As a supply chain director, manager, or boss of a multinational corporation, where the supply chain is an integral part of your business, supply chain cost reductions are always at the forefront of your team’s mind. You can employ countless number of supply chain service providers who will help realized these cost reductions throughout the entire supply chain. As a supply chain expert and value creation supply chain consultant myself, I believe I have identified some core areas that will lead to desired supply chain cost reductions that are both sustainable and realized quickly. None of these core areas are a silver bullet, and they are disguised as a bit of work on the front end. However, all are well worth employing to seek that holy grail of pushing out waste, inefficiency, and most importantly resources (time and money) out of your supply chain.
Below I will outline how a vendor managed inventory model, in conjunction with reverse marketing, value analysis, and collaboration will achieve supply chain cost reductions.
A means of optimizing Supply Chain performance in which the manufacturer is responsible for maintaining the distributor’s inventory levels. The manufacturer has access to the distributor’s inventory data and is responsible for generating purchase orders. To further define it, let’s look at 2 business models:
When a distributor needs product, they place an order against a manufacturer. The distributor is in total control of the timing and size of the order being placed. The distributor maintains the inventory plan.
The manufacturer receives electronic data (usually via EDI or the Internet) that tells him the distributor’s sales and stock levels. The manufacturer can view every item that the distributor carriers as well as true point of sale data. The manufacturer is responsible for creating and maintaining the inventory plan. Under VMI, the manufacturer generates the order*, not the distributor.
Definition: Solicit your suppliers to come into your company to assist you with Supply Chain Cost Reductions, and other important issues, rather than your suppliers soliciting your purchasing dollar. Take a proactive approach to collaborate with your Suppliers.
Reverse marketing starts first with Value Analysis. But, how do you kick off getting your suppliers involved to start this process of fitting in the idea of reverse marketing with Value Analysis and getting to a vendor managed inventory model? I always consult client’s on having a supplier’s day. You may read my post on holding a supplier’s day conference at your facility so that you may increase collaboration.
Here are some outlined steps to creating a construct of collaboration during your supplier day conference so that you may start the process of moving to a vendor managed inventory:
I have been a Consultant for companies that have implemented a very successful, large Supplier Day Conference. It takes planning, structure and effective implementation to work effectively.
Now that you know how to get a supplier day conference and are collaborating with your suppliers better, it’s time to have a value analysis exercise.
It is an orderly and creative method to increase the value of an item. This “item” can be a product, a system, a process, a procedure, a plan, a machine, equipment, tool, a service or a method of working. Value Analysis, also called Functional Analysis was created by L.D. Miles of General Electric Company.
The value of an item is how well the item does its function divided by the cost of the item (In value analysis value is not just another word for cost):
Value of an item = performance of its function / cost
An item that does its function better than another, has more value. Between two items that perform their function equally well, the one that costs less is more valuable.
The “performance of its function” could include that it is beautiful (where needed).
Do not be surprised if as a result of value analysis the cost of an item is less than half of its previous cost.
Select the item to be studied and form a cross-functional study group team:
To value analyze anything, we form a study group of 4 to 6 persons, preferably each with different knowledge, with different backgrounds (cross-functional). They meet in a room free from interruptions.
Reverse Marketing: Suppliers are invited to join your Value Analysis group as they are the experts in the field for the item/commodity you are analyzing. They have ideas that your VA team may not know.
Then we select the item to be studied. The item should be one that gives the impression that its cost is too high or that it does not do its function well. All brainstorming ideas are put on a white board. All ideas are acceptable.
The value analyst should always be aware of functions, not of products, shapes, or processes. The main function is what the item does, is that which somebody wanted to archive by creating the item. Express this function (if possible) with just two words, a verb and a noun.
If the item is composed of various parts, it is useful to ask for the function of each part, and how they contribute to the main function of the item.
Do not be distracted by mere aggregate functions such as the rubber on a pencil’s end or the ice producing part of a refrigerator. These were functions added since it was economical or easy to do so. They have no relationship with the main function.
Find the main function and the secondary functions of an item. Get the cost of realizing each function.
The attitude of a value analyst should be critical, aggressive, nonconformist, never satisfied with what she/he receives for the money given.
The first action of the group should be to gather all the information about the item. Ask the best specialist of the field, not the person most accessible. Get a detail of costs. Collect drawings, specifications, all the written data on the item. Don’t be satisfied with verbal information.
For a pencil, for instance:
(This example, the pencil, is already a high value item).
Center the attention of the value analysis group on the main function, because, during the analysis, the secondary functions may change. The group may choose different secondary functions to realize the main function.
It is not important that the individual costs assigned are imprecise. Because even an imprecise numerical value is much better than an expression such as “very costly” or “of low cost”. Use Pareto’s 80/20 principle for cost analysis… That means 20% of the items are 80% of the total costs. Focus on these 20% first.
Measure the value of the way each secondary function is realized, is materialized:
Investigate the cost of a function. Put a dollar sign on tolerances and strict specifications. See what’s thought to be necessary and which somebody put in, just to be on the safe side. Remember: All that does not contribute to the main function is waste and should be eliminated.
The objective is to find a better way to do the main function. We try to find a different material, or concept, or process, or design idea, that realizes the main function.
People looked for conditions under which the human mind produces really original ideas, a method that helped creativity. These conditions and procedures are stated below and need strict adherence:
This finalizes the brainstorm.
The evaluation should be done after an interval, at best about two days after the brainstorm, to allow the group to gain perspective.
Now the group analyzes each idea. They group similar ideas. When evaluating, do not think why the idea would not work, why it is not possible. Develop each idea, making it more practical, making it function better. Estimate a very approximate cost for each idea and investigate carefully ideas with an apparently low cost. When an idea is canceled, that should be based on facts, not opinions.
Barriers are excuses or preconceived ideas that cannot be substantiated with numbers, facts, detailed and precise information or experimental evidence. Barriers can be honest beliefs. Normally there is gold behind a barrier. Now select the two to four ideas having the lowest cost.
Obtain information for analyzing and developing an idea. Do not work in isolation. Once the group has advanced as far as it can on its own, make contact with specialists. This may be necessary in the selection and also during the development of ideas. The value analyst is a coordinator of specialists, of groups of experts in other companies (Pay them for their contribution in some manner).
Obtain information from the best source, not the nearest or most accessible one. Do not take into account an answer by a person or specialist that lies outside his field of expertise. The use of specialists is a powerful way of tearing down barriers. Avoid generalizations. Do not accept second hand information. Ask for copies of documents.
Make a real effort to develop the ideas of lowest cost that do the main function. Make tests, prototypes, get quotes of cost. Estimate costs of short term alternatives, of long term alternatives and of any new ideas produced during the evaluation.
At the end of this process, the idea of least cost should have been identified. Ask yourself: Would I spend my own money on this solution? If not, modify it.
If you work in an organization or enterprise, be sure that the person really interested in applying the solution gets to see it. Present the final solution in writing, on a single sheet of paper, to the person that should implement it. Give a copy to his boss. This sheet should state the savings, costs and a detailed plan for implementing the idea. It should have all the information needed so that a person that does not know this subject can understand it and do it.
The value analysis group should not itself implement the idea, if this is outside its normal area of work.
Value analysis is not a method of controlling the work of others or of investigating errors.
Normally the amount of work to implement an idea is greater than the amount of work needed to produce the idea. Therefore it is a good procedure to let the people that implement the idea get most of the praise and merit. That produces excellent relations.
Obtain that the group that implements the idea informs of the savings produced and, if possible, benefits from these savings. If needed, help them to establish the way the implementation will be checked and the savings calculated.
It is good to have a recorder on the cross-functional team to write the minutes. A Captain is appointed to lead the discussion. Assignments are given to all members with due dates for replies. Always solicit Suppliers. They are the specialists in their field. Get your suppliers involved. Consider using a Supplier Day Conference for an item or commodity to gather ideas and collaborate with your suppliers.
Supply chain cost reductions are assured using this approach.
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