Symphony Consulting: Newsletters

Symphony Consulting Newsletter – Q1 2006

"A Ferrari with Wooden Wheels?"

It is so obvious that this does not make sense. Who would mix the power of a high- performance vehicle with technology from the old west?!Although it may not be as apparent, you probably have an equally troubling combination in your company. Buried in your complex electronics supply chain is a practice so antiquated, it has not been cutting-edge since Henry Ford made the first Model-T. And yet, this practice is a fundamental driver of your inventory exposure and your overhead costs. It has to do with how ERP is used by you and your EMS partners to order products, sub- assemblies, and components.A company's ordering policy sets the rules for the amount of inventory brought in for an item at any point in time.

Most companies base their ordering policy on a part’s ABC code (e.g. A= 1 week of supply, B = 2 weeks of supply, etc.). This practice has survived relatively unchanged for decades. The impact of this dated approach is that you are paying inflated overhead costs and have unnecessary inventory exposure. How much will depend on your current situation, but consider this data from some simulations we ran with sites at some top EMS companies.Benefits of using a more modern approach to set order policy:

	Transaction Overhead Savings	Inventory Savings
Case 1	24%	18%
Case 2	25%	12%
Case 3	37%	26%

What does this mean for your business? Given that companies are going to extra-ordinary lengths just to get modest improvements in inventory, it is interesting that your best chance for improvement might come from something so simple. As you can see from the table, the benefit is not limited to inventory. In fact the transaction reduction may have a more significant impact on your organization. Many supply chain groups are struggling with work load. Suddenly by re-visiting a long-neglected issue like order policy, you could see almost instant relief and increase your ability to focus on truly important issues.It is easy to determine if your supply chain is suffering from the traditional ABC approach. Ask yourself or your EMS provider the following questions:

How were the weeks of supply chosen for various A-B-C categories? What trade-offs were consider relative to longer or shorter supply periods and the impact on overhead costs and inventory?
As key cost drivers have changed (e.g. cost of money, transportation, price risk opportunity, etc.) over the last few quarters, what changes have been made to the basic policy?

When you peel back the layers and ask enough questions you will eventually get to the disturbing truth that this critical business policy has not received enough thoughtful attention. Almost as troubling will be when you explore the foundation for the current approach and ask "Why?", you are likely to hear, "That is the way we have always done it..."The good news is that once you realize the problem, it is fairly easy to fix and the payback is almost immediate. There are modern answers to this issue and by implementing them you can unshackle your supply chain from its old-west legacy. You can start by having serious conversations internally and with your suppliers.

Symphony has analytical tools and approaches that can help demonstrate the potential for OEMs and their EMS providers. Please contact us if you would like more information info@symphonyconsult.com.