Organizational Opportunities from the Frontline Story 25: Challenging Supply Chain Unreliability | Operational Excellence Quick Hits
Quick Hits share weekly tips and techniques on topics related to Operational Excellence. This week’s theme relates to organizational beliefs. We hope you enjoy the information presented!
In today’s session, we’re going to continue discussing organizational opportunities, stories, and lessons learned from the front lines. Our story today comes from a manufacturing company operating in a make-to-order environment. The company faced significant production pressures due to increasing customer demand. However, hiring new employees and expanding internal capacity proved challenging. As a result, the company began increasing the size of their orders with suppliers to meet the rising demand. This created additional pressure on the suppliers, who then requested longer lead times. In response, the company further increased the order size to compensate for the extended lead time. This cycle continued, leading to a vicious cycle of increasing order sizes and lead times. So, how can we challenge the ordering practices to improve this situation?
To address supply chain unreliability and demand lead time, it is crucial to understand replenishment time. Replenishment time refers to the duration between when a material arrives at a point in the supply chain and when the next order for the same material arrives at the same point. It consists of three elements: order lead time, supply lead time, and transportation lead time. Order lead time starts when the material arrives at the consumption point and ends when the next order is placed with the supplier. Supply lead time encompasses the time taken by the supplier to process the order, including waiting queues and production, to get it ready for shipment. Transportation lead time represents the time it takes to transport the material from the supply point to the consumption point. The replenishment time is the sum of these three elements.
To improve supply chain performance and reduce lead time, an inventory management system must aim to minimize shortages, reduce the excessive demand placed on suppliers, and find ways to protect sales and throughput without increasing inventory or order sizes. Pull replenishment is a mechanism that allows for strategic inventory consolidation, smaller orders with suppliers, placing inventory strategically, and implementing a pull replenishment system. By implementing pull replenishment, we can right-size inventory, place smaller orders with suppliers, locate inventory strategically, and replenish more frequently in smaller quantities.
Let’s consider two examples to compare a min-max system with replenishment time and a pull replenishment system. In the case of a min-max system, if the supplier lead time is two days (80% reliable) and the transportation lead time is one day, with an average daily consumption of 50 units, and a minimum inventory level of 200 and a maximum level of 800, the order lead time is 12 days. Adding the two-day supply lead time and one-day transportation lead time, the total replenishment time becomes 15 days. Therefore, the company needs to order enough material to cover the demand over this 15-day horizon.
However, with pull replenishment, we trigger more frequent orders for smaller quantities, reducing the demand horizon and the pressure on the supply chain and suppliers. In this case, when we consume 100 units, we place a short order. After two days, the 100 units are consumed, and we place another order. As a result, the order lead time is reduced to two days, and the total replenishment time becomes five days (two days for order lead time, two days for supply lead time, and one day for transportation lead time). This significant reduction in replenishment time allows for smaller demand horizons and less strain on the supply chain and suppliers.
To set the inventory target, we consider the maximum consumption within the average replenishment time factored by the unreliability of the replenishment time. By analyzing the order placement and delivery dates, we can calculate the number of days taken by suppliers to deliver orders and determine the unreliability. We can then create a histogram to visualize the range of delivery times and select the 95th percentile as the supply lead time and reliability. The target inventory is calculated as the on-hand inventory plus what is on order.
By shortening the replenishment cycle and demand horizon, we can reduce the demand placed on suppliers. In the case mentioned earlier, the company approached their suppliers with the idea of placing smaller orders, resulting in shorter lead times. By reducing lead time, supplier reliability also improved.
That concludes our session for today. Thank you for joining us. Connect with me on LinkedIn, visit our website to learn more about the services we provide, and check out our YouTube channel for videos on improving organizational performance, supply chain efficiency, and operational excellence.