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Slides for Chapter 9

Slides for Chapter 9. The Cost of Logistics can be enormous.

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Slides for Chapter 9

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  1. Slides for Chapter 9

  2. 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

  3. A Telling Example of finished goods inventory in the Car Industry Courtesy of Professors Howard, M and Graves, A:2004

  4. 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

  5. Inventories 3 TYPES RAW MATERIALSINPUTS ii W.I.P. PROCESSES ii FINISHED GOODSOUTPUTS

  6. Traditionally, manufacturing companies have more capital tied up in inventory than in fixed assets

  7. 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).

  8. 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

  9. 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

  10. The Supply Chain Metaphor may be Inappropriate

  11. 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.

  12. 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.

  13. 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

  14. ABC Analysis

  15. 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

  16. 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

  17. 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

  18. MRP, MRPII, ERP MRP: Materials Requirement Planning MRPII: Manufacturing Resource Planning ERP: Enterprise Resource Planning

  19. Development of MRP/MRPII/ERP

  20. The Basic MRP Questions: 1. How many products are to be made? 2. When do these products need to be made? 3. 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?

  21. Levels of Products - an Example Tricycle 0 Handle Rear Axle Front Assembly 2 wheels Seat Assembly 1 Axle supports Wheel Front axle Steering column Front axle Front axle 2

  22. MRP’s Sequence Business Planning P L A N N I N G Sales Planning Production Planning F E E D B A C K 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 Shop-Floor control Purchasing Purchasing

  23. Linkages within the MRP system

  24. 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

  25. * Planning and implementing MRP can take years - although “off- the 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.

  26. 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).

  27. 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 %

  28. 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.

  29. 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

  30. 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.

  31. 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

  32. The Basic ERP System

  33. Advantages of ERP Systems Provides integration of the supply chain, production, and administration Creates commonality of databases Can incorporate improved best processes Increases communication and collaboration between business units and sites Has an off-the-shelf software database May provide a strategic advantage

  34. Disadvantages of ERP Systems Is very expensive to purchase and even more so to customize Implementation may require major changes in the company and its processes Is so complex that many companies cannot adjust to it Involves an ongoing, possibly never completed, process for implementation Expertise is limited with ongoing staffing problems

  35. 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)

  36. 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

  37. 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

  38. The original seven muda 'deadly wastes' are: • Overproduction (production ahead of demand) • Transportation (moving products that is not actually required to perform the processing) • Waiting (waiting for the next production step) • Inventory (all components, work-in-progress and finished product not being processed) • Motion (people or equipment moving or walking more than is required to perform the processing) • Over Processing (due to poor tool or product design creating activity) • Defects (the effort involved in inspecting for and fixing defects)

  39. Inventory Hides Problems!

  40. Major Benefits of JIT lMPROVEDREDUCED * Quality * Inventory * Productivity * Lot Sizes * Service * Lead-times * Capacity * Unit Costs * Standardization * Design Time * Transport Systems * Space * Flexibility * Energy

  41. 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.

  42. 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

  43. “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

  44. 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

  45. 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

  46. 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 90-model lineup uses just three basic styles. Toyota gearheads call this process kawaitazokinwoshiboru, or "wringing drops from a dry towel." Business Week “A 'CHINA PRICE' FOR TOYOTA” 21st Feb. 2005

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