ElecComp Inc. ElecComp Inc. isa large contract manufacturer of circuit boards and other high-tech parts, The company sells about 27,000 high-value products, whose life eyele is relatively short, Competition in, this industry forces ElecComp to commit to short lead times to its customers; this committed service time to the customers is typically much shorter than. manufacturing lead time. Unfortunately, the manu- facturing process is quite complex including @ somplex sequence of assemblies at different stages, Because of the long manufacturing lead time and the pressure to provide customers with a short response time, ElecComp kept inventory of finished products for many of its SKUs, Thus, the company managed its supply chain based on long-term forecast, the so-called push-based supply chain strategy. This make-to-stock environment required the company to build safety stock and resulted in huge financial and shortage risk. Executives at ElecComp had long recognized that ‘his push-hased supply chain stratezy was not the appropriate strategy for their supply chain Unfortunately, because ofthe long lead time, a pull- fnsed supply chain strategy, in which manufacturing and assembly-are done based on realized demand, ‘ess not appropriate either, Thus, ElecComp focused on developiny supply chain strategy whose objectives are 1, Reducing inventory and financial risks. 2 Providing customers with competitive response times. This could be achieved by * Determining the optimal focation of inventory across the various stages of the manufacturing and assembly process. + Caleulating the optimal quantity of safety stock for teach component at each stage. ‘The focus of redesigning ElecComp’s supply chain wes on a hybrid strategy in which a portion of the supply chain is managed based on push, that is, a Imuke-o-stock environment, while the remaining portion of the supply chain is managed based on pull, thatis, a make-to-order strategy. Observe that the supply chain stages that produce to stock will be the locations where the company keeps safety stock, ‘while the make-to-order stages will keep no stock at all Hence, the challenge was to identify the location in the supply chain in which the stratezy switched from a push-based, that is, a make-to-stock, strategy toa pull-based, that is, a make-to-order, supply chain location is referred to as the push-pull EleciComp developed and implemented the new push-pull supply chain strategy, and the impact was ‘dramatic, For the same customer lead times, safety stock was reduced by 40 to 60 percent, depending ‘on product line. More importantly, with the new supply chain structure, EleeComp concluded that they could cut lead times to their customers by 50 percent and still enjoy a 30 percent reduction in safety stock ‘To understand the analysis and the benefltexpe- rienced by ElecComp, consider Figure 3-11 in which a finished product (part 1) is assembled in a Dallas facility from two components, one produced in the ‘Montgomery facility and one ina different facility in Dallas. Each box provides information about the value of the product produced by that facility ‘numbers under each box ate the processing time at that stage; bins represent safety stock. Transit times between facilities are provided as well. Finally, each facility provides committed response time (0 the downstream facilities. For instance, the assembly facility quotes a 30-day response time to its ‘customers. This implies that any order can be satisfied in no more than 30 days, The Montgomery facility quotes an 88-day response time to the assombly facility. As a esult, the assembly facility needs to keep inventory of finished produets in order to satisfy customer orders within. its 30-day ‘committed service time. Observe that if somehow ElecComp can reduce the committed service time from the Montgomery facility to the assembly foclity from 88 days to, sy. 50 or perhaps 40 days, the assembly facility will be ‘ble 10 reduce its finished goods inventory while the Montgomery facility will need to start building inventory. Of course, ElecComp’s objective is t0Agrayboxiss prosesing age Number under the bon Tstheprocsing ine FIGURE 9-14 How to read the diagrams. minimize systemwide inventory and manufacturing costs; this is precisely what Inventory Analyst™ from’ LogicTools (www.logic-tools.com) allows users todo. By looking atthe entire supply chain, the tool determines the appropriate inventory level at each stage For instance, if the Montgomery facility reduces ts commited lead time 13 days, then the assembly facility’ does not need any inventory of finished goods, Any customer order will trigger an order for parts 2 and 3, Part 2 will be available immediately. Since the facility producing part 2 holds inventory, ‘while pat 3 will be available at the assembly facility Sestak ot = 7410] FIGURE 3-12 Current safety stock locaton. . = = he Number above the box ‘enumber of units rie ake “downsteam ut tow the comment fineto Bonet tage a Costin the bois the ‘ae of he product Pins indeat safety sock eeleshade stock, emp means ne ‘atety tock in 13 days: 13 days’ committed response time by the ‘manufacturing facility plus 2 days” transportation lead time. It takes another 15 days to process the ‘order atthe assembly facility and, therefore, the oer will be delivered to the customers within the committed service time. Thus, in this case, the assembly facility produces to order, that is, a pl ‘based strategy, while the Montgomery facility needs to keep inventory and hence is managed based o us, that is, a make-to-stock strategy. Now that the trade-offs are clear, consider the product structure depicted in Figure 3-12. Brows boxes (parts 4,5, and 7) represent outside supplienSo I [ons | [GURE 3-13 Optimized sooty stock. ‘while black boxes represent internal stages within lecComp’s supply chain. Observe that the assembly facility commits a 30-day response time to the asiomers and keeps inventory of finished goods, More precisely, the assembly facility and dhe Facility manufacturing part 2 both produce to stock. All other slags produce to order. Figure 3-13 depicts the optimized supply chain that provides customers with the same 30-day response time, Observe that by adjusting committed service time of various intemal facilis, the assembly sytem stuns prodiucing to order and Keeps no finished goods Imentory. On the other hand, the Raleigh and Montgomery facilities nee to reduce their commited service ime and hence keep inventory. So where isthe push and where is the pull inthe optimized strategy? The assembly Facility and the [EEz. Dallas facility that produces part 2 both operate now ina make-to-order fashion, that is, a pull strategy, hile the Montgomery facility operates in a make: torstock fashion, a push-based strategy. The impact ‘on the supply chain is a 39 percent reduction in safety stock! ALthis point, it was appropriate to analyze the Impact of a more aggressive quoted lead time to the customers. That is, FleeComp executives con- Sidered reducing quoted lead times t0 the ‘customers from 30 days to 15 days. Figure 3-14 {epiets the optimized supply chain strategy in this case. The impact was clea, Relative to the haseline (Figure 3-12), inventory was down by 28 percent ‘while response time tothe customers was halved, See Table 3-7 for a summary of the results of this study. FOURE 3-14 Optimized safety stock with reduced ead time.‘Saety stock ‘Lead tme to Inventory hholang cost customer Oycietime tums (Sivean) (Gays) (tursivear) 743100 ‘ 105 12 45400 2 105 va 53700 18 18 13 Finally, Figures 3-15 and 3-16 present a more complex. product structure. Figure 3-15 provides information about the supply chain strategy before optimization and Figure 3-16 depicts the supply chain. strategy after optimizing the push-pull boundary as well as inventory levels at different Pan Page) FIGURE 9-15 Current supply chain. stages in the supply chain. Again, the benefit is clear. By correctly selecting which stage is going to produce to order and which is producing to stock inventory cost was reduced by more than 0 percent While maintaining the same quoted lead time tothe customerspid enor Say srk ast SVE a Pals) FIGURE 3-16 Optimizes supa chan ‘To summarize, using « multistage inventory opt mization technology (Inventory Analyst™ from LogicTools), BlecComp was able to significantly reduce inventory cost while maintaining and Sometimes significantly decreasing quoted service limes tothe customers. This was achieved by 1. Identifying the push-pull boundary; that is, iden- tifying supply chain stages that should operate in a make-to-stock fashion and hence keep safety stock, The remaining supply chain stages operate in a make-fo-order fashion and thus keep n0 Jwentory. This is done by pushing inventory to Jess costly locations inthe supply chain 2 Taking advantage of the risk pooling concept. This concept suggests. that demand for a component used by a numberof finished products has smaller variability and uncertainty than that ofthe finished goods; see Chapter 2 3. Replacing traditional supply chain strategies that are typically referred to as sequential. or local, optimizarion by a globally optimized supply chain strategy, In a sequential, oF local, optimization strategy, each stage tries to ‘optimize its profit with very litle regard to the impact of its decisions on other stages in the same supply chain. On the other hand, in a slobal supply chain strategy, the entire supply chain strategy is integrated, so that strategies are selected for each stage that will maximize supply chain performance. ‘To better understand the impact of the new supply chain paradigm employed by ElecComnp, consider Figure 3-17, where we plot total inventory cost against quoted lead time to the customers. The black trade-off curve represents the traditional relationship between cost and quoted lead time to the customers.Safety tock cost versus quoted Lead time son e000 som oom sso ssoom4 swoon 4 swan | same sane | «+ 0 » ” o 0 109 Led tme quote to aster ays) curve isa result of locally optimizing decisions at each stage in the supply chain, The brown trade- ‘off curve isthe one obiained when the firm globally ‘optimizes the supply chain by locating correctly the push-pull boundary ‘Observe that this shift of the trade-off curve, due to optimally locating the push-pull boundary, implies 1, For the same quoted lead time, the company ean. Significantly reduce cost 2. For the same cost, the firm ean signticanlly reduce lead time, Aitional relationship between cost and customer ‘quoted lead time is smooth while the new trade-off ceurve representing the impact of optimally locating the push-pull boundary is no, with jumps in various places. These jumps represent situations in which the Jocation ofthe push-pull boundary changes and sig- nificant cost savings are achieved, } Final, noice thatthe curve epeseting he tas b, presenting he ts }