Oct 25, 2012
By Gerry Sylvia, Senior Supply Chain Operations Manager and featured expert on Episode 2, Season 2. Find out more about Gerry Sylvia
What is a 'supply chain' and why is it so critical to the success of a business?
As we have seen in previous episodes of The Big Decision, the 'supply chain' involves the supply of materials and services, the transformation of that material into a product and the delivery of that product to the customer. In some cases, it can also include the proper environmental disposal of a product at the end of its life cycle.'
In essence, buy it, build it, ship it. Sounds simple enough so why is this so hard? If we look at a symphony orchestra, we can draw some analogies that are very similar. For example, all of the musicians need to be playing the same piece they all need to play the right parts, at the right time. Can you imagine what it would sound like if the string section was playing at a slower tempo than the rest of the orchestra? The strings would come in late, miss their cues and the piece would fall apart. The orchestra would be misaligned, producing a disconnected set of sounds rather than a well synchronized melody.
The same concept applies to the supply chain. Imagine that a particular supplier is late delivering materials. This could cause production to to stop and wait for that material to arrive. Having the production team sitting idle is a cost to the business in terms of salaries, idle equipment and schedule slips. Since they cannot build, they cannot ship and invoice the customer to cover these costs. We can take that further. If the suppliers need to be paid before you can ship and invoice, that adds additional cost. We also need to consider that transportation cost may increase as premium overnight shipping methods may be used to make up some of the lost time. A business can also end up with a misalignment of inventory with too much of some parts, not enough of others. There are also additional handling costs to storing material in the warehouse until it is ready to be used. All of these costs add up and can affect the profit margin and potentially end up shipping the product at a loss. There are hard costs as described above, and there are also costs such as customer satisfaction and reputation that are harder to measure but are critical as these may have long term impacts to the business.
So how do you keep all of the all of the individual components of the supply chain aligned to avoid incurring these additional costs? Just as the conductor of the orchestra has the master score that keeps all of the musicians aligned, the master production planner also has a build plan that keeps the production process in sync. There is generally a sequence of steps involved in building a product with materials required at each of these steps. Consider a large product with a long build cycle time, we may not need to have 100% of the materials available before production can start. In other words, let's say the product takes 5 days to build, and you don't need the 'day 4' materials on 'day 1'. This allows the business to schedule the delivery of some materials later in the process, reducing the overhead cost of that material as it gets consumed as soon as it arrives; less handling less cost. This method is known as "just in time" or JIT. It can be very effective, especially with higher cost materials as it reduces handling and extends the supplier payment cycle. The less expensive components can be stocked on the production line and consumed as required. Never a good thing to have a $5,000 product being held up by a missing $0.50 component!
This type of method provides visual feed back, in other words you can see how many parts are available. They are not hiding in the warehouse collecting dust or lost. This method is called 'point of use replenishment' and can be very cost effective. The theory behind it is based on 'days of supply'. In simple terms when the bin is full, it may represent say for example 30 days of supply (quantity of parts that will get used up in 30 days of production). When the bin is half full, or at 15 days, this can be used as a visual signal or trigger that an action is required. The action may equate to the time it takes to get more parts from the supplier. This is called 'lead time'. If the lead time for the part is 15 days, an order signal is sent to the supplier when the bin is half full which should arrive in time to fill the bin up to 30 days again just before it runs out. This way production only has parts that it needs, when they are needed, avoiding additional inventory, storage and handling costs. The other advantage of this method is that it should require less attention from the buyers as it is more self managed. They don't have to place purchase orders or manage the parts, letting them concentrate on managing the more expensive parts.
In the above examples, I have outlined two commonly used methodologies. There are many more. The trick is to use combinations of methods where it makes the most sense. I keep emphasizing that there is no real magic behind these methods, but when you have 30 or 40 or more suppliers and hundreds of different parts and multiple products with different build schedules, it can get pretty intense.THIS is why it gets so hard to do it right. Doing 'one-of' is easy, kind of like grocery shopping. Keeping a production environment in sync with all of the moving parts is a very different story. This is where good supply chain people become such an asset to a company. It's all good when everything runs perfectly but when a snow storm in Toledo delays a critical delivery, then what? Understanding the supply chain, ensuring lead times are not too tight and understanding the product is critical in assessing the best course of action when something does not go according to plan. Good supply chain people never let the line go down. Bottom line? A lot of planning, hard work and discipline are what make it happen. Anticipating what may go wrong and having back up plans is critical. There are many balls in the air. Orchestrating all of this so it sounds like a great melody, that is where the magic is that is the value of good supply chain people.