Supplier Partnerships and Kanbans: Imagine - 100% Delivery Performance in 120 Days!
Michael Weise, Materials Manager , SOR, Inc., Lenexa, KS 66215, 913/888-2630
Jerry Sanderson, CFPIM, CIRM
Jerry Sanderson, CFPIM, CIRM, President, Gerald A. Sanderson, Inc., Roeland Park, KS, 66201, 913/677-4999
81st Annual International Conference Proceedings - 1996 - Chicago, IL
Introduction. SOR, Inc. is a rapidly growing company that manufactures control instrumentation sold globally to the process industry. In 1947, Roy Dunlap founded SOR as a small precision machine shop and it has evolved into a global manufacturer of instrumentation. The company markets switching devises for the process industry worldwide. These switching devises are marketed through a world wide network of factory trained representatives. SOR instruments measure level, flow, pressure, and temperature. Products are engineered and made-to-order. It is common for the company to ship a special switch on the same day it was ordered. Everyone at SOR is focused to meet the challenges presented to us by the customers and the industry.
After completing a strategic plan in late 1993 it was clear SOR needed to make significant improvements in manufacturing operations to achieve it's vision of becoming a World Class supplier of control instrumentation. Several Focus Factories had been formed and some cellular manufacturing principles were in place, but the results were less than satisfactory. Part shortages seriously impeded the company's progress toward becoming a World Class Manufacturer. The areas requiring attention included improving response time, reducing paper work and excess inventory, eliminating quality slippage - from both internal and external suppliers and reverse the trend of customer returns and employee turnover that was moving in the wrong direction.
The President of SOR, Lew Goetz, took the initiative to correct the situation by allocating resources to the improvement project, including his personal attention and time, and gave direction to the project team. Concentrating on the manufacture of switches in the Pressure Focus Factory and the Materials Management function, our goals were to fully establish cellular manufacturing principles throughout the pressure factory and a material logistics support systems based on kanbans. This paper addresses the material logistic infrastructure, based on kanbans and Supplier Partnerships, and how it helped move the company to a new level of performance in a short time.
Supplier Partnership. SOR realized that traditional purchasing practices were inconsistent with the strategic goals of the company. The Pressure Focus Factory had been given its own material and purchasing function dedicated to the success of their product lines. We knew that it would be essential to the process to establish effective Supplier Partnerships. The purpose of the Supplier Agreement is to insure the on-time supply of quality materials and services at competitive prices to support SOR's manufacturing operations. In return SOR provides its supplier partners with guaranteed volume levels for two years with rapid payment. The agreement's design created the conditions so both parties could make significant progress by increasing profitability and gaining a competitive advantage. In other words, the goal was to have a win/win relationship for the supplier and company.
The agreement awards the supplier 80% of two years annual demand. This is based on total dollar volume detailed on a product list. If the supplier displayed excellent performance in quality, delivery, and prices, the agreement would be extended an additional two years. SOR reserved the right to change parts and quantities on the product list. The company accepted responsibility for ninety days of supplier stock that results from part deletions. The Supplier Agreement can be canceled in ninety days by either party.
Suppliers agree to keep on hand the quantity of "base stock" shown on the Supplier Agreement Product List (see Figure I). This quantity is approximately four Supply Kanbans representing one month demand. The name "Supply Kanban" identifies a card used to signal a material pull from a supplier partner. Suppliers are required to meet SOR's "maximum reasonable demand" of shipping two Supply Kanbans on time each week for four consecutive weeks. SOR's releases and supplier's shipments are closely controlled and are an integral part of the program's success. A Supply Kanban Release Form (see Figure I), showing the number of kanbans released by part number, is sent by FAX, or another suitable method, to the supplier before the close of daily business. The supplier acknowledges receipt of the release in 24 hours by returning the form confirming that the shipment will be made as requested. SOR will not accept the delivery of a partial Supply Kanban or a partial Release. The supplier must give a date for delivery of delinquent Supply Kanban. The delinquent Supply Kanbans are deleted from the original release and released again as a separate delinquent kanban due to arrive as advised by the supplier. (Figure I is not available in this text-only version.)
Shipment of a complete release has made the processing of receipts at SOR very efficient and accurate. The supplier uses the Release Form as a packing list that accompanies the goods. This packing list initiates payment to the supplier within 48 hours after receipt, for all Supply Kanbans delivered by 2:00 p.m. daily. Payments are made by direct transfer of funds to the supplier's designated bank account, or if requested, by mailing a check. Any errors on the packing list (Supply Kanban Release Form) delay payment and would be considered a breach of the Supplier Agreement. SOR's release number, part number, and Deliver To location must be prominently identified on each Supply Kanban container. Each Supply Kanban contains a quantity of parts equal to one week supply. SOR requires suppliers to break the Supply Kanban quantity into smaller interpacks simplifying the movement of parts within SOR's operations.
The Supplier Agreement specifies the criteria for performance measurement along with the procedure for corrective action. SOR's ISO 9001 procedures require the supplier to maintain a superior level of quality to remain on the Approved Vendor List. SOR Quality Assurance maintains a Corrective Action Report tracking log that is reviewed quarterly. Suppliers must take corrective action to remain on the Approved Vendor List. If corrective action is required twice for the same reason, within six months, the Supplier is placed on probation. A third notice for the same reason, during the probation period, is sufficient cause to cancel the Agreement.
Important to maintaining the agreements is SOR's commitment to help supplier partners become successful. Both the Supplier Coordinator and Quality Assurance personnel periodically visit each supplier partner. The purpose of these visits is to monitor the supplier's compliance with the Agreement, coordinate material flows, and communication, by that, assuring continuous improvement toward the supplier's success.
Selling the Partnership. SOR sent special invitations too three or four suppliers, inviting them to attend a Supplier Partnership Program presentation. SOR told the suppliers they would consider signing a two-year exclusive contract for the supply of their products. This agreement would provide their company with a guaranteed level of business with prompt payment on delivery. In turn, the supplier was asked to give SOR quality material, timely delivery, and price protection. The meetings began with a continental breakfast and welcoming address by the president followed by a plant tour given by the senior vice president. During the tour the suppliers saw how their products fit into the manufacturing processes. Next was an overview of the Supplier Partner Program given by the manufacturing manager and the materials manager. The Director of Quality Assurance outlined the quality requirements.
This program was repeated weekly over an eight-week period. The supplier coordinator attended each presentation showing that SOR was willing to go the "extra mile" to insure the success of the program. The fact that several "noncompeting" suppliers attend the presentation together gave a strong signal that this was a significant change in corporate philosophy. They knew that future sales with SOR hinged on joining in the partnership. Most suppliers left the meeting convinced that SOR was committed to the Supplier Partner Program.
Kanbans. A kanban card authorizes work or movement of a standard container of parts. A kanban card always accompanies the parts when they are moved within the plant and the Pressure Focus Factory. The kanban quantity of parts does not change without authorization. To avoid part shortages and expediting, all Kanban cards carry an assigned serial number. A rule-of-thumb was established that a Supply Kanban equals one week's supply. Standardizing on a quantity simplified the system and everyone could easily relate to the idea of a kanban. Work cells in the Focus Factory used a "Cell Kanban" that generally represented one or two days quantity. The interpacks of a Supply Kanban related directly to the size of the Cell Kanban. This allowed one Supply Kanban to service several production cells that used a common part.
For each item on a Supplier Partnership Agreement there were initially five Supply Kanbans in the system. Each card represented a one week usage. Two Supply Kanbans covered internal safety stock during the implementation phase. One card represents the cycle stock in the Material Supply Area (MSA) or Cell. Another Supply Kanban represents one week period for pooling cards before a weekly release by the Buyer/Planner. The last card related to the current release in process at a supplier. Most supplier partners were setup on a weekly shipping cycle.
Before implementing the kanban system, requirements were figured out by a quasi-MRP system that calculated usage history and an occasional bill of material explosion on special orders. Inventory accuracy was terrible and open orders were not included in the netting process. The due dates on open orders were not accurate. Order priorities changed constantly. The materials manager is responsible for all buyer/planners for four Focus Factories, the receiving department, an inventory coordinator, and supplier coordinator. In this capacity he is accountable for negotiating contracts, for the purchase of 10,000 different components. The materials manager was also the project team leader and principal in the implementation of the pull system and the supplier partnership programs. The diagram, Supplier Parts and Kanban Flow (see Figure II), shows the movement of kanbans, material and payment to the suppliers. (Figure II is not available in this text-only version.)
A buyer/planner gets Supply Kanbans cards from a collection box in the MSA or directly from a manufacturing cell. This triggers a Supply Kanban Release Form for the next shipment from a supplier partner. Sometimes Supply Kanbans cards are accumulated over an agreed period. In these situations the kanbans cards are placed on a Kanban Board in the buyer/planner's office. If Q.C. is required, the buyer/planner marks the card so when parts are received they are delivered to Q.C. for inspection. After the buyer/planner has released parts on a Supply Kanban Release Form they are taken to the receiving area and placed on a receiving Kanban Board.
Supplier partners use a copy of the Supply Kanban Release Form as their Packing List. The receiving clerk checks the material against the Packing List and matches it with the Supply Kanbans on the receiving Kanban Board. If any discrepancies are found, the buyer/planner is immediately notified and all movement and system transactions are put on hold. When the materials received match the Packing List and the Supply Kanbans, then the receiving clerk will sign and date the Packing List. Next, he finds the supplier's Supply Kanban Release Form in the computer system and makes a system transaction to receive the parts into inventory and close the open order files.
The Supply Kanban cards are attached to the received containers. If the Supply Kanban shows that Q.C. is required, the containers of parts are placed in the Q.C. area for inspection. Most receipts do not require Q.C. inspection because the supplier provides SPC data. These containers are taken to the Deliver To location shown on the Packing List/Supply Kanban Release Form. Parts used exclusively by a cell in the Pressure Focus Factory are delivered directly to the cell. Parts used by more than one cell are delivered to the MSA. The Packing List is sent to Accounts Payable for payment.
Project Planning and Execution. The goal of the project was to establish an infrastructure that promoted Continuous Improvement based on World Class Manufacturing principles. The attention centered on Focus Factories, Cellular Manufacturing, Supplier Partnerships and a Pull System to manage material flow. The president of SOR was the leading advocate of change and championed the project. Communication was direct, swift and decisive with little tolerance for excuses. Everyone in the project was given the authority and responsibility to execute their required tasks.
The materials manager was the project leader and worked closely with the consultant to develop a project plan to guide activities. All personnel received training on the kanban system. They were told why it would be an improvement over past practices. Simulations of the movement of kanbans were conducted with the line workers acting out various roles such as the supplier, trucker, receiving, accounts payable and the buyer/planner. Before each cell went active with the kanban system, a special training session was held. Yet in retrospect there should have been more training. Unfortunately there was only time to give instructions on the essentials related to "how" the system should work. Education on much of the "why" was assigned to the Continuous Improvement phase of the process.
A consultant normally guides and coaches a project team and task groups through the implementation process rather than taking direct control. In this situation the consulting process took a more direct approach. First, in the mind of the consultant, was to maintain SOR personnel as owners of the project. Guiding and coaching is the first line of action. Only if progress was impeded or confusion entered the process did the consultant become more directly involved. This was especially evident in the early stages of the engagement while developing the project plan and later when project schedules began to slip.
While most of the project team members had received some education in the principles of JIT and cellular manufacturing, few had experience in applying these principles. Having the consultant as a resource, with technical expertise, and an active member of the project, proved to be important to the project's success. On occasion the team required a review of principles, education on World Class Manufacturing techniques, and words to direct the team to avoid critical failures.
Most everyone understood the significance of the project, and had a vision of the future. However, this vision was not uniform and frequently elapsed to individual department interests. The intense pressures of conducting daily operations while simultaneously setting up a new logistics system, procedures, and manufacturing processes took its toll. Yet, even with an occasional "pressure release" by a team member, the project moved forward to a successful conclusion.
The first step was the project plan. Initially the focus was to identify tasks without regard to timing or responsibility. Problem solving was avoided, but ideas were noted for use in the future. After identifying most of the major tasks the team began to figure out the logical sequence of each activity. During this phase new tasks became part of the project plan. The completion date for the project was set for July 31. With the end date in mind, target completion of major tasks were assigned. The last step in the planning process was to assign responsibility to individuals for each task. The project plan listed every action item or task in sequence of the planned date of completion. Emphasis was on when tasks would be completed. The project team met weekly to review and update the plan. The project plan became the marching orders for the team and central to the timely completion of the project.
Operational Results. SOR points to significant improvements resulting from the project. These important gains have both qualitative and quantitative significance (see Figure III, Operational Results) to the company. The customer ship dates requested were the targets of all priorities. Resources were directed to meet this goal. Emergency setups, air freight, rework, and rush incoming purchases were frequent. In the rush of priorities, procedures were often bypassed causing many customer returns. Even with all the expended resources, customer shipping performance was only 67% on-time. (Figure III is not available in this text-only version.)
After changing the factory organization, setting up the kanban system, and Supplier Partnerships, performance improved dramatically. Supplier performance increased from 80% to 100% on-time delivery to date and quantity. SOR's shipping performance to the customers requested ship dates increased to over 92%. At least 90% of all the assembly people are now cross trained on all jobs in the Pressure Focus Factory cells. Turnover, rework, and overtime are down. Morale, quality and throughput are up! The cross training of production workers allows them to more effectively carry out the task of manufacturing a possible two billion combinations of products. The supplier base decreased 40% accompanied by less than 1% on purchase part rejections. The move to kanbans and Supplier Partnerships dramatically reduced order quantities, lead times, inventory, stockouts, space requirements, and paper work. These significant and rapid changes are due to carrying out the principles of Cellular Manufacturing, kanbans and Supplier Partnerships.
While outstanding results have been achieved, there are still many opportunities for improvement. Just recently the two safety stock kanbans were removed from the system and will cut two weeks supply from the component inventory. Improvements in handling engineering changes, preparing new kanban cards, and general control of issued kanbans cards have contributed to better materials management systems. Although all systems have improved, cross-training of all employees and training for new hires is high on the Continuous Improvement list.
The search is ongoing for new suppliers that want to become partners and prime sources of purchase components. Bar Code technology is being considered as an approach to releasing kanbans more quickly to suppliers and shorten the time to receive and report usage. Setup reduction, improving quality, and reducing lead times are the order of the day. Life at SOR is still subjected to all the pressures and problems of a typical manufacturing operation. The differences are we now have an infrastructure in place that helps us respond with confidence. Customers will get their orders complete, on-time, and best in quality. At the end of each day, perhaps most significant, seeing positive results from our efforts add a measure of personal satisfaction.