Perspectives on Various Issues of Interest

Service Part Inventory Management: Implications for Supply Disruption Mitigation

In the 21^st Annual POMS Conference (May 7 - 10, 2010) that was held in Vancouver, Canada, I presented the findings from an ongoing research that my co-authors (Christopher Boone, Christopher Craighead and Joe Hanna) and I are currently engaged in. In this research we assert that an organization’s supply chain strategy must incorporate an effective disruption strategy that seeks to both increase its ability to respond to a disruption and reduce the frequency and severity of disruptions.  Researchers frequently point to inventory as a time-proven strategy for reducing supply chain risk and as a necessary component of an effective disruption strategy.   However, an undisciplined or ineffective inventory strategy can itself create disruptions and have a detrimental impact on an organization and its entire supply chain.  Our study draws from the rich body of spare parts inventory literature and the emerging research on supply chain risk and disruption to form the basis for a longitudinal field study investigating the value of a well aligned inventory strategy as a means for mitigating supply chain disruptions.  Specifically, the study uses field data to assess the performance of a service-centric inventory strategy compared to an item focused strategy relative to (1) the occurrence of inventory flow disruptions (backorders) (2) the duration of the inventory flow disruptions (3) the occurrence of operational disruptions (severe disruptions that culminate in a process or resource shutdown), and (4) the duration of the operational disruptions.  Results from nine test locations and one control location suggest that the service-centric strategy investigated is effective in mitigating both the occurrence and duration of supply chain disruptions.   

SAP Supply Network Collaboration Tool

SAP Supply Network Collaboration tool enables seamless information flow and visibility between buyers and suppliers. It can be implemented as a stand-alone package or can be integrated with back end enterprise applications at the customer and supplier end. It can be used in a hosted environment as a joint-use platform for all supply chain partners.

 Use of SAP Supply Network Collaboration tool to collaborate with suppliers

The tool communicates customer scheduling agreement releases to suppliers and updates to these agreement releases can be received by means of a web interface. The integration of this release process with back-end systems such as SAP ERP and/or SAP APO immensely aid in forecasting and just-in-time replenishment. Suppliers can create advanced shipment notices (ASN) to notify customers regarding the delivery of their purchases. The tools allows comparison of all previous and current release updates to check for disparities.

With the aid of this tool customers can submit purchase orders as well as Kanban replenishment signals via a web interface. Suppliers can view purchase orders and Kanban process based on their status and respond to orders, confirm shipment dates and quantities, and submit ASNs and shipment confirmations to customer's back-end systems. 

The tool complements material requirement planning with dynamic replenishment, a planning comparison process that supports forecasts and supplier production plans. This lets suppliers compare customer forecasts with their own production plans to more effectively match supply with customer demand. The demand monitor allows a comparison of customer forecasts and purchase orders with supplier forecasts and purchase order confirmations. The deviations can be viewed with color-coded thresholds and the planning data can be downloaded into spreadsheet applications.

The tools allows the suppliers to take control of replenishment tasks and thereby simplifies stock replenishment. Customers periodically transmit current inventory data, gross demands, and goods-receipt references from their back-end systems. Suppliers can track this information on inventory monitors. Suppliers can then determine replenishment quantities based on inventories, demand, and minimum or maximum (min/max) stock levels. They can also maintain ASNs to inform customers of planned deliveries.

Suppliers can use ASN packaging functionality to create and print labels containing multilevel packaging-hierarchy data, handling-unit data (such as packaging approaches and materials), and bar-code data. SAP Supply Network Collaboration automatically communicates such data to customer back-end systems within ASN messages, letting customers know what their expected shipments contain. The tool lets automation and management of supplier invoicing, debit, and credit processes. It also gives visibility of payments and invoices via the web or in printed form.

Suppliers and customers can use exceptions – such as new purchase orders, out-of-stock situations, and past-due ASNs – to trigger e-mail or fax notifications. The use of the tool in conjunction with the SAP NetWeaver® Business Intelligence component provides easily customized reporting content related to key performance indicators. The tool also allows navigation to folders within the SAP Product Lifecycle Management application to share files and documents with suppliers.

 Use of SAP Supply Network Collaboration tool to collaborate with contract manufacturers

Similar to suppliers. contract manufacturers can view, print, and download purchase-order data to their systems. This data includes lists of the components needed to build the finished product. They can also change – and request changes to – finished-goods quantities, dates, and components, as well as report on how much of each component has been used. Manufacturers can also view other suppliers’ component shipments and orders when those orders are to be delivered to that manufacturer. 

The tool provides insight into production demands and actual production at the contract manufacturer’s location. In addition to tracking high-level production progress through milestones, it can project the finished goods date and quantity based on current production progress. Suppliers can also view supplier-owned and -managed stock at customer and supplier locations. The tool automatically calculates and displays projected stock levels based on incoming purchase orders and production orders (which are based on min/max stock levels). Then it alerts customers and suppliers when projected stock levels exceed or fall short of their limits.

Use of SAP Supply Network Collaboration tool to collaborate with customers

Responsive replenishment enables you to leverage state-of-the-art vendor-managed inventory capabilities. These include true demand-driven replenishment based on forecasting, short-term forecasting through replenishment planning, and truckload building with or without promotion management. The tool enables management of inventory at customer locations based on demand and min/max stock balance limits using replenishment orders. 

With Web-based collaboration, suppliers and customers can compare forecasts. Suppliers can calculate their forecast based on consumption data, customers transmit their forecasts, and SAP Supply Network Collaboration calculates the difference – triggering exceptions if limits are breached. Workflow mechanisms ensure that a final, consensus-based forecast is reached. Suppliers can integrate this forecast into your overall forecasting process using the SAP Demand Planning application that is part of SAP SCM – or use the forecast within SAP Supply Network Collaboration to ensure replenishment accuracy.

Demand Signal Repository

In 2004, AMR coined the term Demand Signal Repository (DSR) as a common database that harmonizes and cleanses downstream data, including point of sales (POS), inventory movement data, shopper demographics, market trends, and loyalty. It is a powerful enterprise data warehouse that stores large volumes of external and internal data that has been harmonized to provide visibility up and down the supply network. It can also be used to feed line-of-business applications that support demand-driven supply networks. A DSR stores retailer data, third-party data, and internal data in order to drive demand-driven business insights across the value chain of stakeholders. The various retailer data sources could include: point of sales scan data, store and DCs inventories, planograms, store clusters, retail item hierarchies, and events. The internal data sources can take the form of sales, promotions, events, item hierarchies and attributes, store/location hierarchies, forecasts, and shipments. DSR can also help in storing third party data such as syndicated data, weather data, and map/spatial data. 

Using these data sources, DSR helps to create a central database for demand sources and allows the use of business analytics to gain insights for decision making. 

The following figures show the trends (as of 2007) pertaining to DSR in consumer packaged goods industry.

  

The Value of B2B Integration and Collaboration

The Aberdeen Group's recent research titled, "Integrated Demand-Supply Networks: Five Steps to Gaining Visibility and Control" identifies that over 80% of companies regard trading partner community building as a strategic initiative. Only 23% of respondents indicated that they can electronically collaborate with their long tails suppliers. 51% of respondents indicated that they can electronically collaborate with their core suppliers.

Some of the major challenges limiting the formation of trading community are: costly technology solutions to manage B2B integration (40% of respondents emphasized this reason), lack of awareness of the value proposition of B2B integration by top management (39% of the respondents stated this reason), and over-reliance on offline technologies, such as phone, fax and e-mail, for communicating and collaborating with supply chain partners (33% of the respondents reported this reason).

The survey emphasizes the important role plays by Trading Community Management (TCM). TCM refers to a closed loop process that involves recruiting, enabling, on-boarding, and performance management of trading partners. It involves demand networks, comprising of retailers, customers, VARs, resellers, distributors, and the supply networks (i.e. systems suppliers, contract manufacturers, original design manufacturers).

Survey results show that the top performing firms shared several common characteristics. Top performing companies are five times more likely than all other companies to indicate that trading community management has a mission critical impact on their organization. Top performing companies are also 1.3 times more likely than all others to perform regular surveys of their supplier base to identify the extent of their involvement in B2B integration and collaboration.

iPhone's Supply Chain

In the iPhone 4, more than a dozen integrated circuit chips account for about two-thirds of the cost of producing a single device (according to iSuppli, a market research firm in El Segundo, CA). Samsung receives $27 for flash memory and $10.75 to make its (Apple designed) applications processor. German chip maker, Infineon, gets $14.05 a phone for chips that send and receive phone calls and data. STMicroelectronics get $2.60 for the gyroscope, a new addition to iPhone 4. According to iSuppli, the total bill of materials on a $600 iPhone is $187.51. Manufacturing and assembly contributes the least in terms of cost (about 7% of the overall cost). 

Source: Barboza, D. "Supply Chain for iPhone Highlights Costs in China." The New York Times, July 5, 2010.

Efficiency initiatives in hospitals

A recent article in The New York Times highlights the important role that process improvement and lean initiatives can play in health care sector. The article illustrates how Seattle Children Hospital was able to improve its operations on several accounts by implementing "continuous performance improvement" (C.P.I.). Some of the examples are as follows:

1. Before implementing C.P.I., nurses in the intensive care unit used to stockpile several tools, such as catheters in the closet, surgical dressings in patients' dresser drawers and clamps in the nurse's office. This resulted in shortages and an increased time spent in searching for these tools at times of need. With the implementation of a new supply system these issues have been favorably resolved. A system similar to Kanban has been used to ensure availability of tools. There are two bins for each item. When one bin is empty, the second bin serves the need. Empty bins go to the central supply office and the bar codes are scanned to generate a new order. By implementing this new approach, the hospital storeroom is now half its original size, and fewer supplies are discarded for exceeding their expiration dates.

2. C.P.I. examines every aspect of patients' stays at the hospital. As a result, amid rising health care expenses nationally, the program has helped the hospital to reduce costs per patient by 3.7 percent. The total savings by this cost reduction is estimated to be $23 million. By using the facilities more efficiently, the hospital avoided $180 million expenditure on capital projects and was able to serve 38,000 patients last year (up from 27,000 in 2004) without expansion or adding beds.

3. In the department of psychiatry and behavioral medicine, the team started to arrange outpatient resources as soon as children enter the unit, rather than waiting until they are ready to leave. This has resulted in an increase in satisfaction ratings and helped to cut the average time in the hospital from 20 days to 10. The unit now serves 650 children instead of 400 as was the case before implementing C.P.I. program.

4. The hospital has reduced the waiting time for many surgeries from three months to less than one. As a simple example, the C.P.I. initiative identified that the bottleneck was a lack of available inpatient beds for recovery (and not surgeons' time). An examination of hospital's census revealed that there were empty beds on weekends. Accordingly, the hospital decided to schedule more surgeries on Fridays so that patients could recover over the weekend, when more beds were available. This change not only resulted in reduced waiting time for surgeries but also benefited parents and patients who would miss fewer work and school days.

5. The hospital had planned to spend $500,000 on renovating the recovery room. However, the C.P.I. initiative suggested that if a child's parents went to a common waiting room during surgery, instead of an individual recovery room, more surgeries could be scheduled. The parents were given beepers to alert them when their child would arrive in the recovery room. Maps and colored lines on the walls helped point the way. With this change, the renovation plan was scrapped.

6. The hospital is using the C.P.I. project to design a new $70 million clinic and surgical facility in Bellevue, WA. The team used C.P.I. to map out common paths that patients, staff members, supplies and information would flow through. To plan the design, the team worked in an empty office building, using cardboard mock-ups of surgical sites, recovery rooms, anesthesia areas and waiting rooms. Fifty members play-acted various scenarios to test the design's effectiveness. As a result of this thorough analysis, the final design has reduced walking distances and waiting times for patients by grouping related facilities together and creating rooms that can be used for more than one purpose. The initiative helped in reducing the space requirement by 30,000 square feet and a reduction of $20 million.

Source: Weed, J. "Factory efficiency comes to the hospital." The New York Times, July 9, 2010.

Relationship between Just-in-time Manufacturing Practices and Performance

Just-in-time (JIT) manufacturing is among the most commonly researched topics in the area of operations management. In a recently published paper, my co-author and I examine the relationship between JIT manufacturing practices and performance outcomes by means of meta-analysis of correlations approach. Based on an in-depth analysis of literature spanning from 1992 to 2008, the results of this meta-analytic investigation support a positive relationship between JIT manufacturing practices and aggregate performance. However, the findings suggest that not all individual JIT practices are associated with all types of performance outcomes. This study highlights the JIT practices that have the greatest impact on individual performance outcomes and emphasizes the role of moderating factors in the relationship between JIT practices and performance. The following JIT practices and performance measures were considered for this research investigation:

JIT PRACTICES:

 

Setup time reduction: Extent to which the plant is reducing setup times in production;

Small lot sizes: Extent to which the plant is utilizing or working towards using small lots in production;

JIT delivery from suppliers: Extent to which the plant is receiving shipments from vendors on a JIT basis;

Daily schedule adherence: Extent to which the plant is producing to schedule as well as utilizing time buffers to guard against unexpected stoppages in production;

Preventive maintenance: Extent of proper maintenance of machinery such that the production machinery downtime is limited;

Equipment layout: Extent of use of cellular manufacturing design including close proximity of machinery;

 

Kanban: Extent to which operations in the plant utilize the concept of kanban;

JIT link with customers: Extent to which the plant provides JIT deliveries to customers;

Pull system: Extent of existence of a pull production system and the related supporting systems;

Repetitive nature of master schedule: Extent of consistency of production scheduling, as well as the variation in product volumes.

PERFORMANCE:

 

Quality performance (e.g. scrap rate, rework rate);

Manufacturing cost (e.g. unit cost);

Inventory (e.g. inventory turns, inventory levels), cycle time (e.g. manufacturing cycle time, lead time, and throughput time);

Manufacturing flexibility (e.g. mix, modification, volume, new product, and expansion) and delivery performance (e.g. delivery reliability, delivery speed).

 

The significant positive association between aggregate JIT and aggregate performance constructs is not surprising given both the widespread adoption of JIT in practice as well as the general support of this relationship found in extant literature. Analyzing the relationship between individual JIT practices and aggregate performance yields several interesting insights. First, all JIT practices are positively associated with aggregate performance. This indicates that each JIT practice results in improved aggregate performance even though the practice may not be positively associated with performance measures, when considered individually. For instance, kanban is significantly associated with aggregate performance but at the individual performance level it is associated with only three performance metrics (i.e. inventory, flexibility and delivery performance). Second, the results indicate that while most of the associations between individual JIT practices and aggregate performance are generalizable (not subject to moderating factors) across contexts, the association of small lot sizes, pull system and preventive maintenance with aggregate performance are subject to moderating factors. This implies that although these three relationships are significant and positive, the context in which these practices are used could influence magnitude of the achieved aggregate performance improvements.

 

An analysis of the relationships among individual JIT practices and performance outcomes suggest that about one-fourth of the JIT practice to performance relationships are not significant. This outcome indicates that when evaluating JIT practices for their potential impact on various performance outcomes, firms should not assume that all JIT practices improve all aspects of performance. Furthermore, almost half of the relationships among JIT practices and individual performance outcomes are subject to moderating factors suggesting that firms should be cautious in forming performance expectations and tailor JIT implementations by taking the underlying context into consideration. The moderating effects could be manifested in the form of indirect associations of JIT practices with some performance measures. For instance, although small lot sizes were not found to be significantly associated with cycle time performance, it is possible that reduced work in process inventories and organized work environment fostered by small lot sizes may lead to improved cycle time. The level to which this potential indirect association may manifest in certain situations could influence the magnitude of the direct impact of small lot sizes on cycle time performance. Additionally, JIT practices may interact with each other resulting in varying degrees of improved performance. In cases where JIT practices are likely implemented together, such as when equipment layout and pull systems are implemented with other JIT practices, such as small lot sizes and setup time reduction, potential interactions among these practices could influence the magnitude of performance outcomes.

 

Along with the indirect and interaction effects of various JIT practices, in several organizations some of the impact of JIT practices may be redundant in the presence of other infrastructural practices. This could result in a lack of evidence for significant associations of these practices with various performance outcomes. For example, management support may act as a surrogate for kanban. This could explain the lack of association between kanban and cycle time performance. Potential redundancies also exist between kanban and JIT scheduling systems such that one could replace the other in improving quality performance.

 

Given the widespread adoption of the various JIT practices in business settings, the managerial implications of this metaanalysis could be far reaching. This meta-analytic investigation enables identification of those JIT practices that positively influence various performance outcomes. This understanding provides a starting point whereby existing and future JIT practice to performance relationships may be evaluated. To aid in this type of evaluation, the study highlights the ‘‘breadth’’ and ‘‘depth’’ of impact for each JIT practice. A JIT practice has a high breadth impact when multiple performance outcomes are significantly improved. The depth impact of individual JIT practices is captured in terms of the magnitude (average correlation) of the significant relationships between individual JIT practices and performance outcomes. In a resource constrained context, as is the case in most real business situations, managers can evaluate their implementation options based on the overall impact (breadth and depth) of a JIT practice on performance. In this regard, the impact factors can act as a guide for the implementation of those practices that will yield the greatest impact.

 

Our study also informs practice by showing that there could be a wide range in possible performance benefits associated with implementing many of the JIT practices. The performance benefits of several of the significant relationships between JIT practices and performance outcomes are influenced by other unknown factors. Thus, managers implementing JIT practices should be cognizant that the approach for JIT implementation and the environment in which JIT practices are implemented and utilized could impact the effectiveness of the JIT practices in improving performance. It is likely that firms implementing the same JIT practices may see widely varying effectiveness of these practices and therefore mimicking and benchmarking activities, without adequate attention to the context, may turn out to be ineffective in gaining the desired performance outcome.

Source: Mackelprang, A. and Nair, A. 2010. Relationship between Just-in-Time Manufacturing Practices and Performance: A Meta-Analytic Investigation. Journal of Operations Management, 28, 283-302.