TOCICO 2009 Conference TOCICO. All rights reserved.

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1 Lead time management in a machinery manufacturing company Presented By: Namkee Chung, Chonnam National University, South Korea Date: Nov. 18,

2 Contents Supply chain of Hwacheon Co., LTD. 2-Phases approach Phase 1: Manufacturing lead time reduction Phase 2: Sales lead time reduction Phase 1 DBR Raw material replenishment Phase 2 Finished goods replenishment Concluding remarks 2

3 A machinery manufacturing company Hwacheon Co. LTD. In South Korea Lathe, Machining center manufacturer Annual sales amount USD150 million Exports to USA, EU a half of the sales amount 3 overseas branches at USA, Germany, Singapore Small quantity, various products Wanting good delivery performance 3

4 4

5 Sample of Products 5

6 Supply Chain of Hwacheon Demand Production Sales Customer Request Production Order Material Purchasing Processing End item Inventory Domestic Brach Customer Assembly Shipping Oversea Branch Dealer Customer 6

7 UnDesirable Effects Production lead time of 90 days is too long to be responsive to customer demand. d Real sales is unsatisfactory, far from forecasting. There is no idea about how to set the reasonable inventory level. Sometimes the due date promised to customer is missing. Sometimes the demand for production is over the factory capacity. Marketing activity is behind the changes of customer requirement. 7

8 Focuses on inventory Investment increase Bad cash flow Obsolescence increase Increase the profit of company Reduce OE Carrying low level of inventory Protect sales Carrying high level of inventory 1. Replenishment lead time is too long. 2. Forecasting is incorrect. 3. Supplier is unreliable. 8

9 We go to LT reduction, because It leads to the ability of agile responsiveness. It decreases inventory. It is easy to set the goal of improvement activities. TOC-DBR and TOC-Replenishment teaches us to focus on it. 9

10 2-phases approach Demand Production Sales Customer Request Phase 2: Sales LT Reduction Production Order Material Purchasing Processing End item Inventory Domestic Brach Phase 2: Sales LT Reduction Customer Shipping Assembly Oversea Branch Phase 1: Manufacturing LT Reduction 10 Dealer Customer

11 Phase 1: Manufacturing LT Reduction Production production planning and scheduling Implementation of DBR Installing stock buffers Material Purchasing for common parts Processing Assembly Implementation of inventory replenishment system 11

12 Implementing DBR Manufacturing lead time reduction New measurement: Inventory Dollar Days(IDD) Capacity up by bottleneck scheduling Goal Goal 45 days IDD : 000 billion-month Goal On time delivery 90% or more 12

13 What we did for DBR week Subject 1 Subject 2 Subject Lecture 1(2hrs) Lecture 2(4hrs) DBR workshop(2ays) 4 Bottleneck resource Looking into APS Measurement 5 Standard time Lead time 6 Drum Buffer size 7 Buffer management Replenishment 8 Input output design Buffer meeting 9 Non-Bottleneck subordination Stock buffer 10 DBR system review Applying new system IDD Joint meeting with Marketing 13 Concluding review 13

14 Embedding DBR in MRP/APS They had been running MRP and APS systems. It had been usual to have Master Production Schedule delayed by one month or more. We have changed the process of using MRP and APS. TOC-DBR provided the logic. 14

15 Scheduling logic in APS change Finished 완제품 goods 기종A 기종B 조립 Assembly Fine Cutting 사상 M4 M5 M6 Before: Rough cutting & Fine cutting After: Fine cutting only Rough 황삭 Cutting M1 M2 M3 Casted 원자재iron Casted 원자재iron 15

16 Changes in MRP/APS processes customer Production procure process orders planning ment manufacturi ng shipping Production Odering Processing before Prod. plan APS MRP Assembly Testing Shipping Reporting after Production Ordering Stock APS Stock ordering MRP Prod. plan Processing Assembly Testing Buffer Meeting Shipping Reporting (IDD) 16

17 Installing Stock Buffers Categorize purchased items according to commonality and usage rate (ABC analysis) Purchase the A-rated items in advance to stock The purchase timing and quantity is determined by periodic replenishment method 17

18 Periodic Replenishment Target Inventory Level Inventor ry Level Purchasing Quantity 0 LT LT LT Replenishment period time 18

19 Target Inventory Level Target Inventory Level TI = (Demand)(LT) + Safety Stock Purchasing Quantity Q = TI On Hand 19

20 Replenishment system for stock buffers 20

21 Impacts of DBR and Stock Buffer Before After Production horizon 3 months in advance 7 weeks in advance Manufacturing Lead Time 90 days 45 days Finished goods Make to Stock Make to Order(partially) inventory Material purchase order Released based on MPS Replenishment Floor worker schedule Released daily by manager Production planning MPS by manager APS Self control(buffer meeting) Floor schedule low high correctness Parts outlet At specified time Whenever needed 21

22 Performances 항목 Goal Remarks Manufacturing LT 30 days 50 days Inventory IDD : 92 billion month IDD : 154 billion month On Time Delivery 90 % 47% Inventory [IDD-billion months] Inventories Dec Jan Feb Mar Apr 원재료 조립 378 1,539 1,645 1, 반제품 사내가공 외주가공 외주 Set 가공품창고 A/S 창고 치 공구실 소모품 0 완제품 Total 1,836 2,518 2,638 2,768 1,545

23 Seeking Cooperation with Marketing 1. On receiving customer orders, Production notifies to Marketing the expected due date depending on both customer request and factory capacity. 2. Two departments agree on the priority or sequence to process the customer orders. 3. Marketing promises customers on the delivery date. 23

24 Cooperations with Marketing Setting standard lead time Weekly input process of production plan Exploiting the expected due date Application of both TDD and IDD 24

25 Phase 2: Sales LT Reduction Demand Production Sales Phase 2: Customer Request Production Order Material Purchasing Processing End item Inventory Domestic Brach Phase 2: Customer Assembly Shipping Oversea Branch Dealer Customer 25

26 What to do at Phase 2? Which end-item to Make-to-stock? Customer tolerance time < Supply lead time Where to stock the MTS end-items? Factory warehouse or Overseas warehouse? How to replenish the stock? Depending on demand forecast and sales lead time 26

27 Sales Lead Time Customer Overseas warehouse Shipping lead time 40 days Plant warehouse Manufacturing leadtime material Stock buffers material Purchasing order 90 days 120 days Sales Lead Time : the duration until making the finished i goods available at overseas warehouse 27

28 Determining SLT 2 conflicting Criteria Marketing: shorter SLT boost up sales Factory: longer SLT decreases inventories Resolving the conflict Categorizing the end-items into 4 groups Immediate, Short, Medium, Long 28

29 4 Groups of SLT group market SLT (days) Marketing Factors Production Factors Immedia te EU 0 1. Easy to lot production 1. Long LT makes orders lost 2. High chance of low inventory 2. Competition is fierce 3. Worldwide demand USA 0 Short Medium EU 40 USA Delivery is not a major factor for sales 2. General purpose products 3. Adjustments are required EU Specifications are variable during customer contact 2. Low volume, high h spec. 3. Trend is varying USA Variations from general purpose specification 2. Cross shipment between overseas warehouses 3. Changes in specifications 1. High chance of slow runner 2, Small lot size Long EU 140 USA Brand new products 1. Dedicated purpose products 2. Sorts of project 2. High chance of obsolescence 29

30 Locating the inventory Group Overseas Factory Work-in - Material warehouse warehouse process stock Immediate O O O O Short(40 days) O O O Medium(90) Long(120) O Supplier customer 120 days Imm Imm Imm Imm Factory warehouse Imm Imm Imm Imm Material stock 120 supplier Overseas warehouse 30

31 Demand forecasting / Sales planning Canada CEO USA Brasil Market Forecasting Market analysis Branch Approval UK Germany Italy Rusia Turkey Strategy Dealer meeting Promotion Channel Branch Discussions Business goal Products Supports Promotions After service Sale Planning 공 장 31

32 Periodic replenishment Target Inventory Level TI = (Demand)(LT) + Safety Stock Purchasing Quantity Q = TI On Hand 32

33 Target Inventory TI =Demand rate * ( shipping LT + TI =Demand rate * (production LT + Domestic transportation LT+ Shipping production interval ) / 30 days + interval ) / 30 days + safety stock ( safety stock ( 30% ) 30% ) Dealer Overseas warehouse Factory warehouse Production 완제품 기 판 매 량 수주량 ( s.o ) 출 하 량 기 판 매 량 판 매 량 보충기간동안 소진될 선발주 재고 안전재고 보충기간동안 소진될 선발주 재고 안전재고 공정 중 재고 비축 자재 목표 재고 33

34 Orders releasing Order releasing = Purchasing (Sales Order) Products Order released = TI (On hand + Open SO+ Safety Stock) Material Order released = TI (WIP + Open PO + Stock Buffer) Dealer Overseas warehouse Factory warehouse Production 생산지시 판 매 수주 ( S.O ) 완제품 보유재고 발주 수주 ( S.O ) 완제품 보유재고 완제품재고등록 공정중 재고 원재료보유재고 비축자재 발주 34

35 Proceeding to execution Products CUTEX-160 HI-TECH 300 M/C Sales LT Demand Target Order Agreed Inventory Released Branch Factory annual monthly Safety stock 수요량 법인요구 판매 L/T 공장요구 재고 안전 보충 주기 목표 재고 보유 재고 발주량 판매 L/T (합의) 판매 L/T 위치 년간 월평균 재고 항해 수송 생산 법인 공장 법인 공장 법인창고 공장창고 기간 주기 주기 창고 창고 창고 창고 공장창고 생산지시 즉납 즉납 즉납 법인 창고 즉납 40일 40일 공장 창고 HITECH 일 40일 90일 공장 창고 없음 3 없음 3 없음 0 DBR 7 VT 일 90일 140일 주문 생산 없음 없음 없음 없음 없음 없음 DBR 생산방식 DBR 7 없음 3 없음 1 없음 2 DBR Tw 일 140일 140일 주문 생산 없음 없음 없음 없음 없음 없음 MRP Decide the inventory location Decide replenishment interval Calculate Target Inventory Release Order 35

36 Performance Measures Quantity 고점 Normal 적정 저점 안전재고 High Normal Low Normal IDD IDD = Price ( No. of month stayed in warehouse) ( 단위 : 억-월 ) Products Price Entered Shipped duration IDD CUTEC ,000, months 2.9 billion-month CUTEC ,000, 합계 IDD 36

37 Concluding remarks Small change, big impacts No investment in resources MRP and APS is alive when adapted to DBR TOC-Replenishment is effective in decreasing the lead time of both manufacturing and sales Lead time management is essential in supply chain management 37

38 About Namkee Chung Professor at Dept. of Industrial Engineering, CNU, Korea Vice president of TOC Korea Association Dean of Korea TOC Academy Author of some books(korean); TOC Constraint Management(1999), TOC Golden Rule(2002), Performance 200% TOC(2005) Co-translator of Necessary But Not Sufficient(Goldratt), i tt) Smart Thinking(Khwa Choon Ean) Consultancy to companies in supply chain, project management, marketing strategy 38