Tom Lippet, sales representative for DEP, feels the challenge when the successor of Mike O’Leary, Richard Binish, becomes the new purchasing agent at GARD who plans to trim the product line in the next three years. His plan to narrow the service window for suppliers from the original 5 days to 3 days in the next three years to the eventually 1 day window forces Tom to consider ways that can increase the performance and service of their company to win the contracts in the future.
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Solutions for DEP
1) Diagram on the Left shows the DEP/GARD supply chain.
Value adding stages are:
– The inbound transportation from compound suppliers
– The manufacturing and packaging process
– The outbound transportation to GARD
Non-value adding stages are:
– The compound inventory sitting in DEP (7-day supply)
– The order transmission time wasted by receiving and handling orders manually – The finished product staying in the warehouse
The minimum performance cycle for the supply chain is 9 days, whereas the maximum performance cycle is 20 days.
2) The performance cycle can be improved through the use of the 25 percent and 15 percent suppliers. But because DEP used a bidding system that emphasized on price, by giving out more proportions of the raw materials to the 25% and 15% suppliers, the average variable cost per unit will be higher for each compound. However, choosing 25% and 15% suppliers who has a relatively higher fill rate can increase the reliability of inventory availability and reduce the possibility of shortages. Which in turn means that DEP can lower the 7-day supply of each compound to a 6-day or even 5-day supply depending on the reliability of the supplier. By doing so, the inventory carrying cost will decrease and in the end if not saving more for the company, at least balances the extra costs used by purchasing from 15% and 25% suppliers. A Performance Statistics of Compound Suppliers copied from the Integrated Logistics for DEP/GARD Case Study is shown in the next page. For instance, we can see that the fill rate for company 1 is relatively low comparing to other suppliers. And in the case of compound E and F, we have to reason to procure these two compounds from company 1 since it not only has the lowest fill rate but also costs the most. All or portion of the compound A and B can be purchased from company 2 or 3 depending on their capacity and performance consistency.
3) Things to do if I were Tom Lippet:
Change the bidding system in a way that DEP is able to purchase more compounds from suppliers with a higher fill rate and lower performance cycle uncertainty, in order to reduce the days of inventory storage. (People challenge: Employee’s reluctance and unwillingness to change in the manufacturing department.) Communicate with compound suppliers before the next bid and inform them the changes that are going on. Tell them the importance to reduce their performance cycle uncertainty and increase their fill rate. And that these two criteria are also going to be considered as well on the next bid. (Challenge: a) Disturbed relationship between buyer and supplier. b) Ethics issues. ) To facilitate the order transmission process in order to reduce the performance cycle, a more reliable internet-based information technology should be used, such as EDI and ERP systems. However, the installation and implementation of an ERP system can be costly and time consuming. The order transportation performance cycle uncertainty is too high (3-6 days). Automated inventory management is highly recommended to ensure exact day delivery, and cost savings will incur from less labor force required in the warehouses. (People challenge: Possible resentment and intentional sabotage or strikes from warehouse personnel. To mitigate the process, appropriate procedures should be taken to help the workers to find alternative jobs. )
4) It’s important to let Richard Binish to realize how the company is consistently improving according to his expectations. Maintaining a competitive price and quality while enhancing and exceeding their competitors in terms of performance cycle and service would be order-winning criteria for DEP. The implementation of the EDI system will provide real time information between the companies and solidify collaboration. Of course, the criteria will be continuously changing when supply chain management becomes more sophisticated and evolved over time. There will eventually be a day when the fill rates required become 100% and the service window will not be exact day delivery but exact time delivery for DEP. With the industry’s average standard constantly increasing, continuous improvement on supply chain management is necessary in order to survive in today’s competitive environment.