Our client is a $15.0B global power leader that designs, manufactures, sells and distributes its product and related technology around the world. The client had a major issue with unexpected air freight costs into several of its offshore plants. They came to us to analyze the situation. We suggested utilizing a seven step problem solving process to get to root cause. We felt the air freight was symptomatic of the actual root cause.
The first operation we studied had incurred excessive premium air freight, both inbound and outbound, year over year. The client had originally thought most of their freight costs to be recoverable from the supply base however, most was not. The outlying plant had reported back to corporate that the reason for the air freight was due to supplier constraints in the marketplace. In reality, the results of this dysfunction were due to issues in sales and operational planning.
We found average air freight costs for other areas to be in the 10-12% range. However this operation was nearly 57%. Upon further research, we also determined that most of these charges were unrecoverable as the root cause was the operation’s own inefficiencies.
What we uncovered in our study was:
- Insufficient Sales and Operational Planning. Reactive vs. Proactive approach being taken. Our solution: Sales and Operational Planning training and reimplementation
- Understanding the proper use of MRP tools, planning parameters and timely execution of maintenance. Our solution: Evaluate current setting, retrain users, correct missing or invalid data such as lead times, safety stocks, engineering change requests, etc. Establish real time maintenance of systems and all those parameters that affect performance.
- EDI does not consider transit time, which is a huge process and system gap. There is no visibility to in transit time. Our solution: Create system interface with the forwarder so that visibility can be accessed by the planner. Enforce the use of Advanced Shipping Notices from the forwarder or consolidator.
- Inventory Accuracy is less than 80%. Physical location and product identification and the timeliness of receiving were all major impediments to good performance. Our solution: We evaluated current material flow, and looked at map processes used to store, move and track inventory in warehouses and production. We gained repeatable monthly inventory turns and inventory accuracy.
Our actions were to;
- Get to Root Cause investigation and action.
- Implement of Key Performance Indicators so that we can measure improvement.
- Improve forecast calculating and provide for maintenance of systems
- Improve inventory accuracy and material flow processes
- Improve supplier communication and relationship management internally within the organization.
- Achieve budgeted expense control through process control.
We have been able to achieve a headcount reduction of 50% in material handling in this operation. Our inventory accuracy has gone from 80% to 98%, and we expect it to rise to 99.7% when complete. Air freight has dropped to 8% of total costs from 57%. The level of communication with head office has improved and we now have a process when the supplier delivers materials late, the company can charge back the supplier for the freight costs.