Savings and perils in lean supply chains

By Steve Vecchiarelli

As more companies explore and implement lean manufacturing processes, they look to their supply base for potential ways to move costs away from the company – over to their suppliers.  Supplier companies, in an effort to secure more business or maintain existing business have been more than willing to explore, with their customers, methods to achieve these ends.

While most companies are excited about lean procedures, executing the elimination of waste can be nothing more than shifting costs from one place to another. This is no more true than with lean in the supply chain.

These cost shifts can provide savings and perils at the same time. Savings are provided by improving the logistics of inventory movement causing it to be available only when needed. Eliminating a needless ‘safety’ stock position reduces the financial burden of the inventory. Perils occur when the supplier’s supply chain is stretched so thin even minor disruptions can cause stock to not be available to the end-user company

Make the right choice
To help reduce risk, care should be taken when setting your lean plan. When choosing a supply chain partner, an in-depth review of how his inventory allocation process works should be a top priority during your due diligence.

As more companies transition to a vendor-managed materials management solution, they put their supply chain destiny in the hands of chosen suppliers. Some suppliers, in order to maximize return on equity as a result of increased turn, will not ‘hard’ allocate inventory to the customers’ demand.

To accommodate the need for inventory, these suppliers ‘pool’ their customers’ requirement by device. They then apply a ‘trend factor’ or other statistical devices to account for an in-house stock level.

The rational for this thinking is that on any given day, only ‘x’ percentage of their customers will actually need that material. This keeps the supplier inventory turns up but can also put their customers at risk of stock out.

A better solution is to pick a supply chain partner that allocates inventory on a one-for-one basis.  This hard allocation significantly reduces the risk of stock outs and assures integrity of shipment to demand.

Al Stoudt, materials manager for Sound Devices, a manufacturer of professional audio equipment used worldwide, has recently begun the selection of supply chain partners. “As a manufacturer of audio equipment that can be used in any environment including harsh extremes, we needed to pick suppliers that can assure supply as well as minimize our exposure.  Our ability to supply our customers products when they want them played into our choices is important.

We can’t afford any risks that may be associated with pooled inventory. Our supply chain partners provide the systems we need to grow our business without the worry of losing our manufacturing inventory position. This, in combination with internal process improvements, will help our company achieve our anticipated results”.

Supplier concerns
One of the concerns of suppliers is the integrity of customers’ MRP (material resource planning) systems. For lean initiatives to succeed there needs to be a shared success as well as a shared risk scenario existing between supplier and customer. For a supplier to bear the entire risk burden for any process improvement is a recipe for disaster.

When it comes to a forward-looking forecast-to-plan for materials, the plan must be fairly accurate for the supplier to achieve its end of the success equation. If there is a severe mismatch between MRP-anticipated demand against actual releases, the supplier may be in an over-inventory position. It is this type of situation that has moved suppliers to pool demand. This increases its risk and pushes it to its customer undermining its part of the success equation.

System and process control
When a company asks suppliers to hard allocate inventory, the risk involved with a pool inventory mitigates itself as all inventory is allocated to only that customer. To ask this, however, it is imperative that companies have their houses in order. Improving internal processes that minimize the deltas between anticipated and actual demand need to be undertaken.

Sources of MRP input include, but are not limited to, sales data; inventory position, shop floor availability, and manufacturing constraints. It is irresponsible to push inventory burdens down the supply chain to compensate for a company’s lack of process control.

Siemens Manufacturing, a mid-tier EMS (electronics manufacturing services) provider located in Illinois, has done extensive measurement and tightening of its material systems.  Chuck Bauman, chief operating officer, explains, “Our material partners are an integral part of our system. Without their timely delivery, we cannot adequately service our customers. We’re constantly evaluating our procedures to provide them the best forward-looking information so they may have adequate stock levels to meet our demand.”

Missed supply dates can wreak havoc with your schedule and can potentially cost your company a substantial amount of revenue. When your manufacturing life hangs in the balance, an extra step to insure you’re comfortable with your supplier’s method of allocation can pay big dividends in the long run.


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  1. Steve DeCollibus

    Steve DeCollibus    
    North Kingstown RI | North America
    Posted at 5:07 am on September 5, 2013

    This statement,” A better solution is to pick a supply chain partner that allocates inventory on a one-for-one basis. This hard allocation significantly reduces the risk of stock outs and assures integrity of shipment to demand.” while absolutely the best solution for the buyer, is extremely risky for the supplier. I do not see any upside here, you either trust the supplier to deliver or you take the risk that he might not deliver by joining in a non exclusive pool of buyers.

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