Case of the Rewired Supply Chain
ORUN is a fourth generation family owned business and is the leading company for metal cabling used in the telecommunications and automobile industry. It has a corporate headquarters and four plants located in three states. The CEO, Mr. Charles O’Run and the rest of the owners identified a core issue that is critical for ORUN to gain a competitive advantage in a fierce market that includes foreign and multi-national competitors.
In summary, the manufacturing process of a metal cable includes:
1. Drawing – any wire diameters required by the customer can be drawn from appropriately sized wire rod blanks, the initial basic material purchased from specialty metal suppliers.
2. Bunching – twisting a bundle of wires from the drawing machine in the bunching section.
3. Annealing – the hardened conductor is made by heat treatment.
4. Insulation – the outer jacket for the heat-treated conductor is made to insulate it.
5. Marking – custom marking of company logo, size or any specifications desired by the client are printed on the surface of the jacketed conductor in the marking section.
6. Inspection – quality inspection is performed to verify the outer diameter, conductivity and spark test.
7. Wind up – after inspection, the final product is
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8. Final Inspection – after all the processes, a final inspection of the packaged product is conducted.
The objective of this analysis is to lead ORUN as new Chief Operating Officer to achieve the following goals:
1. Allow ORUN to minimize costly inventory;
2. Improve the overall supply chain management within the company;
3. Ensure demand requirements are met, avoiding stock outs and reducing overall costs;
4. Standardize business practices among plants within a given supplier;
5. Increase supplier efficiency with real time information on firm/planned orders and forecasts.
Goals no. 1 and 3 specifically pertain to inventory management while goals no. 2, 4 and 5 tackles supply chain management. To put the solutions in proper perspective, the following section will present an analysis of the problems in these two strategic management functions. At the end of the analysis, alternative course of action will be suggested to attain the primary goal of the owners: 1) To control the rapidly fluctuating material purchase costs and to reduce a significant increase in raw material and finished goods inventories, 2) To ensure that the entire enterprise is organized in a manner befitting a world class manufacturing operation.
II. Analysis of Inventory and Supply Chain Management
In the case given, the following were ascertained as strategic issues and were divided according to: a) Inventory Management issue and b) Supply Chain Management issue:
A. Inventory Management
1. The plant’s operating results are not getting to local and headquarters management on time.
2. The headquarters staff reporting is confusing, and the metrics used by operating units are developed at each remote site and not distributed throughout the company.
3. There is no agreement within the company whether certain products or long-term contracts are profitable.
4. The value contribution of individual vendors to their overall process is unknown.
B. Supply Chain Management
5. There are no procedures in place to ensure unified supplier management throughout the company, leaving the decision instead to the individual plant purchasing managers.
6. The corporate headquarters and the other 4 plants manufacture nearly identical products.
7. There is a significant communication gap between the corporate headquarters and the 4 plants.
8. Information is moving between plants by facsimile and email that daily operations are quite dependent on the speed and availability of these processes.
9. Different procedures exist for the manufacturing, supply chain management, marketing, and financial reporting throughout the various plants.
An organization development issue was also identified in the case. In the past, the top management of ORUN experienced a considerable resistance to change from the workers and mid-level management. However, in this case, the focus will be finding solution only to the two strategic issues mentioned above.
A. Inventory Management Issue
There are two aspects of inventory management. First is inventory control subject to known demand and the other, inventory control subject to uncertain demand. In this case, the assumption is ORUN has a known demand, their product being used in predictable industries of telecommunications and automobile.
Nahmias (2005) provides the following reasons why a company has to hold inventory:
1. Economies of scale. It is probably cheaper to order or produce in large batches than in small batches.
2. Uncertainties. Demand uncertainty, lead time uncertainty, and supply uncertainty all provide reasons for holding inventory.
3. Speculation. Inventories may be held in anticipation of a rise in their value or cost.
4. Transportation. Refers to pipeline inventories that are in transit from one location to another.
5. Smoothing. Inventories provide a means of smoothing out an irregular demand pattern.
6. Logistics. System constraints that may require holding inventories.
7. Control costs. Holding inventory can lower the costs necessary to monitor a system. (For example, it may be less expensive to order yearly and hold the units than to order weekly and closely monitor orders and deliveries. (p. 183)
Integrating these reasons for inventory to this case, the general assumption is ORUN has inefficient inventory practices manifested in the identified problems no. 1 to 5. Specifically, the headquarters and plants of ORUN failed to:
1. Communicate efficiently their respective operating results on time. This may lead to unnecessary costs like holding cost and include the opportunity cost of lost investment revenue, physical storage costs, insurance, breakage and pilferage and obsolescence.
2. Establish a unified system of metrics. Consequently, the analysis of reports and identification of problems, i.e. transportation or logistic concerns in all plants become more difficult. This impedes the company to immediately address inventory problems thus hampers maximize profit.
3. Singly determine what products or long-term contracts are profitable. This limits the management to take advantage of economies of scale.
4. Analyze the contribution of each plant and their respective supplier to the overall process of ORUN. Establishing the contribution of each plant will allow the management to determine a new design of the management processes within the factories, maximizing the ability and potential of each plant and assessing the necessary inventory cost for each plant.
On the other hand, Nahmias identified supply chain significant in relating the activities of the firm to suppliers, factories, warehouses, stores and customers. He wrote: “The term supply chain management (SCM) is relatively new, evidently having emerged from the experiences of Proctor and Gamble (P&G) in the late 1980s when tracking the flow of Pampers though the distribution channel.” (p.294)
In analysis of the problems identified under Strategic Management issues, ORUN failed to:
1. Establish procedures to ensure unified supplier management. Knowing your suppliers may save ORUN logistics costs like transportation and distribution. In analyzing transportation problem with the use of a linear programming, the unit cost of shipping from every source to every sink is known, and the objective is to determine a shipping plan that satisfies the supply and demand constraints at minimum cost (Nahmias).
2. Identify and integrating the core ability of all plants instead of having separate operations. The objective of supply chain management is to design products in a cost-effective manner. Nahmais gave as example Ikea, a Swedish – based firm that sells inexpensive home furnishings. To reduce costs, Ikea designs products that can easily be stored directly at the retail outlets. As a result, customers take their purchases with them removing delays and customization required by more traditional furniture outlets.
3. Link communication among the headquarters and plants. Modern supply chain management seeks to eliminate the inefficiencies that arise from poor information flows.
4. Determine common procedures for the manufacturing, supply chain management, marketing, and financial reporting in the company. ORUN, with a goal of having a world class manufacturing, has to establish early on a unified system for all the management and manufacturing processes in the company.
III. Alternative Course of Action
ORUN is challenged to align their manufacturing processes with inventory management and supply chain management. The following recommendations will help ORUN to achieve this challenge and attain the five (5) goals set by the management.
1. Unifying the inventory system of ORUN
Establishing all plants of ORUN as one will pool a large amount of orders from suppliers. Consequently, ORUN will be able to gain bargaining power and reduce the cost of raw materials at a cheaper price. This will also help ORUN identify suppliers with best materials and categorize them according to their significant contribution to the company.
Further, unifying their inventory system will reduce control uncertainties and control costs. A specialized team for inventory may be formed to help ORUN assess the inventory needs of the company and may eliminate other processes, i.e. daily monitoring, monthly inventory, and quarterly report.
2. Adoption of the EOQ and JIT System
The EOQ trates the basic trade-off between the fixed cost of ordering and the variable cost of holding. If h presents the holding cost per unit time and K the fixed cost setup, then we show that the order quantity that minimizes cost per unit time is Q = ? 2K? / h, where ? is the rate of demand (Nahmais).
By computing for the EOQ, ORUN will be able to determine the best method of reducing their inventories thus minimizing cost for holding and storage. ORUN will also avoid costs of pilferage and obsolescence. On the other hand, the just-in-time system will help ORUN reduce setup times and hence setup costs.
Toyota is a classic example that maximized on the JIT system. They have substantially lower inventory costs per car compared to other car manufacturers in the US. However, this requires a serious commitment from top management and workers.
Nahmais identified the following advantages of JIT system:
1. Work-in-process (WIP) inventor is reduced to a bare minimum. The amount of WIP inventory allowed is a measure of how tightly the JIT systems is tuned. The less WIP designed in the system, the better balanced the various steps in the process need to be.
2. JIT is a pull system. Production at each stage is initiated only when requested. The flow of information in a JIT system proceeds sequentially from level to level.
3. JIT extends beyond the plant boundaries. Special relationships must be in place to assure that deliveries are made on an as-needed basis.
4. The benefits of JIT extend beyong savings of inventory-related costs. Plants can be run efficiently without the clutter of inventory of raw material and partially finished goods clogging the system. Quality products can be identified before they build up to unmanageable proportions. Rework and inspection of finished goods are minimized.
3. Information sharing to establish an effective supply chain
Nahmais explains information sharing as a means for all parties involved (management, suppliers, vendors) to share information on point-of-sales (POS) data and base forecasts on these data only. ORUN may be able to adopt this strategy by engaging into electronic data interchange (EDI). It will transmit a standard business document in a predetermined format from ORUN headquarters to its plants and suppliers and vice-versa. It may hold information on point-of-sale demand, purchase orders, and inventory status.
ORUN may also invest on web-based transaction systems to allow the plants and suppliers communicate efficiently. The company may also opt to acquire Radio Frequency Identification (FRID) tags that makes use of microchips powered by batteries or radio signals. They transmit code via satellite and delivers real-time information to the suppliers and the manufacturers.
To serve as control and evaluation, ORUN may adopt a software for inventory control and outsource computer experts to assess and install appropriate supply chain technology. All these, when in placed, will lead ORUN to achieve minimize inventory cost, improve overall supply chain management, ensure demand requirements are met, standardize business practices among plants and increase supplier efficiency with real time information. The management leadership will play a crucial role to bring these innovations to ORUN thus the challenge may shift from an operation issue to organization development issue.
Nahmias, S. (2005) Production and Operation Analysis. International Edition 2005. McGraw – Hill Education. New York, New York.