Exceed Your Customer’s Needs

Exceed Your Customer’s Needs with Priority Planning

The Production Plan, Master Production Scheduling, and Material Requirements Planning are major components of Priority Planning used to ensure that customer expectations are met.

The Production Plan

Using objectives set by the business plan, the Production Plan takes into consideration the overall quantities of the items to be produced, desired inventory levels, and the availability of equipment, labor and material.

The focus is to develop a plan that will satisfy customer demand yet strike a balance between the market and the product availability over the planned production period(s).

The Master Production Schedule

The Master Production Schedule or MPS, whether formal or informal, is the planned or forecasted ‘build schedule’ the company will sell to the market place. These numbers should match and support the Production Plan.

The MPS is not a sales tool but, instead, is the product mix or the configurations that the company believes it will sell.

Material Requirements Planning

The Material Requirements Planning (MRP) software takes the company’s Master Production Schedule of its end item products and determines the net requirements for materials as well as what production work orders are needed to build products over discrete periods of time.

The Bottom Line.

The Production Plan, Master Production Schedule, and Material Requirements Planning programs are major components of Priority Planning that is used to that customer expectations are met. The Production Plan is developed from the company’s business plan. The Master Production Schedule is the company’s build schedule for its products. The Material Requirements Planning (MRP) system provides the ‘time-phased’ materials and work order needed to build products.

Related Topics

Inventory Management.  “Can You Avoid the ‘Deadly Sins’ of Inventory Management?” The purchase and storage of raw materials typically represents the single largest investment for a manufacturing company. To learn more, please follow this link, Inventory Management.

Sourcing Strategies. The strategic sourcing process is a subset of procurement. It is procurement’s responsibility to find and develop competent suppliers that are qualified to provide the firm with its needed materials. For more on this topic, please follow this link, Strategic Sourcing.

Manufacturing and Supply Chain Services

We are Manufacturing and Supply Chain Services, MSCS, specializing in enterprise wide procurement and supply chain management programs. Our company’s proprietary processes and services promote organization, control and cost reduction boosting your company’s bottom line. How can we help you?

Learn more about MSCS’s procurement and supply chain programs. Contact Us.

 

What is Your Breakthrough Strategy for 2019?

Is your company maximizing its performance by strategically managing the business?

Business’ achieve ‘world class’ by creating and operating high performing organizations. To get to that point requires a strategy that is driven by top management throughout the entire organization.

Strategically Managing Operations.

The three elements that make up strategic management include,

  1. Strategy Formulation
  2. Strategy Implementation, and
  3. Evaluation and Control

Each of these areas are addressed once the company’s ‘external’ (e.g., suppliers, stockholders) and internal or societal factors (economic, technological developments, etc.) have been analyzed and accounted for in the company’s plans.

Likewise, the company’s structure, culture, and resources are analyzed and accounted for in the company’s plans.

Strategy Formulation.

Typically, a firm’s strategy consists of the company’s,

  • Mission, or purpose for existence
  • Objectives, or what activities are planned to achieve the mission
  • A strategy is how the company plans to reach its objectives, and
  • Policies, or guidance of how decisions will be made

Strategy Implementation.

Strategy implementation is the idea of putting the company’s plans into action. This consists of developing,

  1. Programs, that is statements of the steps needed to complete the plan
  2. Budgets, or the conversion of a program into monetary figures
  3. Procedures, an outline of how to do the tasks needed to support the plan

Evaluation and Control.

To succeed, it is necessary to know if the company is making progress towards its goals and objectives. Therefore, the company must have ways to measure its performance.

These performance measurements must be expressed quantitatively, as well as qualitatively, such that each performance goal is specific, measurable, attainable, realistic and timebound.

These measurements, if properly constructed, show the company’s performance to the stated goals and objectives. If the results of the measurements show a need for improvement, the company can undertake corrective action and resolve weaknesses.

By following its strategic plans, a company can methodically and effectively manage its performance to succeed in its business environment.

The Bottom Line.

To maximize performance a company must strategically manage its business. This requires high-level planning that includes strategy formulation, implementation, evaluation and control. Performance goals are the yardsticks used to measure progress. The goals should be specific, measurable, attainable, realistic and timebound. By following its strategy, a company can effectively manage its performance and business environment.

Manufacturing and Supply Chain Services

We are Manufacturing and Supply Chain Services, MSCSGRP, specializing in ‘enterprise wide operations and supply chain management programs. Our company’s proprietary processes and services promote the organization, control and cost reductions boosting your company’s bottom line.  We’re not satisfied until you are satisfied. How can we help you? Contact Us.

Seasons Greetings!

MSCS Group will be temporarily ceasing publication of all blogs and industry articles over the coming holidays. Our last publication for 2018 is Tuesday, December 11th. We will resume publication the week of January 7th, 2019.

We hope that you’ve had a good year and wish you continued success in 2019!

Is Safety Stock a ‘Good Bet’ to Satisfy Customers?

How many times has there been a debate at your company asking the question, “Is safety stock a good ‘bet’ to satisfy customers?”

Everyone knows that inventory costs money. And too much inventory is not a good financial decision. So, is safety stock really needed? If so, is there a ‘middle ground?’

Changing Customer Demographics
In today’s world, with quality and ‘fitness of purpose’ a given, consumers are focusing their expectations on product availability and delivery.
Furthermore, companies now more than ever have local and/or international competition.

That said, today the ‘order winner’ is a company that has the product (or something very similar to what the customer wants) in-stock.
What, then, is safety stock and how is it supposed to help?

Safety Stock Defined
In an imperfect world companies must plan to serve customers even though there are challenges to manufacturing or conveyance to the market place.

Therefore, ‘safety stock’ is a level of inventory (or buffer) planned to protect the company against fluctuations expected during the ‘supply and demand’ cycle.

This means preparing for something the company couldn’t visualize or hadn’t planned on occurring.

One such problem could be an unexpected ‘pent-up’ demand for the company’s products. Likewise, it could be customs holding an inbound shipment for two weeks, a transportation delay due to severe flooding in the south, or snow storms and plant closures in the northeast.

What Factors Determine the Amount of Safety Stock Needed?
There are several factors affecting ‘how much’ safety stock is enough, be it raw materials or finished goods.

The major factors include forecasting, gauging ‘demand during lead time,’ and what ‘level of customer service’ agreed to by executive management, sales and marketing.

Winning
Today, customer satisfaction is of paramount importance. Competition is fierce. Sales success means having what the customer wants and providing it when they want it.

And that’s where safety stock comes in, i.e., what fluctuations can you plan for in the ‘demand and supply’ cycle? It is important to remember that ‘order winners’ … those products available today, not tomorrow.

So, safety stock can be a ‘good bet’ to satisfy customers.

The Bottom Line. Companies have always debated safety stock. Today, most companies have competition. Consumer demographics have changed with product quality and ‘fitness of purpose’ a given. An ‘order winner’ can be determined by having stock. Safety stock is a level of inventory planned to protect the company against fluctuations in the supply and demand cycle. Factors affecting levels of safety stock are demand during lead time and the company’s ‘level of customer service.’ Winning means managing the ‘demand and supply’ curve and meeting the needs of the customer. Order winners can mean having the product available for the customer when they want it. That is, safety stock can be a good bet.

Related Topics

Sourcing Strategies. The strategic sourcing process is a subset of procurement. It is procurement’s job to find and develop competent suppliers that are qualified to provide the firm with its needed materials. For more on this topic, please follow this link. Strategic Sourcing

Procurement Strategy. Companies today are seeing more and more competition. Executives are looking to procurement to add value across the business enterprise. The Procurement Strategy has a major effect on the department’s ability to help the company reach its’ business goals. For more on this topic, please follow this link Procurement Strategy

Transforming Procurement Operations. Today, procurement is expected to bring value to the entire business enterprise. Some organizations have difficulty migrating their legacy processes to more advanced procurement models. For more on this topic, please follow this link. Transforming Procurement Operations

Manufacturing and Supply Chain Services
We are Manufacturing and Supply Chain Services, MSCSGRP, specializing in ‘enterprise wide Procurement and supply chain management programs. Our company’s proprietary processes and services promote the organization, control and cost reduction boosting your company’s bottom line. We’re not satisfied until you are satisfied. How can we help you? Contact Us.

Is Your Company at Risk for Supply Chain Disruption?

What would happen to your customers if they could not get the products they needed from your company for a month, six weeks or a year?

What would your customers do? Do you think they would still be ‘your’ customers after something like this happened?

Furthermore, what would a significant disruption like this do to the company’s revenue stream?

Supply Chain Risks
Supply disruption happens in more ways and more often than we typically know about.

The Supply Chain Visibility provider Resilinc reported 41 weather events in the first half of 2018 affecting suppliers.

There are other supply chain risks as well such as labor strikes (west coast ports in 2015), global, regional and industry wide raw material shortages (e.g., copper, nickel), and global or regional political issues that can affect supply, costs, and product availability (e.g., foreign country boycotts, tariffs, etc.).
The trade magazine Material Handling and Logistics (MH&L) reported, in their ‘State of the Global Supply Chain’ findings, that ‘40% of manufacturing companies in the last 12 months (as of February 2016) reported a significant supply chain event that disrupted their business.’

The Challenge
The challenge is proactively mitigating supply chain risk and that means to ensure that you can provide what your customers need when it is needed.

This means addressing and eliminating as much ‘risk’ in a company’s supply chain as possible.

The Solution
Where does a company start if it wants to mitigate the risk in their supply chains?

The first step is a review and ranking of the company’s product sales according to revenue contribution.

The second step is an analysis of what raw materials and components are needed to manufacture the company’s products. These items too are ranked by importance.

The third step involves generating a ‘priority listing’ so that the most important risk issues are addressed first.

The fourth step is to develop a viable ‘risk mitigation strategy’ for each issue.

Finally, the overall plan to mitigate the supply chain risk(s) is developed and presented to senior management for approval. Executive management will either approve the strategy as is or ask the team to revisit the issues and look for other alternatives.

The Bottom Line. Supply Chain risks or disruptions can be paralyzing to a company’s customers and detrimental to its revenue stream. There are many kinds of supply chain risks to consider, e.g., extreme weather incidents, labor strikes, geopolitical issues, etc. The challenge for companies is to proactively mitigate their supply chain risks. To mitigate risk in supply, a company should review their products, analyze raw materials, rank all issues found, and develop a ‘risk mitigation’ strategy. The final step in the ‘risk mitigation process,’ prior to implementation, involves senior management approval of the selected strategy.

Do You Really Know ‘What’ Your Operational Costs Are?

Do you really know what your operational costs are and the details of the products or services that you are purchasing?

Many manufacturing companies know what they’ve spent in direct material and direct labor.

But when it comes to indirect expenditures, the clarity is just not there.

Ironically, a company can grow substantially and be spending tens to hundreds of millions of dollars on indirect expenses and not have the right process or program in place to analyze or manage it.

To properly analyze this type of spend, it is necessary to,

  • Define the company’s indirect categories of spend
  • Answer questions about ‘agency’
  • Create, publish and support a ‘company-wide’ Procurement program

Defining the Company’s Operational / Indirect Spend
The first step in understanding a company’s ‘operational spend’ requires categorizing, coding and documenting the spend, i.e., the company must have a way of grouping and associating multiple transactions.

This allows the firm to document, tally and analyze dollar amounts and transactions in each category.

The next step, creating an agency doctrine, is more complex but perhaps even more important and must be addressed for a company to manage the indirect spend.

Assigning Agency
The important questions senior executives must ask themselves about agency is,

  • Where, for what categories and amounts, and whom should have the responsibility for the stewardship of purchases on behalf of the company?
  • What are the reasons that the control has been specified in this manner?

Creating, Publishing and Supporting an Agency Doctrine and Procurement Policy
For a company to control spend, there needs to be an agency doctrine, i.e., a written policy that specifically authorizes individuals to act as ‘agents’ for the company when expending company assets.

Likewise, the company will need to create a procurement program so that all company personnel (and suppliers alike) know what needs to be done to obtain the necessary products and services needed to support the company operation.

Senior Management Support
Understandably, the agency doctrine and procurement program must be thorough, working as intended (and absolutely should be tested before release).

However, unless executive management supports all facets of this program, it will not be followed and in that case not provide the information required to properly manage this spend.

The Bottom Line. Knowing what the company’s operational costs are is the first step that is needed to manage these costs. To properly analyze spend, companies must categorize what is being purchased. Likewise, the company must develop and publish an agency doctrine and procurement policy. Finally, executive management must completely support these programs.

Managing a Business with Growth Means Change

As businesses grow, entrepreneurs and the companies they’ve started must cope with changes in their business model and adapt their management style. In addition, they must confront the change in objectives, strategy, measurements and control.

Businesses at Stage One Growth

Stage One companies are typified by an entrepreneur who launched the company to promote an idea, product or service. The company’s main goal is survival and growth.

Likewise, the objectives are personal or subjective and strategy is implicit with exploitation of immediate opportunities. Measurement and control are accomplished by simple accounting and daily observation and communication.

Companies at Stage Two Growth

Companies have gotten larger and resources have expanded providing much needed help. One of the biggest changes, and challenges for stage two companies, is that the entrepreneur has hired functional managers. This transformation can be very difficult for some entrepreneurs, since they typically need to and should (with well-formed guidelines) relinquish decision making responsibilities (but many times do not).

At this stage objectives are focused on profits, meeting budgets and basic performance targets. The strategy typically is on one product or one service. Here, control grows beyond the solopreneur and structured control systems are developed.

Stage Three Companies

A Stage Three business has changed significantly from the early days. It is typically much larger in sales, personnel and products. The change in size also creates a challenge to increase profitability.

There is now a trusted management team as the company’s diversity and complexion has increased significantly. It is necessary to manage the overall business at the strategic and operational levels.

Growth has created the opportunity to be in more than one type of industry and geographical area. This means multiple divisions, product lines and product mixes.

Objectives have changed and take the form of Return on Investment, profits, and earnings per share. Control is performance measurement.

The strategy also changes as the company wants to increase sales of its product lines, both organic or non-organic in nature. This enables the company to exploit more business opportunities.

The Bottom Line. As companies are successful, their businesses grow and must adapt to changes in objectives, strategy, measurement and control. Early stage entrepreneurs make all the decisions and their objectives are personal and subjective. However, as companies grow changes take place. At the other end of the spectrum are larger stage three companies. Growth has taken off and products are diverse and complex. There is a need to have a management team overseeing a much larger organization that focuses on the Return on Investment, profits and earnings. The strategy is to grow the company’s sales, and this can take the form of organic growth or acquisitions.

Can a Digital Procurement Process Really Save Money?

Can a company, in the lower middle market, really save money using a digital procurement process?

Let’s take a closer look …

The First Step
The first step towards digitizing the procurement process can only begin if a company already has a procurement program in place, i.e., process, templates and a submission network.

This being the case, let’s stipulate that management has decided to examine which process is better for the company, a manual or digital purchasing requisition program.

To simplify this example, we will only look at the first part of the process and that is creating and submitting a purchasing requisition to the Purchasing department.

Time Study
To begin, it is necessary to benchmark the company’s current manual process. The time for processing and submitting requests for operational supplies needs to be measured.

Below are the results, using a random sampling of purchasing requisitions, extrapolated to equal one year’s worth of requests.
The next step involved processing the same requisition(s), but this time the requests were processed and submitted electronically. Here are the results. Again, the same sampling of requisitions was used and extrapolated as in the first case.

When comparing these two studies, it is easy to see there is a significant reduction in costs when using the digital creation and submission process. In addition, requisition accuracy increases by eliminating repeated data entry that is an integral part of the manual process.

More Reduction in Costs When Digitizing Other Processes
The reduction in costs achieved by a company can be even greater, once the entire process is digitized. This can be seen when the entire purchasing and administrative processes of the company are digitized (i.e., purchase orders and Accounts Payable).

The Bottom Line.  Once a procurement program is in place, a company can analyze the idea of migrating from a manual to a digital requisition process. The first step is a time study to benchmark manual processes. Likewise, the digitizing of the purchase requisition creation and submission process must be measured. The time saved by a requestor in processing and submission of a requisition was approximately 50%. More opportunity for cost reductions exists when considering digitizing the purchase order and Accounts Payable processes.

Do You Still Have Significant Bottlenecks in Production?

The Challenge.  Many production systems today contain ‘bottlenecks’ or constraints costing a company money. Do you still have significant bottlenecks in production at your facility?

The APICS dictionary defines a bottleneck as “a facility, function, department or resource whose capacity is less than the demand placed upon it.”

In other words, a constraint is an element or process in a system that prevents the overall output from reaching higher levels.

Theory of Constraints. Dr. Eliyahu M. Goldratt developed a philosophy that ‘all’ systems at any one time have only a small number of variables or constraints (perhaps as few as one) that effectively limit the output of a system.

With this in mind, there are ways to optimize a manufacturing system’s output. Likewise, once constraints are removed, a company can reduce its overall costs since more product will be moving through the production process in a shorter amount of time.

It follows that the company’s challenge is to see (and understand) the current state of the production system and then envision the future state allowing for higher output of the system.

Removing Constraints. The APICS dictionary defines ‘five focusing steps’ to help identify and remove bottlenecks or constraints in a system. They include,

  • Identify the constraint – determine the throughput rate and the demand rate
  • Exploit the constraint – maximize use of the constraint
  • Subordinate the constraint – make effective use of the constraint the top priority
  • Elevate the constraint – increase capacity of the constraint
  • Once resolved, identify the new constraint.

One of the most difficult steps, in more complex processes, is identifying the initial constraint in the system.

‘Product flow’ diagrams, that pictorially describe the product and flow rate, can be of help in finding the point or points of constraint in a system.

The Bottom Line. Many production systems exhibit ‘bottlenecks,’ i.e., those elements whose capacity is less than the demand placed upon them. Dr. Goldratt’s theory of constraints stipulates that a system can have only one or, at most, several constraints limiting the systems output. Identifying and removing constraints increases the output of a system and helps reduce costs. APICS defines five steps that assist in removing constraints. Product flow diagrams help identify constraints in a system.

What is Category Management and Do We Need to Worry About It?

In the last few years there’s been a lot of discussion about ‘category management.’ So, what is category management and do we need to worry about it?

Category Management Defined

Category Management is the deliberate grouping of products, that have similar physical attributes and/or manufacturing processes, into a single category.

This is done so the company can better analyze and understand the supply and demand of these products. Ultimately, this action leads to consolidation and leveraging of the supply. And this usually translates into significant cost reductions.

As an example, a company may have different Planner-Buyers purchasing many different machined parts from different suppliers. Furthermore, this could be the case across more than one division of the same corporation. The company would find it very beneficial to create a Category titled Machined Parts and work to organize and manage these parts both at the division and corporate levels.

Category Ranking

Due to limited resources, the importance of a category to the company must be defined. This allows the supply chain group to focus on the most important Categories. Ranking of the Categories can be determined by dollar value and/or how critical the product(s) or service(s) are to generating revenue for the business.

A good example of a critical product is powdered Tungsten, an ingredient used when manufacturing a shape charge (shape charges are used in the perforation of an oil or gas well). There aren’t any substitutions for this ingredient so without Tungsten production stops and the company experiences ‘lost time.’ This could also mean ‘missed’ customer shipments.

Category Appraisal

An appraisal is a ‘status report,’ i.e., how well is a Category performing when supporting the objectives of the company. The report should include usage, projected demand, production issues, cost savings, non-conforming products, etc.

Category Scorecard

The Category Scorecard is composed of important elements from the Category Appraisal, and weighted to provide an overall score. Using the example above, the company should have a way to track and score deliveries, cost, usage, non-conformances, etc.

Category Strategies

Category Strategies are developed to ensure that the category is properly organized and supporting the objectives of the company.

Let’s use the shape charge example above. Suppose the manufacturer has a customer service level goal of 98%. In this case one of the strategies should be to eliminate (as much as possible) production downtime.

Category Tactics

Tactics, for a category, refer to specific actions the company will take to support its strategy for that category.

In the example above, an action to be taken to eliminate stockouts of powdered Tungsten is for the customer and supplier to exchange all necessary information ensuring the continuity of supply. This would include forecasts, current production schedules, inventory levels, consumption figures, etc.

Another tactic could be the creation of safety stocks, both for the supply of raw material and the demand of finished goods. This would attempt to account for any forecasting error(s), backlog changes, etc.

Review, Evaluation and Control

The final step is to review and evaluate the Category Management process to determine if the company is reaching its objectives. If the company is meeting its goals, further action may not be needed.

However, if the objectives are not being met, corrective action should be taken at the corresponding level in the category management process where issues have developed.

The Bottom Line.

The category management process is the careful and deliberate consolidation of products or services to allow for better control and management. This process, depending on the spend, can provide significant cost reductions. The Category Management Process has specific steps to ensure its success. When the Category Management Process is managed properly, it supports the company in reaching its objectives.

Is Your ‘Cash Conversion Cycle’ Number Good, Bad or Really Ugly?

The Cash Conversion Cycle (CCC) is one of the tools that can help manage the company’s assets and liabilities. Is your company’s CCC number good, bad, or really ugly?

The Meaning of a CCC Number.

The CCC is reported in days. The formula for the Cash Conversion Cycle is,
CCC = DIO + DSO – DPO

Where,
DIO = Days Inventory Outstanding (selling or turning over the entire inventory),
DSO = Days Sales Outstanding (number of days needed to collect the Account Receivables), and
DPO = Days Payable Outstanding (number of days, as agreed with suppliers, to pay the company’s bills)

The CCC metric measures the efficiency (performance) of the company when managing short-term assets and liabilities. The lower the CCC value is, the faster the company is converting cash to goods and back to cash again.

The CCC also is a measurement for liquidity, and how much risk exists should the company choose to invest in additional resources over the ‘short-term.’

Calculating the CCC Number.

Company ABC has an Inventory Turnover of 6.8 times per year. Currently ABC has 53 days of production inventory. ABC has ‘aged’ receivables of 40 days. The company has negotiated Accounts Payable terms of N55. Using the formula,

CCC = DIO + DSO – DPO
= 53 + 40 – 55
= 38

This measurement indicates overall performance, but it must be taken in context. The result should be compared to other companies and their CCC numbers in the same industry.

Interpreting the CCC Number.

Let’s say that the business in the above example is using raw materials in production that are commodities. This means their purchasing lead times should be short (let’s say five days). Let’s also state that the company’s manufacturing lead time is ten days.

With these two premises in mind, the company should have a very low CCC number (if they have also managed their DSO and DPO numbers).

Conversely, if the same company above has two months of production inventory on-hand, then the company will probably have a higher CCC number meaning that its Cash Conversion Cycle is too long.

It is important to realize that there can be other reasons for a higher DIO or CCC numbers, e.g., the company may not be meeting customer order ship dates due to planning and/or execution issues.

The Bottom Line. The Cash Conversion Cycle number is just one of the tools available to review company management of assets and liabilities. The number is used to measure how fast the company converts cash to goods and back to cash again. A lower CCC number, if found to be comparatively equal to other businesses in the same industry, can indicate effective management of the company’s Cash Conversion Cycle.