Tier 1 suppliers of the auto industry claim that they fulfill more than 90% of the orders of the OEMs on a monthly basis. The OEMs, however, complain that the supplies are highly unreliable. Before we take sides, let’s look at how the two entities transact.
Picture: ESO Auto Parts
Before the month begins or in the first week of the month OEMs draw up a monthly plan with a weekly schedule. They share this with the suppliers (tier 1), who in turn share it with their suppliers (tier 2). Both sets of suppliers begin planning their month according to this.
There, however, isn’t much point to this planning because the OEMs, generally, alter the schedule even before the first weekend. As everyone goes about changing plans, there is hectic expediting and re-planning. Some suppliers miss delivery deadlines. This disrupts the OEMs assembly schedules, which in turn forces the OEMs to shuffle plans.
The impact of all scrambling is felt by the sales team as well. It does not receive the models listed in the sales forecast. To make matters worse, the sales team also changes the forecast and expects the production team to adhere. Needless to say, the chaos goes from bad to worse.
Burdened by losses, OEMs resort to weeding out ‘defaulting’ suppliers. Suppliers, who have no bargaining power, can do little to help themselves. Neither can they demand stable plans from the mighty OEMs nor can they maintain huge stocks of inventory (raw material or finished goods) as that would mean locking up precious resources, mainly working capital.
So what’s the way forward?
The auto industry has been looking to the Toyota production system’s just-in-time (JIT) to stabilize the environment, in vain. Experiments have failed to yield the expected results. Toyota production system
Why? Two reasons.
– OEMs have not been able to keep their monthly plans stable (absolutely necessary for TPS)
– Suppliers have not been equipped to implement JIT
Rectifying these two issues is a completely different exercise, and time-consuming at that. Besides, the OEMs wouldn’t know where to begin.
Again, so what’s the way forward?
Regular replenishment to actual sales
To begin with, OEMs can replenish dealers’ stocks regularly and frequently. They can do this by keeping an eye on the dealers’ sales and, from the central stocking point, send to dealers only those items they (dealers) have sold.
This ‘regular replenishment to actual sales’ delivers multiple benefits. Dealers don’t have to hoard stocks (as they are ensured of regular supply); their working capital is not locked up in too much stock or non-moving stock. The plant gets a clear view of actual market demand. This indirectly helps supply sync with demand. (As for the challenge of meeting sales targets, sales teams have to focus their efforts on growing secondary sales in the market.)
The manufacturing plant, however, only needs to maintain buffers of the various SKUs at the central stocking point or the central warehouse. It is well-shielded from the spikes in demand and is rid of the chaotic expediting. Downstream entities (tier1 and tier2 suppliers benefit automatically.
The onus, therefore, is on the OEMs to take the first step. So, what if they don’t? Do tier 1 and tier 2 suppliers have to reconcile with the mind-numbing status quo?
No. They can help themselves. Here’s how.
Regular replenishment to actual consumption
Suppliers can begin by creating and maintaining a finished goods or FG buffer. The suppliers’ plants need to keep a close watch on the consumption or OEM offtake from this buffer and plan their schedules to replenish this buffer stock so that the OEMs’ needs are met without interruption.
So what should be the size of the FG buffer?
If all components (procured or manufactured within the plants) are readily available at all times, a tier 1 supplier can assembly any SKU within 1-3 days. Given this assembly time, we can assess that FG buffer of 10-12 days is adequate to satisfy an OEM’s daily demand. Tier 2 suppliers also need to replicate this buffer management system within their plants. These suppliers too will reap multiple benefits such as smoothening of demand, ability to plan for raw material at lower stock levels. Above all, they are able to service and satisfy customers efficiently.
Suppliers need to stay in tune with changing off take patterns of OEMs. The buffer management system has to be kept dynamic so that it is able to adapt quickly to decrease or increase in demand. This feature would prove to be a blessing during a downturn when demand dips and there is need to slow down production. Suppliers who are able to affect the correction in volumes as soon as they catch whiff of a slowdown will sail through the harshest recession.
These are tried and tested elements of Theory of Constraints solution. Their implementation, at supplier plants, have yielded excellent results – 98% reliability in daily supply, over 40% increase in output, decrease in inventory by at least 30%.
Gone are the days of firefighting, OEM dissatisfaction. In fact, OEMs have upped these suppliers’ share of business. The suppliers have been able to deliver the additional volumes with ease with absolutely no additional investment in capacity. It’s a win-win for everyone.