Automotive Spares : Supplier Management the TOC way
The challenge
Meeting customers need of prompt service & high vehicle uptime is one of the major challenge for OEMs. Service level is directly dependent on spare parts availability at the point of consumption. The challenge is due to the large variety of aggregates and child parts required to be kept to provide service. Further, the parts portfolio is ever-increasing for OEMs as new models are getting launched frequently. Thereby significantly increasing the range of parts needed as time progresses.
Moreover, Automotive OEMs have to maintain this enormous variety of parts over the long life span of vehicles (~ 8 years) or even more to comply with the statuary requirement.
To aggravate the already big enough problem, only a limited portion of these parts are demanded frequently, while most are needed infrequently, creating a big chuck of long-tail SKUs.
How push-based system works?
Currently, OEMs mostly give a monthly schedule to their suppliers based on the forecast. Forecasting the demand for such a large range of parts at the OEM level is a big challenge.
why?
There are millions of vehicles running on the road. When a company is forecasting, it is essentially trying to predict what all types of breakdowns, accidents, and repairs will happen in that period, and based upon that, what all parts would be needed to ensure vehicle service.
In such a situation, the actual reality at an SKU level might be different from the forecast. For some SKUs, the market demand might be higher than the estimated demand, resulting in shortages. For some SKUs, the market demand might be lower than the estimated demand, resulting in surpluses.
For SKUs in shortage, OEM tends to place urgent requirements on the suppliers. In case of surpluses, OEM does not need the material immediately. Everyone is aware that there is a lead time in making the SKUs available. The lead time varies based on multiple parameters at the suppliers.
Hence, OEMs give requirements with some extra buffer. On top of it, suppliers(and sub-vendors) further add an additional buffer for estimated peak and produce according to internal batch sizes.
All these results in emergencies at suppliers, unavailability at OEM, and excess stock at both ends
Suppliers Pain points:
When an additional trigger is given (or schedule is changed), sometimes suppliers do not get sufficient time to react. This lead to constant interruption in the planned production batches and many unplanned setups at the supplier end.
Further, suppliers have to expedite raw material with their sub-vendors for items coming in with urgencies. The resulting impact of such changes on suppliers is that there is a loss of capacity due to increased setups. Also, unplanned-setups sometimes lead to raw material wastage, tooling damage, and an increase in rejection due to quality issues.
On the other hand, OEM priority changes (hold back on SKU, or expedite a particular SKU) due to which either suppliers are left with slow-moving stock in Work in Process(WIP)/finished goods at their end or fighting for urgencies.
Such changes in priority, coupled with an imbalance in demand pattern, leads to additional cost due to expediting, overtime (during overload), and blocking of working capital in many items.
What does system needs?
Implement processes that ensure achievement of supplier & OEM objectives, without risk for both (OEM & supplier), and reduce wastages (in capacity and costs)
The Way Out: The Direction of Solution
The variability and uncertainty of demand & supplies are unavoidable parts of any supply chain. The problem could be approached in two ways; either try to limit these uncertainties (better forecasting) or build a system that does not get impacted by the vagaries of such uncertainties & variabilities of reality.
Conventionally, companies mostly try to spend most of the efforts on the former, with little or no success. However, the TOC replenishment system tries to take the second approach.
Introducing Buffers:
To protect the spares supply chain from particularities of uncertainties and inefficiencies, we need to establish ‘Shock Absorbers’ in the system. These shock absorbers are called “Buffers”. Buffer act as shock absorbers, similar to how automobile shock absorbers protect the rider/driver from potholes & bumps.
When buffers are put at multiple stages, it decouples the supply chain. Thereby provides stability in the system. (murphy of one end stop flowing to other end and vice-versa).
Further, these buffers do not have to be absolutely accurate. We should accept that future can not be fully known and thus try to be grossly correct and avoid being precisely wrong. So the proposed solution simply needs a good-enough starting point and a proactive buffer correction mechanism.
Building transparency
Most of the times, the answer to any unplanned need raised by OEM by the supplier is-
“If we would have known in time, then we would have been able to address it time.” “We just took this batch yesterday, and accommodating this much qty in that batch would be easier, but now taking a fresh batch seems doubtful.”
Buffers status for all SKUs to be shared daily with the supplier. Instead of a single snapshot, which currently gets shared monthly for production planning and dispatch.
This enables suppliers to plan production and supply material to OEMs based on the actual market demand.
How does it work?
OEM shows the buffer gap for each SKU daily. The supplier can see how the stock is depleting daily as the consumption is happening from the warehouse. Now, the supplier can plan the part well ahead of time for items showing high consumption before it gets stocked out. In the case of a monthly indent-based system, such requirements get raised as urgent or immediate, and one does not get enough time to react, which leads to a lot of disruption in planning and increased unplanned setups.
On the other hand, seeing a consumption trend also enables the supplier not to produce SKUs where consumption is low(hardly any). By ensuring what not to make, supplier capacities are getting utilized in making SKUs that are needed in the market.
Is it a win-win proposition?
The transparency of requirements and daily frequency helps suppliers plan well in advance based on actual priority. Thus, supplier’s planning of production becomes less and less interrupted by urgencies. Overall unplanned setups reduce due to much fewer urgencies in the system — releasing capacity.
Win for supplier- supplier gets enabled to produce more from the same installed capacity.
Win for OEM- better availability for the entire range.
Hence, the way out is not to try and predict the variability & uncertainties with a “better” forecasting tool, but to use pull-based replenishment -‘daily ordering based on actual consumption and frequent replenishment’ & “buffer filling the buffer” as the mechanism in managing inventory to enable availability at the point of service for ensuring superior customer service.
