2004 Northeast Supply Chain Conference Lean Supply Chain

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2004 Northeast Supply Chain Conference Lean Supply Chain Design by Michael J. Cote, C.

2004 Northeast Supply Chain Conference Lean Supply Chain Design by Michael J. Cote, C. P. M. © SUPPLY MANAGEMENT SOLUTIONS (978) 549 -7884 1 [email protected] com

What will we learn? © SUPPLY MANAGEMENT SOLUTIONS 2

What will we learn? © SUPPLY MANAGEMENT SOLUTIONS 2

What will we learn? How to reduce cost and lead-time in a supply chain?

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! © SUPPLY MANAGEMENT SOLUTIONS 3

Supply Chain Management What is the difference between managing supply… and managing a supply

Supply Chain Management What is the difference between managing supply… and managing a supply chain? © SUPPLY MANAGEMENT SOLUTIONS 4

Explore Supply Chain End-user Sourcing RFX Request for Quote Request for Proposal Request for

Explore Supply Chain End-user Sourcing RFX Request for Quote Request for Proposal Request for Information Request for Deceit © SUPPLY MANAGEMENT SOLUTIONS 5

Which would you select? Our End-User RFQ Laptop A = $1203 Laptop B =

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… © SUPPLY MANAGEMENT SOLUTIONS 6

We Request a Cost Breakdown The game begins … What happens when we request

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. © SUPPLY MANAGEMENT SOLUTIONS 7

We Request a Cost Breakdown Cost Driver Analysis Laptop A Laptop B $450. 00

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) © SUPPLY MANAGEMENT SOLUTIONS 8

Which would you select? Laptop A = $1203 Laptop B = $1257 Sub-tier supply

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? © SUPPLY MANAGEMENT SOLUTIONS 9

What have we learned? End-user Sourcing RFX We select products that are the result

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! © SUPPLY MANAGEMENT SOLUTIONS 10

We want value not fat! How do supply chains create value? © SUPPLY MANAGEMENT

We want value not fat! How do supply chains create value? © SUPPLY MANAGEMENT SOLUTIONS 11

Value Chain Analysis What is a value chain? Linked set of custom-value creating activities

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 e Lumber Cost - $. 05/lb Sell - $. 15/lb Margin - $. 10 u al V Pulp Cost - $. 15/lb Sell - $. 30/lb Margin - $. 15 Paper Retail 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. © SUPPLY MANAGEMENT SOLUTIONS 12

Supply Chain Management Who designs the value-creating supply chain? © SUPPLY MANAGEMENT SOLUTIONS 13

Supply Chain Management Who designs the value-creating supply chain? © SUPPLY MANAGEMENT SOLUTIONS 13

Supply Chain Design The Typical Supply Chain… © SUPPLY MANAGEMENT SOLUTIONS 14

Supply Chain Design The Typical Supply Chain… © SUPPLY MANAGEMENT SOLUTIONS 14

Supply Chain Design Sources of Supply Sourcing Strategy Lead-time Σ of supply + …

Supply Chain Design Sources of Supply Sourcing Strategy Lead-time Σ of supply + … © SUPPLY MANAGEMENT SOLUTIONS = Cost 15

Supply Chain Design Logistics Network Logistics Strategy Lead-time Σ of supply + logistics +

Supply Chain Design Logistics Network Logistics Strategy Lead-time Σ of supply + logistics + … © SUPPLY MANAGEMENT SOLUTIONS = Cost 16

Supply Chain Design Information Flow Information Strategy Lead-time Σ of supply + logistics +

Supply Chain Design Information Flow Information Strategy Lead-time Σ of supply + logistics + communications + … © SUPPLY MANAGEMENT SOLUTIONS = Cost 17

Supply Chain Design Production Strategy Lead-time Σ of supply + logistics + communications +

Supply Chain Design Production Strategy Lead-time Σ of supply + logistics + communications + production … © SUPPLY MANAGEMENT SOLUTIONS 18 = Cost

Supply Chain Design Customer Distribution Strategy Lead-time Σ of supply + logistics + communications

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

Supply Chain Design Who designs the supply chain? Center of Gravity Design and Mfg

Supply Chain Design Who designs the supply chain? Center of Gravity Design and Mfg engineers. Supply Managers. Logistics Managers. Who is responsible for this mess? OEM Supply Chain Team Lead-time Σ of supply + logistics + communications + production + distribution + waste = Total Cost © SUPPLY MANAGEMENT SOLUTIONS 20

Lean Supply Chain Design How can we use Value Stream Mapping to eliminate or

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… © SUPPLY MANAGEMENT SOLUTIONS 21

Value Stream Mapping Costs of Warehouse Manufacturing Non-Manufacturing Material Received Communicate Need – Get

Value Stream Mapping Costs of Warehouse Manufacturing Non-Manufacturing Material Received 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 © SUPPLY MANAGEMENT SOLUTIONS Deliver Material Floor Confirm Price File paper work Savings 15 People 40 K 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? © SUPPLY MANAGEMENT

Lean Supply Chain Design How to improve responsiveness and reduce inventory? © SUPPLY MANAGEMENT SOLUTIONS 23

Pushing Inventory into the Supply Chain Traditional Manufacturing Material Flow Total Value of Inventory

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 Forecast + buffer Part(s) Build up until needed MRP/ERP Manufacturing Kits waiting for shortages Parts Kitted for Manufacturing Build to Forecast © SUPPLY MANAGEMENT SOLUTIONS Forecast +buffer + buffer Your Supply Partner Sub-tier Supplier(s) Customer Orders/Forecast 24 Shipment

Inventory Pull through the Supply Chain Supplier Stocking Programs and Demand Pull Total Value

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 © SUPPLY MANAGEMENT SOLUTIONS 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

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 © SUPPLY MANAGEMENT SOLUTIONS 26

Supply Chain Management How do we optimize the supply chain? © SUPPLY MANAGEMENT SOLUTIONS

Supply Chain Management How do we optimize the supply chain? © SUPPLY MANAGEMENT SOLUTIONS 27

Supply Chain Management Sourcing Strategies May the Source be with you… © SUPPLY MANAGEMENT

Supply Chain Management Sourcing Strategies May the Source be with you… © SUPPLY MANAGEMENT SOLUTIONS 28

Power Converter, Inc. Supply Chain Design Issues C Wire $1. 00 A Copper B

Power Converter, Inc. Supply Chain Design Issues C Wire $1. 00 A Copper B $. 10 E Transformers Average PCI Costs $4. 05 Materials $1. 00 Labor $1. 00 Overhead $6. 05 Power Converter, Inc. (Final Assembly And test) $3. 10 Average Sell Price 10. 00 USD G Iron Magnetic Core Castings $. 05 $1. 00 D Wire $1. 00 F 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 © SUPPLY MANAGEMENT SOLUTIONS 29 Customer 40% USA 35% Europe 15% Asia

Power Converter, Inc. Eliminate waste in the structure of the supply chain G Magnetic

Power Converter, Inc. Eliminate waste in the structure of the supply chain G Magnetic Core Castings Iron $. 05 A Copper $1. 00 D $. 10 Wire F 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 © SUPPLY MANAGEMENT SOLUTIONS 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… ©

Lean Supply Chain Design What did we learn? Some Tips for the journey… © SUPPLY MANAGEMENT SOLUTIONS 31

What did we learn? Price = Value + Waste End-user buyers select and fund

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 © SUPPLY MANAGEMENT SOLUTIONS 32

Tips for the Manufacturing Buyer Lean Supply Chain Design Lean it out! Select or

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 © SUPPLY MANAGEMENT SOLUTIONS 33

Tips for the Non-Manufacturing Buyer Select Lean Designed Supply Chains Ask for cost break

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 © SUPPLY MANAGEMENT SOLUTIONS 34

Lean Supply Chain Design Questions © SUPPLY MANAGEMENT SOLUTIONS 35

Lean Supply Chain Design Questions © SUPPLY MANAGEMENT SOLUTIONS 35

2004 Northeast Supply Chain Conference Lean Supply Chain Design by Michael J. Cote, C.

2004 Northeast Supply Chain Conference Lean Supply Chain Design by Michael J. Cote, C. P. M. © SUPPLY MANAGEMENT SOLUTIONS (978) 549 -7884 36 [email protected] com