How do you know your supply chain works?

May 31, 2005
"The most important aspect of our parts supply chain is how we perform for our customers our dealers," states George Kurth, director, supply chain and

Hyundai Motor America. "We must provide high levels of customer service while keeping costs down as efficiently as possible. For us, total supply chain cost includes measuring performance on the service side," he notes.

Through dealer satisfaction surveys, Kurth's team knows order fill rate is the number one driver of dealer satisfaction. "If needed parts are available, our dealers are happy," he says.

To track how well it achieves its supply chain performance goals — happy dealers and lowest cost — Hyundai uses two fill rate measures: facing and system.

"Facing fill rate is the order fill rate from the warehouse to which the dealer is assigned," Kurth explains. "If we can keep that fill rate very, very high, it's good for dealer satisfaction and it reduces transportation costs.

"Shipping from the assigned warehouse on our dedicated delivery route is cheap," he adds. "We pay for the truck no matter how full it is. If the part is not available from the assigned warehouse, we have to ship from another via an expedited carrier. We can satisfy the dealer and get the part there on time, but the cost soars."

At order line level, Hyundai's facing fill rate runs about 96%, considered good for the automotive industry. The automaker's system fill rate — what the entire warehouse system fills — runs about 98%, another high mark in the industry. "But that means 2% of the time, I have to use premium transportation," Kurth explains.

While transportation costs are a major focus, Kurth notes total cost of supply chain includes inventory and productivity costs.

"Total supply chain cost must include the amount of inventory or months of supply. We look at this in great detail to be sure we're conforming to our goals, yet we understand goals are industry specific. We're about average for our industry, but we're heavy compared to others. We tend to carry a lot of parts inventory because Hyundai automobiles last several years. In contrast, Dell Inc. has virtually no parts inventory because a six-month-old computer is obsolete," notes Kurth.

On the transportation cost front, Kurth recognizes where he has little control.

"Fuel costs have increased tremendously. We try to hedge against increases with fixed price contracts. And we measure and control Hyundai's air order ratio from Korea to the U.S. We compare inbound air orders vs. surface orders and we know a smooth, predictable supply chain with high fill rates helps us achieve our goal of no more than 4% of orders by air," Kurth explains.

"At the same time, we focus on maximizing density in containers while also measuring the time it takes to move a container through the supply chain. We can provide desired service at lower cost if we can find a faster ship, clear Customs more quickly, or take the time to use domestic rail instead of truck."

"Outbound to dealers, our domestic milk runs carry a fixed charge," continues Kurth. "The more you can pack into a truck vs. back orders shipped via an expedited carrier,the lower the cost. Improving order fill rates reduces those expedited costs."

While Hyundai's internal measures reflect its strong focus on service, Kurth's team is moving in a new direction for customers that want their supplier to measure delivered-fill rate. Current measures focus on shipping an order on time.

"We're not yet sophisticated enough to measure the approximately 5% of the time a shipment is delivered late or damaged or incomplete," Kurth explains. "To meet this new customer requirement, we must add a transportation management system interfaced with our current system."

Customers of Moen Inc., a manufacturer of plumbing products, also are ratcheting up the expected service level. "We have a few major accounts that dictate the measures we use and tie to our internal measures," says Scott Saunders, vice president supply chain with Moen.

Traditionally, Moen's customers used line fill rate to measure service. However, that's changing. "More customers want us to look at dollar amount fill," adds Saunders. In fact, a handful of customers are pushing Moen toward the perfect order concept.

"We're working on setting up a system to track total performance," says Saunders. "Customers want 100% of lines shipped on time. That's a much more difficult measure but that's what customers expect.

"Initially, the biggest challenge may be internal," continues Saunders. "It's tough to see performance numbers drop. Numbers that used to be in the high 90s for line fill aren't as high under the order completeness concept."

Another challenge in achieving the perfect order concept is collaboration with internal and external parties. "We have issues with carrier deliveries and bill of lading accuracy. We're trying to define it and go piece by piece, looking at how to measure these elements. We're working with carriers to report back to us on their performance," adds Saunders.

At Solectron Corp., a provider of electronics manufacturing services, involving supply chain partners is an important part of measuring and improving performance, with a strong focus on lean.

"We're working with our suppliers to drive lean supply chain practices," states James Molzon, vice president customer fulfillment and logistics with Solectron. "We still forecast, but we're moving to a pull system that allows suppliers the flexibility to respond to changes in overall demand. If we need to ship a certain number of units per week, we order ahead or forecast our need for the next 13 weeks. If there's a spike or a lull in demand, we work continuously with suppliers to provide immediate visibility to requirements rather than operating only on the long-term forecast," he explains.

"Our goal is to drive lean through the supply chain processes, on the factory floor and through our supply base. We want much more visibility between our factory and our supplier's factory," adds Molzon. "We're focusing on actual demand and we're pulling from suppliers based on actual demand. While many suppliers are still on a discreet order basis, we're striving toward a supermarket replenishment perspective."

With lean principles in place, a factory has much faster response times, Molzon observes. "We can immediately change the production schedule and manage shorter production runs." So Solectron's supply chain team is helping suppliers implement lean principles on their factory floors. "When suppliers use lean practices, there's more level loading of their production facility and less buffer stock. Visibility to immediate demand means less need to buffer," he notes.

Visibility to what's important to internal and external customers determines what gets measured at Moen. Saunders' supply chain team separates measurements into five main categories: service, cost, productivity, quality, and environmental health and safety — with subcategories in each area. For example, cost data include separate measures of inventory.

Collected data are shared at several levels within Moen. Each month, Saunders' team presents a high-level scorecard to the executive team, covering events needing attention at that level. He also shares measures with operations people — items they need to see daily, like fill rate to customer, percentage of phone calls answered appropriately, or parts per million defect rate for different manufacturing operations.

"We're looking for exceptions," says Saunders. "Maybe inventory levels don't match our goals. When we see something out of line, we dig deeper for root causes."

In addition to current measures, Moen's executive team looks at historical data — perhaps prior year and current year plans compared to actual performance. "Each measure has a level of significance. Where we are off target, we come up with an action plan. If we're off by a large number or the data show an unpleasant trend over time, the executive team wants an explanation and a plan of action," notes Saunders.

Looking at trends beyond the four walls is another way to gauge supply chain performance.

"In our industry, we're rated high in customer service and average in cost," notes Kurth. Since he is aware of how his company rates within the automotive industry, Kurth knows Hyundai could do better on the cost side. Hyundai belongs to an automotive and heavy equipment industry group — an independent company that collects performance and cost metrics from member companies.

"We receive results once a year, plus special benchmarking projects from time to time," notes Kurth. "We see each other's performance data by company. Cost data is a blind study where we only see our own data versus other coded entries."

Customer feedback is an important benchmarking tool within the high-tech industry as well, adds Solectron's Molzon. "We do subjective and quantitative customer satisfaction surveys, with more and more emphasis on quantitative assessments."

Dell Inc.
Hyundai Motor America
Moen Inc.
Solectron Corp.

Reducing returns

"How we manage returns is part of our overall cost," notes George Kurth, director, supply chain and logistics with automaker Hyundai Motor America. "We measure dealer return rate as a percent of sales, per dealer and in the aggregate."

Two years ago, Hyundai implemented its Smart Stock program. "We tell dealers how to set their inventory control system," Kurth explains. "We populate our dealer inventory system with part classifications and best-in-class system parameters. The system understands global demand and calculates orders.

"If dealers implement successfully - if they stock product according to our recommendations - we take back all excess inventory at one time, then readjust inventory once per quarter," Kurth adds.

It works, he points out, "because healthy dealers buy inventory that sells. Dealers won't be healthy with excess inventory on their shelves. And we can put their unused parts back into stock and resell to other dealers."

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