Parts Management Models and Applications: A Supply Chain System Integration Perspective Sameer Kumar, Ph.D. November 15, 2004 As a faculty member, I am interested in learning how to make supply chains function more effectively in today’s global business community. Clearly, supply chains have been in existence since the first manufacturer discovered it was more effective to buy components and raw materials rather than make their own. Supply chains then expanded into distribution channels when manufacturers learned that independent intermediaries could often facilitate the movement of goods and services from their factories to the end users and ultimately consumers.Now, supply chains are complex entities, and many of the analytical tools used in system optimization can be directly applied to improving the efficiency and functionality of the supply chain. This results in higher profits for supply chain members and lower total costs for end users and consumers. When done correctly, everyone in the economy comes out ahead.The best way to describe my scholarship in this field is through an example of my research projects. By studying and then testing various procedures with a leading manufacturer of transport refrigeration equipment, I can illustrate how advanced process models are used to integrate the supply chain.BackgroundThe company was concerned that poor inventory management processes, leading to inaccurate stock records, were adversely affecting bottom-line profits and customerservice levels. Inaccurate stock records resulted in stock-outs and lost sales or overstock and excess carrying costs. Failure to incorporate variability in procurement lead times also produced shortages that negatively affected customer service and satisfaction.After examining the company’s processes, I proposed an integrated approach to improve customer service, reduce costs through improved inventory and operational management techniques, and address improvements in the overall supply chain rather than focus on individual business operations. The approaches outlined below involve adapting advanced process models to accurately address complex operational dynamics across the supply chain.Moving from problem to solutionPreliminary analysis revealed that the source of inventory errors was primarily data entry. The manufacturer had no formal procedures to identify and correct these errors. By creating a parity checking procedure based on material conservation concepts, “out of range” entries could be immediately flagged and rechecked at the time of data entry, minimizing downstream effects of uncorrectederrors.Adding an Electronic Data Interchange (EDI) network between the manufacturer and its suppliers allowed lot sizes and inventories to be reduced without affecting ordering costs and lead times. Orders that did not correspond to standards triggered automatic calculation of the penalties that would result from incorrectly placed orders.Similarly, at the “downstream” end of the distribution channel, expensive and low demand items were serviced directly by the manufacturer, while other items were distributed through dealers. The existing division of the items was subjective. The company believed that dealers should keep shelf inventory for more items, but if an item was not profitable, dealers would not inventory it. I identified a process model that provides aneconomic rationale for subsidizing dealers for maintaining optimal levels of key items, thereby encouraging them to keep appropriate shelf inventories of those items. The subsidization is justified to increase market share and profitability.As is typical in any parts inventory system, many items in inventory were fully interchangeable. No procedures existed to control the proliferation of parts. The valid point for controlling this proliferation was the design department. To help them minimize component proliferation, I devised a framework that uses a three-level decision-making hierarchy. Level one represented standardization of system modules; level two represented capacity decisions for a product line; and level three incorporated thermodynamic optimization for control systems to keep the system dynamically balanced in changing environments.Key lessons learned: Serve your supply chain, not just operations Using the models and process originally developed for one manufacturer, a pilot study was carried out to improve planning and fulfillment process for a manufacturer of highpressure positive displacement plunger pumps. The study validates the holistic perspective of parts management described above.Several findings are notable:• A synchronized system from source to consumption can significantly improve operations; however, systemwide changes require a cross-functional team focused on reducing waste and investment in inventory.• Traditional measures of manufacturing efficiency and utilization were compared to proposed measurements of throughput, investment in inventory and operating expense. Although traditional measures indicated profitability would decline, the new measures show improvement and increased profitability of 200 percent for this product line.• Improved capacity management is achieved by sharing information between suppliers and customers.• Finally, for all the world’s complex problems, there are simple answers, but they are often wrong.By adapting widely used concepts in industrial engineering and management science, it is possible to transfer these practices to new venues, such as the growing field of supply chain management, to produce cost savings and service improvements that benefit all members of the supply chain.We first identify the operational problem, then adapt and test the model that offers a solution, and then bring the results into the classroom. Companies benefit, students benefit and the academic community benefits from this development and exchange of knowledge.