Category Archives: Supply Chain

Asset-Oriented Supply Chains Need Supply Chain Network Optimization

I couldn’t agree more with this recent headline from Supply Chain News that notes that Asset-Oriented Supply Chains Need Supply Chain Network Optimization More Than Ever because, like just about every other type of supply chains, they do. This is because, as IDC Manufacturing puts forward in a recent research report,

  • profitability is closely linked to the cost, and efficient use, of raw materials which are steadily increasing in price while market pressure is driving sales prices down,
  • high operating costs (partly due to the continual increase in the cost of energy and water) are making plant efficiency a key concern, and
  • changing demand patterns are adding additional strain to the supply chain from regional shifts and gaps between production and actual demand.

A good supply chain network optimization tool will allow a company with rising costs and shrinking revenues to understand the costs and benefits of each supply chain network option open to them and answer the following questions:

  • What is the optimal allocation of materials or customers to plants and/or distribution centers (DCs)?
  • What is the best location for new plants and/or DCs to minimize freight, inventory holding, and/or rail fleet costs while maximizing customer service levels?
  • How do we reallocate our capacity so we may close (temporarily or permanently) under-performing plants?
  • What capacity should we build into our plants, production lines, or processes, down to the requirements of specific machines or tools?
  • Based on our inventory levels and production capabilities, what is the optimal product mix, considering co- and byproducts?
  • Based on seasonal demand or production limits, what should we pre-build in inventory?
  • How do we optimize our production and distribution schedules for the desired levels of customer service and profitability?
  • What is the profitability impact of crossing borders – from currency exchange rates, tariffs, or duties?

And in this economic climate, such a tool may well make the difference between riding out the economic downturn and becoming a victim of it.

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Intel Reduces Atom Supply Chain Costs By 70%, But Is It Enough?

A recent article in Supply Chain Digest noted that Intel needed to reduce supply chain costs for its Atom chips by 80% to stay competitive and that, so far, it’s managed to shave costs by 70%. For most companies, this type of cost reduction would be unthinkable. But is it really?

Let’s think about supply chain costs and the opportunity for bloat. We have inventory. We have distribution. We have packaging. We have duties and (value added) taxes. We have inputs. We have production. Etc. Any one of these costs can be extremely bloated. You might think you need nine weeks of inventory when you only need three — there’s 66% bloat. You might think you need air freight when better planning could allow for ocean freight. There’s 50%+ bloat. You might think you need a certain type of packaging when a redesign could be just as sturdy with half the material. There’s another 50% bloat. You might think a tax is unavoidable, but a slight change could eliminate the tax. For example, under some free trade treaties, shipping the printer cartridge separate, instead of pre-loaded, eliminates a VAT. You might think that you need expensive raw material X, when a slight redesign would allow you to produce a better quality product with cheap raw material Y. A slight, lean, re-design of your manufacturing layout might double throughput. Etc. It is a possibility, especially if you have a lot of levers.

However, Intel only had one. Cost-service tradeoffs were off the table, as the chip had to work. Computer chips have about the highest value-to-weight ratios that you can get, which leaves little or no room to improve distribution costs. Intel’s packaging has been getting smaller and smaller over the years, so little room was left in packaging. Once a chip is designed, the raw material needs are locked in (and it still takes years to bring a fundamentally new chip design to market). Due to the nature of chip fabrication, once the plant is built, the process can’t be (significantly) changed. A chip is a single well-defined component, so there’s no wiggle room where duties are concerned. All that was left for Intel was the inventory lever.

For it’s traditional chips, which sold for $100 or more, as compared to the $20 or less selling point for the new Atom chip (which was being designed for the low-cost mobile device market), Intel operated on a nine-week total order cycle time. During the first seven weeks there were typically a large number of order changes — over 90% of orders were changed after initial placement. This led to significant inventory builds as factories spent considerable time optimizing and re-optimizing the factory schedule. However, if Intel could move to a true “make-to-order” model, reduce cycle time to two weeks, plan within four days and allow no changes after that time, the small hit in factory utilization that might would result would be swamped by the reduction in inventory, storage, and handling for all the chips what were currently routed to the DC.

Even though the internal perception was that you can’t truly build to order in the chip industry, an Intel factory was chosen in Asia as the pilot plant and an iterative approach that incrementally ratcheted down from nine to (a little over) two weeks was implemented. The end result was that supply chain costs were brought down from about $5.50 per chip to about $1.40 and that the minor hit that was expected to factory utilization did not materialize.

But is it enough? While Atom chips may be selling for close to $20 now, the market will very quickly force the cost down to about $10 (or less) per chip as more chip makers focus their sights on the mobile markets. Intel expects to get its supply chain costs down to under $1.00 per chip in 2010, but if disruption causes chip prices to fall rapidly, that could still be in excess of 10% per chip! And while supply chain costs of 10% would be welcome in some industries, it’s rather high in the chip industry where they have been traditionally been around the 5% mark, or less.

While I think supply chain will be Intel’s saviour, I think their work is just beginning and that they will have to pull off multiple revolutions to keep Intel at the forefront. Especially since Intel’s legal bill is going to skyrocket yet again as it just agreed to pay $1.25 Billion to settle disputes with AMD and has just been accused of bribing computer makers. This is on top of the $1.45 Billion the E.U. fined Intel in May.

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Cost of NOT Using Modern Supply Chain Systems: 6.8 Billion

A recent article over on CNN Money that noted that the “store theft cost” (CNN Money Nov 10, 2009) to your family, largely due to a 9% jump in retail theft over the past year, is $435 — as shoplifting, employee theft, and supply chain fraud cost retailers $42.2 Billion between July 2008 and June 2009, had a surprising revelation.

Breaking this mega-loss down, we find that:

  • 18.7 Billion is due to employee theft
    which could be considerably reduced with better screening, security and processes
  • 15.0 Billion is due to shoplifting
    which could be somewhat reduced with better security, but will likely always be a problem
  • 6.8 Billion is due to processing, supply chain errors, and frauds
    which could be eliminated with good systems and processes
  • 1.7 Billion is due to other causes

There’s no excuse for any errors. Good end-to-end e-Procurement systems can match every invoice against the purchase order and contract and make sure you’re only paying for what you ordered at contracted rates. Good forecasting and inventory tracking systems will prevent costly errors. And good visibility systems will allow you to spot any exceptions as soon as they occur and stop frauds, and fraudsters, in the act.

So now that you know that not using this technology is personally costing you, and everyone else in your organization, about $70 a year, why aren’t you using these systems? The reduction in loss alone over their service life-time will more than pay for them. (Not to mention the savings that a good sourcing, e-procurement, or inventory system can help you identify!)

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Dick Locke on “Training Supply Management Personnel on Quality Assurance Basics”

Well, I’m glad the Doc is publishing his material on cultural differences. I’ve promised a blog entry on international topics every two weeks, but I’ve been suffering from blogger’s block. I’m tired of debating whether China is manipulating currency or not. I’m sure the ‘cultural differences’ series will generate lots of comments. This gives me a chance to write something on a more general topic: training supply management personnel on quality assurance basics.

What brought this to my attention was a discussion over on Strategic Sourcing and Procurement’s discussion board. It struck me how many KPIs (Key Performance Indicators) referred to quality as a KPI. It also struck me that many of them were phrased in terms of “good enough” quality. A few got it. No one should see incoming material with any quality defects as “good enough”. Intermediate standards other than zero defects may be necessary steps on the road to perfection, but they should be improving annually, and the performance measurement should count all defects, not just abnormally high defect levels.

I wonder though, if quality is so important, why there is so little training on the topic in the various training and certification companies. ISM has a two hour course on basics, and a two day course on six-sigma. APICS seems to have nothing. Neither does Nahabit and Associates or Next Level Purchasing. That’s probably why HP resorted to an in house-developed training program when I worked there.

Our director of corporate procurement had his quality engineers write an eight hour training program that he attended with all his senior staff. It had almost no math in it, but relied on drawings and concepts. Lots of us were engineering undergrads and that helped. In my case it almost offset the 6AM start time that my morning-person boss insisted on. I even remember the basic take-aways. Here they are:

  1. You’ll never get better than about 1% defective if you rely on inspection. You need statistical process control to get better than that.
  2. AQL inspection plans have a very high probability (like 90%) that you will accept a lot with the specified defect level. Some entire industries still use AQLs. (Shame on them.) LTPD plans are better if you are using sample inspection.
  3. Never let your supplier use a sampling plan that allows a lot that had a defect in inspection to be shipped without 100% re-screening. (Jargon version: use c=0 plans.)
  4. Know what a control chart is and how to make one.
  5. Insist that your suppliers control chart key processes. That will define their process variation.
  6. Compare your specification limits to the suppliers process variation. If the supplier’s variation isn’t a whole lot less than your specification, you and the supplier are in trouble. The supplier is going to build scrap and some of it will find its way to you. This comparison is called Cp or CPk. Higher numbers are better.

OK, it’s not really that simple. But I wonder why training programs are so scarce? Are the quality wars over and quality won? It did in some countries and some industries but not others. What does your company do about training its procurement professionals?

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One out of Eight Organizations Get It. What Do We Do About The Other Seven?

According to AMR’s latest research, summarized in this piece on “driving supply chain transformation through the Chief Supply Chain Officer”, only one out of eight organizations have a CSCO, CPO, or equivalent that reports directly to the CEO.

The supply chain is the life-blood of a modern company but seven out of eight companies still don’t have a C-suite leader?! This is just crazy. What can we do? If you have any ideas, I’d love to hear them!