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[2005-11-25]
Using BPM as the Core to Improve Global Logistics System

[2005-11-18]
Manufactures Use BPM to Achieve Inventory Risk Management and Decrease Unused Materials

[2005-11-11]
Discussion of Introducing Enterprise Class BPM

[2005-11-04]
Selecting the BPM from the Highest Level of the Enterprise

[2005-10-28]
BPMN and BPEL

[2005-10-21]
From SOA and Web Services to POA

[2005-10-14]
When Modern BPM Meets SOA

2007 | 2005

BPM Mini Course.Class6:Applied Analysis of Implementing BPM(1of2)

Manufactures Use BPM to Achieve Inventory Risk Management and Decrease Unused Materials

Originally Published in iThome Computer Paper, vol. 217, 2005/11/18

From 1990 up to now, the electronics industry in Taiwan has thrived, creating many high growth businesses. Yet, when companies grow in a fast pace, it is when management challenges start. Especially when global competitors and profits continue to be squeezed as well as with more complex and dynamic operating environments, the margin of error is continuously decreasing. The cost of making a mistake becomes higher. Also, over emphasis on sales volume and production capacity results in low awareness of cost, resulting in the idle storage of materials and semi-finished goods, which if increased too rapidly, would result in a cash flow crisis. An analysis of the product structure of manufacturers, over 80 percent of the costs are material costs, for network and communications products, over 90 percent of the costs are material costs. When the profits of the manufacturing industry continue to decreases, if the IT systems can be utilized, increasing effectiveness in managing materials is a good prescription for the business to survive at such as competitive era. Below are four major challenges from previous experiences in consulting BPM processes in the manufacturing industry:

4 Challenges of Inventory Management

Change in Demand: Past control in demand mostly focused on anticipating the needs of customers to make improvements. Yet, more and more changes in needs are a result of changes to orders. Such as during 2000~2001 when there was a global inventory problem, which occurred because of the over-optimistic belief in delays in taking delivery for orders was only a temporary phenomenon, while market demand has not decreased. It wasn't until when large quantities of orders were cancelled that resulted in serious overstocking of inventory that cannot be put to use and decreasing prices that result in losses. As well, competitors were marketing new products at increasing speeds, forcing product design to also have to quickly make changes. This resulted in changes in demand for components, so if research & development and materials management cannot effectively resolve the issue, it would result in losses due to decreasing price or overstock inventory that cannot be put to use.

Changes in Supply: Businesses that operate under a global operations model, there are often cases where there are surplus raw materials in one location while there are insufficient quantities of them in another location. If the system is distributed and cannot timely control the status of warehouses in each location, businesses will often lack effective integrated information and would blindly increase safety reserves or advance orders of raw materials to ensure a sable supply source, resulting in an increased stock level. Not to mention that due to the lack of information penetration when communicating with other companies in the supply chain could result in an echoing effect.

Uncertainty of Production Capability: When there are natural disasters or other external overpowering force that causes insufficient production capability, or when key materials from upstream venders are in tight supply, manufacturers will stock up in higher levels to prepare, or seek another supplier and sign a contract to guarantee a stable supply source. When the economy is good, stocking more inventory and contracts promising purchasing quantities can avoid the risk of the lack of raw materials to ensure sufficient quantities of products are produced to respond market demand. But when the economy downturns, or when market demand was not as strong as expected, then it would result in surplus stock.

Lax Control of Product Change Processes: In the manufacturing industry, Product / Engineering Change Notices (ECN) are very common. It is a result of many reasons, such as customers changing product type / increase new features; research and development department changing designs to increase product yield, purchasing substitute materials to reduce cost… etc. Basically a proper ECN Control process can avoid unnecessary inventory. Using changing the order as an example, if there is a lack of good order management policy, sales personnel or even newly admitted sales assistants can change orders whenever they see fit. Yet, the purchasing and materials management departments would only be alerted after the fact; then the loss resulting from overstock materials that won't be used were not evaluated before the change. Thus, there is no basis to request compensation from the customer. In the long run, these problems will reflect in the quantities of stocked items.

After describing the four largest challenges for modern business to management inventory, let me share a real case of a manufacturer with readers on how to use BPM methods to create rapid response mechanisms, to achieve stock risk management, to meet the goals of reducing unused materials. Company A is an ODM/OEM manufacturer. It is located in an industry characterized by rapidly changing demands, short product lifecycles, and ever decreasing profit margins. To resolve the challenges it faces in this environment and increase profitability, the company's vice-president of finance discovered from quarterly financial reports that stock levels have a trend of being high. Through inter-organization and interdepartmental discussions, it was discovered that during the process of rapid growth for the company, it was focused on achieving sales figures and increasing production capacity. The standard operation processes vary in each location. Barriers exist between organizations, resulting in unclear responsibilities, creating many problems that result in unused stock inventory. The problems can be summarized as below:

ERP order management does not update the sales forecast system when orders are changed. So when orders are transferred early, if the relative expected demand is not cancelled, the expected demand would be overstated, resulting in repeated material orders, while it is difficult to hold anyone responsible.
The lack of a good order management policy results in relevant departments not being notified immediately when ECN and customer changes orders (for example: when the order is in manufacturing, the sales changes the order, but does not transfer the information to manufacturing).
Lack of a good inventory management policy and system, or the lack of monitoring of materials that cannot be used. Then after much time has passed, these materials can only be resold at very low prices.
BOM form not updated in a timely manner and tracked, resulting in shared materials or materials still using old material numbers or versions.
Lack of an interdepartmental and intersystem information platform to assist sales/materials management/production management/purchasing personnel to communicate, so that each can respond properly to changes in demand.

After some discussion, company A realized that to resolve the problems mentioned earlier, an interdepartmental process work platform is needed. On one hand, it would standardize the operation systems at each location and create a rapid response method for changes in demand. On the other hand, it would clarify the responsibility within the organization and eliminate selfish departmentalism, while effectively tracking and control of inventory performance. Also, through the monitoring and tracking ability of the process system, it can support long term goals such as continuous analysis and process improvements. Therefore, company A decided to introduce the BPM concept. Since the scope of the product strides across MIS, sales, materials management, production management, purchasing, research and development, and finance departments, therefore a professional BPM consultant with a proper introduction method can effectively resolve conflicts between departments, utilize resources across departments, and effectively and systematically introduce products to meet the expected goals. Through assistance from the external BPM consultants to complete the shared the vision and goals of the project, confirmed the required processes, and selected a person to be responsible for each process to assist with defining the process and interdepartmental negations. The execution plan is listed below and is transferred to the BPM project team to develop the project:

Introduction Stage – The first stage focuses on mechanisms to react rapidly to changes in customer demand, it includes the following task items:

Order Cancellation and Modification Management Process System: Refine order changes by sales (Changes in items ordered, quantity ordered, and packaging items) and manage the process. Use the BPMS to connect purchasing, materials management, and production management operation processes.
Demand Forecast Coordination Management System: Connects the demand forecast in the ERP and APS modules to prevent repeated material orders from happening.
Loss Estimation Coordination Operation Process System: Use the BPM to assist in estimating losses due to order changes, and generate discrepancy reports at regular intervals to assist the sales department in requesting compensation from customers.
Surplus Material Tracking System: Aside from requesting compensation from customers for surplus materials, it can also be transferred to RD, Sales, or Purchasing to be used as substitutes or transfer production to deplete it. The objective of this system is to assist in management and tracking of surplus material.

The second stage focuses on the creation of an early alert system, effects of EOP and ECN on managing and tracking of stock, as well as planned purchasing management. Currently the first stage of the project is almost completed. After it is completed, it is expected to introduce the following benefits:

Assist interdepartmental operation processes to reduce losses and increase rapid response and speed of joint operations of the business.
By integrating BPMS with OracleERP and I2APS, large amounts of human processing have been eliminated. This would make the utilization of human resource more effective.
Provide proactive monitoring of processing inter-organization orders, reducing the need to wait until customers file a complaint and then trying to combat the disaster.
Establish active prevention of extra unused material, ability to find where the responsibility lies, and a complete tracking ability when it does happen.

Increasing business profits includes creating new revenue sources and controlling expenses. Due to competition at a global scale, businesses are only left with a small profit margin. Then why not try another method, through controlling expenses. After all, “One more dollar of revenue does not equal one more dollar of profits (This is because there are costs and sales & management fees associated with the increased revenue); but saving one more dollar can result in an additional one dollar increase in profit.” This article attempts to explain with a real case of how a manufacturing industry can apply BPM to achieve stock risk control and reduce unused materials. Hopefully the sharing of experience in saving costs would be beneficial to businesses.

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