Supply Chain Management in its broadest context deals with the flow of material and information

form the natural resource stage all the way through to the ultimate customer. Consequently,
supply chains cover several enterprises such as raw materials suppliers, companies who
transform the materials by adding value, finished goods suppliers, distributors and retailers. In
order to optimize our business processes, we must make sure that all the resources within the
supply chain share the gained benefits equitably.
On a more local level, this means that a manufacturer will include both its sup-pliers and
customers in the supply chain with the intent of minimizing constrains and addressing all major
business objectives. These objectives almost always include issues such as: Inventory
reductions, reductions in lead times and cycle time, development of Internet communications,
improvement in the order fulfillment process and improved customer satisfaction.

Slide 4-18 presents a review of the subjects covered in this supply chain management mini-presentation.
Hope they provide you with a few ideas on how to improve your supply chain. Get out there and try them
outremember that inventory management can be only as strong as the weakest link in the total supply
chain.

Youve seen slide 4-3 before. Take another look at the gross to net requirement planning that is required to
launch a purchase order in an MRP or ERP system. If maintaining the integrity of the databases driving
this system is not a high priority (usually isnt), is it any wonder that planner/buyers spend so much time
rescheduling and canceling previously released purchase orders.
Lesson Learned: Much progress can be made in reducing the problems of a discrete purchase order
launching system. However, even when database integrity is at its highest, the need for rescheduling (due
to built in time delays of the system and inside of lead-time sales opportunities), will always be a problem
for suppliers. What we need to do is link our suppliers to a JIT pull system that communicates in realtime our long term materials via focused forecasting and our short term requirements via stabilized
schedules.

Many books and articles have been written about kanban and JIT. Slide 4-5 represents the most
important rules that apply to implementing these techniques in a factory. Once a factory adopts
these techniques they find that the whole concept of the pull system is practical common sense.
It is the ability to select and develop a world class supply chain that makes or breaks an
implementation.
Lesson Learned: Do not start a factory pull system until you have at least initiated a supplier
development program. To start the pull system before you have assessed the current state of
your supply chain is the most common cause of pull system failures. Well get into the details on
how to initiate and maintain a supplier development program shortly.

Slide 4-6 shows a pull system with typical JIT and kanban techniques. Product flows from work
station to work station with materials required to make the product move to the work station just
in time by the use of a kanban, empty bin, replenishment system.
Lesson Learned: Visual schedule control of production materials is an effective kanban
technique. Suppliers are instructed to organize their parts into sets of matched parts for specific
sub-assemblies. Specially designed trays or bins that accommodate parts sets are then shipped
to the factory. These trays (or bins) are stored close to the work station and are moved to the
work station in accordance with the pull systemsreplenishment rules. In its most simplest form, a
full tray of parts is exchanged for an emptied one. When initiating a pull system, it is important to
establish sufficient bufferinventories to ensure flawless material availability. As the system
matures and suppliers become world class, these buffer inventories are reduced to the point that
inventory turnover exceeds expectations.

Slide 4-7 displays some of the various signal methods used in pull systems.
The light pole is a favorite in the process industries not only to indicate an impending material
shortage but also to notify engineers of a process problem.
Lesson Learned: The easiest and best signal system is the old two-bin system. At the work
station you start with two filled bins with backup bins located on shelves close to the work station.
When one bin is emptied, it is pulled from the work station and replaced with a full bin. Empty
bins are picked up by a supplier and returned to the storage rack as full bins. The total number of
bins in the queue is dependent on supplier reliability and quality. In starting a pull system, you
may have ten bins in the queue and as time passes and the supplier performance improves, it is
possible to reduce the bins in queue by 60 percent or more. The ultimate target is to have no
need for bins on the storage shelf.

Slide 4-8 lists some of the important elements of effective inventory manage-ment. Startup and
buffer inventories will be high when first implementing a pull system but as the system matures,
the need for excess inventory will disappear. Using the standard of inventory turnover to
measure inventory utilization, it is not uncommon to see inventory turns double in the first year
and triple in the second.
Lesson Learned: The best system for inventory control in a point-of-use-logisticssystem is to
design parts kit trays to be used in a two-bin signaling system. This methodology makes it easy
to take a physical inventory and lends itself to effective inventory back-flushing. Under this
inventory technique, back-flushing can be accomplished at critical points in the build process
rather than waiting for the completion of modules and/or the final assembly. Kit trays also help
with part shortage control and cycle counting of work-in-process.

Part No. 2: Procurement Strategies, Supplier Selection, Key

Supplier Development (To be continued)
About the Author
Bill Gaw is the founder of Business Basics, LLC and a "been there, done that" lean enterprise
advocate. He is the developer of six training packages and seven training modules published to
help individuals and companies reach their full growth and earning potentials. To review details of
his popular Supply Chain Management Tutorial, simply click on the below link:
Supply Chain and Inventory Management

For knowledge and implementation know-how you'll not find in

the books at Amazon.com... neither in the APICS Library

nor the Harvard Business School Press,

simply click on: http://bbasicsllc.com
Business Basics, LLC
6003 Dassia Way, Oceanside, CA 92056
West Coast: 760-945-5596
2001-2013 Business Basics, LLC

Supply Chain Management in its broadest context deals with the flow of material and
information form the natural resource stage all the way through to the ultimate customer.
Consequently, supply chains cover several enterprises such as raw materials suppliers,
companies who transform the materials by adding value, finished goods suppliers,
distributors and retailers. In order to optimize our business processes, we must make sure
that all the resources within the supply chain share the gained benefits equitably.

On a more local level, this means that a manufacturer will include both its sup-pliers and
customers in the supply chain with the intent of minimizing constrains and addressing all
major business objectives. These objectives almost always include issues such as: Inventory
reductions, reductions in lead times and cycle time, development of Internet communications,
improvement in the order fulfillment process and improved customer satisfaction.

Slide 4-18 presents a review of the subjects covered in this supply chain management minipresentation. Hope they provide you with a few ideas on how to improve your supply chain. Get out
there and try them outremember that inventory management can be only as strong as the weakest
link in the total supply chain.

Before we can even start to put on paper a new layout for a sequential production line with point-ofuse-logistics support, it is necessary to review and update our procurement strategies. Slide 4-9
provides inventory objectives.
Lesson Learned: A critical success factor relative to establishing an effective pull systemis the building
of a world class supply chain. Purchasing parts based on the lowest selling price and establishing
second sources of supply no longer are winning strategies. Instead of price alone, we need to evaluate a
suppliers flexibility to change, quality attitude, schedule reliability and total cost. We need to shrink
our supplier base to a manageable number and identify our key suppliers. Key suppliers will require an
on going program to identify and achieve continuous performance improvements. In short, we need to
develop our suppliers as if they were a department within our factory. With this mentality there is no
longer a need to second source parts. Would you second source parts that were made in your factory? I
think not!

Slide 4-10 presents the objectives of focused procurement. In this example the case study
company has reduced their vendor count from 771 to 215 qualified suppliers and has
identified 50 key suppliers that the purchasing team interfaces with to continuously improve
their performance.
Lesson Learned: Intimidation used to work fairly well as a method of getting vendors to tow
the line. But today, vendors have become supplierstheyre more sophisticated in their
dealings with customers and the good ones are more selective in choosing their partners.
Some suppliers will be classified as key suppliers and contracted into a unique working
relationship called the partnership.

Slide 4-11 applies the Pareto Principal to gain key supplier focus. Key suppliers can be
classified as commodity suppliers or outsource suppliers. Commodity suppliers will usually
contract for a wide variety of like parts such as electronics, structural, hydraulic, pneumatic,
etc. Outsource suppliers will provide cabling, printed circuit boards, electronic assemblies,
machine components, etc.
To receive world class service from key suppliers we need to treat them as extensions of our
companythey need to have access to real-time data on whats happening in the company
and where it is headed. The more we communicate and work with these suppliers the sooner
they will reach their full potential.
Lesson Learned: The days of vertical integration are over. No longer can we tolerate the cost
of maintaining a total in-house capability to make every part that is needed in the final
product. Outsourcing all non-core processes is todays rule. Why? Because the supplier
marketplace has specialty houses that can do almost every manufacturing and business
function better and at a cost savings.
A good example is the outsourcing of a total machine shop at our case study company. The
tooling business (proprietary and a core competency) was growing so fast that the strategy
was to gradually outsource the non-core competency machine shop parts and convert the
machines to tooling work centers. Not only was this strategic objective a winner, it was
implemented in record time and the aggregate cost of outsourced parts was reduced by 20%
below in-house standards.

Supplier selection is a crucial part of a supplier development program. Purging and

upgrading from a price only vendor structure to key supplier partnerships requires a
tenacious pursuit for high performance suppliers. The creation of a supplier selection
team is a requisite of a supplier development program. Slide 4-12 identifies a typical
supplier selection team.
Lesson Learned: In selecting outsourcing suppliers, it is advisable that the
planner/buyer be skilled in the purchasing process and have technical expertise in the
outsourced processes. For example, when our case study company outsourced their
machine shop, they converted a machine shop supervisor to a planner/buyer and
provided him with planner/buyer training. They rightfully concluded that it was
speedier and easier to acquire the planner/buyer skills. You never want a
planner/buyer that lacks technical expertise managing an outsource supplier.

It is important to have a procedure that documents the process of supplier selection. Slide 413 provides the basics of a supplier selection process. Consistency and integrity are
paramount to an effective execution of the selection process.
Lesson Learned: It is amazing how many suppliers will be eliminated simply by requesting
them to fill out and mail in a supplier pre-survey. If you are in search of suppliers for on-site
visits to find a particular commodity supplier, the pre-survey will insure that the suppliers
selected for an on-site visit will be what you are looking for and will save much time and
frustration!

Selecting outsource suppliers requires a deeper investigation than what is done for
commodity suppliers. A lot more is at risk and you want to make sure that the supplier
selected is compatible with your companys management philosophy and business culture.
Slide 4-14 lists the more important business elements and processes that should be included
in a key supplier on-site audit list.
Lesson Learned: Outsourcing non-core production requires special attention to the planning
process. For example, our case study company outsourced machine components to three
machining companies. Their plan was not to establish second sources but to tie each supplier
to a specific product and sequential productionline. This way they could work with each
supplier to develop the material handling and scheduling methods that best fit each of the
products. In electronics, they worked with two suppliers. They started out with cables, added
PC board stuffing, added sub-assemblies and finally successfully out-sourced black
box, plug-and-play manufacturing.

Communication is the name of the game and the better they are the better the results will be
from key suppliers. There is no substitute for on-site visits to key suppliers. The practice of
MBWA at supplier sites has more payback than any other option available. Email is good,
telephone is better, but the on-site visits are best.
Lesson Learned: When our case study company established a partnership with a machining
company that was 1200 miles away, most everyone thought we had gone mad. But this
company was perceived to be much better than the rest of the competition so the selection
committee accepted the distance risks. The responsible planner/buyer spent 50% of his time
at the suppliers facility at the beginning of the partnership. After six-months, he was down to
once a week and by the end of the first year he was down to monthly visits. How well did this
supplier work out for our case study company? Well, they have the best quality and on-time
delivery record of all key suppliers, their parts go directly to the production lines with no inhouse inspections performed and they have never shut down a production line. All this at an
aggregate cost reduction of 14% from the previous in-house production costs.

Performance measurement is just as important for key suppliers as it is for in-house

production. The graphs in slide 4-16 are self explanatory but it should be noted that the
graphs use the rolling ten-period format that we discussed in the balance scorecard module.
Lesson Learned: Do not create a cookie cutter supplier measurement system and then
dictate it your suppliers. Key suppliers should have their say about how their performance is
to be measuredit should be a negotiated process. It is crucial that key suppliers are
committed to the standards by which they will be measured.

An annual key supplier conference is a good business practice. But dont think that you will
solve any problems at such a conference. Such a get together should be afeel good event.
Who should attend and some topics for discussion are listed in Slide 4-17. Awards for
exceptional performance is a good practice but dont get carried away.
Lesson Learned: A supplier of the year award can be demotivational and should be avoided.
A much better approach is to give out specific accomplishment recognition awards, such as a
supplier that has developed a special parts handling innovation, or a supplier that contributed
over 5 suggestions on how to reduce costs through parts redesign. These types of awards
are specific and consequently accepted and respected by all suppliers.

About the Author

Bill Gaw is the founder of Business Basics, LLC and a "been there, done that" lean enterprise
advocate. He is the developer of six training packages and seven training modules published
to help individuals and companies reach their full growth and earning potentials. To review
details of his popular Manufacturing Best Practices CD Library, simply click on the below link:
PowerPoint-Plus Training Modules

For knowledge and implementation know-how you'll not find in

the books at Amazon.com... neither in the APICS Library

nor the Harvard Business School Press,

simply click on: http://bbasicsllc.com
Business Basics, LLC
6003 Dassia Way, Oceanside, CA 92056
West Coast: 760-945-5596
2001-2013 Business Basics, LLC