Maintaining That Free Flow
Reducing production lead time and improving on timely completion of orders will enable a supply chain to move smoothly, notes Prabhakar Mahadevan.
Recently we met with an auto components manufacturing company and we were invited to analyse their business reality in order to improve their financial performance. While analysing their reality, we realized that the company caters to the replacement market besides supplying components to the Original Equipment Manufacturers (OEMs). As a process, while planning for the forthcoming month’s capacity the company typically considers the forecasted OEM demand (delivery schedules) that it has received from its customers, and assigns the rest of the capacity to cater to the replacement market. We also learnt that the company maintains an average delivery performance of close to 90 percent.
The company serves two different markets—as an OEM supplying parts to the auto manufacturer and also distributing spare parts to the replacement market. On further evaluation, it was clear that the company assigns higher priority to automotive customers (OEMs) relative to the replacement market when it comes to fulfilling demand, although the profit margins are apparently higher when the components are sold in the replacement market. The sales team further revealed that their customers (auto companies) were quite unhappy about the very low availability of spares in the replacement market as well as the low due date performance (DDP) of their company. The lack of spares in the replacement market encourages spurious players to fill the gap, which leads to a spiralling impact on the auto company’s reputation and service levels to customers.
The situation clearly mandated deeper introspection.
Measuring the DDP
When questioned further, the company’s team explained how they were used to measuring the due date performance (DDP). Currently, the company measures its DDP as the percentage of SKUs supplied to the OEMs as per the entire month’s requirement, for example, in a given month nine out of ten SKUs are supplied in full to the customer and therefore the DDP is 90 percent. If the relevant SKU, for example, was needed by the customer at the beginning of the month, and the company supplied the SKU by the last day of the month, from the company’s perspective, it is
considered as on-time supply (for its DDP calculation). In reality, since the OEM customers hold a few weeks of stock at their premises, they are actually providing a few weeks of advance intimation to the auto parts manufacturers to fulfil their orders.
However, in the replacement market, customers expect instant availability of relevant parts since the vehicle is under maintenance/repair and needs to be put in order soon. To summarize, the needs of the two market segments are distinctively different: The OEM customers are willing to provide advance intimation for the supply of their SKUs and need high reliability from their suppliers, whereas the replacement market customers need high availability of the parts they require. Therefore, the needs of different segments have to be dealt with differently, which mandates appropriate manufacturing and supply chain strategies which will enable the company to fulfil the needs of the respective market segments.
How To Be Successful
What is mandatory for being successful?
The automotive industry example can be generalized across several industry verticals. For example, if a customer walks into a store to buy products like soap, shampoo, bread etc., he or she expects to see the product on the shelf instantly, while a customer who wishes to buy a car, will be willing to wait for few days or weeks to receive a car of his choice (colour/model/other configurations). Based on all these examples, we can claim that customers across markets segments have an intrinsic ‘tolerance time’—a time that he or she is willing to wait to avail the relevant product or services. If the suppliers (across the value chain) don’t supply their products/services within this ‘tolerance time’ of the customer, there is a big risk that the customers will buy any available alternate product, with the suppliers losing the business opportunity, market share and profit opportunities. Therefore, it is necessary that suppliers develop their
manufacturing and supply chain strategies which enable them to deliver their products/services well within the customer’s tolerance time.
How to satisfy customer’s need within tolerance time?
In most production environments, the manufacturer typically takes about four to eight weeks to process a given order. Let us evaluate the scenario a bit deeply. In most situations, the sum total of all processing time for a given order can be technically termed the ‘Touch Time’. It is observed that the total Touch Time to manufacture a given order is always a fraction (five percent to 30 percent) of the overall lead time of the order. For example, in an airport, from the moment a passenger enters till he reaches the departure gate, it typically takes between 30 to 40 minutes (sometimes even more). However, the actual Touch Time, the time he spends to get the boarding pass and pass through security check, is normally just a few minutes. The rest of the time he/she spends waiting in the queue.
Similarly, in a majority of production environments, for any given order, although the Touch Time is a small fraction of the overall lead time, a significant amount of the time is spent waiting for the order to be processed (due to resources, waiting for decisions, matching parts, etc). Therefore, the flow of the order is impeded at several points in production due to several reasons and this increases the order lead time, which results in lower supply performance to customers. Due to low supply performance, companies tend to release customer orders much earlier than usual to the shop floor for processing (since supply reliability is below satisfying levels and customers demand better performance). This eventually results in long queues of orders in-front at work centers, thereby causing accumulation of Work in Process inventory. This in turn impedes flow to the shop floor, which increases the lead time (much beyond the needed Touch Time) and thus results in an overall low supply chain performance.
Thus to reduce production lead time and improve on timely completion of orders to customers, we must have a smooth flow of orders within the shop floor.
Reducing Waiting Time
In the manner that supply chain (including production) is managed currently, there appears to be an assumption that requires introspection. The assumption that ‘in order to complete orders at the earliest and to achieve better on-time performance, we MUST start processing customers orders immediately upon receipt’ is damaging. As discussed earlier, it causes excessive waiting time and work-in-process. The application of the Theory of Constraints philosophy (invented by Dr. Goldratt) works on the principles as given below.
In order to accomplish smooth flow within production, it is imperative to control the number of open orders (customer orders that require processing in the foreseeable future) on the shop floor. In order to implement the above said principle, it is required to design a process to control the rate of releasing work on the shop floor which should be aligned with the capacity of the plant. The way to get this done would be to release work within a pre-defined time interval (known as time buffers) ahead of the committed due date of the order. This would ensure that only
relevant customer orders are allowed on the shop floor, thereby reducing the quantum of work (WIP) within production. This will improve the flow of work, resulting in shorter production lead times. In addition, a global priority system to manage customer orders would better the flow and improve supply chain performance (significantly improve supply chain reliability and the availability of required SKUs).
Implementation of these concepts does not need any change in plant layout. Based on several implementation experiences, typically a comprehensive TOC based system can be implemented within few weeks and benefits can be experienced within a short time. More interestingly, implementation of these solutions does not need any major investment, on the contrary, it reduces work in progress (WIP) significantly and releases a substantial amount of cash. However, the company would have to undergo several paradigm shifts to successfully implement these concepts. Therefore, due consideration to human dimensions needs to be given during implementation to get complete involvement from all the stake holders involved.
Prabhakar Mahadevan is Regional Director, India region, Goldratt Consulting.