Multiple ways to refine inventory management.

Implementing Lean manufacturing principles means figuring out the right tradeoffs. In a perfect world inventories arrive just-in-time from a small pool of suppliers that have agreed to work to a common forecasting and lot-size philosophy.

Engineering teams enhance this process by maximizing component commonality in every design.

However, EMS isn’t a perfect world. The total number of suppliers grows with each customer. Component commonality varies not only among customers but sometimes even in the same product line, particularly in companies with longer lifecycle product. Forecasting accuracy varies widely. Some customers value the benefits of Lean philosophy, but others simply want the lowest material cost possible. Implementing a textbook Lean philosophy can increase the risk of component shortages in the event of allocation, plus it may increase material cost.

The goal of eliminating waste that comes with poorly managed inventories through use of Lean principles does make sense. In SigmaTron International’s system three key areas are addressed in eliminating waste:

Centralized SCM and rationalization. From a pure Lean perspective, a small core of strategic suppliers is ideal. However, that goal is typically achieved by designing in component and supplier commonality. From an EMS perspective, this can be challenging in many markets, as many customers in segments such as medical, defense or industrial have regulatory and/or product qualification considerations that limit redesign or approved vendor list (AVL) options. Additionally, when existing products are outsourced, there may be tooling considerations that make it costly to change from an existing supplier. Finally, when a supply chain is “Leaned” too much, unanticipated supply chain interruptions or spikes in demand can result in material shortages.

That said, waste can still be eliminated in materials sourcing by taking a strategic approach to supply-chain management and rationalization.

Centralized management of key commodity segments such as printed circuit boards, semiconductors (ICs and linear logic), power products, connectors, electronic components (relays, electrolytic, ceramic and film capacitors), plastics and metals helps minimize supplier count by establishing a core of competitively priced suppliers with the right mix of capabilities. In this type of model, major commodities undergo periodic review, depending on pricing volatility, to ensure pricing stays competitive. This type of approach provides a clear path to best-cost-competitive options if customers are willing to change their AVL. It also provides a basis for negotiating standardized terms when suppliers must be added to the list. In SigmaTron’s model, centralized SCM is coordinated through its International Purchasing Office in Taiwan. In addition to identifying best sources and monitoring trends in each commodity, the team manages supplier quality in Southeast Asia. Team members are Green Belt-certified and use Six Sigma tools to analyze supplier quality issues.

Another area where a centralized approach can reduce cost and time is in the growing area of regulatory compliance in sourcing activities. SigmaTron has established a Green Initiative Compliance Service Center in its Suzhou facility that interfaces closely with component engineers and procurement professionals in the Taiwan IPO and elsewhere to gather necessary materials documentation from suppliers related to regulatory, social and environmental initiatives such as RoHS, RoHS II, REACH, Conflict Minerals and California’s Proposition 65, as well as customer-specific initiatives. The GICSC communicates with the rest of the company’s supply-chain management organization. This effort is supported by specialized software that provides updates as monitored jurisdictions create new rules or modify existing rules.
The tool can also be programmed to support customers with specific lists of substances and materials to track.

One inherent challenge in any centralized model is the possibility the unique needs of a specific facility are ignored. Another potential downside can be excess transport of materials, which might better be sourced locally or within a specific region. This can be addressed through local purchasing teams at each facility. While the IPO drives the overall commodity management effort, each team has the ability to source locally when that addresses regional business requirements or delivers a lower total cost. The local teams also identify potential suppliers within their region that may be a fit for global or regional sourcing, particularly in the area of maintenance, repair and operating (MRO) supplies. Sometimes this results in surprises. In one recent example a US supplier of antistatic bags turned out to be the lowest-cost option in North America.

Distributors also play a vital role in the supply chain. First, they Lean the supply base by representing a common source for many varieties of components, enabling an EMS provider to purchase against customer AVLs without adding suppliers. Second, they have aligned their services from a systems perspective with those of highly automated EMS providers. Finally, franchised distributors represent a known chain of custody for the manufacturers they represent. This can reduce material integrity documentation requirements and helps eliminate the defect opportunities that counterfeit components can otherwise create.

Minimized transaction cost. Perhaps the best way SCM practices can be leaned in EMS is by eliminating unnecessary touches and transactions. Information technology can play a vital role in minimizing transactions when a centralized SCM strategy is employed.

SigmaTron utilizes an off-the-shelf ERP system enhanced by an internally developed suite of software. Via its proprietary iScore system, each operation and the IPO has visibility into forecasted demand, actual demand, inventory in each facility and inventory on order. The IPO and distribution partners in each region act as “single” suppliers for most materials, increasing efficiency by consolidating orders. Auto-replenishment tools supported by an MRP share system take the touches out this process. Vendor-managed inventory (VMI) ensures onsite materials availability.

Auto-replenishment strategy has also been carefully developed. The primary tools for auto-replenishment are Sigmatron’s Production-Driven Replenishment (PDR) system and its Automatic Replenishment System (ARS) tool. Distribution and other strategic suppliers have linked their systems with SigmaTron and receive pull signals via PDR. PDR is triggered automatically when iScore checks inventory for shortages as shop orders are released. If a shortage is detected, a PDR pull signal is sent to the supplier and parts are received in two to five days. The ARS tool is utilized with MRP share for the lowest cost products suppliers typically have on the shelf.

Low average selling price components are stocked at higher inventory levels, because the administrative cost of multiple transactions is greater than the cost of bulk purchases stocked in inventory.

From a Lean perspective, the goal is to set up automated systems that keep the right-sized pipeline flowing for each type of material.

Project status visibility. Materials systems are linked globally to provide company-wide visibility into inventory levels and materials status. The tools are also linked to customers and program managers. This level of system linkage increases efficiency of centralized SCM. For example, if a production schedule is changed, the IPO can see the requirements on the system, view the AVL, the stocking levels and demand. This lets them determine immediately how urgent the part requirement is and whether air or sea is the best shipping option.

Customers also have the same level of visibility via iScore. This provides an excellent dashboard for monitoring forecasts and inventory/material-on-order levels, and adjusting as needed. Finished goods Kanban provides a final tool for supporting demand variability, which can’t be easily controlled within the system.

While a textbook Lean approach to materials management can work in OEMs with complete control of their AVL choices, a modified approach is often more effective for the far more complex EMS world. This can be particularly important when the customer base includes highly regulated or longer lifecycle products with variable demand, since these products may have limitations on AVL changes. Systems that link the customer, EMS provider and suppliers driving auto-replenishment based on actual demand help eliminate unneeded inventory and non-valued-added transactions.

John Sheehan is vice president – director of materials and supply chain, SigmaTron International (sigmatronintl.com); john.sheehan@sigmatronintl.com.

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