The Client is a Tier 1 Supplier in the Material Handling Industry. The plant works four, ten-hour shifts each week. Additionally, the plant must maintain a 98% on-time delivery rate to the OEM’s (Original Equipment Manufacturer) who only allow a three-week lead time on their orders. The plant does not have either finished goods (the manufactured products available for purchase) or significant raw materials inventory.
Additionally, the plant was designed for one specific customer to purchase one particular product. Therefore, all manufactured products are made-to-order with a specific configuration. Finally, the plant was set up with a Just-In-Time (JIT) system for its vendors, which allowed vendors two weeks to ship raw materials.
The plant has many customers in the same industry, but with different configurations. There is no Min-Max inventory control system, and small hardware parts are stocked at the assembly line. Unfortunately, a side effect of these hardware parts stocked at the assembly line is a finished product that has missing parts when delivered to the customer. There is also a constant shortage of critical parts which cause assembly line downtime.
Overtime is often required of the employees, to maintain the on-time delivery rate, which adds to the plant’s labor inefficiencies. Moreover, the need for overtime is not discovered until the day before it is required.
Orders for customer requirements, which were requested three weeks in advance, were compiled on Friday night. The MRP (Material Requirements Planning) system ran over the weekend to supply the buyers with their products. On Monday, the buyers reviewed the MRP results and drafted a Purchase Order (PO) to the supply chain for the exact number of items requested in the MRP run. This process means that the vendors received their POs on Monday evening and created their production schedules on Tuesday. In effect, the vendors had a total of seven working days to produce and ship the necessary parts on time. A majority of the made-to-order supply chain was within the one-day shipping time. The sole exception was the equipment parts, such as bearings and castings, that came in bulk order to a supplier warehouse from China.
All these conditions resulted in labor inefficiencies, higher-than-budgeted inbound freight costs, and missed customer shipments. The company’s supply chain experienced the same issues because they were continually juggling their schedules to accommodate vendor requirements.
The morale of the labor workforce was low due to working unscheduled overtime, which cut into one of the plant’s best fringe benefits, which was a three-day weekend.
The financial impact of these conditions was an average EBITDA (Earnings Before Interest, Tax, Depreciation, and Amortization) of 2.0 percent.
The first step towards resolution was to identify the manufactured parts that were always in short supply. Once the parts were identified, we had to determine if they were common to all customer products or unique to specialty items. The common elements are then assigned a Min/Max inventory level based on both their one-month usage and the POs issued to vendors.
Secondly, all the hardware and small parts were moved away from the assembly line to ensure inventory integrity. These items were then classified as “Common Parts.”
Next, a process was established for the kitting, or the gathering together, of all “Common Parts.” At the outset, the parts were kitted in bags and placed in small totes using a version of the Bill of Materials needed to manufacture a product. This system of kitting proved to be a slow procedure and mistakes were still made in the kitting process.
The fix for the problematic kitting process came from an element of the TPS (Toyota Production System). A placemat was created using pictures to represent the different manufactured parts visually. Moreover, identifying numbers were written underneath each picture for each kit type. Lastly, each kit was matched to a PIN (Product Identification Number) that represented a unique finished part. This identification process enabled the warehouse parts picker to identify an element more efficiently to reduce errors. Finally, this also means that, just like your childhood model car kit, if you have parts leftover, or the kit is short of parts, it is a signal that someone, either the parts picker or the assembler, has made a mistake.
Finally, we had to address the issue of the parts imported from China. A review of the usage and the shipping lead times revealed that the optimum solution was to keep a one-month supply on order in the factory, a one-month supply in transit, and a one-month supply in the local vendor warehouse. However, the company had to commit to paying for the inventory, even if the product mix changed. The customers were also informed that they had to give a three-month notice of any product changes.
The assembly line efficiency improved almost immediately. The on-time delivery percentage was consistently at 98 percent or above. The number of rejects from test and final inspection was cut by 75 percent. The assembly line went back to a scheduled four-day work week with limited additional overtime.
On the supply chain side, the vendors could reduce the amount of inventory they were carrying, which allowed them to concoct a more efficient production plan. This planning process also encouraged cost reductions on the inbound freight, which was included in the vendor pricing. As a result, the company was either able to negotiate better terms or a decrease in pricing.
The customers were delighted at the improved on-time delivery percentage and the reductions of line-in rejects. The number of expedited freight occurrences to the customers was also significantly reduced.
In the final analysis, this project was a significant element of the company achieving an EBITDA of 12 percent, along with an increase in business and new projects from the considerable industry OEM’s.
Just-In-Time works when you have a defined product mix with an optimal lead time. If you have a variable product mix with a lead time that is too compact, you must use some variant of a Just-In-Time system.
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