Supply-chain managementThe power of strategic partners

Marc Casseres

APICS Professional Development Meeting

April 21, 2009

Page 2

Outline

• Supply-chain management – the basics

• Supply-chain strategy development

• Procurement methodology

• Internal logistics methodology

• Lean supply-chain enablers

• Strategic partners

• Conclusion

Page 3

Customers Suppliers

VMI

Dock-to-Shop

Kanbans

Certified Suppliers

BuySite

CMOShip Trigger

iBins

Exostar

A demand-driven supply chain

• Focused on the customer pull – products, performance, cost, technology management, time to market, etc.

• Requires reengineering the enterprise – processes, metrics, responsibilities

A fully integrated and lean supply chain leverages material logistics, procurement, subcontracts, and supplier engineering by partnering

with fewer but superior suppliers —

To provide affordable products to our customers on time, every time

Page 4

7 guiding supply-chain principles

1. In sync with factory demand

• Reduced cycle time

• Increased availability

2. Integrated supplier partners

• Reduced supply base

• Trusted and seamless Relationships

3. Lean material logistics

• Demand pull

• Supplier-managed inventories

• Dock to stock / point of use

4. Material affordability

• Leveraged volumes

• Reduced material cost

• Open-book pricing

5. Material availability guarantee

• Certified suppliers

• Pipeline to forecast

• Bonded inventory

6. Integrated with new product

introduction

• Design collaboration

• Preferred parts

• Rapid prototyping

7. Aligned with global business needs

• Speed to market

• Price to win

• Assured quality

Page 5

Strategic supply-chain integration

ChaosChaos

• Frequent shortages

• No visibility outside 4 walls

• Heavy expediting

• Excessive inventory

• Poor material quality

• Long lead times

• Mass incoming inspection

• Unstable systems

Strategic supply chain integration isoptimization at the enterprise level

“Functional parochialism”“Functional parochialism”

StabilityStability

• Controlled inventory

• Some lean practices

• Reliable material quality

• Varied lead times

• Supplier qualification

• SPC-based incoming inspection

• Large central stores

• “Invisible systems”

• Reliable forecasts

• “Managed” customer demand

“Internal cooperation”“Internal cooperation”

Industry best

practiceIndustry best

practice

Strategically

integrated supply chain

Strategically

integrated supply chain

“Internal integration”“Internal integration”

“External integration”“External integration”

• Schedule sharing

• EDI and Web linkages

• Supplier-managed inventory

• Supplier self-qualification

• Leveled requirements

• No incoming inspection (dock-to-shop)

• Service/spare catalogs

• Point-of-use restocking

• Kanban signals

• Pay on consumption/receipt

• Buy to forecast/configure to order

• Build to forecast/ship to pull

• Supplier-driven product improvement

• Product/process design integration

• Strategic alignment with suppliers

• Shared risk (strategic alliances)

• B2B Web transactions

• Global inventory visibility and planning

• Pull/kanban deliveries

• “Unfettered” customer demand

• Integrated customer to supplier logistics network

• Ongoing customer lead-time minimization

• Consumption-based scheduling (customer to supplier)

Page 6

Supply-chain strategy development

• Procurement methodology

• Internal logistics methodology

• Quality systems methodology

• Financial methodology (payables and tracking)

• IT systems support methodology

• Facilities support methodology

• Contractual methodology (T’s & C’s)

Page 7

3-tiered procurement methodology

Discrete material requirement

Supplier-managed

inventory (SMI)

• Commodity partners

• On-site suppliers

• Pipeline to forecast

• Ship to replenishment trigger

• Kanban replenishment

• Certified suppliers (dock to shop)

• Blanket PO/consolidated monthly billing

Leveraged volume

procurement

• Combine requirements across business

• Release POs against agreements

• Traditional receiving / inspection/stock/issue

• Full incoming inspection

• Traditional A/P

• Standard T’s&C’s

Discretely issued

purchase order

• Buyer negotiates price and delivery

• Traditional receiving / inspection/stock/issue

• Full incoming inspection

• Traditional A/P

• Standard T’s&C’s

Page 8

Inventory classification

% Cost% Cost% Cost% Cost75.0%75.0%75.0%75.0%

18.0%18.0%18.0%18.0%

4.3%4.3%4.3%4.3%2.7%2.7%2.7%2.7%

100%100%100%100%

% Parts% Parts% Parts% Parts3.8%3.8%3.8%3.8%

12.4%12.4%12.4%12.4%

13.1%13.1%13.1%13.1%70.7%70.7%70.7%70.7%

100%100%100%100%

Each commodity requires a different approach to ensure materialavailability, highest quality, and lowest possible cost

Commodity procurement methodology

• Critical to understand material costs vs. material volume and transactional volume

Page 9

BAE Systems’ supplier partner selection criteria

• Commodity coverage

• Past performance

• Quality performance

• Life-cycle management capability

• Inventory risk sharing

• Direct material pricing

• Service fee/markup (if applicable)

• Payment terms

• Freight

• Inventory positioning commitment

• Delivery lead time (from trigger)

• Technical support

• Implementation capabilities

• SDB solution

• Supplier performance requirements

• Must provide resources at BAE Systems’ sites

• Must maintain 60-90 days of bonded forecasted inventory

• Must fill replenishment signals within 7 days

• Must agree to consolidated billings

• Must maintain dock to shop

Page 10

BAE Systems’ SMI logistic methodology

• Typical SMI utilizing supplier’s employees to perform the transactions required to order,

receive, and deliver material to production areas. The supplier’s employees are located

within the facility and have Intranet access to support the SMI.

Factory

point of use (POU)Forecast

MRP requirements

Requisitions

POs

Material transfers

Receiving transactions /

back-flushing

Supplier’ s rep

BAE Systems office

Stockroom

Kanban bins

Discrete kits

Milk run delivery to:

In-house or

supplier’s warehouse

TriggerTrigger

Reorder

loop

Page 11

Distribution model

Partnership agreement

Direct factory trigger

Point of use

Supplier-managed

Supplier-managed

Supplier-managed

Supplier-managed

Certified supplier

Invoicing

Accounts payable

MIS support

Product standardization

DFAR / ITAR compliance

Obsolescence disp.

Product design

Asset carrying cost

Partnership agreement

Direct factory trigger

Point of use

Supplier-managed

Supplier-managed

Supplier-managed

Supplier-managed

Certified supplier

Invoicing

Accounts payable

MIS support

Product standardization

DFAR / ITAR compliance

Obsolescence disp.

Product design

Asset carrying cost

BAE SYSTEMSFUTURE ACTIVITIES

BAE SYSTEMSFUTURE ACTIVITIES

REDUCED

SHARED

SHARED

SHARED

REDUCED

ELIMINATED

ELIMINATED

ELIMINATED

ELIMINATED

ELIMINATED

ELIMINATED

REDUCED

REDUCED

SHARED

ELIMINATED

ELIMINATED

Sourcing/quotation

Procurement

Receiving

Storage

Distribution

Material handling

Inventory management

Quality inspection

Invoicing

Accounts payable

MIS support

Product standardization

DFAR / ITAR compliance

Obsolescence mgmt.

Product design

Asset carrying cost

Sourcing/quotation

Procurement

Receiving

Storage

Distribution

Material handling

Inventory management

Quality inspection

Invoicing

Accounts payable

MIS support

Product standardization

DFAR / ITAR compliance

Obsolescence mgmt.

Product design

Asset carrying cost

DISTRIBUTION CURRENT ACTIVITIES

DISTRIBUTION CURRENT ACTIVITIES

Sourcing/quotation

Procurement

Receiving

Storage

Distribution

Material Handling

Inventory Management

Quality Inspection

Invoicing

Accounts Payable

MIS Support

Product Standardization

DFAR / ITAR compliance

Obsolescence mgmt.

Product design

Asset carrying cost

Sourcing/quotation

Procurement

Receiving

Storage

Distribution

Material Handling

Inventory Management

Quality Inspection

Invoicing

Accounts Payable

MIS Support

Product Standardization

DFAR / ITAR compliance

Obsolescence mgmt.

Product design

Asset carrying cost

BAE SYSTEMS CURRENT ACTIVITIES

BAE SYSTEMS CURRENT ACTIVITIES

Page 12

Not all inventory organizations need all enablers – but flexibility to apply appropriately is essential to lean enterprise implementation

IT systems support methodology –lean supply chain enabling factors

• Multi-inventory organization architecture vs. singular process architecture

• Common, co-mingled inventory vs. project procurement/inventory management

• Moving average unit cost vs. project-specific standard cost

• Back-flushed/“post-pegged” inventory valuation vs. pegged procurement and inventory valuation

• Order management (soft-linked customer demand) vs. project contracts (hard-linked customer demand)

• Common quality plans vs. project quality clausing

• “POU pull” vs. inventory management “locator code push”

• Controlled FIFO consumption trigger vs. lot traceability

Page 13

Lean supply-chain effects

• Improve profitability through cost minimization• Simplification and standardization

• Minimize inventory

• Reduce handling

• Reduce transactions

• Increase sales through superior supply-chain services • Increase value-adding processes

• On-site suppliers

• Improve competitive position through timely delivery of high-quality products and services

• Reduce cycle times from supplier to customer

• Increase inventory turns

• Improve competitive position through ability to launch new products quickly and efficiently

• Dynamic synchronization of supply-chain processes

• Reduced product realization cycle times

• Improve new-product manufacturability and quality

Page 14

Responsiveness vs. rationalization

• Typical “before” comments:

• “How hard can it be to schedule airplane builds?”

• “Why can’t the customer get his MRP scheduled properly?”

• “It not our fault we were late to ship product ‘X’ – the customer pulled in the schedule last week.”

• “The customer dropped those in the schedule behind me – I was already late when I saw the first requirement for those.”

• “We’d be on schedule if the customer level loaded his schedule.”

• “Give me a req and I’ll buy it – but you are inside lead time.”

• A new mindset:

• “The customer is allowed to ask for anything.”

• It is up to us to figure out how to be ready and provide it with the shortest possible reflex cycle.

• It’s never the customer’s fault – it is always our fault. How can we improve?

Page 15

Service delivery model alignedto global business needs

• Speed to market, product cost, quality

• Flexibility to adapt

• Lean and agile to provide the material – on time, every time as pulled from the DFT factories

• Supplier partnerships

• Reduce lead times, process variability, and total material cost

• Preferred parts

• Supplier-managed inventories and logistics

Provide affordable products to our customers on time, every time

Page 16

Our customers

We Protect Those Who Protect Us®