By

Skip Stein

The Process

 

The process of successfully managing a finished goods manufacturing, sales and distribution supply chain are many and varied.  Typically, the ‘sell side’ is first addressed by implementing general accounting systems, manufacturing process & control systems, and the marketing  or ‘sell side’ of the business.  The sell side will focus on meeting customer demands by efficiently managing finished goods inventories, timely processing of customer orders, delivery of the product to the customer as requested and subsequent invoicing and payment processing.

 

This sell side of the business is heavily focused on customer order processing as this is the most visible part of the P&L equation in most businesses.  Electronic order processing, delivery and payment processing are frequently an integral part of this business process.  Following the Electronic Business Flow Model (EBFM) businesses develop efficient process control systems to manage the sell side.  By implementing sophisticated Electronic Data Interchange (EDI) and other electronic transaction processing systems, orders are received from the customer, processed and delivered in an efficient and timely manner.

 

As companies continue to evolve their MRP/ERP systems (either by developing or by purchased packages), the supply side of the business gains visibility.  Always searching for ways to trim costs and increase margins on the sale of finished goods, it is a business decision to apply the EBFM business model to the supply side of the manufacturing process.

 

The goal of applying EBFM to the supply side is to reduce overall raw material and parts inventory (including safety stock), eliminate out  of stock conditions on raw materials, eliminate production line interruptions (except for scheduled downtime), and to reduce overall overhead and handling costs.

 

Material Acquisition & Control

 

In order to accomplish these goals, there are a variety of supply side material acquisition processes that can be initiated.  Typically, these processes will be implemented in conjunction with an automated Procurement Management System that is closely coupled to the existing MRP/ERP systems.  These procurement systems will help manage and control the supply side processes that will be initiated.  Among the most efficient supply side control processes that can be initiated are:

 

Vendor Managed Inventory (VMI) – This process places the burden (at least partially) on the supplier to manage raw materials and/or parts inventory.  This may be accomplished in a variety of ways and often depends on the level of sophistication of the supplier as well as that of the manufacturer.

 

• Remote Inventory Management –Inventory of raw materials and parts are stored at the vendor site, but allocated (fully or partially depending on contractual agreements) to the manufacturer.  These materials will be moved on a demand bases (as forecast by the manufacturing process) to the manufacturing site as needed.  Purchase Orders are generated by the supplier on a replenishment basis.  Materials are invoiced at the time of shipment to the plant/site.

• Local Inventory Management –Inventory of raw materials and parts are stored at the manufacturing site in a location usually reserved or allocated to the supplier.  The supplier is responsible to maintain inventory levels based on consumption and forecasting information supplied by the manufacturer or directly obtained by the MRP system at the local plant/site.  Purchase Orders are generated by the supplier on a replenishment basis.  Materials are invoiced at the time of shipment to the plant/site.

• Vender Managed Kanban (VMK) – Similar to Local Inventory Management, but inventories are managed and stored at the manufacturing site and are consumed on an as-needed basis or by Kanban.  The supplier is responsible to maintain inventory levels based on consumption and forecasting information supplied by the manufacturer or directly obtained by the MRP systems at the local plant/site.  Purchase Orders are generated by the supplier on a replenishment basis against an open order (usually with not to exceed and/or time limitations).  Materials are invoiced as they are consumed; typically a material receiver is generated when the Kanban is initiated for the draw of raw materials or parts.

 

Supplier Release Scheduling – This process follows a more typical order/supply process.  The manufacturer provides periodic forecast to the supplier based on the MRP systems at the local plan/site.  The orders are typically placed against an open purchase order (with limits) and shipped based on the forecast schedule.  Materials are invoiced at the time of shipment.

 

Bid/Quote Material Sourcing – This process is fully manufacturer driven with little or no forecasting to the supplier.  When material/parts requirements are identified, the manufacturer purchasing department will release a request for quote to a variety of suppliers (either directly, through published media, or integrated public quote systems).  The purchase order is issued based on price and availability to deliver within the timeframe specified on the quote request.  Materials are invoiced at the time of shipment.  Inventory management, replenishment and future sourcing are managed by the manufacturer.

 

Direct Purchase – this process is the simplest.  A suppler of materials or parts is identified by the purchasing department and a purchase order is issued for a specific quantity at a specified price (often based on published price book or by negotiated contract).  Materials are invoiced at the time of shipment.  Inventory management, replenishment and future sourcing are managed by the manufacturer.

 

As with the sell side, sophisticated electronic transaction processing systems are available to support the supply side order, receipt and consumption process.  One of the primary issues with the supply side is that frequently raw material supply companies tend to be less technologically sophisticated than their consumer retail counterparts are.  Often suppliers will be small local raw goods or small part/component suppliers with little or no electronic information system capabilities.  In these cases, currently available Internet and Web based tools, portals and other support systems provide resources to even the smallest job shop so they too can participate in the electronic supply side transaction processing systems.

 

Selection for Automation

 

One of the main tasks with automating the supply side of the business, and extending the EBFM model to the supply side, is to identify the capabilities of the business’ suppliers.  Selecting a short list of key suppliers by common criteria will help focus the implementation process on those suppliers who are most critical in the manufacturing process.  One of the best ways to select the most critical suppliers is to conduct a survey; first internal, then external.  Working with the purchasing department, select the highest volume (dollar as well as units), those identified as a constrained suppler (where there is more industry demand than raw material or parts are available),  and suppliers identified by the shop floor manager as supplying critical components, are a good place to start.  Once identified, the purchasing department can conduct an external survey (or may be able to provide a direct response) to assess the capabilities of each suppler to interface to the manufacturer electronically.

 

Once the short list of qualified suppliers is available, the purchasing department will work with the automation team to identify the best way to automate the supplier’s raw material or parts acquisition and management.  There are several ways that the various material acquisition models can be implemented.  These acquisition models, based on EBFM, include a close partnership between the supplier and the manufacturer; one that may not have existed as a previously relationship.  This trading partner relationship includes contractual agreements as well as bonds of trust between the supplier and manufacturer that are demonstrated by the mutual ability to work toward a common goal.  The technological execution of this relationship will be in the form of electronic transaction exchange or trading for the purpose of obtaining raw materials and parts for the manufacturing process.

 

Technology Process

 

Today’s technologies provide a variety of ways to exchange trading partner information electronically.  We will discuss only the most viable in today’s marketplace.

 

Electronic Data Interchange - EDI provides businesses with the ability to exchange business documents easily between trading partners without the laborious, time consuming, and error prone movement and handling of paper.  The format of EDI transactions is controlled by standards published by national/international bodies.  (For additional information please see: http://www.msc-inc.net/EDI_Information_Sources.htm).  EDI transaction data can be transmitted point-to-point (using direct connection communications protocols), via the Internet (using AS2 level security), or by means of a Value Added Network Carrier (VAN).

 

Web Portals - Web portals create a centralized access point, simplifying access to information.  Real time access to information, answers and reports can be processed and viewed 24 hours a day.  Centralized security – access rights are defined and maintained in a single location - can be implemented to limit the supplier to viewing only their information.  Electronic transactions can be generated/transmitted/received via the web portal using web based tools (such as EBXML) or by simple File Transfer Protocol (FTP) in XML, EDI or proprietary formats.  Web Portals are one way to address the needs/requirements of suppliers that have limited systems processing capabilities by providing access to information via the Internet with a simple browser interface.

 

Virtual Private Network (VPN) - VPN connects to the Internet using a standard broadband or dial-up link to any ISP’s local point of presence (POP).  VPN client software running on a remote machine then uses a combination of encryption and authentication technologies to establish a secure ‘tunnel’ over the Internet to a VPN gateway running at the edge of the corporate network.  Once the VPN tunnel has been established, all communications between the client and the gateway are secured.  This design leverages the Internet for long distance data transport while outsourcing modem termination hardware and last-mile connectivity to the ISP and local phone company respectively.  Electronic transactions can be generated/transmitted/received via the web portal using web based tools (such as EBXML) or by simple File Transfer Protocol (FTP) in XML, EDI or proprietary formats.

 

In addition to the security and file transfer capabilities, VPN connections can provide access to the manufacturer’s systems (inventory, forecasts and other information) directly by providing access to the manufacturer’s electronic MRP systems.  This allows the supplier to monitor and control inventory levels and forecasts to meet the manufacturer’s demand.

 

Supply Management

 

As previously discussed, the execution of the electronic transactions will be in conjunction with a inventory supply model.  While all of the models discussed are potent methods to address material resource supply, one of the most efficient as well as the most complex is the Vendor Managed Kanban.

 

Kanban is a Japanese term for "visual record", which directly or indirectly drives much of the manufacturing organization.  It was originally developed at Toyota in the 1950s as a way of managing material flow on the assembly line.  For more than three decades the Kanban process, a highly efficient and effective factory production system, has developed into an optimum manufacturing environment increasing global competitiveness.

 

The essence of the Kanban concept is that a supplier or the warehouse should only deliver components to the production line as and when they are needed, so that there is no storage in the production area.  Within this system, workstations located along production lines only produce/deliver desired components when they receive a card and an empty container, indicating that more parts will be needed in production.  In case of line interruptions, each work-station will only produce enough components to fill the container and then stop.  In addition, Kanban limits the amount of inventory in the process by acting as an authorization to produce more inventory and supply more raw materials.  Since Kanban is a chain process in which orders flow (see EBFM) from one process to another, the production or delivery of components are pulled to the production line.

 

To automate a vendor managed Kanban, it is important that the vendor has a ‘visual record’ of the manufacturing process (where their materials are used).  Part of this visualization is presented by the manufacturer’s forecasting model for each production element.  The other components depend upon the VMI inventory model chosen.  While the VMK is the ideal implementation, a Kanban can be implemented with any chosen VMI model.

 

In any case, information flow is the key to making a Kanban or any supply side inventory system function cost effectively.  This information flow is generated by several key components in any manufacturing system:

 

• Inherent demand communicated by the marketing or ‘sell side’ of the business.  This demand is generated by customer purchase orders, customer consumption/forecasts and anticipatory sales trends.

• Open orders and work in process (WIP) inventory.  This represents supply inventory currently in the pipeline or currently being consumed (already assigned/allocated by Kanban or other inventory draw).

• On hand supply inventory measured against on hand finished goods inventory.  Here the goal is to limit both of these components to a minimum.  An AOT (Always on Time) supply side inventory coupled with efficient manufacturing process will allow a JIT (Just In Time) production and delivery of the customer finished product to the desired destination.

• Lead time to produce relates directly to raw demand and the manufacturing cycle.  The longer the time to produce a finished good from the raw materials and parts (supplied by Kanban or other material supply system) the more ‘in process’ inventory of materials will be in the system.  Efficiencies in the production process will help eliminate any excess in the process control MRP systems.

 

No matter which inventory supply model or technique is utilized, the overall goals are the same: to manufacturer goods for the least cost, in the shortest amount of time with sales at the highest margin that the market will allow.  Efficient supply side inventory management and control will provide a critical component to overall Return on Investment (ROI) as measured by margin and sales components and resulting in profit to the company.

 

Material Resource Planning Automation Work Plan

 

As previously discussed, the first steps to automation of the material supply side of the manufacturing process are involved with the survey of key suppliers.  Since the assumption had been that we have been dealing with an existing manufacturer of finished goods, much information will be available from the purchasing department and the buyers currently involved with material supply processing.

 

A detailed work program will need to be developed.  Management Systems Consulting, Inc., specializes in project management and is prepared to assist you with the development of a detailed project plan that will enable a successful Material Resource Planning Automation project to be successful and cost effective.