Page 91 - DMGT525_MATERIALS_MANAGEMENT

Materials Management

Notes participating to facilitate quantum improvement in utilization of manufacturing and logistics
assets and cost performance.

Principle 4: Differentiate product closer to the customer and speed conversion across
the supply chain.

Manufacturers have traditionally based production goals on projections of the demand for
finished goods and have stockpiled inventory to offset forecasting errors. These manufacturers
tend to view lead times in the system as fixed, with only a finite window of time in which to
convert materials into products that meet customer requirements.
While even such traditionalists can make progress in cutting costs through set-up reduction,
cellular manufacturing, and just-in-time techniques, great potential remains in less traditional
strategies such as mass customisation. For example, manufacturers striving to meet individual
customer needs efficiently through strategies such as mass customisation are discovering the
value of postponement. They are delaying product differentiation to the last possible moment
and thus overcoming the problem described by one manager of a health and beauty care products
warehouse: “With the proliferation of packaging requirements from major retailers, our number
of SKUs (stock keeping units) has exploded. We have situations daily where we backorder one
retailer, like Walmart, on an item that is identical to an in-stock item, except for its packaging.
Sometimes we even tear boxes apart and repackage by hand!”
Realizing that time really is money, many manufacturers are questioning the conventional
wisdom that lead times in the supply chain are fixed. They are strengthening their ability to
react to market signals by compressing lead times along the supply chain, speeding the
conversion from raw materials to finished products tailored to customer requirements. This
approach enhances their flexibility to make product configuration decisions much closer to the
moment demand occurs.
Consider Apple’s widely publicized PC shortages during peak sales periods. Errors in forecasting
demand, coupled with supplier inability to deliver custom drives and chips in less than
18 weeks, left Apple unable to adjust fast enough to changes in projected customer demand.
To overcome the problem, Apple has gone back to the drawing board, redesigning PCs to use
more available, standard parts that have shorter lead times.

Principle 5: Manage sources of supply strategically to reduce the total cost of owning
materials and services.

Determined to pay as low a price as possible for materials, manufacturers have not traditionally
cultivated warm relationships with suppliers. In the words of one general manager: “The best
approach to supply is to have as many players as possible fighting for their piece of the pie—
that’s when you get the best pricing.”
Excellent supply chain management requires a more enlightened mindset—recognizing, as a
more progressive manufacturer did: “Our supplier’s costs are in effect our costs. If we force our
supplier to provide 90 days of consigned material when 30 days are sufficient, the cost of that
inventory will find its way back into the supplier’s price to us since it increases his cost structure.”
While manufacturers should place high demands on suppliers, they should also realize that
partners must share the goal of reducing costs across the supply chain in order to lower prices in
the marketplace and enhance margins. The logical extension of this thinking is gain-sharing
arrangements to reward everyone who contributes to the greater profitability.
While the seven principles of supply chain management can achieve their full potential only if
implemented together, this principle may warrant early attention because the savings it can
realize from the start can fund additional initiatives. The proof of the pudding: creating a data

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