Where Does the Supply Chain Fall Short?
Over the last decade I have heard several interesting answers to the question, “Where does the supply chain fall short?” Most common answers include “forecasts,” “supplier performance” and “part shortages.”
As you are probably aware, these are unpleasant outcomes and not the root causes. I have met with companies who use build-to-stock, build-to-order and engineered-to-order business models to service their customer demands. In the discrete manufacturing world, vertically integrated factories have largely given way to assembly shops, or assembly shops with some component manufacturing. This has led to factory floors becoming even more reliant on their global supply chain. Additionally, this means that the manufacturers’ ability to dictate to their suppliers has declined while their dependency on them has increased. While this is not a “gloom and doom” situation, it definitely warrants a different approach to deal with the evolving supply chain.
Collaborate rather than Dictate
For a long period of time, purchasing and procurement have been comfortable sending forecasts and purchase orders (POs) to suppliers based on their material requirements planning (MRP) system’s recommendation. The more frequent the MRP runs are, the higher the probability that POs are sent on one run while generating exceptions to expedite, defer or cancel the same POs in the next. This invariably keeps suppliers on tenterhooks while leading to poorer delivery performance.
In most cases, the inputs to these MRP-managed runs are customer forecasts and sales and operations planning (S&OP) plans. It is not uncommon to hear a plant manager lament, “If only our customers purchased based on our plans.” This process has become complex and unruly because end-customers (retail stores, OEMs, or distribution channels) have their own forecasts, manufacturing companies have their production plans, while multi-tier suppliers live in a seemingly separate world. The consequence of this disconnect is communication failure, as no amount of faxes, emails, phone calls, EDIs, file-transfers, etc., can bridge the open-loop process across the value chain.
With the evolution of the Internet and cloud-based solutions, there is clearly light at the end of tunnel. We now have an opportunity to communicate in real time through collaborative portals to establish a single version of truth via an interactive closed-loop communication. Through personal involvement in supply chain management across more than 100 deployments, I have seen more commonality in the supply chains irrespective of their manufacturing business model.
Below are a series of case studies that highlight how cloud-based solutions have helped various companies to accomplish their respective goals.
High-Volume Products
This company in the residential HVAC market has several manufacturing plants spread out across the U.S. and Mexico, with the majority of their plants acting as high-volume producers, with some more vertically integrated than others. At one plant, the company was procuring materials from a global supply base, but the frequency of delivery had to be very high due to their limited space on the shop floor. They collaborated with a third-party logistics (3PL) provider who would stock this inventory and deliver a truckload of materials every hour, based on the production requirements.
This plant established a pull process between its manufacturing facility and 3PL provider. Assembly lines were triggering Kanban signals to the 3PL on actual usage in real time. The 3PL would print RFID labels based on the Kanban signals, stick them to the boxes or pallets before loading the truck, and send them to the factory floor every hour.
The plant’s receiving dock was equipped with RFID antennas which would automatically receive the truckload and update their ERP system. Interestingly, the RFID labels also carried the point-of-use location that triggered the Kanban consumption signal, allowing the material handler to deliver directly to the line. There was another pull process set up between the 3PL and suppliers that would get triggered based on shipments to the plant. For a sub set of parts, the plant was directly triggering Kanban signals to the suppliers who were executing shipments based on those demands.
Establishing this closed-loop process dramatically improved the material replenishment process in several ways. First, it helped the company to reduce their inventory by over 45 percent, as they carried just-in-time inventory at the plant floor. Second, the use of clear electronic replenishment orders sent to suppliers based on actual consumption eliminated the bullwhip effect while streamlining their delivery. This resulted in improving the supplier on-time delivery performance from 80 to 98 percent. Lastly, automation at the receiving dock triggered replenishment signals using scanners, which dramatically increased the shop floor productivity while eliminating the manual errors.
Project-centric Engineered-to-Order Products
At the other end of the high-volume, repetitive manufacturing spectrum is the one-off project that is engineered-to-order for a specific use. A European company was servicing an oil exploration project by delivering large project-specific valves and gears. Typically these projects took years to complete with high potency of constant delays. This company ended up manufacturing gears and having to hold them in stock as the project timeline slipped.
Given the nature of these projects, raw material and components were sourced from a long lead time (six to nine months) supply base. This compounded their problem of having to carry raw material and finished goods when the projects went out of sync. This company was also interested in doing just-in-time inventory—not driven by consumption, but by project/production schedule. Clearly the basic problem in this case was disconnected communication as well.
The company deployed a collaborative cloud-based solution where the replenishment was controlled by a workflow. When the company won a new project, the engineering department designed and developed the specifications. Suppliers were provided with specifications and an expected timeline, and received orders electronically. The suppliers then manufactured their goods based on the specifications within their stated lead time. When they were ready, a flag was set which told their customers that the specified elements were ready to ship.
With all the suppliers collaborating in this process the manufacturer was made fully aware of the component readiness prior to scheduling production. The manufacturer then collaborated with customers on the project status and scheduled their production. Once the production schedule was set, the cloud-based solution automatically notified the suppliers with a ship date using their transit time. This ensured that the material arrived at the factory floor right in time for production.
Implementing the solution eliminated the two key problems – high inventory and lack of space. The unintended benefit was some inventory reduction on the supplier side through schedule visibility, clear ship dates and a standardized shipping process.
Complex Build-to-Order Product
Let’s now discuss a company that lies in between the two extremes referenced above. This large equipment manufacturer has moderate levels of complexity and configurability in their product range. Given the nature of large equipment manufacturing, they had a lot of component parts and huge supply base. They were extremely reliant on their MRP to drive their production schedules, and the communication with their robust supply base was handled by a team of buyers. As the MRP ran multiple times in a week, the buyers were overloaded with approving, expediting, deferring and cancelling purchase orders.
If MRP recommendations were not being completed prior to the next MRP run, the consequence was substantial communication issues with the manufacturer’s large supply base. Some of the most obvious ramifications were part shortages and high expediting costs.
One of the reasons buyers couldn’t complete their task on time was the transaction volume combined with a typical MRP multi-screen interface. Navigating through MRP screens to confirm new orders or make changes to existing orders can be arduous and challenging, especially in this manufacturer’s case where a legacy MRP system was in use.
They decided to use a cloud-based supply chain solution to collaborate with their supply base, acting as a front end to their legacy MRP system. They set up a Software as a Service (SaaS) portal which was tightly integrated with their legacy MRP. Suppliers got their forecasts, planned releases and firm orders through this portal. They were able to acknowledge the orders, suggest reschedules, ship goods, print standardized bar code labels and track their performance. The buyers, on the other hand, were using the portal to approve POs and deal with MRP exceptions using a very intuitive and friendly user interface. The behind-the-scene integration was keeping the MRP and the cloud-based solutions in sync in real-time.
Within a short timeframe, hundreds of suppliers were transacting thousands of raw material parts through this cloud-based portal. Suppliers for this manufacturer varied from small “mom and pop” shops to large multi-billion dollar companies. Buyer productivity dramatically improved as buyers were using a simplified interface that allowed them to approve, modify or reject MRP recommendations with a few clicks. Buyers who were used to working long hours on the tasks at hand were now completing their responsibilities within an hour or two and focusing on the more important tasks of strategic sourcing.
Since the MRP was being fully updated between each run, the supplier bullwhip effect was virtually eliminated. Suppliers also had clear order signals, streamlined shipping processes and visibility into their actual performance. This type of self-measurement resulted in a dramatic reduction in part shortages and expediting charges.
Convergence in the Supply Chain
Most of us pride ourselves on the unique solutions we create in response to the problems we encounter. In the previous century, there was a very good reason why this diversity existed. Without a global network, customers had their own wide or local area networks that differed from those of suppliers. Customers had their ERP and suppliers had theirs (which is still true). Communication between each of the parties was disconnected and done in a batch mode.
However, over the last decade, more convergence—rather than diversity—has risen among the supply chain processes. There now exists a network that all of us reside in – the Internet. There is global infrastructure on which mission-critical transactional applications can be developed – cloud infrastructure. There is a common interface that can be globally used – an Internet browser. There is an easy deployment model that connects all of these –SaaS.
Cloud-based supply chain solutions offer opportunities for large manufacturing companies with globally dispersed manufacturing facilities and supply bases to actively engage with their suppliers to streamline manufacturing procurement and purchasing functions. This level of collaboration was not feasible in the past and therefore opens up an entirely new strategy for managing inventory and replenishing raw materials. Hopefully, as we ask the same question of “where does the supply chain fall short,” in the future the answer won’t be “collaboration.”
Narayan Laksham is CEO and founder of Ultriva, a provider of collaborative supply chain solutions.
