Supply Chain Vector [Electronic resources] : Methods for Linking the Execution of Global Business Models With Financial Performance نسخه متنی

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Supply Chain Vector [Electronic resources] : Methods for Linking the Execution of Global Business Models With Financial Performance - نسخه متنی

Daniel L. Gardner

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Chapter 9, the Pareto technique allows teams to focus on inputs that are responsible for the greatest amount of variation in a process. For purposes of inventory management, ABC analysis identifies those stockkeeping units (SKUs) that represent the largest percentage of overall inventory value. The rationale behind this practice is if the highest value inventory items can be reduced first, the overall effect of the exercise will be more beneficial to a company. Applying the 80/20 rule, it may be said that 20% of all SKUs represent 80% of the total value of inventories.


An understanding of Pareto analysis makes the ABC breakdown much more intuitive. ABC analysis divides inventories into categories (A, B and C), each of which is based on the dollar value of the SKU. SKUs with the highest value are placed in category A, those with medium value in category B and the remainder in category C. This categorization allows management to focus on the biggest dollar-value items first by taking measures to reduce inventories beginning with the A category.


Cumulative by design, ABC analysis states that 65% of inventory value come from 10% of the SKUs (category A), 25% of the inventory value comes from 20% of the SKUs (category B) and 10% of inventory value comes from the remaining 70% (category C). As displayed in Figure 12.3, ABC analysis states that 90% of the total inventory value (A + B) is driven by 30% of the total number of SKUs.




Figure 12.3: ABC Analysis for Inventory Management


The results of the NikoTech analysis, implemented across all four plants and shown in Figure 12.4, were revealing. Considering NikoTech's product mix (cellular phones, laptops, desktop computers and routers), it may not be surprising that the majority of the 23 SKUs placed in category A were for laptops and cellular phones. It is also telling to note that the 23 SKUs in question represented 15% of the total SKU count but, more importantly 65% of the total dollar value ($85.8 million). Moving on to category B, 25% of the total SKUs were found in this section (37 out of 150), representing 30% of the total dollar value ($39.6 million). Finally, and not inconsistent with ABC analysis, category C has 60% of the SKUs (90), but only 5% of the value ($6.6 million). While this analysis shows which product families represent the makeup of finished goods inventories, it does not tell management a lot about where the problems were occurring and why they were happening. Based on this information, the team was able to dig deeper into the issue and uproot some key drivers of the problem.




Figure 12.4: ABC Analysis for Finished Goods


The ABC analysis led management to conduct another Pareto exercise on the category A offenders, this time isolating which plants were responsible for the largest amounts of finished goods. Once it was determined that China and Mexico represented the majority of finished goods, all short-term efforts were focused on bringing them in line. The combination of a five why analysis and subsequent deployment process .map told an interesting story. First, it was discovered that China had serious problems with laptop returns from major customers in the United States. It seems that the same lead time issue that was plaguing materials management had found its way into finished goods, with customer orders going out the door well after their due dates. Because NikoTech's customers were losing sales due to late deliveries, they exercised delivery time clauses in their contracts with NikoTech and rejected the goods.


A detailed process map of logistics flows out of the China plant revealed that lead times had increased due to the fact that the logistics department had changed ocean carriers. While saving $300 per container in transportation costs, the lead time had increased by 15 days into the port of Long Beach, California. The logistics department never shared this innovation with the sales director, and the problem went unnoticed for months. Once discovered, the logical solution was to revert back to the original carrier so as to be in a position to comply with contractual lead time agreements.




Turning its efforts to the Tijuana plant, the NikoTech team realized there were similar inventory levels of cellular phones, but for different reasons. Due mainly to the high demand for cellular phones from clients in South America, the Tijuana plant could not keep up with production. After a few brainstorming sessions, it was revealed that when the capacity problem cropped up, management had decided to ship partial orders as opposed to no goods at all. However, a process mapping session also showed that as goods were prepared for shipment, the commercial documents (invoice and packing list) did not match the actual quantities of goods. Specifically, the order management personnel did not make adjustments to the orders to reflect the decrease in product shipped. When shipments arrived at destination in South America, customs noticed the discrepancies and either delayed or seized shipments. In many instances, it took over 30 days to fix the problem, again putting NikoTech well beyond its delivery commitment. Predictably, customers rejected orders and sent them back to NikoTech on a freight collect basis.


Once uncovered, the documentation problem was solved via a poka-yoke (foolproofing) mechanism that was built into the process. Basically, copies of the adjusted order information were shared with the shipping area, and a process was put in place whereby all physical cargo had to be reconciled with the paperwork. Consistent with the 3 Cs approach to documentation handling, the Mexico plant was able to be sure that all documents were complete, correct and consistent with the quantity of physical goods. Upon implementation, the process was monitored through the use of trend charts that plotted the delivery time of each shipment. If an individual order was outside of the established parameters, corrective action was taken to make sure the situation did not happen again.


In the case of category A finished goods, the concerted effort of ABC analysis and several Six Sigma tools was able to uncover and eradicate many problems. However, even after taking these measures, NikoTech management felt that there was still too much money tied up in finished goods for a build-to-order model.


ABC analysis can reveal a great many things about the makeup of finished goods inventory. One thing it cannot isolate, however, is the age of the inventory. An inventory aging report requested by the team revealed that of the $132 million in finished goods, $45 million had been on the books for almost two years. The result of poor quality, returns and failed product launches, these products remained on NikoTech's books with little hope of redemption.


It was no secret at NikoTech that the policy on obsolete inventory or no-buyer inventory was to keep values on the balance sheet. As any accountant knows, this practice artificially props up the income statement but has a negative effect on asset utilization. NikoTech deferred losses on the income statement, hiding the obsolete inventory values on its balance sheet. This number inflated the value of the inventory line item, which had an adverse effect on all measures associated with asset utilization and velocity. The solution to this problem is to try and find a buyer, albeit at a discount, for the goods in question. If that does not work, management will eventually have to bite the bullet and take the charge to the income statement. Net income would suffer in the short term, but all asset utilization calculations would improve proportionately.


Based on the breadth and depth of the inventory discussion, few would disagree that the biggest challenge facing supply chain managers today continues to be inventory management. This is particularly true in a production environment, where raw materials, work in process and finished goods can become a runaway train, and a vector approach to measuring performance must be exercised consistently throughout the years. Tools like DOI, cycle counting, Pareto analysis and detailed process mapping are but a few of the methods that have been and continue to be available to businesspeople today. It is the use of these tools, along with an obsession to overturn every operational stone, that will bring companies a step closer to supply chain excellence.


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