Front End I Electronic Components Supply Network
Sharing inventory risk to improve performance
Investment in inventory of electronic components and other materials has long been regarded by many systems integrators as a liability rather than an asset, but as Adam Fletcher explains, in today’s market where risk mitigation is important this opinion needs to be rethought
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t is widely recognised that inventory sitting gathering dust and becoming outdated is a financial drag on any business. Not as well recognised is the fact that ‘moving’ inventory (i.e. turning stock or consumed materials) is a real business asset. This holds true for all parties in the electronic components supply network, whether it’s the manufacturer, authorised distributor or systems integrator, and for all classes of inventory. All manufacturing resource planning IT/ERP systems monitor the organisation’s inventory status and provide periodic feedback via management reporting, generally on a weekly or monthly basis. This reporting is produced on an individual line item basis and considers inventory in four primary ‘buckets’: below; on; above; or grossly above target levels based on the planned (forecast) demand. Those in a Purchasing / Materials function are all too familiar with the outcome of this process, which is either praise for getting inventory almost right or more commonly, an
supply problem but sometimes by a rapid and unforeseen increase in demand. Inevitably a “stock-out” situation with any inventory item causes all classes of inventory to stop moving and liabilities quickly mount, particularly because sales revenue targets are also put at risk. Most of the unwelcome management activity is now centred around the Materials / Purchasing desk, with managers wanting to know “what’s gone wrong?” and how quickly it will be recovered?
Just-In-Time
Many systems integrators use Just-In-Time, lean manufacturing and low inventory MRP systems in an effort to hold their inventory in the range “Below” moving to “On” in synchronisation with the “Pull” (demand) signal from their manufacturing operations. These systems regard all inventory as “waste” and work at their best when the customer-demand forecast is accurate and stable, the lead-time for components or sub-assemblies is low to
and type of electronic components (or other elements) used by the organisation by standardising on a particular item where possible. This has the benefit of reducing the number of line items which need to be managed and provides common usage between different end- products made by the organisation and increases volumes on standard parts. The downside of “Variety Reduction” is that it can lead to a compromise in performance at the design level and from a materials management perspective demand for end products all with different demand characteristics across multiple products and assemblies increases inventory risk. The inventory for these items tends to be more difficult to plan accurately because the aggregated demand is more volatile, especially if inventory levels are set too low.
The manufacturing lead-time along with
the purchasing cycle are also critical in setting inventory thresholds in MRP systems. For most of the last decade the availability lead-time for modest volumes of almost any of a wide range of electronic components has been artificially low - typically under two weeks - but that has not always been the case. In 2011 the average lead-time extended rapidly from 6 weeks to 12 weeks and then 16 weeks as a result of a natural disaster, and then remained at the extended level for several months.
uncomfortable discussion about performance and proposals for improvement.
The disaster scenario is a “stock-out” (no inventory) situation, generally caused by either an unforeseeable technical or
8 November 2013
stable or if the cost of an inflated finished goods inventory through a level of planned overproduction is acceptable. “Variety Reduction”, is another important factor in lean manufacturing: this task aims to reduce the number, range
Components in Electronics
During this period many very large multi-national system integrators reliant on lean manufacturing systems had to reduce their output in line with materials availability and as a result, were faced with a huge loss of revenue. Some even had to temporarily close down their manufacturing plants altogether.
Improving partnerships Manufacturer authorised distributors support over 95% of the electronic component requirements of systems
integrator customers in the UK / Ireland. One of the important but little recognised roles of an authorised distributor is to aggregate multiple customer demand and put the necessary inventory in place to effectively buffer their customers from all but the worst fluctuations in lead-time availability. Distributors however cannot be expected to buffer all products or insulate their customers from very severe, adverse changes in splendid isolation. They too have inventory and financial objectives to achieve and are more likely to balance their inventory investment with actual demand when provided with regular, reasonably accurate or best estimate input from their customers. In today’s market inventory risk can best be managed by improving the customer/supplier partnerships but it’s a two way street. System integrators should aim to increase or maintain their in-house “safety stock” investment to a minimum of 6 - 8 weeks of average usage and be prepared to extended the holding to 10 to 12 weeks of average use when buffer- stock inventory is held on the customer’s behalf by authorised distributor partners. Close monitoring of actual use and business levels by both the systems integrator and authorised distributors should result in necessary changes agreed and implemented monthly (or quarterly as a minimum) to reflect forecast demand changes and general lead-time availability of components within the market. The reduction in risk engendered by a modest investment in inventory together with the improvement in supply network management that comes with improved customer/supplier communication will generate a great return when change occurs, which trust me will happen, and will probably be unexpected.
ECSN |
www.ecsn-uk.org Adam Fletcher is Chairman of Afdec/ECSN
www.cieonline.co.uk
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