06.02.10
Lean Planning for Medical Devices: Part II
Having all the elements in place for efficient procurement will ensure the most effective Lean manufacturing processes.
In the May issue of Medical Product Outsourcing, the first part of this article explored how production and replenishment are planned using a “pull” system based upon consumption, not a traditional forecast-driven “push.” Also discussed was how to execute a pull system using a statistically sized reorder point (ROP) that ensures sufficient product to meet service-level and demand requirements, including random variation.
In this issue, the focus will be procurement for a Lean Flow business, including changes in the raw/purchased material procurement methods. Together, Lean planning and procurement make up the core of a Lean Material Strategy (LMS). To properly design a Lean supply chain, the LMS reviews every aspect of planning and procurement, redesigning the business processes to eliminate the waste and convert to a pull process throughout the supply chain.
Applying Pull to Procurement
The same pull methodology will be used to procure material as was discussed in first part of this article for managing finished goods inventory (FGI). Historical data will be used to statistically size an electronic kanban trigger—which is an ROP. Also, a minimum order quantity (MOQ) is created, based upon a minimum buy quantity from the supplier or a frequency of shipping (once per day, once per week, once every two weeks) and the quantity represented by that delivery frequency. There will be exceptions to using the pull system to procure materials as well. Exceptions could include:
• Low-volume materials that are not kept in stock are purchased when the product is sold and there is an
actual material requirement;
• Material purchased to support special sales events (extremely high spikes in demand) as the demand
is realized;
• Due to lot-traceability requirements, there will be times when materials cannot be presented in the line as a two-bin system due to the potential to mix materials from two different lots. In this case, material will be presented or pulled to the line by order. Note the number and types of materials handled this way should be minimized so that unnecessary material handling is minimized. Issues with lot traceability in a kanban usually can be addressed by bag-and-tag. Suppose a kanban container holds 100 units. To refill it, there currently are 35 of an older lot, and the remaining 65 come from the current lot. The 35 are placed in a bag; the bag is tagged with its lot number, and the same is done for the remaining 65. What results is a full kanban, with the two different lots identified.
There will be other exceptions, but these are typical. The calculation of the statistical ROP for materials is driven by the daily demand (or usage), the supplier lead time and the service level desired. Ideally, service level should reflect the finished-product item number and be calculated through to the component level. At this time, there are not any computer systems capable of calculating the component ROP from the finished-item service level. Until this is possible, component parts should have service levels applied by ABC classification, by commodity and/or by supplier. The least-expensive items should have the highest service levels, the most expensive items should have the lowest service levels. Note that the service level of the components required to produce a product must be higher than the desired service level of the finished product. A 95 percent service level for a finished product cannot be achieved with a 92 percent service level for the component.
The service level relates to the number of standard deviations in demand variability that are added to the average usage during lead time (daily average usage multiplied by lead time). As an example, a 97.73 percent service level is equal to about two standard deviations of demand variability, and a 99.38 percent service level is about two and a half standard deviations. The higher the service level, the more variation in usage that will be applied to the ROP, and, therefore, higher potential on-hand inventory. This increase in material availability is critical to meet the variation in demand of the product. If material is not available, product cannot be produced, shipped and invoiced to the customer.
Lean procurement includes a focus on the tools used to signal and drive requirements to suppliers, as well as on the development and improvement of supplier performance. This means spreading the use of pull to the supplier, having the supplier embrace a Lean Flow factory redesign, and the supplier then using pull and statistically sized ROP to procure raw materials. By working with suppliers to showcase the success in your business using LMS (including Lean planning and procurement), working to educate the supplier base about Lean Flow factory design and LMS, medical device companies can achieve lower costs, reduced lead times, smaller minimum order quantities and more frequent deliveries, better on-time delivery from suppliers, and reduced inventory.
Will every supplier adapt its manufacturing strategy to LMS? Obviously not. But those that do become powerful partners in the creation of a world-class supply chain design. Often, companies find some of the suppliers already are on the Lean journey, looking for improved Lean customer-supplier partnerships. There will be those that only use a portion of the powerful tool set presented to them, and therefore will create some benefits for themselves and their customers. Suppliers who refuse to work on reducing lead times, costs and improving on-time delivery performance clearly are targets for replacement.
Streamlining the Process
Changes to the planning process will require some additional reports, possibly some links to external statistical calculation tools and possibly the addition of some new information fields inside manufacturing resource planning. The goal of the LMS is not to introduce additional work for the planner/buyers, but to streamline the planning and procurement processes. Therefore, any additional effort to size, manage and maintain the ROP/pull system must be offset by reducing the tasks from the current MRP processes. That is why Lean planning and procurement are pieces in the overall LMS and supply chain design process.
One way to reduce the overall time buyers spend on the procurement of materials is the use of the pull system. Using the pull system reduces the amount of shortages and wasted efforts for the buyers caused by reacting to the sudden need for material caused by a shortage. Shortages are reduced because materials are replenished based upon consumption, not forecast. If the forecast says no material is required, but based upon consumption there is a pull signal to replenish, the material should be purchased. If the forecast says buy this material because a sale is predicted to occur in the future, but there is no physical consumption, do not buy the material.
The ROP/pull system also is designed to focus a buyer’s attention on the 20 percent of the part numbers that make up 80 percent of the dollars consumed. For C-type items, the service level is held high, the MOQs are large and the risk of a shortage is very low. Because of the low dollar value of these items, a high service level may drive a large quantity of an item, but not a large inventory value. Therefore the ROP/MOQs used for these items (that make up the bulk of the part numbers) tend to be set and operated by the system with very little manual intervention. This allows the buyers to concentrate on the A items, with the B items getting next priority.
Because the A items make up 80 percent of the dollars purchased, companies at this point should check every replenishment signal for future demand above normal usage within lead time, promised supplier deliveries, usage demand spikes in the ROP calculation, sales promotions causing requirements greater than the ROP variation can sustain, supplier quality issues, and any other known issues requiring monitoring. A buyer’s workload should be 60-80 percent effort on these A-type items. With lower service levels than C items, usually more complex components and fewer days supply of inventory, these items are more likely to create a shortage in production than a C item such as a washer. These items also are likely to cause huge inventory increases if procured using poorly calculated ROPs.
With the orders planned and the materials made available, Lean planning needs to tie the production process together from order entry to product shipment. In Lean planning, since ideally the need for the production work order may have been eliminated, the MRP software will need to be capable of back-flushing material when product is completed. A traditional MRP-based work order (not a traceability document) can drive two undesired, non-Lean results: 1) kitting of components, and 2) MRP-driven, forecast-based, push-system production quantities. A back-flush, on the other hand, 1) decrements component inventory as it is consumed, or pulled, and 2) recognizes completed-unit quantities.
There will need to be a method to generate a listing of demand or a sequence for the first operations to begin to produce product in the order the planner determines. For those companies requiring lot traceability, the device history record’s lot quantity now ties to sales-order quantities, or to MOQ quantities triggered by the ROP electronic kanban. In any case, the work order or lot quantity simply would not be a large push-system batch representing weeks or months worth of forecast consumption.
For a company that has significant make-to-order demand, customer service and planning must be able to provide the customer with an accurate ship date, a date that the business will meet 95 percent on time or better. The planner will need a software tool to be able to fill demand into a daily sequence plan up to the factory or lines’ daily production-plan goal. Once tomorrow’s production plan goal is filled with demand, a new sales order or kanban trigger or single-use kanban must begin to fill in the next day’s available capacity. This will allow the customer service department to tell the customer on the phone the expected product ship date. There are MRP software tools that have this “capable to promise” planning tool, or one may need to be developed.
The Lean planning and procurement processes described in this series of articles provides the basics for understanding the changes required in this new Lean environment. Initially, there will be a significant amount of work for the planning function to convert to Lean planning. Once the conversion is complete, however, the planning process will be greatly simplified and allow the planners to focus on more important aspects of planning than creating reams of paper, hot lists and expediting product through the factory.
Preston “Jay” McCreary is a founding partner at FlowVision, LLC, a full-service provider of Lean and Flow manufacturing services. McCreary has been educating and implementing Flow Manufacturing concepts for more than 17 years, and he has more than 35 years of manufacturing management experience. His implementations have been used in a variety of industries, in more than 100 manufacturing companies.
Having all the elements in place for efficient procurement will ensure the most effective Lean manufacturing processes.
In the May issue of Medical Product Outsourcing, the first part of this article explored how production and replenishment are planned using a “pull” system based upon consumption, not a traditional forecast-driven “push.” Also discussed was how to execute a pull system using a statistically sized reorder point (ROP) that ensures sufficient product to meet service-level and demand requirements, including random variation.
In this issue, the focus will be procurement for a Lean Flow business, including changes in the raw/purchased material procurement methods. Together, Lean planning and procurement make up the core of a Lean Material Strategy (LMS). To properly design a Lean supply chain, the LMS reviews every aspect of planning and procurement, redesigning the business processes to eliminate the waste and convert to a pull process throughout the supply chain.
Applying Pull to Procurement
The same pull methodology will be used to procure material as was discussed in first part of this article for managing finished goods inventory (FGI). Historical data will be used to statistically size an electronic kanban trigger—which is an ROP. Also, a minimum order quantity (MOQ) is created, based upon a minimum buy quantity from the supplier or a frequency of shipping (once per day, once per week, once every two weeks) and the quantity represented by that delivery frequency. There will be exceptions to using the pull system to procure materials as well. Exceptions could include:
• Low-volume materials that are not kept in stock are purchased when the product is sold and there is an
actual material requirement;
• Material purchased to support special sales events (extremely high spikes in demand) as the demand
is realized;
• Due to lot-traceability requirements, there will be times when materials cannot be presented in the line as a two-bin system due to the potential to mix materials from two different lots. In this case, material will be presented or pulled to the line by order. Note the number and types of materials handled this way should be minimized so that unnecessary material handling is minimized. Issues with lot traceability in a kanban usually can be addressed by bag-and-tag. Suppose a kanban container holds 100 units. To refill it, there currently are 35 of an older lot, and the remaining 65 come from the current lot. The 35 are placed in a bag; the bag is tagged with its lot number, and the same is done for the remaining 65. What results is a full kanban, with the two different lots identified.
There will be other exceptions, but these are typical. The calculation of the statistical ROP for materials is driven by the daily demand (or usage), the supplier lead time and the service level desired. Ideally, service level should reflect the finished-product item number and be calculated through to the component level. At this time, there are not any computer systems capable of calculating the component ROP from the finished-item service level. Until this is possible, component parts should have service levels applied by ABC classification, by commodity and/or by supplier. The least-expensive items should have the highest service levels, the most expensive items should have the lowest service levels. Note that the service level of the components required to produce a product must be higher than the desired service level of the finished product. A 95 percent service level for a finished product cannot be achieved with a 92 percent service level for the component.
The service level relates to the number of standard deviations in demand variability that are added to the average usage during lead time (daily average usage multiplied by lead time). As an example, a 97.73 percent service level is equal to about two standard deviations of demand variability, and a 99.38 percent service level is about two and a half standard deviations. The higher the service level, the more variation in usage that will be applied to the ROP, and, therefore, higher potential on-hand inventory. This increase in material availability is critical to meet the variation in demand of the product. If material is not available, product cannot be produced, shipped and invoiced to the customer.
Lean procurement includes a focus on the tools used to signal and drive requirements to suppliers, as well as on the development and improvement of supplier performance. This means spreading the use of pull to the supplier, having the supplier embrace a Lean Flow factory redesign, and the supplier then using pull and statistically sized ROP to procure raw materials. By working with suppliers to showcase the success in your business using LMS (including Lean planning and procurement), working to educate the supplier base about Lean Flow factory design and LMS, medical device companies can achieve lower costs, reduced lead times, smaller minimum order quantities and more frequent deliveries, better on-time delivery from suppliers, and reduced inventory.
Will every supplier adapt its manufacturing strategy to LMS? Obviously not. But those that do become powerful partners in the creation of a world-class supply chain design. Often, companies find some of the suppliers already are on the Lean journey, looking for improved Lean customer-supplier partnerships. There will be those that only use a portion of the powerful tool set presented to them, and therefore will create some benefits for themselves and their customers. Suppliers who refuse to work on reducing lead times, costs and improving on-time delivery performance clearly are targets for replacement.
Streamlining the Process
Changes to the planning process will require some additional reports, possibly some links to external statistical calculation tools and possibly the addition of some new information fields inside manufacturing resource planning. The goal of the LMS is not to introduce additional work for the planner/buyers, but to streamline the planning and procurement processes. Therefore, any additional effort to size, manage and maintain the ROP/pull system must be offset by reducing the tasks from the current MRP processes. That is why Lean planning and procurement are pieces in the overall LMS and supply chain design process.
One way to reduce the overall time buyers spend on the procurement of materials is the use of the pull system. Using the pull system reduces the amount of shortages and wasted efforts for the buyers caused by reacting to the sudden need for material caused by a shortage. Shortages are reduced because materials are replenished based upon consumption, not forecast. If the forecast says no material is required, but based upon consumption there is a pull signal to replenish, the material should be purchased. If the forecast says buy this material because a sale is predicted to occur in the future, but there is no physical consumption, do not buy the material.
The ROP/pull system also is designed to focus a buyer’s attention on the 20 percent of the part numbers that make up 80 percent of the dollars consumed. For C-type items, the service level is held high, the MOQs are large and the risk of a shortage is very low. Because of the low dollar value of these items, a high service level may drive a large quantity of an item, but not a large inventory value. Therefore the ROP/MOQs used for these items (that make up the bulk of the part numbers) tend to be set and operated by the system with very little manual intervention. This allows the buyers to concentrate on the A items, with the B items getting next priority.
Because the A items make up 80 percent of the dollars purchased, companies at this point should check every replenishment signal for future demand above normal usage within lead time, promised supplier deliveries, usage demand spikes in the ROP calculation, sales promotions causing requirements greater than the ROP variation can sustain, supplier quality issues, and any other known issues requiring monitoring. A buyer’s workload should be 60-80 percent effort on these A-type items. With lower service levels than C items, usually more complex components and fewer days supply of inventory, these items are more likely to create a shortage in production than a C item such as a washer. These items also are likely to cause huge inventory increases if procured using poorly calculated ROPs.
With the orders planned and the materials made available, Lean planning needs to tie the production process together from order entry to product shipment. In Lean planning, since ideally the need for the production work order may have been eliminated, the MRP software will need to be capable of back-flushing material when product is completed. A traditional MRP-based work order (not a traceability document) can drive two undesired, non-Lean results: 1) kitting of components, and 2) MRP-driven, forecast-based, push-system production quantities. A back-flush, on the other hand, 1) decrements component inventory as it is consumed, or pulled, and 2) recognizes completed-unit quantities.
There will need to be a method to generate a listing of demand or a sequence for the first operations to begin to produce product in the order the planner determines. For those companies requiring lot traceability, the device history record’s lot quantity now ties to sales-order quantities, or to MOQ quantities triggered by the ROP electronic kanban. In any case, the work order or lot quantity simply would not be a large push-system batch representing weeks or months worth of forecast consumption.
For a company that has significant make-to-order demand, customer service and planning must be able to provide the customer with an accurate ship date, a date that the business will meet 95 percent on time or better. The planner will need a software tool to be able to fill demand into a daily sequence plan up to the factory or lines’ daily production-plan goal. Once tomorrow’s production plan goal is filled with demand, a new sales order or kanban trigger or single-use kanban must begin to fill in the next day’s available capacity. This will allow the customer service department to tell the customer on the phone the expected product ship date. There are MRP software tools that have this “capable to promise” planning tool, or one may need to be developed.
The Lean planning and procurement processes described in this series of articles provides the basics for understanding the changes required in this new Lean environment. Initially, there will be a significant amount of work for the planning function to convert to Lean planning. Once the conversion is complete, however, the planning process will be greatly simplified and allow the planners to focus on more important aspects of planning than creating reams of paper, hot lists and expediting product through the factory.
Preston “Jay” McCreary is a founding partner at FlowVision, LLC, a full-service provider of Lean and Flow manufacturing services. McCreary has been educating and implementing Flow Manufacturing concepts for more than 17 years, and he has more than 35 years of manufacturing management experience. His implementations have been used in a variety of industries, in more than 100 manufacturing companies.