1. © S UPPLY M ANAGEMENT S OLUTIONS 1 Lean Supply Chain Design by Michael J. Cote, C.P.M. 2004 Northeast Supply Chain Conference ( 978) 549-7884 Mcote@imaginesms.com

2. © S UPPLY M ANAGEMENT S OLUTIONS 2 What will we learn?

3. © S UPPLY M ANAGEMENT S OLUTIONS 3 What will we learn? How to reduce cost and lead-time in a supply chain? How do supply chains create value? Who designs a supply chain and how? How to eliminate waste? How to improve responsiveness and reduce inventory? How “lean thinking” can optimize a Supply Chain? Tips on improving your supply chain!

4. © S UPPLY M ANAGEMENT S OLUTIONS 4 What is the difference between managing supply… and managing a supply chain? Supply Chain Management

5. © S UPPLY M ANAGEMENT S OLUTIONS 5 End-user Sourcing RFX Explore Supply Chain Request for Quote Request for Proposal Request for Information Request for Deceit

6. © S UPPLY M ANAGEMENT S OLUTIONS 6 Our End-User RFQ Which would you select? Laptop A = $1203 Laptop B = $1257 In our RFQ we told suppliers what we wanted… We received a price. We should be asking…

7. © S UPPLY M ANAGEMENT S OLUTIONS 7 We Request a Cost Breakdown What happens when we request suppliers give a cost breakdown to give us insight into the design of the supply chain? A. Give it willingly because we are the customer! B. Are somewhat reluctant because they know we are lying when we promise we won’t give the information to their competitors. C. Provide slightly (in)accurate information to win the business. D. Tell us we’ll freeze in hell before they give us that type of information. The game begins … 

8. © S UPPLY M ANAGEMENT S OLUTIONS 8 Laptop A $450.00 CPU 220.00 Case 52.00 LCD $722.00 Cost Drivers (80%) 124.00 Other Material (20%) $846.00 Total Material 120.00 Labor (Value Add) 220.00 Overhead (Non-Value) 17.00 Profit (Market Value) $1,203.00 Total (Bid) Laptop B $450.00 CPU 245.00 Case 75.00 LCD $770.00 Cost Drivers (80%) 102.00 Other Material (20%) $ 872.00 Total Material 120.00 Labor (Value Add) 130.00 Overhead (Non-Value) 135.00 Profit (Market Value) $1,257.00 Total (Bid) We Request a Cost Breakdown Cost Driver Analysis

9. © S UPPLY M ANAGEMENT S OLUTIONS 9 Which would you select? Laptop A = $1203 Laptop B = $1257 Sub-tier supply chain material value Laptop B has $26 more in material value Could it be more? (Depends on overhead costs in supply chain) Overhead (No-value add or waste) Laptop A has $90 more waste! How much in sub-tier? But… Laptop B has $118 more profit Is Profit Value? Opportunity for negotiation? Which company has long term viability? Now which would you buy? Which supply chain will you select?

10. © S UPPLY M ANAGEMENT S OLUTIONS 10 End-user Sourcing RFX What have we learned? We select products that are the result of their supply chains. We are the only source of money in the supply chain. Price = Value + Waste Most supply chains are fat and ugly!

11. © S UPPLY M ANAGEMENT S OLUTIONS 11 How do supply chains create value? We want value not fat!

12. © S UPPLY M ANAGEMENT S OLUTIONS 12 Value Chain Analysis What is a value chain? Linked set of custom-value creating activities Vertical in nature (supply chain) “Value” is anything the customer is willing to pay for… Value Chain Analysis Margins = perceived value (what are customers willing to pay for the “value-add?”) Competition (RFQ) establishes worth or value Center of gravity – primary value adding activity Margins = Cost of value add (labor & equipment) + Profit + Waste Lumber Cost - $.05/lb Sell - $.15/lb Margin - $.10 Pulp Cost - $.15/lb Sell - $.30/lb Margin - $.15 Paper Cost - $.30/lb Sell - $.35/lb Margin - $.05 Retail Cost - $.35/lb Sell - $.45/lb Margin - $.10 *Note: The margins and costs are for demonstration purposes only and do not reflect true industry costs. Value Chain Value

13. © S UPPLY M ANAGEMENT S OLUTIONS 13 Who designs the value-creating supply chain? Supply Chain Management

14. © S UPPLY M ANAGEMENT S OLUTIONS 14 Supply Chain Design The Typical Supply Chain…

15. © S UPPLY M ANAGEMENT S OLUTIONS 15 Supply Chain Design Sources of Supply Sourcing Strategy Lead-time = Cost Σ of supply + …

16. © S UPPLY M ANAGEMENT S OLUTIONS 16 Supply Chain Design Logistics Network Logistics Strategy Σ of supply + logistics + … = Cost Lead-time

17. © S UPPLY M ANAGEMENT S OLUTIONS 17 Supply Chain Design Information Flow Information Strategy Σ of supply + logistics + communications + … = Cost Lead-time

18. © S UPPLY M ANAGEMENT S OLUTIONS 18 Supply Chain Design Product Design Production Strategy Σ of supply + logistics + communications + production … = Cost Lead-time

19. © S UPPLY M ANAGEMENT S OLUTIONS 19 Supply Chain Design Customer Distribution Distribution Strategy Σ of supply + logistics + communications + production + distribution… = Cost Lead-time

20. © S UPPLY M ANAGEMENT S OLUTIONS 20 Supply Chain Design Who designs the supply chain? Design and Mfg engineers. Supply Managers. Logistics Managers. OEM Supply Chain Team Who is responsible for this mess? Center of Gravity Σ of supply + logistics + communications + production + distribution + waste = Total Cost Lead-time

21. © S UPPLY M ANAGEMENT S OLUTIONS 21 How can we use Value Stream Mapping to eliminate or reduce waste? Lean Supply Chain Design Price = Value + Waste Send an RFVSM (request for value stream mapping) (If you believe suppliers will respond to this you also believe in Santa Claus) Work with suppliers map their processes and eliminate waste…

22. © S UPPLY M ANAGEMENT S OLUTIONS 22 Material Received Inspect ManufacturingNon-Manufacturing Put into Warehouse Kit Material Value Stream Mapping Deliver Kit to Floor Costs of Warehouse Track & Chase Shortages to Kit Inventory Cycle Counts Deliver Shorts To Floor Material Received Deliver Material Floor Savings 15 People 40K sq ft 70% Less Inventory Waste Eliminated Communicate Need – Get Price Issue Order Supplier Ship & Deliver End-User Approval Confirm Price File paper work Issue Invoice Pay for Parts Communicate Need – Get Price Supplier Ship & Deliver Pay for Parts Purchase Card

23. © S UPPLY M ANAGEMENT S OLUTIONS 23 How to improve responsiveness and reduce inventory? Lean Supply Chain Design

24. © S UPPLY M ANAGEMENT S OLUTIONS 24 Pushing Inventory into the Supply Chain Your Supply Partner Parts Kitted for Manufacturing Shipment Sub-tier Supplier(s) MRP/ERP Forecast + buffer + buffer + buffer Build to Forecast Part(s) Build up until needed Customer Orders/Forecast Traditional Manufacturing Material Flow Forecast +buffer + buffer Kits waiting for shortages Forecast +buffer Total Value of Inventory in the Supply Chain = $50 Million Lead-time = 4-6 weeks

25. © S UPPLY M ANAGEMENT S OLUTIONS 25 Inventory Pull through the Supply Chain Your Supply Partner Kanban Min/Max VMI Manufacturing Supplier Kanban Shipment Sub-tier Supplier(s) MRP/ERP Forecast Replenish Extended Material Pipeline with Triggers Part(s) Pulled For use Information on Kanban Pull Customer Orders/Forecast Supplier Stocking Programs and Demand Pull Match Cycle Time Requirements Total Value of Inventory in the Supply Chain = $15 Million Lead-time = 1 week

26. © S UPPLY M ANAGEMENT S OLUTIONS 26 High Impact Parts Delivered More Frequently Mathematics of Inventory Management Drivers = 20% of Inventory Parts = 80% of Inventory $ Increase Frequency to once every two weeks AfterBefore Lean Lesson – Deliver parts more frequently

27. © S UPPLY M ANAGEMENT S OLUTIONS 27 How do we optimize the supply chain? Supply Chain Management

28. © S UPPLY M ANAGEMENT S OLUTIONS 28 Sourcing Strategies Supply Chain Management May the Source be with you…

29. © S UPPLY M ANAGEMENT S OLUTIONS 29 Power Converter, Inc. Copper Wire Sources Wire Iron Magnetic Core Castings Supply Chain Design Issues Transformers Power Converter, Inc. (Final Assembly And test) Customer 40% USA 35% Europe 15% Asia Links Other Components From Distributors Current supply chain Issues: Magnet Cores have a 5 month lead-time Transformers are dual sourced because of past late deliveries from supplier F $.10 $1.00 $.05 $1.00 $3.00 $3.10 A B C D E F G $1.00 Average PCI Costs $4.05 Materials $1.00 Labor $1.00 Overhead $6.05 Average Sell Price 10.00 USD

30. © S UPPLY M ANAGEMENT S OLUTIONS 30 Power Converter, Inc. Copper Sources Wire Iron Magnetic Core Castings Transformers Power Converter, Inc US. (Final Assembly And test) Customer 40% USA 35% Europe 15% Asia Links Other Components From Distributors Supply chain improvements: 1. Negotiate an agreement with G to stock cores $.10 $1.00 $.05$1.00 $2.80 A $1.00 PCI Costs $2.80 Materials $1.00 Labor $.90 Overhead $4.70 Average Sell Price 10.00 USD G FD Power Converter, Inc. Europe (Final Assembly And test) 2. Sole source transformers to F – Reduces cost of transformers & wire (economies of scale) 3. Additional distribution/FAT center in Europe with common sources (lower overhead) Eliminate waste in the structure of the supply chain 22% Total Cost Reduction

31. © S UPPLY M ANAGEMENT S OLUTIONS 31 What did we learn? Some Tips for the journey… Lean Supply Chain Design

32. © S UPPLY M ANAGEMENT S OLUTIONS 32 What did we learn? Price = Value + Waste End-user buyers select and fund supply chains Manufacturing supply chain teams design supply chains Partner with sources in the supply chain to eliminate unnecessary waste Improve responsiveness and reduce inventory by pulling inventory through the supply chain & pushing information Increase frequency of deliveries of high impact materials in the supply chain Optimize the structure of your supply chain with a holistic view and do it early in the design process

33. © S UPPLY M ANAGEMENT S OLUTIONS 33 Lean Supply Chain Design Lean it out! Select or develop lean sources Eliminate Duplication! Move from “buying” to allowing suppliers to manage delivery Let Demand Drive the Supply Chain! Allow consumption not forecast drive the supply chain Optimize! Eliminate waste in the supply chain Outsource non-core competencies – Not core business Compress – balance freight, cost of value, quality Collaborate to reduce total costs Focus on the customer Delivery Frequency! Deliver only cost drivers more frequently Tips for the Manufacturing Buyer

34. © S UPPLY M ANAGEMENT S OLUTIONS 34 Ask for cost break down in your RFX Use a two-step RFX process Step 1 – Ask “what value is available?” first Step 2 – Request quote for the value wanted Provide supply chain accurate information on your needs All supply chains have a target market– make sure you are in it! Take the supply chain approach Reduce costs over the long term by selecting a supply chain and developing it… Don’t jump from one to the other (quote-to-quote) Use the quoting process to benchmark and select long term partners Tips for the Non-Manufacturing Buyer Select Lean Designed Supply Chains

35. © S UPPLY M ANAGEMENT S OLUTIONS 35 Questions Lean Supply Chain Design

36. © S UPPLY M ANAGEMENT S OLUTIONS 36 Lean Supply Chain Design by Michael J. Cote, C.P.M. 2004 Northeast Supply Chain Conference ( 978) 549-7884 Mcote@imaginesms.com