Supply Chain Management issues and overview

Group 6 (PT-2011)

March 21

Operations Management

Supply Chain - Inventory Management Issues
• Manufacturers would like to produce in large lot sizes because it is more cost effective to do so. The problem, however, is that producing in large lots does not allow for flexibility in terms of product mix. Retailers find benefits in ordering large lots such as quantity discounts and more than enough safety stock. The downside is that ordering/producing large lots can result in large inventories of products that are currently not in demand while being out of stock for items that are in demand. Ordering/producing in large lots can also increase the safety stock of suppliers and its corresponding carrying cost. It can also create what’s called the bullwhip effect. The bullwhip effect is the phenomenon of orders and inventories getting progressively larger (more variable) moving backwards through the supply chain. This is illustrated graphically on the next slide. How then can we cope with the bullwhip effect? Centralizing demand information occurs when customer demand information is available to all members of the supply chain. This information can be used to better predict what products and volumes are needed and when they are needed such that manufacturers can better plan for production. However, even though centralizing demand information can reduce the bullwhip effect, it will not eliminate it. Therefore, other methods are needed to cope with the bullwhip effect. Methods for coping with the bullwhip effect include: • Reducing uncertainty. This can be accomplished by centralizing demand information. Reducing variability. This can be accomplished by using a technique made popular by WalMart and then Home Depot called everyday low pricing (EDLP). EDLP eliminates promotions as well as the shifts in demand that accompany them. Reducing lead time. Order times can be reduced by using EDI (electronic data interchange). Strategic partnerships. The use of strategic partnerships can change how information is shared and how inventory is managed within the supply chain. These will be discussed later.

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Supply chain of KONE
The purpose of our delivery chain is to deliver our products to our customers’ building sites in the most efficient manner possible, fulfilling time and quality requirements, while aiming to minimize our operational carbon footprint. KONE conducts business with close to 22,000 suppliers. We purchases 80 percent of our raw materials, components and systems supply for new equipment production from approximately 100 suppliers located in proximity to our production centres. Suppliers include raw material providers, contract manufacturers, component manufacturers, as well as subcontractors in the installation phase. For elevators, key components are assembled by KONE using proprietary technologies. Other components are provided by external suppliers and are sent either to our engineering and production centers or directly to distribution centers. Some suppliers consolidate different elevator components into modules for delivery to our distribution centers, minimizing the amount of packaging and logistics. Escalators, on the other hand, are delivered to the construction site as a complete unit. Our commercial escalator manufacturing takes place in China, whereas heavy duty escalators are assembled in different locations. The final assembly and installation of all elevators and escalators occurs at the building site by our technicians or qualified subcontractors in accordance with KONE specifications. Improving the sustainability of our supply chain We strive for sustainability of its operations, and expects the same level of commitment to environmental excellence, quality, safety, and ethical business practices from our business partners, which include our suppliers and subcontractors. To put this commitment into action, we issued the KONE Supplier Code of Conduct in 2008 and all our suppliers have been required to sign this code. The Supplier Excellence Certification Program is a key element of our supplier quality management process. The purpose of this program is to monitor and develop suppliers to total quality excellence. Our supplier certification program assesses each of our supplier sites across four key parameters such as Environmental management systems and quality management system. Our supplier factories are required to attain the ‘Supplier Excellence’ Certification. Purchasing Ethics Charter We, the purchasers of the KONE Equipments, realize and accept our critical role in enhancing values for our customers. In this important endeavour, we will conduct all dealings with our suppliers with honesty and integrity for mutual growth and prosperity. We will also understand and comply with law, regulation, and codes governing the conduct of our business.

Most manufacturers that I encounter are constantly looking at ways to improve their inventory costs and reliability. Nothing is worse for them than having a customer order and/or production ticket ready for staging only to find that the raw materials are not available. During my review of business processes for prospects many times the Material Planner/Purchasing Manager is doing a visual review of the raw materials in the warehouse to verify inventory quantities to either complete purchase orders or create the production schedule. They don’t trust their ‘system’ numbers. Raw material inventory integrity is often one of the biggest problems that I encounter with prospects. There could be many reasons why inventory control is such a pervasive problem: The use of separate accounting/financial systems for the inventory and manufacturing systems. Raw materials are ordered on one system and manually updated in another system. The purchase receipts are not completed in a timely and correct manner. Raw material is received at the wrong cost or wrong quantity. Human error. By the time the vendor invoice arrives the raw material has been consumed. Raw material quantities are purchased on one unit of measure but consumed in another unit of measure with incorrect conversion methods. Quality control is not tracked therefore inferior materials are hitting production causing production to use more than the formula or batch ticket calls for. Production is not recording actual. Not inputting quantities used for production or staging in a timely manner to relieve raw material inventory. Not having a work in process (wip) of the manufacturing process takes several steps and time. Cycle counting is not in place. Physical inventories occur once a year. Once a year is pretty extreme! Some companies complete this task once a month due to poor inventory controls. The majority of the companies I encounter with these problems are using two or more systems to manage their business. Sometimes one or more of the business tools is a spreadsheet. I have nothing against spreadsheets as long as they actually tie back to a database that is driven by real transactions. One system for accounting and one system for manufacturing makes no business sense to me. This use of disparate systems can cause many problems; one being inventory

control. If you are selling out of one system and manufacturing in another how do you know what your demand is for production? Is someone taking the sales orders and then filling out a production schedule? Then someone is updating one system with the finished goods to ship and invoice… I have to enter vendor invoices into the accounting system to cut checks, but I am purchasing in another system… Confusing? This scenario demands a lot of manpower just to function on a day to day basis.

Conclusion These problems of course point to operational and personnel issues, but they also point out to the need for an integrated financial and manufacturing system that is inherently designed to track items 1 – 6 and more. A production and material planner should not be spending his days looking for raw material in your warehouse; he should be on the phone getting you the best price available for the items. He should be able to feel confident that your system data is accurate and so should you.

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