Problem Definition
TKMC was mandated to advise the company Automotive Assembly (AA) which is in the automotive business and assembles axles for sports cars. The company has - as a Tier1 supplier - several locations worldwide, always near the OEM’s production plant for just in sequence delivery of the axles. The business model of AA is to assemble the components and pieces of the Tier-N suppliers to build a fully functional axle, quality check them, transport them to the plant of the OEM and prepare the axles to be directly built into the car on the production line. The axle has to be fully functional including damper, springs, brakes and all the necessary electronics. The administrative work for billing and paying is done centrally over all plants in the headquarters by a special department.
Short Solution (Expand)
Detailed Solution
I. Client situation
The CEO of the OEM plant in Problem-City has increasingly become unhappy and scheduled an ad-hoc meeting with the manager of the corresponding plant manager of company AA.
Several possible problems possible, but since the customer of company AA is unhappy it should must do something with the products (axles) AA produces. Possible reasons coud be:
- Wrong sequence or even worse, not the right time for the delivery of the products
- Faulty axles – very dangerous since axles are a safety-relevant component
II. Derivation of measure list
The plant manager of AA took the meeting very serious and did an internal assessment of the production and financials. Besides some production issues, he detected a serious cash problem with a concerning low liquidity. He was not sure he would be able to pay his employees.
Problems could arise from the three different topics, all based on net working capital. Net working capital = inventories + receivables - payables.
Interlinkage:
- High inventories result in low liquidity due to tied cash in inventories.
- Receivables: customer is not paying the bill on time – outstanding cash
- Payables: we are paying the customer to early compared to what we have to – drainage of cash to early
Short-term measures:
|
Inventories |
|
Very low potential |
|
Receivables |
|
Medium-to high potential |
|
Payables |
|
High potential, since the plant manager is not dependent from somebody else for the measure to be successful |
Medium-term measures for the next weeks:
|
Inventories |
|
High potential, since 7 types of waste offer many measures along the value chain |
|
Receivables |
|
Medium, since the administrative work is done centrally, we can assume that there is already a certain degree of optimization |
|
Payables |
|
Medium, since the administrative work is done centrally, we can assume that there is already a certain degree of optimization |
III. Inventory optimization
The plant operates 5 days a week, with one shift each day. One shift is 8 hours.
AA has (here simplified) only one supplier S for this product. This supplier S has three other suppliers for each component they have different lead times which are on average: 3 days, 5 days and 7 days. On some occasions, the sub-suppliers of S have difficulties and the lead times go up to 6 days, 10 days and 14 days (in the same order as above).
On an average month, AA needs 3,600 springs. Sometimes the OEM-plant is quicker and produces up to 1,000 cars a day.
Also, consider these given formulas:
- The interviewee has to pick the longest lead-time for the calculations (7 days) since the supply chain always is only as fast as the slowest chain element.
- Each axle has 2 springs, and since each car needs two axles (front and back axle) a car needs 4 springs.
- The interviewee has to guesstimate the number of days in a month. We assume that an average month has 20 working days.
Lead time demand = lead time x average daily usage = 7 days x (3,600 springs/20 days a month) = 1,260 springs
Safety stock = ((1,000 cars x 4) x 14 days) – (180 springs per average day x 7 days)
= 56,000 – 1,260
= 54,740 springs
Reorder point = 1,260 springs + 54,740 springs = 56,000 springs
IV. Cash savings
The plant manager is surprised by the numbers since the current safety stock is 60.000 springs and obviously well above that number.
Potential: 60,000 – 54,740 = 5,260 springs -> 52,600 EUR
Saved capital costs: 52,600 x 0.08 = 4,208 EUR
Risks: running out of springs and not delivering them to the OEM plan. Major business threat.
