The concept of Globalization (requirements seeking the most efficient resource) and Supply Chain Management (reducing the amount of WIP – Work In Process – throughout the supply chain to improve overall efficiency) should not be conflicting strategies for manufacturers. What causes these two strategies to clash? The clash is a result of the overall lead time of the complete supply chain directly affecting the amount of time for which future requirements must be forecasted.
A simple example might help. Manufacturer A is based in North America. They buy a component from Manufacturer B based in a Low Cost Region … say the Far East. In turn B purchases materials and labor from the local market, let us call then C1, C2 and C3. Manufacturer A takes four(4) weeks from the time that the complete material set enters their receiving dock until the finished product leaves the shipping dock. B takes two(2) weeks to manufacture the components from purchase order release to shipping dock and five(5) weeks ocean freight/ customs clearance/ delivery to distribution location. C1, C2 and C3 take two(2) weeks from purchase order release to delivery. All this assumes that negotiations between manufacturers has already taken place, prices have been set, sub-manufacturers are covered with blanket purchase orders, if any (e.g. they have forecasted requirements and have inventory is process). Adding all of this up, in the optimum situation Manufacturer A’s sales force would tell their customers that they can not get product for at least 13 weeks! In other words, Manufacturer A’s production schedule for the next 13 weeks is already committed and firm. Perfect world, everyone has time to do their part of the process with sufficient time. Until your competitor tell your customer that they can deliver a similar product in 5 days!!
What are the implications? Manufacturer A will have to act on a build schedule which is a combination of actual customer orders and a forecast. This schedule will have to be provided all of their sub tier manufacturers for their action.
During training sessions, I would tell the attendees that if I could prepare an accurate forecast … I would be on some huge sail boat in a calm ocean in a warm climate at that very moment!! The gist is that once a forecast is added to the Master Schedule, you can be assured that it will be wrong!
How to resolve this conflict?? Many very successful companies have solved this dilemma. They have solved the dilemma by;
- Close communication with marketing/ sales to identify market shifts,
- Constantly updating the master scheduling information systems,
- Sharing those constantly changing master schedules with their respective sub tier manufacturers, expecting immediate adjustment to their production schedule, and
- Relying on the sub tier manufacturers to pass that schedule down the supply chain, again expecting immediate adjustment to their respective production schedule.
We currently have a situation where we have a customer that only maintains actual customer orders in their production schedule. We are the next tier of suppliers. We have blanket purchase orders for the components we supply. Our total lead time (manufacturing plus ocean freight/ customs) is approximately nine(9) weeks. Guessing that their production process time is two(2) to four(4) weeks, gives a total of 11 to 13 weeks. Does this system work?? Not very well. We are experiencing dramatic increases in certain components and decreases in others. A significant amount of expediting. My guess is that they are accepting production schedule changes within that total lead time. We have past history usage and minimal view of the future usage, most of the time we get visibility of future requirements when they are trying to expedite shipments of product.
What should change? Better and timelier communication with Marketing/ Sales to determine what will be sold and entering a finished product forecast into the Master Schedule. Finished product forecast because a manufacturer can not ship a 99.99% complete product! Forecasting components rarely results in shippable product. The finished product forecast quantity should be adjusted and/or moved out on a periodic basis as the sales environment changes. Remember, until the component inventory actually hits the receiving dock, the manufacturer’s cash investment is zero!