Off-Shoring, On-Shoring -SCM As A Core Competency

Bob Forshay, VPTransformance Advisors Inc.

APICS Terra Grande District Houston, TX

March 1, 2012

AgendaLearn

Evaluate – Debate

Apply

Why We Do This?Group Exercise

Impacts, + or –ExamplesWhat If?Call To ActionSummary

Off Shore Impacts?Pros

Lower Labor CostsBusiness IncentivesLower Materials CostsVolume Buy Price

Low Unit Cost?

Partial HistoryLaptop Batteries - FiresPet Food Contaminated - DeathsLead Paint on Toys - DeathsDrywall Contaminated – SicknessBusiness Lost to Pirating - RevenueEmbedded Security Risks – SecurityHow do you proactively manage the risks?What is the real cost?

Business Impacts?Cons

Lead time Risk - Greater Inventory Risk?Information Risk - Communication? - Quality Processes? - Quality Reporting? - Quality Management? - Change Management?Management Risk - Sourcing Integrity? - IP stolen w/i 6 months Transportation Risk - Logistics Controls? - Import/Export Costs?

ConsCapacity Risk - Uncertain Commitment? - Volume to Justify? - Cost of Change?Service & Repair Cost? - LT to Service? - Separate Facility/Skills?Disruption Risk - Triage & Recovery - Relocating key personnel?Economy (foreign) RiskExchange Rate RiskCustomer Confidence RiskMarket Risk

Social Impacts?Subpar Labor Practices

Low compliance to work standards Fraudulent audits Child labor est. 4-5% 10-20% turnover/month 12-18 hour shifts Union worker complaints = reason to fire Suicides increased - higher than average Epidemic of chemical poisoning incidence

US Worker Earning Potential – Standard of Living down

Environmental Impacts?Substandard air qualityWater supplies cannot sustain natural lifeClimate changen –hexane exposure

Teams CompeteRobotRick EnterpriseControl PCBA Outsourced to ChinaForeign labor cost 50% of US labor$50 per ea. from China$59 per ea. from US10,000 unit monthly volume

Evaluate Supply Chain Alternatives

What Is The True Cost?What doesn’t flow to the Purchase Order Price but is still a cost we are paying?

Supply Chain Digest News

Total Landed Cost CalculationKey to Supply Chain OptimizationStill Immature Practice, 2010 3PL Study FindsOnly 45% Report Extensive Use; 41% report Somewhat Use;Data Capture Challenges - Primary Obstacle

Oct 2010

Poll – 2010 15th Annual 3rd Party

Logistics StudyA. Data Not available

B. Do Not Have Right Tools

C. Insufficient Time for Analysis

D. Not Sure how to calculate TLC

Least Total Cost the total cost of a landed shipment including purchase price, freight, insurance, and other costs up to the port of destination. In some instances, it may also include the customs duties and other taxes levied on the shipment.

BUT – Is there more to know?

Total Landed Cost ExampleMalaysia USA

Quoted price per board 50.00 59.00 Export packaging 1.00 - Ocean freight 2.20 - Marine insurance 0.26 - Supplier price 53.46 59.00

(CIF Los Angeles) FOB OriginPort of entry handling 0.80 - Customs duties 2.14 - Customs brokerage fee 0.25 - Inland ground transportation 1.25 0.80 Inventory 3.12 0.86

(8 weeks) (2 weeks)Communications 0.16 - Travel 0.63 0Administrative 0.60 - Additional cost 8.95 1.66 Total Landed Cost 62.41 60.66

Example – Circuit Cards

Circuit Cards Risk10,000 units produced per quarter,75% in transit – Boat25% already arrived$110 each! $1MImmediate Engineering Change Implemented, Rework = 100%

Circuit Cards RiskRequired assy’s to ship productTakes too long to returnNon Standard LaborReassigning allocated skills, stopped other important workAllocate limited supply of new parts, Rework in US and New Build in China, costly expediting

Example – Forged steel Parts

Forged steel PartsVolume Low - weekly demandQuality Requirement is very highLead Time from US = 2-4 weeksLead Time from China = 8-16 weeksInventory at risk increased 4x

Forged steel PartsOver half of items outsourced ultimately cost MORE.Quality problems increasedSignificant incidents reduced OTDSome product returned, added freightSome reworked locally when possible, added labor

Example – Mechanical Steel Fab

Mechanical Steel FabPower Supply designed by US team, manufactured by CM in ChinaAssy at 2nd CM in China for Assy & TestQuality Management System ignoredDefects set aside at Assy CM, piling up in informal “MRB” area.Assy Contractor ran out of usable PS’s as defect rate from Contract Mfg grew.

Mechanical Steel Fab“Escapes” found their way to customers.Production Stopped.Intransit inventories quarantinedTriage sort & ship process set up in Bonded Warehouse.Return majority not usableWeeks to recover AFTER quality defect root cause identified.

Poll – Results

A. Data Not available

B. Do Not Have Right Tools

C. Insufficient Time for Analysis

D. Not Sure how to calculate TLC

49%

48%

31%

27%

Too busy working ON the business to work IN the business!

Too busy driving to stop for gas!

What If?

Supply Chain Management is a core competency

Lean Supply Chains

SupplierRelationshipManagement

CustomerRelationshipManagement

LeanEnterprise

On Shoring Instead - 2011

GE Water Heaters Local collaboration saves cost, US 6% less

than China – 400 Jobs returnedHydraulic Die Cutting process Custom Order Warranty Cost reduced 90%

Master Lock productivity increased 6x Returned mfg from overseas

China Labor Cost Rising Boston Consulting Group Press Release from May 5th, 2011; “We should expect net labor costs for manufacturing in China and the US to converge by around 2015.”

Daily Supplier DashboardMinimize Risk, Minimize Variation!Manage the Leading IndicatorsFPY – First Pass YieldInbound Materials CertifiedDaily “MRB” resolution, no laggards!Track / Improve Response TimeDaily Quality Reporting by SN/itemCommon Data BaseTimely CARs, Corrective Action Reports

Promote EducationLean

Supply Chain

CurrentPosition

Specify Value

Identify Value Streams

Create Flow

Leverage Pull

Seek Perfection seven types

of wasteMovement

Motion

Waiting

Defects

Over production

Poor processing

Inventory

Supply Chain Management is a core competency

SupplierRelationshipManagement

CustomerRelationshipManagement

LeanEnterprise

Benefits?

The World Class Imperative

Supply Chain

Capabilities

Market Leadership

ProfitAdvantage

*Supply Chain Management Review, Survey of 110 companies in five sectors

Business Strategy

Total Supply Chain Management Cost

5.87.1 6.7 7.0

6.1 6.5

12.213.1

11.310.3 10.9 11.5

0.0

5.0

10.0

15.0

Computers Industrial Telecom Chemicals PackagedGoods

Overall

% R

even

ue

BestAvg

75% Higher Profits

*

Call To ActionList Three Things To Do Next WeekWhat are you measuring?TLC as The Metric?Who Collaborates on data?Balanced Scorecard & Daily Dashboard

Questions? Ideas?

Summary - Key Takeaways

Elements of lean supply chains must include Total Cost view.

Apply 5 principles of lean

Systematic lean leadership = Participation and Education

End of Presentation

How to Reach Us

Bob Forshay,CPIM, CIRM, CSCP, CSCA, CSCM, CLM

VP, Transformance Advisors Inc.

720-244-0579 c720-295-LEAN

bforshay@emailTA.com