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A supply chain consists of:
-
Vendors.
-
Customers (or end users ).
A supply chain is just like a stream running
downhill. Starting from your position in the supply chain, your suppliers are
upstream and your customers or end users are downstream.
When an organization has gone through its own
Lean improvement process, it will begin to see more clearly the interactions it
has with its upstream suppliers and downstream customers.
No organization can exist in a vacuum, its
succeeds or fails by its own ability to obtain supplies as required to meet it's
own customer demands. This process had led many organizations to realize that
they can only grow and become successful when their suppliers can grow with
them.
As the organization becomes more effective in
meeting customer demand, it places an increasing demand on its vendors to supply
what is required, when its required on time, every time. If the vendor cannot
achieve this goal then the relationship is doomed to failure unless you can find
a way to assist your vendor to improve their own processes to be in alignment
with yours.
In the days of mass production many purchasing
managers believed it was a great advantage to have several suppliers negotiate
over the price of a part, because this way they would purchase at the cheapest
price. This method of choosing a supplier was fraught with problems leading to
material quality, missed shipments and lack of confidence. Many suppliers were
forced into bankruptcy as a result of trying to compete for business which was
based on the cheapest prices. It was a win-loose situation.
However, in today's market price is not the only
factor for consideration when deciding who is going to become your key supplier.
You need a supplier who can:
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Consistently supply a quality product and
maintain the specifications required.
-
Maintain competitive product cost in line with
the market value of an item.
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Deliver the product on time, every time to meet
your needs.
-
Build a confident business relationship to help
each other.
So again as you improve and drive to become a
Lean enterprise you place more demands for consistency on your suppliers. As
your organization reduces inventory levels, you will require vendors to deliver
smaller lots on a daily or weekly schedule.
Lean Supply Chain Case History
LMC has one client who is
currently manufacturing 50 products per week and they asked their list of
suppliers to send them only a one week supply every Friday. They also requested
that the vendors keep a one week supply on the shelf for them to call off, if
their sale numbers increased during any given week. Our client experienced many
different responses from its suppliers, some saying "they could not meet these
requirements," to others saying "they will have no problem."
Before LMC started working with
this client they would order items from their suppliers in lot sizes of 250 per
order. The lack of effective inventory control allowed their buyer to purchase
multiple lots of goods based on panic calls from the shop floor even though they
had inventory in their warehouse. LMC worked closely with this
particular client for one year. Their inventory of several items was so large
they did not need to purchase any additional supplies
for almost six months. This made a huge difference to both their cash flow and
cost of goods sold. If you have excessive inventory sitting in a warehouse
waiting to be used, it is dead money. It's like having dollar bills sitting
around on the shelf instead of in the bank. A business can only spend money to
buy materials, and it only gets money when goods are sold, not when they are
sitting on a shelf.
From a Lean Manufacturing perspective, I see
three levels of products in any organization, raw material, finished goods and
all the stuff in between such as parts or sub assemblies. The only materials
that have value are raw materials and finished goods. Why? Because if the
business ceases to be tomorrow, I can send back raw material to the vendor and
sell the finished goods, everything in between is scrap material. When an
organization can think in these terms they are on the path to increasing
inventory turns and improving cash flow.
Two good metrics for supply chain effectiveness
are:
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Inventory turns.
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Cash conversion cycle.
Inventory Turns
Inventory turns will show how the relationship between sales
revenue and inventory. The higher the number of inventory turns, your
organization is operating at a more cost effective level.
The number of times you turn your inventory during a given
period can be easily calculated.
Inventory turns = Cost of goods sold / Investment in inventory
Inventory turns = $10,000,000 / $2,000,000 = 5 turns
If the organization in the above example could increase their
inventory turns from 5 to 10 over the same period of time, they would be able to
make the same sales with half the inventory. This means they have an extra
$1,000,000 in the bank to use for other projects.
Cash Conversion Cycle
Cash Conversion Cycle is the elapsed time between paying for
raw materials to fulfill the order and receiving payment from the customer.
The average Cash Conversion Cycle in the US was 100 days in
1998, this was a 10% improvement since 1994. Many companies do not know their
actual cash conversion cycle, yet it is one of the key metrics to business
success and liquidity. The cash conversion cycle is calculated by using the
average number of days taken:
Inventory supply + (Accounts receivables - Accounts payable)
25 days supply of inventory + ( 90 days for AR - 30 days for
AP) = 85 days
This example of a Cash Conversion Cycle is 85 days
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