Innovating to Optimize Multiple Dimensions of Supply Chain Performance

Co-author: Robert Benny

Supply Chain innovation dedicated to end-to-end performance improvement through collaboration with its network of suppliers and customers is essential to staying competitive. How important is it? Just one change in the way a semiconductor company handled its supply chain contributed significantly to a large percent reduction in finished goods inventory and improvement in factory utilization.

Today’s global marketplace and volatile economic conditions make it essential for supply chain organizations to develop and execute strategies that optimize company costs while delivering differentiated value to customers. In fact, APICS — the trade association of operations management — emphasizes that supply chains should:

• Create value,
• Contribute to the organization’s competitive infrastructure,
• Leverage global logistics,
• Synchronize supply with demand, and
• Measure performance throughout the supply chain.

One method that is used to assess supply chain performance is the “triangle of metrics” consisting of delivery performance to customers, inventory optimization to maximize cash, and asset utilization to manage the cost of manufacturing finished products. This model is derived from AMR’s (now Gartner) Hierarchy of Supply Chain Metrics by Debra Hofman in 2004.

Many dependencies and factors relate all three points of this triangle of metrics into a unified supply chain. The focus here is on two of the elements of this essential model: how to use manufacturing postponement (configure-to-order – CTO) to reduce / optimize inventory and improve asset utilization and how to use statistical modeling to improve forecast accuracy.

CTO is enabled at the next-to-last step in a semiconductor manufacturing test process, which differentiates a few highly similar parts into many highly distinct products (or SKUs “stock keeping units,”). Since implementing CTO, factory variation has been reduced by 50 percent, contributing to overall SCM improvements such as agility, responsiveness and lower costs.

CTO is a manufacturing postponement strategy that helps load factories more linearly, reduces finished goods inventory, reduces dependency on the accuracy of estimated product mixes, and improves support of upside demand inside lead times.

Statistical demand planning models were introduced as an element of the planning for CTO. The “intra-quarter statistical model” (or, IQSM) was used in demand planning at the SKU level to help determine intra-quarter demand likelihood based on historical, actual consumption. This model scrutinized the velocity of the actual orders compared to history and the current demand forecast. It guided the supply planning team to determine which SKUs to build all the way out and which to hold at the CTO postponement point.

Postponing production at CTO was driven by IQSM to defer building inventory of finished products by holding material near the end of the test-mark-pack flow until an order is received. This enabled control of options to create multiple unique SKUs from a single postponed part quickly and at a very low cost before the flow finishes. It added significant flexibility to overall inventory and enabled efficient satisfaction of constantly changing customer demands.

In some product flows material accumulates at the final personalization point in the supply chain due to the manufacturing strategy of stopping further processing when that material no longer satisfies actual or forecasted demand. Holding the material at this point provides the flexibility of waiting to select the final SKU until customers demand it – reducing the uncertainty window down to a day or two from the normal lead time of two or more weeks. CTO extends this practice with two main differences:

• First, material that would have normally been differentiated and finalized based on a market forecast was held at CTO until an order is received.

• Second, to improve factory linearity, extra material was inserted into the back-end production flow during low points and processed up to the CTO point to await final marking based on actual or predicted orders from the statistical model.

High customer demand drains the accumulated CTO. By holding material — instead of finished goods — in CTO, the supply chain planning team reduced the company’s finished goods inventory while still responding to demand changes. CTO allowed the supply chain to simultaneously optimize materials inventory and maximize market responsiveness without pushing factories into overtime or expediting.

The strategic decision to delay the final stage prior to product shipment at the CTO point was a manufacturing postponement tool to help balance three metrics:

• Finished goods inventory
• Forecast mix accuracy
• Factory loadings

CTO also helped manage factory capacity in the beginning of a quarter, especially when demand was back-end-loaded and subject to variability within lead-time. This approach was part of an ongoing effort to optimize production costs, reduce inventories, and deliver value.

Outcomes

Results revealed significant improvements in factory linearity and finished goods inventory levels. Finished goods declined by 40% within three quarters. This reflected the institutionalization and increasing maturity of IQSM and CTO. Overall, it was the direct result of predicting the likely end-of-quarter billings more accurately earlier in the quarter and managing the production accordingly. In addition, factory linearity improved by 50%, as IQSM provided a risk-based assessment of what would sell. By prepositioning the correct CTO inventory levels, the supply chain was able to manage factory linearity while watching orders closely.

In today’s dynamic market, companies must respond to shifts in demand in order to garner business. Companies work consistently to provide customers with supply to meet dynamic demands and not compromise service levels or inventory. The key is to do it profitably and in a way that optimizes working capital. IQSM and CTO processes enable both goals to be achieved.

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ciao…mam

Robert Benny is an Expert Council Member at Firestorm Solutions and Associate Director of the Supply Chain Center of Excellence, McCombs School of Business at The University of Texas, Austin.

Michael Massetti is a supply chain executive who has lead innovative teams in procurement, quality, supply chain planning, operations engineering, and more.

Other articles by Michael …

• So, You Really Enjoy Being a Supply Chain Professional?
• Are Supply and Demand Driving You Crazy?
• Having Fun Managing Your Suppliers?
• Be Careful When You Say the “A” Word
• Supplier Remuneration – Sometimes You Just Have to Ask
• Don’t Be Afraid to Say “No!” to a Bad Contract
• Relationships Do Affect Sourcing Decisions
• Your Next Career Step – Anticipate or Fear “The Fork in the Road”?