Aerospace Supply Chain

A World-Class Approach to Class-C Components is the second in a three-part series created by Waer Systems. The series is designed to help OEMs and Tier I/II manufacturers - especially those involved in the procurement and inbound supply of high volume low cost parts - better appreciate the value of maintaining a world-class supply chain.
The other two parts in the series, The Nine Basic Rules of a Successful Supply Chain and Supply Chain Alignment Assessment: A Road Map provide further methodologies behind developing a more efficient and effective supply chain. They are also available at no charge to qualified individuals.

The Supply Chain is the process through which a company creates and distributes its products and services to the end user. It includes a number of specific elements; production planning, material sourcing, transportation management, warehouse management and demand management. These functions are tightly integrated to provide the products and services to the end user in an efficient, timely and profitable manner.

In addition to internal functions, the supply chain also encompasses the activities of external entities, including materials and parts suppliers, manufacturers, distributors, and transportation providers. The supply chain comprises not only the movement of goods between supply chain participants, but also the flow of information and funds. Supply Chain execution begins at the point a demand is created and is about the efficiency and efficacy with which that demand is fulfilled.

When a supplier, itself, controls the flow and handling of the materials they provide to the supply chain, this is called Vendor Managed Inventory or VMI for short.

Class-C Components is a term many industries use to describe high volume, low cost (or HVLC) parts and materials. These components include items like screws, bolts, clips and other fasteners, as well as perishable goods such as food service materials and other items used by the personnel in the supply chain, such as gloves and paper masks. While there is no set cost (or quantity) that qualifies an item for C-Class status, for purposes of this document we will consider C-Class to be items costing less than $3.00 each.

Another term to understand is Kitting. In many processes, a set of components is needed in a single manufacturing step. To simplify collection effort s at the point of use, these components are placed within a single packet, or 'kit' and delivered to the line station together.

While there are other terms used within this White Paper that might be new to those unfamiliar with basic Supply Chain mechanics, the four listed above are the only ones we felt were critical to fully understanding this document and which have differing meanings in other publications.

This White Paper documents the Information and Material Flows of a World Class materials replenishment process in an Aircraft Manufacturing environment. This White Paper has for its focus high volume or Class-C materials.

That being said, the principles detailed here are similar, if not identical, to world-class processes for the full range of parts as well as for supply chains within other industries, especially those involving the manufacture of vehicles and production line goods, as well as supply chains requiring the controlled flow of a high volume of materials.

A lengthy answer here would be as long as the White Paper itself, but it is important to understand the value of better managing the flow of your low cost parts.

In the past it was time-consuming and risky to try to create leaner inventories of parts costing less that $2.00 or $3.00. Monitoring them took a large number of personnel and one line stop would offset many months of care and attention. For this reason, many manufacturers erred on the side of caution and made sure they had more than enough of these Class-C parts on hand in every warehouse, at every station, and in production at any given time. This resulted in large stockpiles of components, which often went unused, became obsolete, and were eventually dumped. The OEM usually bore the brunt of these wasted costs, which could very easily reach $2- 5 million per year per plant.

With improved processes and new technologies, it has become far easier to keep a tighter control on lower cost parts. With OEMs being less willing to bear the full cost of unused components and the industry's increased pressure to lower production costs without decreasing quality, suppliers and manufacturers alike have been looking for places to save money. Many have turned their attention to leaning out their supply chains and reducing their overall inventory levels.

That being said, the principles detailed here are similar, if not identical, to world-class processes for the full range of parts and a number of other industries, especially those involving the manufacture of other vehicles and production line goods, as well as supply chain requiring the
controlled flow of a high volume of materials.

This White Paper documents the Information and Material Flows of a World Class materials replenishment process in an Aircraft Manufacturing environment. This White Paper has for its focus, high volume or Class C material. A companion piece, a process map is included at the end of this document. It will be helpful to the reader to refer to this process map first and use the following text to interpret it. The numbered items below refer to their corresponding points in the diagram.

World Class Replenishment Management System (RMS) takes advantage of information and networking technology to allow all parties to work from the same information in real time. Using these technologies, actual demand (which could exist in the form of either a customer's sales order, a manufacturer's work order, or a "kanban" replenishment order from a manufacturer, or a transfer request from Logistics Provider.) is used as the basis to schedule, manufacture, and deliver to the manufacturing site.

This approach, Vendor Managed Inventory (VMI) changes many long-standing relationships with regard to inventory ownership and management. Here, suppliers are responsible for the inventory at each stage of the process and only when the part is placed in a bin at the point of use is the Manufacturer charged for the part.

As profit margins are threatened by competition, companies must continue to eliminate waste, in the form of excess inventory, from their supply-chains. In a fully-applied VMI scenario, the supplier is not just responsible for the inventory on a manufacturer's site or warehouse, the supplier also owns the inventory - it remains on the supplier's asset register until the manufacturer consumes it. Some manufacturers in the high-tech sector are already being charged only after they have used the part. This way of working provides an enormous incentive for the supplier to keep inventory buffers to the absolute minimum. When applied in conjunction with the proper replenishment tools and procedures, the cost benefit of working in this way has already proved to be significant.

Taking out the unnecessary buffers of inventory in this way can enable the benefit of shorter payment cycles between a manufacturer and a supplier. Again, there are precedents to prove that, when less of a company's cash is tied up in stock, supplier payments can be settled more promptly without a negative impact on overall cash flow. In a truly lean environment such as is being envisioned here, the payment transactions (like the inventory replenishment transactions that they follow) typically occur with greater frequency, but with lower total amounts.

Supplier ownership can be defined either at the level of an entire warehouse, or at the level of an individual bin location(s) within a warehouse.

VMI enables the collaborators within a Supply-Chain to take better control of part obsolescence, and part supersessions. Obsolete stock directly drives down inventory turns and degrades warehouse asset utilization. When a supplier has synchronous visibility of one of its parts on a manufacturer's production line, an obsolescence issue can be promptly identified, and remedial actions can be taken immediately. This contrasts sharply with the old approach in which manufacturing line supervisors would frequently be the first to identify an obsolescence problem - typically a stack of material sitting in a "squirrel's nest" of no observable purpose.

Tools that support VMI will enable the management of quality procedures at source: testing, checking, and the provision of correct documentation by the supplier, rather than by the manufacturer's own Goods-In or Quality personnel. The goal of zero quality costs has often eluded manufacturers because they have been compelled by outdated systems and procedures to continuously check that material being received conforms to the required standards. RMS tools that are now available can help to eliminate much of the risk on the part of the supplier when accepting total responsibility for the quality of its deliveries. The process of confidence-building on the part of the manufacturer will be helped considerably by having a view of the data that the supplier is maintaining, and by the efficiency savings that will accrue from not having to check parts themselves after they have already been checked by a supplier.

This approach is flexible enough to be used side-by-side, with more traditionally managed procurement and supply environments. Characteristics of this system include: Two-Way visibility from the manufacturer (also known as the OEM) to the supplier and from the supplier to the OEM. This means that both parties are able to view the same data at the same time via an information portal that both can access via the Internet or a private network. The point is equally valid for Aftermarket distributors.

The development of web-based applications has been a key enabler, especially where large groups of remote users are involved. Users need only to have access to a machine with an internet browser in order to engage in genuinely collaborative activities. Clarity over data and processes, and a shared understanding of respective responsibilities between supplier and manufacturer will deliver a new sense of control, which is a key benefit of any collaborative relationship.

A demand driven inventory management system. Which means that the supplier and the OEM plan and maintain inventory levels for each part based upon actual consumption, or demand rather than reliance on periodic (i.e., annual, monthly or weekly) forecasting. Forecasting can play a role, particularly in seasonal or cyclical planning environments. Coupled with effective-dated stocking parameters (safety stock / excess stock / min qty / max qty / replenishment multiples, replenishment lead times...), suppliers can plan their own buying requirements with greater agility than would be the case without a longer-term forecast. In summary, a forecast can be used for replenishment planning. The firm demand is used for actual execution of replenishment tasks.

Forecast accuracy was (and will remain) a key criterion of business efficiency. Replenishment tools, and the transactions that they drive, can serve as a repository for actual usage data that may be compared with forecasts. The comparison serves the purpose of allowing manufacturers and their suppliers to work on forecast accuracy as a task of continuous improvement. The benefit is that suppliers will be able to buy (or make or transfer) more intelligently.

Automated, rules-based replenishment. This means that the supplier is responsible for maintaining inventory at given levels or rules. An example of such a rule would be: Do not allow the level of inventory to fall below x level. Algorithms that form the basis of Waer's software products use actual demand data to maintain supplies in the pipeline and at each workstation. This approach defines a "demand" or "pull" system as opposed to a "forecast based" or "push" system. Tools to periodically calculate/validate storage bin sizing requirements will help optimize the use of warehouse space and production line management.

Drill-Down
This view examines a single manufacturing facility and how parts and information move from Supplier to Point-of-Use, how replenishment signals are recorded and the cycle continues.

Material Flow
Material Flow Material is received at the OEM (or aftermarket distributor, or 3PL) either directly from the supplier or from a distributor who consolidate materials from several suppliers and performs the value-added services of sorting and delivering these materials to a single, or in many cases to several OEM locations. However, no matter who performs the actual delivery, materials are delivered to the manufacturing site with a barcode attached. (Small items such as fasteners arrive in plastic bags and the barcode is applied to the bag.) Materials are further sorted by Line station (i.e., work station or work area) and arrive in wheeled carts to facilitate movement from the receiving area to each line station. Plant logistics personal move the carts to the line stations and place each part (or bag of components) in its assigned bin. Each bin has a bar code that gives it a unique location and identifier.

Information Flow
Receipts are scanned at the receiving area to identify that they have arrived at the plant and then again when they are placed into individual bins or carts at each line station. This scan updates inventory records and becomes instantly visible to inventory managers at the supplier and the OEM.

Material Flow
In some situations, the supplier or a distributor, will prepare several different components, that
are all used in a single manufacturing step, and put them into a single package or "kit". This kit is delivered to the line station and used all at once to complete that one step. In this case, the kit is treated as a separate inventory part number and managed as an individual part.

Information Flow
Kits are tracked as individual components. See "Receiving" above. When a supplier of a kitted part has visibility of the manufacturer's own bill of material (or kit structure), the supplier can assemble the kit, and can be confident that the kit structure they are using is according to the manufacturer's latest specification. Components that are permitted as alternatives by the manufacturer will also be seen by the supplier, and may then be used whenever required.

Material Flow
At a line station the operator removes the components he needs from their location. A two-bag system is used to ensure that materials do not run out. When an operator opens a bag (or kit) he is required to scan the bar code on the bag and the bar code on the bin location. The operator then completes the manufacturing step.

Information Flow
When the bag is opened and scanned along with the bin location, the record of usage is immediately visible to the inventory managers at the OEM and the supplier. The usage record is blended into other usage data and the suppler reacts with a replenishment trigger calculated by the RMS.

Material Flow
The information portal is a display of transactions. There is no actual material flow in or out of the portal.

Information Flow
Actions taken throughout the supply chain are recorded and become visible from the portal. For example, a suppler can see when the component is used and where it is used as well as trend lines and target inventory levels measured against target levels at each plant, and each line station. The OEM can see the same information as well as the actions taken by each supplier to react to replenishment signals and then replenishment activity.

Depending on the component and the relationship with the OEM, a distributor can provide value added services for several suppliers by providing distribution services (i.e., bringing their materials into a warehouse near the OEM's operations and making deliveries according to the agreement between the OEM and the supplier) and in some cases managing the inventory on behalf of the suppler and performing billing and collection services as well. Distribution points run by the distributor can be near the OEM or in some cases can be on the premises.

Suppliers schedule manufacture and deliver materials to meet the specifications and schedules of the OEM. With visibility to actual usage via the Information Portal, the supplier sets his
production schedule based upon real-time data and insures that overall inventory levels and the inventory of individual parts do not fall below agreed to levels at each OEM facility and line station.

The enhanced visibility and the reduced waste that can be enabled by the use of collaborative replenishment tools will undoubtedly facilitate the management of manufacturing and distribution environments that are becoming increasingly complex. For example, a typical automotive plant (or aerospace plant?) could be working with 700 suppliers across 14 countries. Let's say that an average car (or aircraft door?) requires 3000 components, which need to be delivered to a production line at the precise point in time when they need to be fitted to the new vehicle (or door) which is, with increasing frequency, being configured to a specific customer order. The replenishment tools and procedures that are being described here are critical components for any system to be capable of managing tasks on such a scale and complexity.

Other opportunities for integrated replenishment management tools:-

Development of improved partnerships with 3PLs:
- Enable management of manufacturer's total inbound requirement
- Enable management of supplier's total outbound requirement
- Enable reduction in number of vehicles running empty
- Optimize replenishment tasks by enabling better consolidation/frequency of picking/packing/shipping/delivering.
- Include the ability to perform "reverse logistics" (supplier returns) within the scope of standard operating procedures.

Ability to integrate with financial applications for the purpose of:
- Evaluated receipt settlement (ERS)
- Calculation of exchange rate variances
- Calculation of purchase price variances
- Payment processing
- Receipt Accrual

Since the early 1980s, Waer Systems have been helping leading aerospace OEMs (e.g. Airbus, Bombardier, etc.), 3PLs (e.g. Satair, GE Supply) and Tier I/II manufacturers gain optimal profitability from their supply chains, as well as increasing the overall control and visibility they have over their warehouses and materials flow.

Waer Systems provides lean techniques and innovative software solutions for Vendor Managed Inventory (VMI) and Replenishment Management Systems (RMS) in order to help increase the ready availability of parts while decreasing the reliance on safety stocks and excess inventory.