Supply Chain Management
A Re-engineering of the Supply Chain to
Reduce Costs and Improve Service
REM Associates of Princeton, Inc. recently worked with a major private label healthcare supplier to the retail market to completely re-engineer their supply chain from procurement through delivery and customer service including, information systems and data management. This program began with an assessment of each of the supply chain elements and included implementation of recommended changes working alongside company managers and staff.
Supply chain re-engineering objectives were to:
- Improve product and customer demand forecasting, including promotional activity
- Reduce operational costs of supply chain activities
- Improve service to all customers, including retail, wholesale, and military
- Reduce inventories and related investments at all levels, including raw materials, WIP, and finished goods.
Key issues indicating the need for a re-engineering effort were:
- Approximately four inventory turns per year.
- Customer Service in terms of on-time and complete shipments below 70%
- Lack of good forecasting, including inability to use available POS data
- Production Plans beyond capacity resulting in the purchase of excess raw materials and components
- Out-of-stock position at a major customer over 20%
- High risk of loosing major customer, accounting for over 25% of total business sales.
Results of this work:
- Inventories reduced by over 35% - over $40 million
- Inventory accuracy improved from less than 80% to over 95%
- Customer service in terms of on-time and complete over 96%
- Major customer in stock position over 97%
- Ownership and responsibility for both forecasting and inventory assigned to key managers
- Re-organization of key management functions and responsibilities significantly improved communications, decision making, and timeliness of management actions
- Total supply chain operating costs reduced in excess of 15%
- Major improvements in static and dynamic data for management tools and decision making
- Production plans were within capacity constraints.
Major areas of concentration resulting in significant improvements were:
The culture in this company was to solve customer out-of-stock problems by sending e-mails. Once the e-mail was sent, the “sender” felt that the problem was solved. “It’s off my desk,” was the thinking. By implementing daily, now weekly, one-hour meetings, with senior individuals, to resolve out of stock and manufacturing issues, the out-of-stock position has greatly improved.
No ownership existed for either product forecasting or inventory management. Several forecasts were in place including production, sales, and finance. Substantial amounts of excess inventories existed, including overstocks due to forecasts and production plans beyond capacity. Establishing ownership of both forecasting and inventories provided management with increased controls and focus on accuracy and levels.
This company is using MPRII software that is approximately 15 years old. Since installation, several new manufacturing sites have been added; however, the static data had not been updated in many years. Less than 50% of products manufactured were produced on the primary machinery. Production plans were not based on realistic capabilities. Overtime was being worked when not required, and not being worked when required.
A six-month effort was undertaken to update all static data. Various programs were modified to provide monthly feedback to manufacturing regarding primary resource utilization and equipment run rates. Audit processes were developed to verify static data for all purchased items.
A monthly production-planning meeting was initiated for senior management to review production plans within capacity constraints and approve operations schedules for the next three months.
Inventory accuracy was well below 80%. For an MRPII system to be effective, inventory accuracy of 95% is required. With 90% accuracy the system can be functional with significant manual intervention. With inventory accuracy below 85% the system cannot be effective.
A cycle counting program was initiated, as well as new processes for dealing with partial lots, improving inventory accuracy to a level well above 95%.
The lack of ownership of forecasting coupled with the MRP systems issues led to extremely high inventory levels consisting of excess raw materials, WIP, and finished product. Inventory segmentation, with focus on key items and excesses, provided the opportunity to reduce significant amounts of over stocks and the ability to turn inventories to more closely match the needs of the business. This coupled with improved management tools and processes produced significant reductions in total working capital and operating costs.
An excess inventory reduction blitz converted excess inventories to cash and/or usable storage space. By enlisting senior management support and focusing on the most significant excess, 70% of the excess was reduced in less than six months.
Numerous systems improvements were recommended within the existing system and modules were implemented that were licensed, but not in use. These improvements would ensure that the production requested from each of the six manufacturing sites could be achieved within the time period requested.
This project was extremely successful resulting in enthusiastic approval by senior management, their board of directors, and key investment bankers. If your company has any of these issues/symptoms please contact REM Associates for an evaluation of what supply chain re-engineering could accomplish for your organization.