Supply & Demand Chain Design
Following The Red Line
The Red Line N.V.
Juli 22, 2005
Author: Michiel Franzen
Thesis
Industrial Engineering and Management Science
Faculty of Management and Organization
University of Groningen
The Netherlands
Author: Michiel Franzen
First Supervisor: Dennis Vegter (University of Groningen)
Second Supervisor: prof. dr. Jacob Wijngaard (University of Groningen)
The author is responsible for the contents of this thesis. The copyright of this thesis rests
with the author.
Table of Content
Management Summary 1
Preface 5
PART I: THE PROJECT 6
1. The Red Line N.V. 7
1.1 The Red Line N.V. 7
1.2 TRL Advanced Textiles B.V. 8
1.2.1 Organizational Level 8
1.2.2 Demand Supply Chain Management 9
1.2.3 TAT Strategy 10
1.2.4 DSCM Strategy 10
2. Problem Definition 11
2.1 Background of the assignment 11
2.2 Necessity of the assignment 11
2.2.1 Strategic necessity 11
2.2.2 Threat of external forces 12
2.2.3 Current Symptoms at DSCM 12
2.3 Problem Definition 13
2.3.1 Objective and Main Question 13
2.3.2 Subquestions 14
2.3.3 Research boundary conditions & Deliverables 14
2.3.4 Scope definition 15
2.3.5 Type of research 16
2.4 Conceptual Model 18
2.5 Project Team 19
PART II: THE CURRENT SITUATION 20
3. Product Classification 21
3.1 Introduction 21
3.2 Product Classfication Dimensions & Drivers 21
3.3 Applying the Classification Drivers 23
3.4 Product Classes 25
3.4.1 Big Fast-moving Products 25
3.4.2 Small Fast-moving Products 26
3.4.3 Slow-moving Products 26
4. Supply Chain and Demand Chain Description 28
4.1 Supply-Chain and Demand Chain 28
4.2 Supply Chain Description 29
4.2.1 Source 29
4.2.2 Make 30
4.2.3 Lead Times 32
4.3 Demand Chain Description 34
4.4 Planning Process 37
5. Customer Order Decoupling Point & Determinants 39 5.1 Introduction Customer Order Decoupling Point & Determinants 39
5.1.1 Customer Order Decoupling Points 39
5.1.2 Customer Order Decoupling Points for this project 40
5.1.3 CODP Determinants 41
5.2 Supply Chain Determinants 42
5.2.1 Volume Flexibility 42
5.2.2 Mix flexibility 43
5.2.3 Diversity in the Chain 45
5.2.4 Controllability of Manufacturing 46
5.2.5 Cost of Stock Keeping 46
5.2.6 Risk of Obsolescence 47
5.3 Demand Chain Determinants 48
5.3.1 Required Delivery Reliability 49
5.3.2 Required Delivery Time 50
5.3.3 Predictability of demand 50
5.3.4 Specificity of demand 54
5.3.5 Delivery flexibility 54
5.4 Summary CODP Determinants 56
PART III: THE DESIGN 58
6. Inventory Policies 59
6.1 Introduction Inventory policies 59
6.2 Continuous or Periodic Review of Inventory Status 60
6.3 Control Systems 60
6.3.1 The (R,S) System (periodic review) 61
6.3.2 The (R,s,S) System (periodic review) 62
6.3.3 The (s,Q) System (continuous review) 63
6.3.4 The (s,S) System (continuous review) 64
6.4 Conclusion Inventory Policy & Formulas 65
7. Scenarios 66
7.1 Introduction Scenarios 66
7.2 Scenario Costs 67
7.3 Scenario I 67
7.3 Scenario II 69
7.4 Scenario III 70
7.5 Scenario Overview 71
7.5.1 Scenario Costs at Different Delivery Reliability 71
7.5.2 Difference in Scenario Cost 72
7.5.3 Difference in Control Cost for Control Systems 72
7.6 Conclusions Scenarios 73
PART IV: CONCLUSIONS & RECOMMENDATIONS 74
8. Conclusions & Recommendations 75
8.1 Conclusions 76
8.2 Recommendations 79
8.3 Reflection 80
Bibliography 81
FIGURES
1.1 Company structure 13
1.2 Business Unit Organization 15
1.3 DSCM Structure 15
1.4 Business Strategy 16
2.1 Five Forces (Porter) 19
2.2 In & Out-of-Scope 24
2.3 Redesign / Design 25
2.4 Conceptual Model 26
2.5 Project Team Structure 27
3.1 Classification Drivers & Aggregation Level 30 3.2 First Classification by Main Drivers 31
3.3 Product Classification 32
4.1 Supply Chain & Demand Chain Desription 35
4.2 Production Process 37
4.3 Lead Times 38
4.4 Stock Points 40
4.5 Customer Order Cycle 43
4.6 Delivery Times 43
4.7 Long & Short Term Orders 44 4.8 Demand Chain Planning Process 47
5.1 CODP determinants 48
5.2 Volume Flexibility 52
5.3 Mix Flexibility 53
5.4 Diversity in the Chain 54
5.5 Diversity in the Chain (summary) 54 5.6 Controllability of Manufacturing 55
5.7 Cost of Stock Keeping 56
5.8 Inventory Cost / Service Level 57 5.9 Predictability of Demand 61
5.10 Delivery Flexibility 64
5.11 Summary CODP Determinants 66
6.1 Current Inventory Policy 68
6.2 Visualization (s,Q) without prioritization 73
6.3 Visualization (s,Q) with prioritization 73
6.4 Formulas (R,S) and (s,Q) systems 74
7.1 Scenarios, CODP’s and Inventory Policies 75
7.2 Pro’s and Cons Scenario I 76
7.3 Visualization Scenario I 77
7.4 Pro’s and Cons Scenario II 78
7.5 Visualization Scenario II 78
7.6 Pro’s and Cons Scenario III 79
TABLES
3.1 Big Fastmover s 33
3.2 Small Fastmovers 33
3.3 Slowmovers 35
4.1 Shipment Times 45
5.1 CODP Determinants 50
5.2 Predictability of Demand of Big Fastmovers 60 5.3 Predictability of Demand of Small Fastm. 60 5.4 Predictability of Demand of Slowmovers 62
5.5 Delivery Flexibility 64
7.1 Scenarios 75
7.2 Scenario I Costs (98%) 77
7.3 Scenario II Costs (98%) 79
7.4 Scenario III Costs (98%) 80 7.5 Scenario Cost Difference (98% / 95%) 80
BOXES
4.1 Sourced products 39
4.2 Lead Times 41
4.3 Time-to-Batch 42
4.4 Allocation 44
4.5 Customer Service Levels 44
5.1 Tender Business 51
6.1 Safety Stock 70
7.1 Scenario Costs 76
AOS : Average Order Size
AOT : Average Time between Orders ATO : Assemble-to-Order
ATP : Available to Promise COC : Customer Order Cycle
CODP : Customer Order Decoupling Point DP1 ; Decoupling Point 1 MTCS
DP2 ; Decoupling Point 2 MTCS / ATO DP3 ; Decoupling Point 3 MTO
DSCM : Demand and Supply Chain Management e.g. : For example
ERP : Enterprise Resource Planning ETO : Engineer-to-Order
Fastm : Fastmovers FIFO : First In First Out FTE : Full Time Equivalent
HR : Human Resource
KSF : Key Succes Factor LSP : Logistic Service Provider MPS : Master Production Schedule MTCS : Make-to-Central-Stock MTO : Make-to-Order MTS : Make-to-Stock
NA : North-American
OTC : Order-to-Cash
PMTO : Purchase & Make-to-Order PTO : Package-to-Order RAF : Rolling Annual Forecast RLW : Red Line Weaver RM : Raw Material
ROF : Revised Operational Forecast
RT&D : Research, Technology & Development SCOR : Supply-Chain Operations Reference SKU : Stock Keeping Unit
T2B : Time-to-Batch
TAT : TRL Advanced Textiles B.V.
TQ : Techlogical Batch size TRL : The Red Line N.V.
WACC: Weighted Average Cost of Capital
Management Summary
The project’s objective is to identify quantified improvement opportunities in planning strategy and inventory policy, taking in consideration that it has to be with high delivery reliability, but also at optimal supply-chain costs. As it makes sense to define a policy for a clustered group of items with similar characteristics, the product portfolio is analyzed and classified on the supply-chain characteristics: amount of orders per year and sales volume per year, resulting in three classes: Big Fast-movers, Small Fast-movers and Slow-movers. The classes will be used to translate the effect of the determinants that pull and push the Customer Order Decoupling Point (CODP). A discussion has elaborated on the structure of the current demand chain and supply chain, together with the CODP and which determinants influenced this position for the different product classes.
Regarding the supply-chain determinants, one of the key determinants for this process at this moment is Volume Flexibility and will be for the near future. Due to capacity shortage there is limited volume flexibility, especially on the weavers and X-line.
Subcontractors are assumed to have volume flexibility. Consequently, the Big Fast-
moving class is limited to decoupling upstream and the other two classes can move
upstream. Mix Flexibility is a limitation for X-line and some RLW grades. X-line limits
the Big Fast-moving class to decouple upstream. The Small Fast-moving and Slow-
moving class have no limitations to move one step upstream due to assumed mix
flexibility at the subcontractors and taking into account the products on the weavers that
have set-up costs. Gardening is limited in decoupling upstream due to high set-up effort
and time. Diversity in the chain increases throughout the chain. As a result it gives
reason to move the CODP upstream for all product classes to limit the diversification in
the chain and, as a consequence, in the stock. Controllability of Manufacturing is high
for almost all the products (except Gardening products), which consequently gives room
to move the CODP upstream, as a high controllability of manufacturing enables the
preservation of a high delivery reliability. Gardening needs special attention, because of
the still high uncontrollability. Cost of Stock Keeping shows significant cost levels,
which trigger the thought of lowering it, when it is possible due to the customer service
levels. Therefore the product classes show a CODP direction upstream from the cost
point of view. Risk of Obsolescence is not an important aspect that affects the CODP
been an issue so far. Products that were considered dead movers could be sold with some extra effort. To conclude the supply-chain determinants, the translated effect on the product classes is that that the CODP cannot move upstream for the Big Fast- moving class, due to volume and mix flexibility but can move one step upstream for the Small Fast-moving and Slow-moving class, limited by volume flexibility and keeping into account that the Gardening products need special control.
Regarding the demand chain determinants, first that can be said is that the Required Delivery Reliability is unknown at TAT. Because of that, there is no influence on the CODP measurable. The reliability levels will be chosen as input for the scenario design.
Required Delivery Times is another determinant that is not known to the business. The delivery times will be formulated based on the position of the CODP and will be the output of the scenario design, leading to a proposition towards marketing & Sales.
Predictability of Demand shows on all three classes a reason to move upstream, as the predictability gets higher when a decoupling upstream is made. Specificity of Demand is not an issue that influences the CODP position. This is due to the fact that the specificity is high and therefore it is important to know exactly which products the customer wants instead of roughly knowing what type of products are demanded.
Delivery Flexibility is flexible, but the extra costs of air transport (above sea transport) are exceptionally high and therefore not preferred. The mix and volume flexibility that influence the delivery flexibility at decoupling points more upstream are limited for the Big Fast-moving class, but give room for the other two classes. To conclude the demand chain determinants, the translated effect on the product classes is that the CODP cannot move upstream for the Big Fast-moving class but can move upstream for the Small Fast- moving and Slow-moving class, limited by delivery flexibility.
At this moment no real formalized inventory policy is used. To resolve the issues of
replenishment orders and customer orders that interfere with each other in this current
situation, different options for review interval (periodic / continuous) and four different
control systems have been discussed. (R,S) is a periodic system that orders every R an
amount that fills the stock up to level S. (R,s,S) is also a periodic system that checks
every R is the stock level dropped below s and then orders an amount that fills the stock
up to level S. (s,Q) is a continuous control system where a replenishment order of fixed
size Q is done when the stock level drops below s. (s,S) is a continuous control system
where a replenishment order of variable size (S-s) is done when the stock level drops below s. It has been decided based on the comparison that it is best for this project to calculate a control system that is close to the current situation for short-term improvement opportunities and see what long-term possibilities would comprise. (R,S) and (s,Q) systems will be considered as equivalents for their more accurate counterparts (R,s,S) and (s,S) systems, under the assumption of neglecting the undershoots. A good first picture can be drawn using the (R,S) system as a short-term option as formalized control system and the (s,Q) system to notice longer-term saving possibilities.
With regard to the scenarios, three scenarios have been formulated based on the possible decoupling points that have been concluded founded on the determinants of the supply-chain and the demand chain. The first scenario is to produce all products on stock. This is comparable with the current policy. The advantages of producing on stock are the relatively easy (customer) control situation and the smallest customer delivery times. Depending on the destination, it fluctuates between 1 week and 7 weeks. The main disadvantage is that there will be relatively high stock levels and costs, compared to the other scenarios. The second scenario means that the Slow-moving products will be assembled-to-order, which means that the subcontracting products in this class will be assembled to order (except Gardening). The Big and Small Fast-moving products and other Slow-moving products are manufactured on stock. The advantages are that the stock portfolio will be simpler in this scenario than in Scenario I, which also enables lower stock levels and cost in comparison to Scenario I. The disadvantage is the more difficult (customer) control situation in comparison to Scenario I, because a part of the production process is controlled on customer order instead of on replenishment order.
Also longer delivery times will be instigated for Slow-moving subcontracting products, which leads to an increase of 2 to 6 weeks (R,S) / 2 to 3 weeks (s,Q). The third scenario means that the subcontracting products in the Small Fast-moving and Slow- moving classes will be assembled-to-order (except Gardening). The Big Fast-moving products are manufactured on stock. The advantage is that the stock portfolio complexity will be lowest of all scenarios, which enables the relatively lowest stock levels and costs.
The savings are 6,5% in comparison with Scenario I for the (R,S) System (11,5% saving
with (s,Q) System). A disadvantage is that this scenario has the most difficult (customer)
control situation of all three scenarios, and this scenario leads to longer delivery times for
the subcontracting products in Small Fast-moving and Slow-moving class, just like in
expected, that the scenario costs for 95% are lower than for 95%. For the (R,S) system this difference accounts for a cost saving of around 12%. For the (s,Q) system this is around 14% cost savings. The maximum cost difference between the different scenarios do not show significant savings: the difference between scenario I and II is around 25.000 euro. On 4.000.000 kg production capacity this is a maximum of 0,05%
extra loss in capacity efficiency on the weavers, which, due to set-ups this efficiency loss
can easily be bigger. The difference between the scenario I and III is around 80.000
euro. On 4.000.000 kg production capacity this is a maximum of 0,2% extra loss in
capacity efficiency on the weavers, which also due to set-ups (especially for X-line) this
efficiency loss can easily be bigger. The control costs are based on the time it takes to
control the system. This control cost varies for all inventory policies but also for the
different scenarios. Main difference in control costs that can be given for the planning
time is the difference between continuous planning and periodic planning. A continuous
policy has more interruptions in the planning. Therefore more often new plans need to
be made. This takes more time, or more small parts of time. The difference in costs
between (s,Q) and (R,S) is around 450.000 euro; this is a loss of 45.000 kg to Level 3
Quality equivalent (by e.g. more set-ups in (s,Q) system). On a production capacity of
4.000.000 kg, this can be translated to an efficiency loss of around 1%. The delivery
times are dependent on the chosen CODP. For decoupling upstream the delivery times
increase for the subcontracting products in the classes that are decoupled on DP2. The
delivery times for products that are produced on stock vary from 1 to 7 weeks. For
products that are assembled to order the delivery time increases with 2 to 6 weeks. To
conclude, the saving made on stock keeping costs by decoupling upstream are not
significant and the control situation alters considerably as well. The cost savings on
considering 95% delivery reliability in comparison to 95% is noticeable. The delivery
times rise significantly by decoupling upstream.
Preface
Before you lies my disseration of my graduation project which I have done for my studies in Industrial Engineering and Management Science. I want to thank a couple of people that helped me during the project. Due to confidentiality, I will refer to the organization where I did my internship as the fictive company of The Red Line N.V. and no names of employees and other details will be mentioned.
First of all I want to thank my supervisors at the company for helping me and guiding me.
This construction worked out very good in the end if you ask me. Second of all I want to thank Dennis Vegter and Jacob Wijngaard for the supervision of the project. And of course also my colleagues at the company.
Finally, I want to thank my family and friends, for the fact that they were always there for me, when I was down and knew exactly what to say to get me up again. Thanks!
Michiel Franzen
Juli 2005
Part I: The Project
“All conservatism is based upon the idea that if you leave things alone, you leave them as they are. But you do not. If you leave a thing alone, you leave it to a torrent of change.”
Gilbert K. Chesterton 1874-1936
Change is a necessary cause. If the company does not change, it will stay in a changing environment. This is also the case at this company and in the field of Demand and Supply Chain Management. It is more and more important to use the capacity as efficient and effective as possible, without losing the focus of the customer demand. By linking the ‘Demand Chain’ and the ‘Supply Chain’, in this project the issues for now and the future are identified and used to find opportunities to improve the situation. To begin the project a general introduction is given of the holding and of the business unit. The business unit strategy and the DSCM strategy will be explained next.
In chapter 2 a background description is given on the necessity of the assignment, by identifying the external influences, but also the internal symptoms that lead to urge of this investigation. The preliminary problem definition based on the necessity is then described together with the project structure and the communication structure, followed by the boundaries of the research and the scope definition. The conceptual model will be introduced in paragraph 2.4.
Chapters Part I
1. The Red Line N.V.
2. Problem Definition
1. The Red Line N.V.
1.1 The Red Line N.V.
The Red Line N.V. (TRL) supplies its industrial partners with products and semi- manufactures which offer distinctive benefits in terms of technology and continuous product development. The company focuses on materials with functional characteristics in the field of safety and protection (people and the environment), durability and specific technological and/or quality features. In industrial markets it operates leading brands which are internationally renowned for quality and functionality in their respective market areas. The Red Line N.V. is among the international market leaders in:
•
Artificial grass fibres for top-flight sports
•
Composites for the aerospace industry
•
Tentcloth and awning fabric
•
Plastic packaging for consumer goods
The organization structure is decentralized and is built around the three clusters (figure 1.1), which are: Advanced Textiles and Composites, Industrial Fabrics and Technical Components. The Advanced Textiles and Composites cluster is focused on developing, producing and finishing high-grade fabrics, non-woven and other textile materials for professional customers in various markets and is a global supplier of advanced composite materials for aerospace and a wide range of industrial applications. The Industrial Fabrics & Grass cluster is used in a wide variety of end-use markets, such as infrastructure works, road construction, hydraulic engineering projects, the agricultural sector, manufacturing industry and the leisure sector. The Technical Components cluster revolve around producing high-grade plastic injection-moulded packaging products..
The Red Line N.V.
Advanced Textiles &
Composites
Industrial Fabrics
Technical Components
TRL Advanced Textiles
TRL Advanced Textiles (TAT) develops, produces and finishes high-grade fabrics, non- woven and other textile materials for professional customers in various markets. The company occupies a prominent position on the market for protective and industrial clothing and plays a leading role on the market for canvas and awning fabrics. Worldwide, the group ranks among the major suppliers of interlinings for the clothing industry and labels for the graphics industry. The company develops and supplies advanced textiles for industrial and protective clothing, fabrics for tents and awnings, interlinings for the clothing industry and labels for the graphics industry.
In order to understand the background of the assignment, it is important to have a brief overview of the processes. In the following, the organization structure at TAT and DSCM are sketched followed by the TAT strategy and DSCM strategy.
1.2.1 Organizational Level
The organization structure is described in figure 1.2. Finance & Business Support is
responsible for the budgeting process and accounting, but also for the facility
management (e.g. IT and Telephone). General Affairs & HR takes care of recruitment,
selection and education, but also takes into account the developments in the labour
market to balance the demand for labour with the supply for labour within the
organization. RT&D is responsible for the development of the products and process and
is essential in the innovation process. Manufacturing is accountable for producing
according to spec and using the machinery effectively and efficiently according to the
planning. The Marketing & Sales organization is divided in two sections: Industrial and
Clothing. Both are responsible for achieving their own objectives. The Department of
Demand Supply Chain Management (DSCM) will be discussed in the next paragraph.
1.2.2 Demand Supply Chain Management
This project is conducted under supervision of DSCM, which takes care of balancing the organization’s market demand and the supply-chain capabilities. DSCM is responsible for the capacity planning, sourcing, logistics, order intake and delivery and inventories. In short: the Demand Chain and the Supply Chain and is considered as a staff department, according to TAT regulations. The department consists of four main sections, as displayed in figure 1.3:
- Purchasing,
-
Demand Chain Planning,
- Customerservice,
- Logistics.
Purchasing is responsible for the supply of all raw materials. Demand Chain Planning aligns the supply chain with the demand chain, by pleasing the customers as good as possible, but using the supply chain as efficient and effective as possible. The whole process is described more detailed in paragraph 4.4. Customer Service takes care of the order handling. For this purpose, DSCM has a global order desk that handles all orders. The customer service desk is responsible for a significant part of the actions with
Director
M&S Industrial
M&S Clothing
DSCM General
Affairs & HR
Finance &
Business Support
Research, Technology
& Dev’ment
Manufac- turing
Figure 1.2: TAT Organization 2005
Figure 1.3: DSCM Structure DSCM
Purchasing Demand Chain Planning
Customer Service
Logistics
comprises all on-site transportation, warehousing, packaging as well as quality control.
External logistics are handled by the logistic service provider (LSP).
1.2.3 TAT Strategy
TAT identifies four Key Success Factors (KSF’s) that are the basis for TAT’s success and enables the company to achieve high performance and product quality valued by the customers. Due to confidentiality they have been censored. What can be said is that the KSF’s consists of innovation and service as the main elements.
1.2.4 DSCM Strategy
A DSCM Strategy is currently present for main aspects; details are currently being defined. Therefore a short sum-up of the direction will be given in which the strategy will be formulated in the near future. DSCM has a global steering model. This means that from the headquarters in Pijnacker, DSCM is globally steered. DSCM and its strategy can be split up in different fields:
Purchasing
-
Critical Raw Materials have a global steering model
-Non-critical Raw Materials have a local steering model
-
Purchasing strategy is local-for-local if effectively and efficiently possible; all Raw Materials are preferably purchased from a local supplier.
Demand Chain Planning
-
Global Steering model; the whole demand chain is handled on global level,
-Supply Strategy is not yet formulated: considerations are:
o Local-for-local production or o Dedicated lines of production
o Which (if any) production capabilities need to be sourced o MTS
Customer Service
-
Global Steering model (Global Customer Service Desk) Logistics
-
Outsourcing with worldwide partner
- Site Logistics organized in each plant
2. Problem Definition
2.1 Background of the assignment
The organization has grown rapidly in the last years. This has influenced the whole supply chain, as the company needed more capacity and more applications in order to address an increasing market demand. Furthermore, TAT started to serve more markets and did extend its global activities as a result of a demand that is still rapidly growing worldwide. At this point of time it seems necessary for the future development of TAT to investigate if the current, historically developed Supply Chain of the company is still appropriate and efficient against the background of changing market conditions and more complex organizational operations.
For facilitating the analysis, it is required to evaluate the TAT supply chain with respect to performance on costs and its service level
1, to determine improvement opportunities.
The reason for the evaluation of the performance in costs and service levels is to secure growth and profitability at TAT by meeting customer requirements. Especially the increasing pressure from potential competitors, while TAT is having shortage in production capacity at this moment, makes TAT aware of the fact that it has to address customer needs in quantity and quality demands on a constant level in order to stay competitive in the market and control the process accordingly.
2.2 Necessity of the assignment
2.2.1 Strategic necessity
To sustain the current competitive advantages of TAT, KSF’s that were described in
section 1.2.3 need to be built upon. Due to good sales and growth possibilities the
product performance on the end market and product innovation were more in focus
than delivery reliability. The KSF Delivery Reliability has not been an issue so far, as the
demand currently still exceeds the capacity of TAT, but there is also limited capacity
available in the market. The customer is aware of this supply shortage. How long this
market situation will last is unknown. Nevertheless, delivery reliability is seen as an
On short-term, all external threats seem considerably low and do not alert for immediate action. But the development of the threats is as important as the current situation. Most of the threats are limited at this moment due to the limited availability in the market. On long-term, development in the new entrants market can be a significant potential threat, leading to a market where the customer requirements will alter and will consider more than the product performance alone. In order to compete in such a market, it is important to find improvement opportunities that support the customer requirements.
2.2.3 Current Symptoms at DSCM
There are seven main symptoms at DSCM that have lead to preconception of the use of an evaluation and an eventual design of the current chain and its procedures, with the considerations of the market developments. These symptoms
2can be categorized as follows:
a. Supply Chain
o No formalized inventory policy
o Inventory Coverage is perceived to be big
o An stock unbalance between fast movers and slow movers o Existence of dead movers
o No insight in internal and external lead times
b. Demand Chain
o Customer requirements are not clearly defined
o No complete measurement of Supply-Chain capabilities (e.g. delivery
reliability)
Regarding Supply Chain, at this point of time there is no formalized inventory policy recorded. There is a target for two months in stock for all Stock Keeping Units (SKU’s), but this target has been put up more for practical reasons and is not based on any analysis concerning the optimal inventory required. The second issue is that the
inventory coverage is perceived to be big and is not meeting the target of two months.Although there is extra stock available for some products, which is needed for business growth, while production capacity is being expanded, the stock of the product mix is often out of balance. At the moment there is only one planning strategy known:
2 Derived from meetings and aligned with DSCM Manager
everything is made to stock at this moment. This could also be one reason why DSCM has the problem of a stock unbalance between fast moving and slow moving products and the existence of dead movers, whereas the latter are products in stock that cannot be or hardly be sold. All products are treated the same way, whether it accounts for 80%
of the volume or for 1%. This is a reason to question the current policy. Like the required delivery times, internal lead times are also not measured. However, the lead times are important to determine the best DSCM policy. The internal lead times need to be derived from the analysis of the supply-chain.
With regard to Demand Chain, clearly defined customer service requirements are limited. Especially the required delivery times of the customers are an important input for DSCM being able to design the structure of the chain and the control processes efficiently. At this moment there is only an incomplete measurement of the performance of the supply-chain. This limits an evaluation of TAT’s performance and its supply-chain capabilities that are important for staying competitive.
2.3 Problem Definition
32.3.1 Objective and Main Question
OBJECTIVE
Identify quantified improvement opportunities in planning strategy and inventory policy that lead to a high delivery reliability at optimal supply-chain cost.
MAIN QUESTION
Which quantified improvement opportunities in planning strategy and inventory policy can be identified and how can these opportunities be realized in order to
achieve high delivery reliability at optimal supply-chain cost?
2.3.2 Subquestions
1. How is the current (supply) chain structured, e.g. manufacturing processes, organization, logistics, decoupling points, markets, planning processes and current performance cost and delivery reliability?
2. What prerequisites need to be taken into account for the business with regard to the delivery reliability, delivery times and cost level?
3. What are opportunities with regard to planning strategy and inventory policy at high delivery reliability and at optimal supply-chain cost.
2.3.3 Research boundary conditions & Deliverables
Regarding the process:
-
The investigation project will take up to 6 months.
-
Sensitive information, received during the investigation will need to be handled with care and confidentiality.
Regarding the deliverable:
- The recommendations have to unite with the strategic objectives that are set,
especially delivery reliability and growth.
- The cost - benefit balance needs to be positive with regard to the quantified
improvement opportunities.
This will result in the deliverables:
- Product
Categorization with
-
Planning Scenarios with defined Customer Order Decoupling Points
-Costs and Delivery Times involved with the scenarios
2.3.4 Scope definition
The project will focus on quantified scenario design. The scope of the project can be described from three different views:
-
The level of strategic involvement,
-The product and market range and
-The scope in the supply chain process.
This is shown in figure 2.2. The level of strategic involvement of this project is mainly on tactical level and partially on a strategic level. In this project the corporate strategy will be accepted as such. The project aims at looking for quantified scenarios on planning strategy and inventory policy to enable the strategy in its best manner. Consequently the project is mainly on a tactical level. The outcome could still trigger a reconsideration of certain strategic movements; therefore there is a certain level of strategic involvement.
Looking at the product and market range, two new markets with its related products will be out-of-scope: ‘On Site’ and ‘Projects’. The reason for this is the unpredictable situation of these two new ‘Product/Market Combinations’. They are actually still considered as projects.
In the supply chain the focus will be on the manufacturing and the internal part of the
delivery process. Sourcing / Purchasing will not be considered, as it is sufficiently
decoupled and does not seem to be a problem at this moment as it does not have a
direct impact on the delivery reliability. It will be described briefly in chapter 4. The
operations of the Logistics Service Providers (LSPs) are also not analysed in this project,
as this is a part of the outsourced capabilities. This project will not aim at including new
service agreements with the LSPs in the scenarios. Also new warehouse locations will
not be the scope of this project.
One other thing that is out-of-scope is SAP. The ERP-system SAP is part of the detailed designer phase of the new improvement opportunities that could come out of this
project. Hence it will be out-of-scope.
2.3.5 Type of research
There are two types of research known
4: scientific research and practical research. The difference lies in knowledge objective. The Scientific research’ goal is to contribute to the universal knowledge base. Practical research is aimed to offer data, insights, methods and concepts, useful to tackle occurring management problems. This research is practical, as solutions need to be found that will improve the business performance of TAT.
For the practical research, two different approaches can be considered: a redesign and a design. A redesign takes the current situation into account and how the business and its customers wants it to be in the future, that can lead to a gap in the situations. This gap needs to be filled by the redesign of the current situation. This requires information about the current situation (e.g. performance on reliability) and the desired situation.
4
De Leeuw (1996) p70
Strategic Level
Tactical Level
Operational Level Scope
Supply Chain
Supply Chain
Source Make Deliver
Scope
Supply Chain
In-Scope Products & PMC’s
Offshore / Projects
Figure 2.2: In & Out-of-Scope
Without this essential information there cannot be a gap to be analyzed where a redesign can be based upon.
A pure design can be described as a ‘green-field’ study in an extreme case. That means: an optimal solution has to be identified without existing structures, conditions or information. Unfortunately, this is most often not possible. Factories are located somewhere on the planet, machines are built and have certain abilities, people are hired and are trained to be able to do certain things. As a result a design with the current situation taken as a basis to work from and requirements of the new design will be done.
Requirements are the points or directions on which the new design needs to be based upon. This does not involve a gap analysis. In this project, the best way to do the project is to make a design, because the prerequisites of a redesign cannot be fulfilled.
Information on crucial points to build a redesign on, are still unknown to the business. A design, built on the information that is known needs to be the result of this project. The difference between redesign and design is visualized in figure 2.3.
Current Situation
Gap Analysis
Desired Situation Requirements
Redesign
Design
Figure 2.3: Redesign / Design
In the figure 2.4 the conceptual model of this project is shown. In short all aspects of the planning strategy and inventory policy are given and according to which the project will be discussed. In Part II the Product Classification is the starting point; the product portfolio will be analyzed and grouped. Next the Customer Order Decoupling Points (CODPs) and the determinants that influence the position of the CODP for the different product classes, will be discussed, from the supply-chain and from the demand chain point of view. The inventory policies / control systems are the next point for discussion.
The different systems that can be used to control the CODP are described. For every Product Class the position of the CODP can differ. Therefore the three most feasible scenarios will be described. The scenarios will be calculated based on the inventory policies and together with the delivery times and scenario costs will be the outcome of the scenarios.
Scenario III Scenario II Scenario I
Product Classification
Customer Order Decoupling Point
Inventory Policy
Delivery Reliability
Delivery Times +
Scenario Costs
Figure 2.4: Conceptual Model
Project Owner / Leader
Project
Member Technical Support University
Project Leader
Project Support
2.5 Project Team
In this project there are five people directly involved:
- Project
Member
-
Project Owner / Leader
- Project
Support
- Technical
Support
-
University Project Leader
The Project Owner is responsible for the result of the project towards the organization and needs to be updated on developments in the process. The Project Leader is responsible for the day-to-day development of the project and has intensive contact with the Project Member.
The Project Leader is the main connection
between TAT and the university of Groningen. The Project Leader is the same person as the Project Owner in this project. For more practical support Project Support is assigned from the department of Purchasing Services. Technical Support is given from the head office of TRL. This support is meant to give a project a structure that is used TRL wide.
This gives the business more strength to learn from each other’s mistakes and successes.
The university Project Leader is responsible for giving the view of the university on the procedures of the project developments. The project needs to be of academic value and will be done individually by the Project Member.
The Project Member is involved in handling all parties in this project and takes care of the execution of the project. This involves e.g. planning, scope setting, environment research, interviews, data analysis and drawing conclusions from the received information.
Figure 2.5: Project Team Structure
Part II: The Current Situation
“Perception is strong and sight weak. In strategy it is important to see distant things as if they were close and to take a distanced view of close things.”
Miyamoto Musashi 1584-1645
The big picture is as important as the detailed one. Therefore, this part will deal with all aspects of the supply and demand chain. This will be done in a general and a more detailed way. Furthermore preparations of the scenario design will be made. This part can be split up in three sections:
Product Classification
Supply Chain and Demand Chain Description
Customer Order Decoupling Points (CODP) & Determinants
First the product portfolio will be analyzed, looking for similar characteristics, which will lead to a classification of the products, which is useful for the planning strategy. Second, the description of the current supply-chain and demand chain are, followed by the planning process. From that point onwards, the CODP will be the center of the research project. Determinants that will influence the CODP from supply-chain and demand chain point of view will be discussed. This part will be the input for the design of the scenarios.
Chapters in Part II:
3. Product Classification
4. The Supply Chain and Demand Chain Description 5. Customer Order Decoupling Point & Determinants
3. Product Classification
3.1 Introduction
TAT sells many different products. As a result this part will commence by taking a picture of the current product portfolio and looking how the products look alike and can be treated in the same way by grouping them. First the dimensions and drivers with which the ‘classification’ will take place, are discussed in paragraph 3.2. The drivers will be applied on the product portfolio, which leads to the different classes. In paragraph 3.4 the product classes will be discussed separately by looking at which products are in which class. The product classes will come back in chapter 5, where the Customer Order Decoupling Point and its determinants are discussed from the Supply-Chain and Demand Chain point of view, and what this means for the position of the Supply-Chain for the different product classes.
3.2 Product Classfication Dimensions & Drivers
There are many items with similar characteristics. As a result it makes sense to define a policy for a clustered group of items. One approach that is developed is to classify stock items into different categories, requiring different approaches to stock control. The system is known as the ABC-system
5or Pareto system. The system is simple in principle. All stock items are categorised into one of the groups – A, B, C, … – in terms of their relative importance. It may relate to financial contribution, costs of the organisation, frequency of use, opportunity costs and so on
6. In chapter 6 the considerations on the classification drivers for the TAT product portfolio are described.
Before the product portfolio will be divided, first it has to be clear how it is going to be divided and by what rules. The product classification can be described as having three dimensions:
- Product
Dimension
- AggregationLevel
- ClassificationDrivers
In figure 3.1 all dimensions are shown. Of the whole scala of products in the scenario design almost all products will be considered. Only the products that are involved with the ‘PMC’s’ Offshore and Projects will be out of scope, as defined in chapter 2. Looking at the aggregation level three levels can be identified:
1. High Level (Fibre / X-line) 2. Product Grade Level
3. SKU Level (Stock Keeping Units)
The highest level is a separation in the end products in types of product. This would mean looking at two end products: X-line and fibres. The second level is the Product Grade Level and gives all products without a specific quality notation and packaging.
The SKU level is a real specific level and includes the quality notation and packaging type. There is only one of the three quality grades that is influenced by the planning strategy and the mix in packaging is steady, which will be outlined further in paragraph 4.2. Consequently the aggregation level will not go further down then the Product Grade Level.
Last it is important to note, what are the drivers to assign products to specific classes.
The characteristics that are general for all products are:
-
Amount of orders (per year)
-Sales Volume (per year)
-
Characteristics of the Production Process
As main drivers the amount of orders and sales volume are chosen. The amount of orders on yearly basis shows how often a product is needed; the frequency of the demand. This is important for the design, because slow- and fast-moving products need
Products
Classification drivers
SKU’s (incl. Quality & Packaging) 280 Product Grade (incl. Toller & X-line) 65
X-line / Fibre 2
Order #
Sales Volume Main Drivers Aggregation
Choice
Figure 3.1: Classification Drivers & Aggregation Level Prod.
Proc.
a different approach. A big order amount triggers a demand for e.g. mix flexibility. The sales volume shows how much of the product is needed. It shows how much of the production volume is allocated by a certain product. A high-volume product enables capacity decoupling, to create volume flexibility. The two parameters are interrelated; a product of 10 grammes can be sold every day in comparison to a 10.000 kg product ones a year; the 10 grammes product would be shown as a low-volume, but fast-moving and the latter one as an high-volume product, but slow-moving.
The characteristics of the production process consist of difficulties, special treatments of the production process that leads to a reconsideration of the product in a class. Some product applications need special attention, because of the difficulties with production (controllability of manufacturing (p5.3.2)) and the long lead times (required delivery times (5.2.4)) that can occur.
The first two drivers contribute best by separating slow- and fast-moving products and by identifying the high-volume products from the low-volume products. The additional driver of production process characteristics is used to discuss questionable products. The reason of chosing amount of orders and sales volume above profit margins is that the information regarding profit margins is highly confidential and as a result not accessible.
3.3 Applying the Classification Drivers
-
Order amount separates slow- from fast-moving products (80% : 20%)
-Sales volume separates high- from low-volume products (80% : 20%)
According to these drivers four groups arise:
- Big
Fast-movers
- SmallFast-movers
- BigSlow-movers
- SmallSlow-movers
If the classification is done by accumulating the order amounts per product grade and the sales amount per product grade, the characteristics arise as shown in figure 3.2. The complete list of grades is shown in attachment 1. The group Big Slow-movers is a
Order Amount
BIG FAST- MOVER
SMALL FAST- MOVER BIG SLOW-
MOVER
SMALL SLOW- MOVER
Sales Volume Figure 3.2: First Classification by Main Drivers
- Q4 - Q5
I is purchased and is interchangable with O, which is in the Big Fast-movers group. The other two products in the Big Slow-mover group are subcontracting products made from Off-spec material from Q and S. The amount of orders are still relatively high (20 to 30 orders a year), although according to the 80-20 rule (Pareto) it is considered as slow moving. Due to the big sales volume, these two products could be moved to Big Fast- movers as well. This makes the group Big Slow-movers obsolete and turns Small Slow- movers into Slow-movers.
Another grade of discussion is H in the group Small Slowmoving. This grade is interchangable with J, which is the new developed equivalent of the product. H is not produced anymore, but can be purchased. The Small Slowmoving R is used to produce RX1 (an X-line product). A small portion of the produced R is sold separately, this grade will therefore be considered together with RX1, as separate control of R will only lead to less efficient production and higher
cost. Also SX3 is considered a Small Slowmoving product, but this is the only X-line product in another class.
As it is a product with big growing market potential and a general X-line control procedure is favourable, SX3 will be moved to the Big Fastmoving class.
This sums up the first classification. The Big Fastmovers show a small amount of grades that make up for most (90%) of the sales volume. The Small Fastmovers have a smaller proportion of the sales volume (4%) but still account for a great number of orders per year. The Slowmovers account for most grades at TAT, but relatively account for a small sales volume percentage and order activity. It is summarized in figure 3.3.
Figure 3.3: Product Classification BIG FASTMOVER
Grades: 20 % Orders: 60 % Sales: 90 %
SMALL FASTMOVER Grades: 15 % Orders: 26 % Sales: 4 % SLOWMOVER Grades: 66 %
Orders: 15 % Sales: 6 %
Order Amount
Sales Volume
24.500 kg
40 orders
3.4 Product Classes
3.4.1 Big Fast-moving Products
There are 13 products in this class that have a high order occurrence and a big annual sales volume. The average order size is around 1 to 3 tons. The products in this class are at this point manufactured (semi-) continuously in order to be able to fulfil the demand as good as possible. The products with relatively lower order occurrence are the ones mentioned in paragraph 3.3: Sourced products and Subcontracting products and SX3.
Volume 2004 No. Of
Product Grade Order Sales Volume Cust
Big Fast-mover
General 32% 43%
Q 380 659.352 KG 99
S 72 225.580 KG 31
J 95 122.399 KG 18
O 171 81.718 KG 73
Sourcing 1% 4%
I 30 99.196 KG 9
H 29 26.329 KG 30
Subcontracting 2% 5%
Q4 26 88.151 KG 5
Q5 20 49.430 KG 3
X-line 26% 41%
SX1 232 697.030 KG 80
SX4 157 148.177 KG 79
SX2 94 126.802 KG 57
RX1 69 50.317 KG 18
SX3 14 24.801 KG 9
Total Big Fast-mover 1346 2.348.151 KG
Volume 2004 No. Of
Product Grade Order Sales Volume Cust
Small Fast-mover
General 3% 1%
P 60 14.187 KG 38
Sourcing 5% 1%
N 65 8.547 KG 39
K 47 4.210 KG 20
Subcontracting 19% 3%
Q3 64 24.461 KG 19
O4 84 17.625 KG 22
P4 50 9.212 KG 16
X1 42 5.574 KG 9
N1 59 3.304 KG 8
M1 62 2.698 KG 10
K1 61 1.355 KG 12
Total Small Fast-mover 594 91.171 KG
Table 3.1: Big Fast-movers Table 3.2: Small Fast-movers
The 10 products in this class have a high order occurrence of around 40 to 80 orders per year, with small average order sizes, ranging from around 20 kg to around 400 kg. Most products in this class are subcontracting products. The underlying products are P and purchased products and B (Big Fast-mover).
3.4.3 Slow-moving Products
In this group there is a very diverse group of products. The products can be grouped as follows:
- General
Products
- SourcedProducts
- SubcontractingProducts
- Gardening- Other
