Shane Maher MBA shares with LMJ readers a research investigating the current thinking on supply chain integration by offering a case study of a leading orthopaedic manufacturer.
Like John Darlington suggests, if we can shorten the length of time a product remains within the supply chain and ensure that the correct product is given to the customers at the end, then we shorten the time between delivery and payment.
It is also recognised that the proper management of any SC will diminish risk and uncertainty and will also optimise the inventory level and process cycle time so that the organisations are able to satisfy the customer and make a profit. Recently, there has also been a move from a supply driven to a demand driven marketplace. As a result, previous differentiators such as manufacturing quality and local supply no longer apply.
The basis for this article is to evaluate the current thinking on supply chain integration (SCI) and the implications and learnings for the medical device industry by using an actual integration process at a medical device manufacturer and by performing a critical review of their implementation process.
Organisations cannot exist in isolation from the market; any organisation regardless of size or orientation needs to meet the requirements of its customers. Supply of goods and services is the only point where the customer is willing to part with payment for the product or service. The supply chain is the means by which the organisation gets the product or service to the customer.
In 2009, Bicheno and Holweg said: “The key trick to supply chain management is to consider the entire suppliers, manufacturing plants, and distribution tiers, and the aim for synergy: 2+2=5”.
Manufacturing, long seen as the basis of production within the medical device sector, has evolved into a worldwide, commodity management, low-cost base process. Due to the downsizing of the world itself it is now very easy to source product anywhere, and quality, which for a long period was seen as a differentiator, no longer applies.
Any organisation that wants to commence its journey to SC integration must first understand its own supply chain. Very few organisations have mapped the complete supply chain and as a result have limited understanding of the complications within it. This lack of understanding frequently leads to losses within the system. As with any process review or change, the primary focus needs to be defining the current state. Without this mapping, organisations could be limited in the actual change taken, or focus resources in areas of minimal return.
Once the mapping exercise has been completed, there will emerge a focal point around which the SC rotates. For the majority of organisations this focal point is the relationship between the manufacturing organisation and its suppliers. This relationship is usually managed by the purchasing/procurement departments within any organisation.
This understanding is essential to ensure that de-coupling points for the chain are established. De-coupling points define the point at which the SC is driven by forecast value streams, the point at which the SC is driven by actual customer demand. These points in the SC are inventory locations that buffer against variation on the demand side on one side and variation in supply on the other. Failure to hold inventory in the correct location or quantity could result in stock outs or excess inventory.
DEVELOPMENT OF INTEGRATED RELATIONSHIPS
As with any process, SCI is part process and part relationship, for integration to succeed there has to be recognition of the fact that the interaction of the different parties within that relationship is crucial to the outcome of that relationship. As we have seen already, the traditional methodology can be adversarial or dependency based. For supply chain to become integrated there has to be a move away from that adversarial- or dependency-based methodology.
Trust is an integral part of building that new relationship, the importance of trust cannot be underestimated in any relationship. During the integration process a number of different points or stages must be clearly outlined.
MAPPING OF SUPPLY CHAIN
In early 2010, the integration process began with a big picture mapping exercise. This involved a number of different functions internally including planning, procurement, warehousing, logistics, incoming inspection, finance and quality. The initial mapping exercise was also targeted at the internal and external structures. They mapped the entire SC from tier 1 to the products leaving the manufacturing facility and arriving in the primary distribution centre.
The results showed that the facility had 562 active suppliers across all categories. The team conducted a number of exercises as part of the mapping event and as support for the mapping event. The inputs to the mapping event and method of data gathering are outlined below.
We can reduce the complexity by segregating the supplier base of 562 into three distinct categories:
- Raw materials, including all packaging items as per the BOM;
- Consumable items, all controlled items used in the manufacturing process but not on the BOM;
- Services, this category included any outsourced influences on the SC from freight and logistics providers to custom brokerage services and internal warehousing activities.
The mapping exercise was led by the purchasing group and to aid the exercise a set of controlled questions was identified to ensure that the information gathered was consistent across the SC. Part of the answers required were provided by the procurement individual and the remainder was provided by the supplier. The information was then collated into a supplier matrix detailing answers to the questions by supplier. These questions included:
- Savings both generated and projected. This was to include price changes but separately “Continuous Improvement Projects” (CIPs);
- Risk Assessment rating based on current financial standing of the supplier from low, medium or high;
- Product supplied including the number of different SKUs and the batch size used;
- Lead time including the lead time at supplier, their tier one supplier, all external processing times if applicable and freight services;
- Current communication tools used including frequency of supplier audits and business reviews conducted by our organisation.
The results of the review when totaled show that the lead time of the total supply chain is 74 days, the manufacturing facility only accounting for 6% of it.
The final part of the mapping activity was the assessment of the purchasing activity and the extent, if any, of relationship management. Each of the procurement professionals were required to keep a log of activities over a two-week period. This task was completed by utilising the outlook calendar system and categorising the different tasks completed on a daily basis.
The only positive forward looking activity performed by the procurement group in conjunction with the suppliers is time meeting with suppliers on new product introduction (NPI). These activities represent only 17% of the total time in procurement activities.
CONCLUSIONS FROM THE MAPPING PROCESS
Prior to the mapping event there was a lack of understanding within both the SC group and the management team of the interaction between the different elements within the supply chain. There were a number of tangible benefits to conducting the exercise and the team working together with the other value streams on gathering the information:
- It created a visible SC that previous to the exercise remained hidden. The team had a greater understanding of their actions on the total SC;
- It made the task of articulating the need for change easier for both the current SC group and the management teams at a higher level;
- It showed the lack of interaction between the supplier group and the procurement group, very little of the communication could be described as positively contributing to the SC;
- The transactional nature of the procurement groups activities and the lack of interaction with the suppliers;
- There is a high value on the total amount of inventory within the entire SC but the team have no visibility to the total inventory in the system.
CREATING THE FUTURE STATE
The process required one area of focus due to the fact that a single focus would reduce the risk of disjointing the process and prevent a lack of understanding of what was to be achieved.
The focus area identified was reducing the lead time of the entire SC from the current 74 days in 2010 to 20 days total in 2014.
The reasoning behind the focus on lead time was to increase the responsiveness of the total SC to respond to the customer and as an enabler of moving the entire system from one of a push system to a pull system. The main focus of delivering the future state were identified as:
- Creating a visible supply chain that could react to changes in demand;
- Create trust within the supplier base;
- Educate the SC group including the supplier base on how to improve;
- Reducing the amount of manual input required to change the flow of material;
- Eliminating the requirement for storage of material on site thus releasing the current floor space of 17,000 sq ft back to production;
- Standardising the work required to ensure consistency;
- Creation of systems to support the drive to 20 days by 2014.
During the implementation process a number of factors appeared to be crucial to the success of the project, these components are covered in the current literature available as reasons for failure. The argument raised in this article is that the separate components must be addressed with a single end in mind or the process will descend into one of maximising individual links to the determent of the chain.
The importance of understanding the flow of material through the chain and the interactions of the various components impacting flow cannot be assessed in isolation. Based on the learnings gained from the process, I have created a model to incorporate the buildings blocks of integration. The model differs from others currently available as its foundation is based firstly on gaining understanding through mapping, building the relationship through learning and knowledge transfer and agreeing a strategy deployment policy to deliver a relationship based on trust, with common metrics and measures of integrated process.
The concentration is required to be on the flow of product through the entire SC with quality and logistics pivotal.
Ensuring the quality of the product as it progresses through the chain is one of the central properties. Failure to have quality improvement at the core will result in an increase in the amplification within the SC caused by failure demand.
The second core activity is a logistics service that is fully integrated into the SC. The provider must be part of the strategy and training programme. The information exchange needs to be a two way process up and down the chain. The process needs to be repeated to ensure continuous improvement of the integration process.
The enablers or steps necessary for integration start with mapping and understanding leading to greater knowledge within the SC. At this point, a level of training is required to ensure common language and understanding.
Once this levelling has been achieved the organisations need to ensure directional continuity by agreeing the strategy deployment process.
These are the building blocks of a relationship based on trust and understanding. This process is further enforced by having a common set of metrics and measures; this process reduces the risk of slippage in understanding. The final building block is the usage of integrated process such as vendor management inventory (VMI). The VMI programme enables risk equalisation latterly along the supply line.
From a transactional lean perspective, the introduction of the VMI programme has made a considerable difference to the amount of time spent by procurement individuals on tactical procurement activities. In the initial mapping exercise it was identified that 55% of the time available to professionals was spent monitoring inventory and placing or altering PO’s. On any supplier using the VMI programme this has reduced to 5%. This created a capacity within the procurement group.
I suggest that there is a number of contributing factors to the low utilisation of integration as a business model. SCI is an all encompassing process that requires a lot of effort and management over a long period of time.
The integration process that was undertaken as part of this case study is nearly two years in progress and during that time there have been a number of successes. The biggest success to date has been the relationships and understandings created with the supply base that was previously based on a more adversarial relationship. There is a lot more work required to get the organisation and SC to full integration but in the opinion of the researcher the building blocks are in place. Prior to commencing a similar journey any organisation willing to commence the process will need to have an understanding of the commitment involved. The results can be delivered but there are no shortcuts to achieving any level of integration.