft 70% Less Inventory Deliver Shorts To Floor Pay for Parts

23. Lean Supply Chain Design How to improve responsiveness and reduce inventory?

24. 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) Manufacturing Kits waiting for shortages Part(s) Build up until needed Parts Kitted for Manufacturing Build to Forecast Shipment

25. Inventory Pull through the Supply Chain Supplier Stocking Programs and Demand Pull Customer Orders/Forecast Total Value of Inventory in the Supply Chain = $15 Million Lead-time = 1 week Match Cycle Time Requirements Forecast MRP/ERP Your Supply Partner Manufacturing Kanban Min/Max VMI Part(s) Pulled For use Sub-tier Supplier(s) Supplier Kanban Replenish Information on Kanban Pull Shipment Extended Material Pipeline with Triggers

26. High Impact Parts Delivered More Frequently Mathematics of Inventory Management Drivers = 20% of Inventory Parts = 80% of Inventory $ Before After Increase Frequency to once every two weeks Lean Lesson – Deliver parts more frequently

27. Supply Chain Management How do we optimize the supply chain?

28. Supply Chain Management Sourcing Strategies May the Source be with you…

29. Customer Power Converter, Inc. Supply Chain Design Issues Average PCI Costs $4.05 Materials $1.00 Labor $1.00 Overhead $6.05 Wire C E Transformers Power Converter, Inc. (Final Assembly And test) $1.00 $3.10 Average Sell Price 10.00 USD Copper A G Magnetic Core Castings B Iron $.10 $.05 $1.00 $1.00 40% USA 35% Europe 15% Asia D Wire F Transformers Other Components From Distributors $1.00 $3.00 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

30. Customer Power Converter, Inc. Eliminate waste in the structure of the supply chain PCI Costs $2.80 Materials $1.00 Labor $ .90 Overhead $4.70 22% Total Cost Reduction Magnetic Core Castings G Iron Power Converter, Inc US. (Final Assembly And test) $.05 $1.00 Average Sell Price 10.00 USD Copper D Wire Transformers F A $.10 $2.80 $1.00 Power Converter, Inc. Europe (Final Assembly And test) Supply chain improvements: 1. Negotiate an agreement with G to stock cores 2. Sole source transformers to F – Reduces cost of transformers & wire (economies of scale) 40% USA 35% Europe 15% Asia 3. Additional distribution/FAT center in Europe with common sources (lower overhead) Other Components From Distributors Sources Links $1.00

31. Lean Supply Chain Design What did we learn?Some Tips for the journey…

32. 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

33. 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

34. 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

35. Lean Supply Chain Design Questions

36. 2004 Northeast Supply Chain Conference Lean Supply Chain Designby Michael J. Cote, C.P.M. (978) 549-7884 Mcote@imaginesms.com