Problem_Solution__Kuiper_Leda

Running head: PROBLEM SOLUTION: KUIPER LEDA Problem Solution: Kuiper Leda MBA/550 University of Phoenix Problem Solution: Kuiper Leda Inventory management involves planning and controlling inventory from the raw material stage to the final delivery. Businesses rely on input from suppliers, which are required to manufacture their products. Managing a business’ productions schedule efficiently in order to keep their commitments to their customers is vital. At a minimum, businesses need an adequate supply, but they also need to be able to handle an excess or shortage of inventory. This is where capacity planning and management also comes into play. Kuiper Leda Inc. (KL) is a company that is facing the decisions and challenges that inventory management, planning, forecasting and organizing can create. Sourcing components, developing inventory and distribution plans, and rationalizing the supplier base are all aspects of inventory management KL is facing. Through further analysis of the company’s issues, opportunities, alternatives and end-state vision Kuiper Leda will be better equipped and prepared to move towards a more fluid inventory management process. Situation Analysis Issue and Opportunity Identification Kuiper Leda Inc. (KL) is located in The Republic of Novamia and is an electronic component manufacturer, which specializes in the production of Electronic Control Units (ECUs), and sensors for the automobile industry. The assembly plant assembles ECUs and a production line is dedicated to microchips. KL’s clients include automobile manufacturers and Original Equipment Manufacturers (OEMs) for the automotive industry. KL has been in operations for the past 10 years and began with an investment of $100 million and the revenue currently has reached $400 million this year. The company has recently entered into another product line, Radio Frequency Identification Devices (RFID) which also has led the company to install a new production line for RFID tags. The new line has been in operation for 6 months and has enabled KL to make progress in the international market. However, with KL’s capabilities come issues and opportunities. One of the issues that KL is facing is its capacity limit. Midland Motors, an American Original Equipment Manufacturer (OEM), has placed an annual order of 250,000 ECUs and 35,000 RFID tags to facilitate inventory control in their factory. This order is urgent to Midland and KL, by whatever means possible, will need to manufacture and supply higher volumes over its regular orders. This issue is also known as a bottleneck, which is defined as “any resource whose capacity is less than the demand placed upon it. A bottleneck is a constraint within the system that limits throughput… it is that point in the manufacturing process where flow thins to a narrow system” (Chase, Jacobs & Aquilano, 2005, p. 725). With this capacity constraint come opportunities. KL now has the opportunity to foster a closer relationship with Midland Motors through this large order. Because Midland has had unprecedented business and is a large auto company, KL could benefit from their business and relationship. The next issue KL faces is the need for a better process of dealing with excess stock and production; especially KL’s microchips, which are partly outsourced and partly going to be manufactured in-house. Inventory control and supply chain management is crucial with mitigating such an issue. “It is important for managers to realize that how they run items using inventory control logic related directly to the financial performance of the firm” (Chase et. al, 2005, p. 605). If KL does not come up with an efficient inventory management plan they will be causing themselves unnecessary lost revenue. KL’s opportunity comes from the development of a new inventory management plan. The plan should consider the forecast errors, service levels required by KL’s clients, an increasing lead time for manufacturing each device or a batch, and priority of demand. The fluctuating demand patterns are another issue KL is facing. These fluctuations are due to a substantial growth and demand over the past two years for ECUs, mainly because of the increase of new car models introduced into the automotive industry. This has led to KL expediting many orders, which in turn has eaten into KL’s ECU margin. When uncertainty is relevant in demand safety stock is needed. “…Safety stock is needed to manage the risk created by demand variability” (Chase et. al, 2005, p.605). KL must overhaul its current distribution system. Until the present, KL’s distribution system has been served from central supply at the plant, but KL expects to capture a larger portion of the market for ECUs in the US . With a new distribution strategy, KL will be able to supply the increasing demand for new orders in the US and internationally. KL has been successful with its new and existing product lines and their customer base has been steadily growing and has decided to move forward by adopted the use of just-in-time (JIT) manufacturing. However, JIT is causing the company to have a leaner sourcing base. KL must decide to drop one of it suppliers. Once the supplier is dropped, the process of finding, analyzing, and selecting suppliers could take months. The process needs to be commenced right away so that a new set of suppliers will be able to be integrated into KL’s production plans. Through this process of streamlining supplies and using JIT manufacturing will assist KL in establishing long-term relationships, reducing administrative overheads and procurement costs. KL may want to re-evaluate its decision to use JIT manufacturing because, “comparing JIT to synchronous manufacturing, JIT does an excellent job in reducing lead times and work-in-progress. This has several drawbacks which, concerns continual improvements to the system, JIT is a trial-and-error procedure applied to a real system” (Chase et. al, 2005, p.736-737). While all these situations have consequences, they also affect different stakeholders. Stakeholder Perspectives/Ethical Dilemmas The first obvious stakeholder is KL. The company is making progress into the new international market by growing its customer base with Midland Motors. However, by taking on this large order KL is over exceeding its capacity limit. Not only is their capacity limit not sufficient, but more seriously, other customer relationships may be affected and broken because of the acceptance of Midland Motors business. Midland Motors is another stakeholder as well. They have placed a large order with KL and have made it clear that it is urgent. They need the order in four weeks and expect the quality to be top quality. KL suppliers are also a set of stakeholders, of which one will be dropped due to streamlining supplies. This could adversely affect the supplier and KL. The supplier will lose KL’s business; KL may be creating a gap between supply and net requirements, complicating procurements, and delay production if they drop the wrong supplier. Current KL customers are also stakeholders in this company. Because KL is taking on such a large order, the current regular orders from KL customers may have to be pushed back causing dissatisfaction from the customers and possibly cutting ties with KL. With defining a problem statement, KL will be able to prioritize and re-examine their options. Problem Statement In order for Kuiper Leda to develop a more efficient inventory management process, the company will restructure its current supply chain to provide maximum efficiency with minimal resources while keeping their commitments to their customers. End-State Vision Kuiper Leda has the potential to continue experiencing growth and positively progressing in the international market as a million-dollar electronic component manufacture. In order to satisfy Midland Motors specification for delivery Kuiper should outsource the ECU production, which will have a lead-time of 4 weeks and manufacture RFIDs in-house. Kuiper Leda should drop some of its suppliers by end of the quarter in order to effectively to rationalize their supplier base. Kuiper should select a distribution method that will have low carrying costs, low transportation cost and will not increase the back up inventory. This should be accomplished by end of the quarter. Kuiper should develop an inventory management plan by end of the year for handling the requirement of Microchips, which will put into consideration suppliers and inventory plans. Kuiper should adopt Just In Time production in order to avoid the inventory carrying costs and help them have a valid schedule to their suppliers. Kuiper Leda should accomplish the above mentioned vision and continue to grow worldwide. Alternative Solutions The benchmarks outline multiple solutions for managing inventory in the supply chain. First, companies can take a close look at the demand management policy [italics added]. Through demand management policy [italics added] KL management will coordinate and control all sources of demand so a productive system can be used efficiently and the product delivered on time. Second, companies can perform and increase existing manufacturing capacity [italics added]. This will allow the organization to meet the heightened demand for ECUs and RFIDs due to the amount of output that a system is capable of achieving over a specific period. After meeting increasing maximum capacity, KL needs to reengineer the distribution strategy [italics added] to meet the new demand logistically with the increased output. With the new demand and limited capacity KL could use outsourcing to meet the demand for ECUs and RFIDs. This would allow KL to meet the new demand while maximizing profits with limited expansion of facilities. Fourth, KL can simplify forecasting by looking at overall inventory management including the materials requirement planning (MRP), master production schedule (MPS), and the bill of material (BOM). KL could truly maximize potential by implementing similar practices of three companies: Precise Technology Inc, ON Semiconductor Inc. and JM Family Enterprises. Precise Technology focuses on the process and on the rate of customer demand and involves single-piece flow, minimal inventory [italics added] (Valero, 2004). As part of a joint venture with a customer, and by using lean techniques, Precise saved when it built a new plant in 1999 (Valero, 2004). Fewer machines were used to meet production goals which were a result of automation and cycle time reductions through process improvements (Valero, 2004). Order entry time dropped 80% while the amount of scrap was cut in half because of implementation of a continuous improvement process (Valero, 2004). According to Valero (2004) The philosophy of lean manufacturing embraces the systematic reduction of dock- to-dock lead time also known as the value stream by creating continuous flow and eliminating non-value-added actions, or waste. Lean manufacturing's success in the plastics industry supports the view that systematic elimination of waste is a significant key to profitability. Kuiper Leda can look at Precise Technology Inc. in order to have alternative distribution strategy to counteract the increase demand they are facing which has caused periods of fluctuating demand patterns. Another example is taken from the company ON Semiconductor. ON Semiconductor faced the challenge of fluctuating demand [italics added], but with an efficient supply chain strategy was able to drive up their service levels and forecast their demand. By adopting the AMR Research’s Demand-Driven Supply Network (DDSN) concept, the three core elements including demand sensing, demand shaping and profitable demand response enabled ON Semiconductor to do a better job of understanding the company’s demand patterns. The company’s use of inventory planning tools comes into play by analyzing demand variability patterns, such as order lead-time and supply chain data (Atkinson, 2007). “The idea is to apply a total systems approach to managing the entire flow of information, materials, and services from raw materials suppliers through factories and warehouses to the end customer” (Chase et al, 2006, p. 6). By having an effective supply chain management and strategy, ON Semiconductor achieved significant competitive advantage thanks to their supply chain operations. The third benchmark is JM Family Enterprises. JM Family Enterprises is a recognized leader in the automobile industry providing diversified vehicle distribution, finance, warranty, insurance, and retail sales service. The company recently outsourced [italics added] all its mainframe hardware, software and operations because mainframe usage at the $8.2 billion automotive holding company had leveled off. The outsourcing vendor immediately optimized operations so that critical month-end financial reports were distributed to company executives much sooner than before. According to Overby (2005) the vender used the same hardware and the data, so they were able to gain efficiencies simply due to the technical know how of running a mainframe (p.1). KL could reap similar benefits through outsourcing. Since KL’s situation involves handling more output than they can currently handle, an outsourcing vendor could provide increased cycle time, inventory management, and risk mitigation while simultaneously allowing KL to meet the demands of its customers. Based on these three benchmarks as a model for success, KL leadership must revamp current inventory management (IM) practices to ensure the organization maximizes future capacity. The benchmarks illustrated the need for KL to improve demand management policy and increase existing manufacturing capacity. According to Chase (2005) a supply chain is a network of linked firms, from the initial vendor of raw materials through manufacturers, distributors, and sellers, to the end customer. KL needs to streamline the IM process from receiving raw materials from suppliers, to work in progress inventory (WIP), to distribution inventory including components in transit. KL can centrally manage demand with independent ordering systems. Analysis of Alternative Solutions In the alternative solution evaluation matrix each alternative was measured. The primary alternative solutions were then given numbers that measured how they best helped KL to meet the specified goals. The rating (5) represents the best alternatives in relation to the goals; (1) represents the worst rating. The inventory management process was rated a (5) because an area that is most important and has the most significant impacts on KL. KL should create a new Inventory Management Plan to include streamlining excess suppliers and revamping the distribution strategy. KL needs to increase manufacturing capacity, for this reason manufacturing capacity is rated a (4). KL needs to increase maximum capacity to meet heightened demand; this was weighted as (3). Another option in working with limited capacity is outsourcing both manufacturing and logistics. This would help to expand capability by outsourcing as the supply and demand fluctuates. KL must redraft inventory management processes by forecasting future demand. KL can also create better demand management policy. KL’s demand policy should centrally regulate demand while using warehousing for distribution strategy. Centralizing warehousing would help reduce overhead in relation to transportation costs. Distribution strategy also includes an adjustment of the MRP for the year. MRP takes into account the MPS which leads to the BOM to determine individual requirements for components or sub assemblies for a product. These tools would help KL to manage the data and the overall supply system. Risk Assessment and Mitigation Techniques Managing risks can be difficult because the individual risks are interconnected. “As a result, actions that mitigate one risk can end up exacerbating another” (Chopra and Sodhi, 2004, ¶ 5). There are a variety of risks associated with the supply chain and these include delays, disruptions, forecast risk, procurement risk, receivables risk, inventory risk and capacity risk. The main risks that KLI faces have to do with inventory risks. Excess inventory can hurt the financial performance of KLI. Inventory risk hinges on three factors, which include uncertainty of demand and supply, the value of a product and its rate of obsolescence. “Supply chain risks can become full fledged problems, causing unanticipated changes in flow [and] can seriously disrupt or delay material, information cash flows, damage sales and increase costs” (Chopra and Sodhi, 2004, ¶ 2). Table four represents the risks and mitigation of risks involved with KLI. Optimal Solution After realizing the issues, opportunities and alternatives as well as the risk related to those alternatives, KL is better positioned to come to an optimal solution. KL’s vision and goals for the company encompass further growth in international markets, successful financial performance, which will lead to the production of new products, and efficient responsiveness to demand as well as managing and regulating demand. The optimal solution will aid the company in accomplishing these goals. First, the optimal solution will begin with the creation of a new inventory management plan [italics added], (table 5). KL will implement a minimal inventory [italics added] strategy, the same strategy used by Precise Technology. The use of this strategy will prevent unnecessary revenue lost. Second, the optimal solution is to address manufacturing capacity limitations, KL will focus on the production of ECUs. KL will outsource the production of the RFID tags. The outsourcing will allow KL the opportunity to increase facility capacity, which will later enable them to produce both ECUs and RFIDs. KL will create an infrastructure that will support the RFID production line. The increased capacity will alleviate the current bottleneck. Third, KL will recreate its demand management policy. KL will centrally regulate demand by using warehousing for distribution strategy. Until that time they will move forward with just-in-time manufacturing. The negative impact of JIT is discussed earlier in this paper. With a new inventory management plan, outsourcing initiative and new demand policy, KL will be able to improve the supply chain and increase revenue. However, an implementation plan is needed to successfully complete these actions. Implementation Plan Functional tactics are the specifics, which are vital in the process of reaching a strategic plan. If there are no tactics, essentially there are no short-term goals to meet the grand strategy. Time, specificity and participants are key elements to consider in creating functional tactics. The first step that KL must take is the creation of a new Inventory Management Plan. This deliverable will take 1 month to complete and the CEO, Zach Miller will oversee the project. The plan will include increasing KL manufacturing capacity and temporary outsourcing of RFID production. This deliverable will take 1 year to complete and the CEO, Zach Miller and VP OPS, Nicole Swanson will oversee the project. The next step is the creation of the demand management policy. KL will overhaul its current distribution system. KL will implement JIT. JIT manufacturing will require them to find, analyze, and select suppliers. This deliverable will take 2 months to complete and the CEO, Zach Miller will oversee the project. KL will replace JIT manufacturing with a centrally regulated demand by using warehousing for distribution. This deliverable will take 1 year to complete and the CEO, Zach Miller and VP OPS, Nicole Swanson will oversee the project. Now that KL has an implementation plan, measuring the effectiveness of their actions will better position the company to readjust the strategy if needed. Evaluation of Results It is important to measure results to see how effective the alternative solutions are in reaching the end state goals. End state goals and suggested metrics are summarized in Table 3. In order to determine if Kuiper Leda has been successful in implementing an effective inventory management program to reduce inventory carrying costs to no more than 5% per month, a monthly review should be conducted to make sure inventory carrying costs are reduced. Kuiper Leda should conduct a monthly review to determine the projects to outsource in order to focus more on the core competencies. A monthly review should be conducted by Kuiper to evaluate the products to be produced Just In Time to avoid inventory-carrying costs, eliminate waste and help them have a valid schedule to their suppliers. It is important for Kuiper Leda to take necessary steps to correct the problems they are facing. Conclusion An efficient supply chain is a vital process for running a business. With productive supply chain practices, KL can enhance its success. KL has many opportunities to revamp and improve its inventory management process. By realizing the company’s mission and analyzing alternatives, KL can alter its demand management, manufacturing capacity and distribution strategy to reach their goals. These tools and concepts will aid KL in managing the company data as well as their overall supply system. KL can now reach maximum efficiency with minimal resources while keeping their commitments to the customers. References Atkinson, W., (2007). On Semiconductor leverages demand-driven model for improved execution. Purchasing, 136 (5), 20-22. Retrieved on May 15, 2007 from EBSCOhost database. Chase, Jacobs & Aquilano. (2005). Operations Management for Competitive Advantage, 11th ed. New York: McGraw-Hill. Chopra, S., & Sodhi, M., (2004). Managing risk to avoid supply-chain breakdown. MIT Sloan Management Review, 46(1), p. 53-62. Retrieved May 21, 2007 from EBSCOhost database. Overby, S., (2005). Simple successful outsourcing. CIO Magazine, October 2005. Retrieved May 16, 2007 from www.cio.com/archive. Valero, G. (2004). Business, strategies & markets. Modern Plastics, 81(4), 54. Retrieved 19 April from EBSCOhost database. Table 1 Issue and Opportunity Identification Issue Opportunity Reference to Specific Course Concept (Include citation) Concept KL’s existing capacity is insufficient to handle the increased load from Midland Motors order on the plant and is experiencing a bottleneck. Midland Motors has placed an order for 250,000 ECUs and 35,000 RFID tags. This order is urgent to Midland and KL will need to manufacture and supply higher volumes over its regular orders. KL now has the opportunity to foster a closer relationship with Midland Motors. Because Midland has had unprecedented business and is a large auto company, KL could benefit from their business and relationship. “A bottleneck is defined as any resource whose capacity is less than the demand placed upon it. A bottleneck is a constraint within the system that limits throughput. It is that point in the manufacturing process where flow thins to a narrow stream,” (Chase, Jacobs & Aquilano, 2005, p.725). Bottlenecks and capacity constraints KL needs a better process of dealing with excess stock and production. Their Microchips are partly outsourced and partly going to be manufactured in-house. The opportunity lies in the development of a new inventory management plan. It can consider the forecast error, service levels required by the client, cumulative lead time for manufacturing each unit or a batch of the product, and priority of demand. “It is important for managers to realize that how they run items using inventory control logic relates directly to the financial performance of the firm. A key measure that relates to company performance is inventory turn” (Chase et. Al, 2005, p.605). Inventory control and supply chain management/ inventory turn Fluctuating demand patterns due to a substantial growth and demand over the past two years (of ECU demand because of new car models introduced into the industry) has led to expediting many orders, which has eaten into KL’s ECU margin. KL will be able to develop a new distribution strategy for increasing demand for new orders in the future. “When we bring uncertainty into the equation, safety stock is needed to manage the risk created by demand variability” (Chase, et. al, 2005, p.605), Safety Stock Just in time (JIT) manufacturing is causing KL to have a leaner sourcing base. Thus, a supplier needs to be dropped; the process of finding, analyzing, and selecting suppliers could exceed six months. This process needs to be commenced right away so that a new set of suppliers will be able to be integrated into KL’s production plans. This move will assist KL in establishing long-term relationships as well as reducing administrative overheads and procurement costs. “Comparing JIT to synchronous manufacturing, JIT does an excellent job in reducing lead times and work-in-progress, but it has several drawbacks…concerning continual improvements to the system, JIT is a trial-and-error procedure applied to a real system” (Chase et. al, 2005, p.736-737). Comparing synchronous manufacturing to MRP and JIT Table 2 Stakeholder Perspectives Stakeholder Perspectives Stakeholder Groups The Interests, Rights, and Values of Each Group Kuiper Leda Progress into the new international market by growing its customer base with Midland Motors. By taking on this large order KL is over exceeding its capacity limit and other customer’s relationships may be broken. Midland Motors Midland Motors has placed a large order with KL and has made it clear it is urgent. They need the order in four weeks and expect the quality to be top quality. KL suppliers One of the suppliers will be dropped due to streamlining supplies. This could adversely affect the supplier and KL. The supplier will lose KL’s business; KL may be creating a gap between supply and net requirements, complicate procurements and delay production if they drop the wrong supplier. Current KL customers Because KL is taking on such a large order, the current regular orders from KL customers may have to be pushed back causing dissatisfaction from the customers and possibly cutting ties with KL. Table 3 Analysis of Alternative Solutions Table 4 Risk Assessment and Mitigation Techniques Risk Assessment and Mitigation Techniques Alternative Solution Risks and Probability Consequence and Severity Mitigation Techniques Outsourcing products • employee layoffs • increased financial risk related to training new employees • cultural incompatibility • language/Communication barriers • legal and contractual issues • governmental involvement • economic stability espionage/security issues • decreased company’s reputation and face ethical dilemmas cultural dilemmas • increased need for security personal and programs designed for increased security • research pros cons to outsourcing before making decisions • diligent contract management • create a strong security framework • company and individual background checks Inventory management • the value of a product may be too expensive to sit on shelf • uncertainty of demand and supply • its rate of obsolescence • hurt financial performance • unexpected losses • costly to hold products with short life cycles • pooling inventory • create common components across products • postpone or delay the last stage of production until all orders are in hand Demand forecasting • mismatch between company’s projections • forecasts that are too low, products may not be able to see • forecasts that are too high result in excess inventory • long lead times, seasonal demand, high product variety and smaller product life cycles all increase forecast error • higher volatility in orders • lack of knowledge of end-customer demand at upstream locations • adjust pricing and incentives to decrease variation in orders • continuous replenishment programs (CRP) • selectively holding inventory and/or building responsive production and delivery capacity • collaborative planning forecasting and replenishments systems (CPFR) Table 5 Optimal Solution Implementation Plan Deliverable Timeline Who is Responsible Create a new Inventory Management Plan to include streamlining excess suppliers and revamping the distribution strategy. 1 Month CEO, Zach Miller Establish outsourcing agreement 1 Month CEO, Zach Miller and VP OPS, Nicole Swanson Increase maximum capacity to meet heightened demand 1 Year CEO, Zach Miller and VP OPS, Nicole Swanson Re-create demand policy 1 Year CEO, Zach Miller Table 6 Evaluation of Results End-State Goals Metrics Target Kuiper Leda should implement an effective inventory management program to reduce inventory-carrying costs to no more than 5 % per month. Kuiper Leda should conduct one review every month Kuiper Leda should implement an effective inventory management program to reduce inventory carrying cost by end of the quarter. Kuiper Leda should outsource some of the orders from its customers in order to focus more on the core competencies. Kuiper Leda should conduct monthly review to determine which orders are better outsourced to meet customer’s demands. Kuiper Leda should implement an effective outsourcing program by end of second quarter. Kuiper should produce Just In Time to avoid inventory-carrying costs, eliminate waste and help them have a valid schedule to their suppliers. Kuiper Leda should conduct monthly review Kuiper Leda should immediately implement a production forecasting strategy to better serve its customers.