A similarly underdeveloped approach was taken to raw material inventory despite the severe ramifications resulting from production rescheduling for want of raw materials. (Lack of raw materials also can "eat" into available capacity by idling both machines and labor and forcing unplanned changeovers.) This particular company had an internal policy to keep on-hand raw material inventory levels limited to no more than two weeks, regardless of external or internal suppliers' lead time and supply uncertainty. As a result, nearly 5 percent of the company's capacity downtime was attributed to "missing components."
In another example, we helped a North America-based high-tech product manufacturer successfully balance its supply chain's core operational resources in order to exceed customer performance requirements. Prior to implementing this strategy, the company took a one-size-fits-all approach to products and customers. Customers could order products with dramatically different levels of customization and still expect the same order-to-delivery lead time of three to four weeks — a situation that led to more than 60 percent of customers reporting dissatisfaction with some aspect of the company's performance.
Under the new strategy, "core" raw materials and component inventories were held only for "standard" configurations, which the company guaranteed to deliver within two weeks. These "core" components permitted the company to assemble-to-order the so-called "standard" configurations representing 80 percent of the company's sales, which still satisfied the high levels of customization almost all customers required. Many of these "core" components were sourced for low cost from Asia. All products that were classified as "non-standard" had longer delivery lead times — but most of their "non-core" components were sourced from the supplier's domestic locations in order to maintain an overall order-to-delivery lead time of less than six weeks. The Asian suppliers were managed for low cost with high levels of predictability, while domestic suppliers were managed for lead time and capacity to ensure reasonably quick deliveries of unique components.
To help ensure quick delivery once the raw materials and components were received, the company's plant maintained capacity flexibility in final assembly, testing and outbound distribution to manage peaks in demand. The result of these new strategies was a rapid improvement in on-time delivery performance from 40 percent to 90 percent, a 60 percent inventory reduction, a low-cost profile for the majority of the product line through low-cost-country sourcing, and the ability to meet all configuration requirements of customers through one of the two supply chains.
Determining where and how the critical operational resources were positioned in this global value chain helped to dictate the enabling processes, policies and measures that needed to be established. Initially, delivery reliability was emphasized over speed with internal and external suppliers. The company established and shared measures and took corrective actions where needed. It also upgraded or adapted systems to provide greater visibility of transactions across the value chain, and it improved communications internally as well as up and down the value chain with suppliers and customers. At long last, the performance promised by the sales force could be met in a cost-effective fashion, and operations could deliver consistently and reliably against deadlines.
The Three "Silver Bullets": Using the Critical Operational Resources as a Strategic Weapon
The need to undertake efforts like the above examples will only grow in coming years. Most companies will continue to focus on their core competencies and outsource many parts of the business they deem to be non-core. Additionally, increased partnering efforts and the emerging "networked business" models will see companies working together in new ways. These trends toward extended supply chains and the ongoing move toward virtual value chains make it absolutely imperative that businesses fully understand the tradeoffs they are facing as a result of outsourcing production, increasing the use of contract manufacturers and shifting production and/or supply to low-cost countries.
Because the dynamic business environment is characterized by constantly changing customer demand, unexpected disruptions in supply lines, rapid technological obsolescence and continuously reconstructed value chains, decisions about the three critical operational resource buffers will need to be reexamined on a continuous and collaborative basis. All key functions must actively participate in and contribute to this process. This will help to ensure that the company's plans and decisions are developed and made in a truly integrated fashion and, furthermore, that the plans and decisions of the various partners within the extended enterprises and value chains are also fully integrated.
While the concept is simple, few companies/value chains have pushed aside the distractions of the latest improvement fads and demonstrated the discipline and focus to consistently achieve top performance. Those that have religiously review, refine and improve the tradeoffs between our three cross-enterprise, operations management "silver bullets": capacity, inventory and lead time.
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