Opportunities for Savings – Supply Chain

Your company is growing and things are going well.  The original business model that was put in place, years ago, is now really gaining momentum.  Revenues are increasing, but now you are starting to notice that expenses are also increasing at the same rate, or possibly faster.  To get a handle on things, you have mapped out your entire supply chain.  Additionally, you took the extra step to assign levels of time and money for each step and activity in the supply chain.  You now have a very large stack of data, but how do you sift through it all to find areas of inefficiency?

This is when having a Lean Six Sigma expert on staff can really provide a lot of value to your organization.  However, if you do not have that skill set on staff, all is not lost.  The principles of analysis are actually very logical and can be done without any special certifications.  It can take time to pull everything together, to come up with an accurate assessment of the opportunities available, but the gains are worthwhile.

Through your earlier efforts, you have identified a couple of key areas in your supply chain that needed further inspection.  These were most likely areas with more complexity; touch points and re-work loops, or possibly areas that had a disproportionately high proportion of time, defects or money spent on them.  With these areas identified, it is time to look at every applicable step or transaction in your process map.  Each step needs to be scrutinized for the inputs that lead directly to that process being completed, and the potential outputs of the process need to be listed.

When one understands all of the inputs, outputs and function of the link in the supply chain, then that operation can then be studied in terms of value.  What would happen if that step was removed from the process?  What time or monetary value is that step providing to the inputs, to add necessary value to the outputs?  What if that step was taken sooner or later in the supply chain; would that increase or decrease the value of the process, compared to its placement today?  All of the inputs need to be evaluated for their contribution to the process, also, to ensure that each one is necessary, needed, and as complete and accurate as possible before being assimilated into a link in the supply chain.  What we are looking for are operations being performed in the current state that really do not add necessary value (or enough value) to the overall process.

The same goes for re-work loops.  What is happening in a process that causes steps to repeat themselves?  Is it quality defects in materials, inaccurate or incomplete information, or timing issues that are causing conflicts with a downstream process?  Re-work loops are one of the biggest efficiency wasters, as they are causing a process to be repeated without output to the next link in the chain.  All of this extra time and money is waste.

Once waste has been identified, the next step is to do a root cause analysis to determine the source of the inefficiency.   When digging into this type of analysis, the explanation “that’s how we’ve always done it” is not an acceptable reason or response.  There is a reason and cause for every action, and each action has a downstream effect; positive, negative or irrelevant.  As you find actions that cause negative or irrelevant effects, those are the first ones that need to be eliminated or changed.  Even the actions that have positive effects need to be evaluated to ensure that the positive effect is worth the expense of the time or money being spent on the action.

This has been a theoretical discussion up to this point, so perhaps an example will help to illustrate the principle of root cause analysis.  In a former career, we asked vendors to go through an EDI testing process before shipping product to our distribution centers.  A percentage of vendors would either not sign up for EDI testing, or fail the testing process, and it was causing a re-work loop for the compliance associates to continually go after these bad performing vendors and convince them to fall into line.

Before we began the analysis process, some employees wanted to solve the problem by asking the merchandising department to be more involved in the process of compliance testing, and create extra forms for them to fill out and go through with prospective vendors.  Knowing that reactive solutions like this are not always the best course of action, we encouraged the employees to look deeper into the problem before coming up with a solution based on gut feel.  We started by asking the basic question; “why do we need a vendor to be EDI compliant?”

The initial answer was fairly predictable; “Because our vendor manual states that all shipments must comply with our standards, and it is our job to ensure the vendors follow the manual.”  O.K.… but besides the manual, why must the shipments be EDI compliant?  What would happen if the shipments came in without an EDI advanced ship notice (ASN)?  Well, it turns out that if shipments come in without an ASN, or carton labels, then an associate has to manually create a receiving transaction, the cartons must be hand counted, and carton labels manually applied.

Great!  Now we had a reason that could have costs and time assigned to a non-ideal process.  We did the exercise of researching time and expense, and came up with an additional average cost of $.05 per unit for non-compliant shipments.  Next, we looked at the vendors who failed, or never attempted the testing process.  We were looking for any characteristics that would be common among the vendors from either a product type or industry segment.  If we could find any common traits of those vendors, then perhaps a targeted solution could be developed, rather than a blanket process change that added more steps and work for other parts of the company.

Interestingly, we did find a common similarity in the low performing vendor base, but it had nothing to do with product type or industry.  Instead, it had to do with the size of the vendor, and the size of the orders we placed with these companies.  It turns out that nearly 90% of the vendors refusing to embrace EDI, were those vendors that did less than $50,000 in gross annual sales.  Most of which were very seasonal in nature with only two or three orders a year, or they were added as the result of a one-time buy for special liquidation pricing.  By the time the vendor calculated their costs of signing up with an EDI provider, paying for the testing process, then paying transactional fees, purchasing labels and label printing software, it did not make financial sense to comply with the required EDI standards.

A proposal was then made to have our company pay the EDI fees for the vendor, to at least get the efficiencies of product flowing smoothly through the receiving operation.   However, we asked the group to analyze that decision before implementing it.  How many units were being received by this size of vendor and, at $.05 per unit, how many units would have to be received to pay for our own company’s investment in subsidizing the EDI costs for these vendors?  It turns out that even if more than 50,000 units were received, it still would not be enough to justify the financial return of paying the costs of implementation and transactions for these smaller vendors.

As a result of this study, an internal policy was put in place regarding vendor size and the policy of holding them accountable to EDI compliance.  As a result, our compliance staff ended up having more time to pursue more financially viable issues, by eliminating the burdensome re-work loop of chasing down smaller vendors from their normal task list.  Additionally, another department was not burdened with unnecessary paperwork as a blanket fix to a problem, due to a reactive policy that was not fully vetted.  Finally, it became easier for a subset of the vendor community to do business with the retailer.  All in all, it was a successful project.

This was not the only fix that that company put in place, by going through supply chain mapping and root cause analysis.  Continuous improvement was a core function of the supply chain group and, every year, operating costs were reduced as a percentage of sales.  It does not take any special certifications or degrees to do the same in your organization.  Only the desire and discipline to understand your supply chain, look for areas of inefficiency and implement well thought out plans to improve your operation.

Derk DeMasters, Director of Operations – Adams Industries