Why Just-in-time Wont Work for Public Health Overview of Supply Chain Basics

James Elam, Manager, 3M Supply Chain Network Analysis Rob Wehrman, Manager, 3M Supply Chain Optimization & Modeling Expertise Center

Our Values and Goals

Six Market - Leading Businesses

Health Care Business Consumer and Office Business Industrial and Transportation Business

Electro and Communications Business Display and Graphics Business Safety, Security and Protection Services Business

International Focus
3M companies in more than 60 countries Sales in nearly 200 countries Consulting with Ministries of Health outside the US on Pandemic Influenza Preparedness

Speakers
James Elam, Manager, 3M Supply Chain Network Analysis Rob Wehrman, Manager, 3M Supply Chain Optimization & Modeling Expertise Center

Agenda
Introduction Basics Concepts in Supply Chain and Manufacturing Just-in-Time Manufacturing Concepts Warehouse and Transportation Considerations Conclusions Questions

3M 2006 All Rights Reserved

General Supply Chain Processes

Demand Information

Material Flow

Material Flow

Material Flow

Typical Supply Chain Network Model

Supplier Manufacturing Distribution Customer

Delay

Delay

Delay

Planning

Planning

Planning

Planning

Forecasted Demand and/or Orders Information

Planning

Types of Manufacturing Processes: Batch

Most prevalent Planned quantity of one product Many different products made on same equipment Economic situation determines an optimal batch size Products are run in a logical sequence to optimize process Lead time includes waiting in queue and processing time

3M 2006 All Rights Reserved

Types of Manufacturing Processes: Flow

Not as prevalent Single product production Very low variability Equipment usually runs at a steady pace Lead time is short as product is available all the time Capacity is expensive and hard to increase

3M 2006 All Rights Reserved

Manufacturing Capacity
Usually fixed at a rate determined by equipment Economics drive minimum capacity to meet demand Some excess capacity accommodates variability Demand can exceed capacity Adding capacity is generally a long lead time
Hypothetical Demand of an Item
250

Demand Quantity

200 150 100 50 0 1 4

Capacity

Demand can exceed capacity

7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52

Time Periods
Capacity
3M 2006 All Rights Reserved

Demand

Avg. Demand

Manufacturing Planning Processes: Make-to-Stock

Demand lead time is shorter than supply lead time Orders are filled from inventory Use forecast to produce inventory before demand occurs It is important to forecast accurately Replenishment quantities are based on an economical size

Inventory

Consumption Reorder

Replenishment

Cycle Stock

Cycle Stock Safety Stock

Cycle Stock

Time
3M 2006 All Rights Reserved

Manufacturing Planning Processes: Make-to-Order

Wait for actual orders before production Demand lead time is longer than supply lead time Usually used for low demand items that are hard to forecast
Hypothetical Demand of an Item
250

Demand Quantity

200 150 100 50 0 1 4

Lead time allows making product when capacity is available

7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52

Time Periods
Capacity
3M 2006 All Rights Reserved

Demand

Avg. Demand

Importance of Demand Forecast

Forecast is an estimate of anticipated demand All forecasts have error Forecast error is the difference in the forecast and actual The goal is to have minimum forecast error such that the planning is acceptable
Low forecast Error: System is stable High forecast Error: System is chaotic Error Demand

Actual Demand Forecast Time

3M 2006 All Rights Reserved

History of Just-in-Time Manufacturing

1799 Eli Whitney, interchangeable parts 1910 Henry Ford, first to implement Just in Time manufacturing
We have found in buying materials that it is not worth while to buy for other than immediate needs, Henry Ford. Designed a process that eliminated waste and reduced variability

1950 Toyota introduced the Toyota Production System

Replication of the Ford system Included new concepts of Total Quality Management, Small Batch Production and Cellular Manufacturing

1990 James Womack, The Machine that Changed the World,

History of automobile manufacturing in Japan, US and Europe Lean Manufacturing is introduced as a new phrase for JIT

Today Its still all about eliminating waste in the total business process

3M 2006 All Rights Reserved

Just-in-Time Concept
Definition: Producing exactly what is needed and transferring it to where it is needed precisely when required. Characteristics:
Little or no inventory Mostly make-to-order with short lead times Greatly reduced variability from all sources Eliminate special cause variability Supply chain synchronizes to a pacing process Many tightly scheduled events Excess capacity is a form of waste that is minimized

JIT Systems are deliberately designed

It can take years to establish They dont occur naturally or by chance

3M 2006 All Rights Reserved

Example Normal Demand Pattern

Hypothetical Demand of an Item
250

Demand Quantity Demand Quantity

200 150 100 50

0

Special Cause Demand that JIT will not accommodate

7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52

Time Periods
Capacity Normal Demand Capacity Normal Demand Capacity Avg. Avg. Demand Normal Demand JIT Demand Demand Avg. Demand JIT Demand Unplanned Demand
3M 2006 All Rights Reserved

JIT Shortcomings for Public Health System

Demand is characterized by large unexpected events End user lead time requirements are extremely short The steady state condition of the supply chain will not accommodate the high demand spikes Not practical to have enough capacity to accommodate high demand spikes Public health emergencies cant be scheduled in advance For public health emergencies you should have inventory on hand

3M 2006 All Rights Reserved

Manufacturer

Material flow and Inventory

Distributor
Short lead time with inventory Long lead time without inventory Limited storage capacity

Limited capacity, flow rate is limited Longer lead time Planned with forecast

Public Health
Inventory in many locations Limited storage capacity

End Use

Limited inventory Planned based demand

Manufacturer

Material flow and Inventory

Distributor
Short lead time with inventory Long lead time without inventory Limited storage capacity

Limited capacity, flow rate is limited Longer lead time Planned with forecast

Under normal conditions the system is in balance

Public Health
Inventory in many locations Limited storage capacity

Hypothetical Demand of an Item

250

Demand Quantity

200 150 100 50 0 1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52

End Use

Time Periods
Capacity Normal Demand Avg. Demand

Limited inventory Planned based demand

Manufacturer

Material flow and Inventory

Distributor
Short lead time with inventory Long lead time without inventory Limited storage capacity

Limited capacity, flow rate is limited Longer lead time Planned with forecast

When demand exceeds supply inventory is consumed

Public Health
Inventory in many locations Limited storage capacity

Hypothetical Demand of an Item

250

Demand Quantity

200 150 100 50 0 1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52

End Use

Time Periods
Capacity Avg. Demand Unplanned Avg. Demand Normal Demand Unplanned Demand

Limited inventory Planned based demand

Manufacturer

Material flow and Inventory

Distributor
Short lead time with inventory Long lead time without inventory Limited storage capacity

Limited capacity, flow rate is limited Longer lead time Planned with forecast

If demand exceeds supply long enough inventory is depleted

Public Health
Inventory in many locations Limited storage capacity

Hypothetical Demand of an Item

250

Demand Quantity

200 150 100 50 0 1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52

End Use

Time Periods
Capacity Avg. Demand Unplanned Avg. Demand Normal Demand Unplanned Demand

Limited inventory Planned based demand

Manufacturer

Material flow and Inventory

Distributor
Short lead time with inventory Long lead time without inventory Limited storage capacity

Limited capacity, flow rate is limited Longer lead time Planned with forecast

After unplanned demand system can be put back in balance

Public Health
Inventory in many locations Limited storage capacity

Hypothetical Demand of an Item

250

Demand Quantity

200 150 100 50 0 1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52

End Use

Time Periods
Capacity Avg. Demand Unplanned Avg. Demand Normal Demand Unplanned Demand

Limited inventory Planned based demand

Planning for High Demand

Hypothetical Demand of an Item
250

Demand Quantity

200 150 100 50 0 1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52

Time Periods
Capacity Normal Demand Avg. Demand

3M 2006 All Rights Reserved

Planning for High Demand

Hypothetical Demand of an Item
250

Demand Quantity

Create stock

Forecast event Capacity added in response over time

200 150 100 50 0 1 4

7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52

Time Periods
Capacity Avg. Demand Unplanned Avg. Demand Normal Demand Unplanned Demand

3M 2006 All Rights Reserved

Planning for High Demand

Hypothetical Demand of an Item
250

Demand Quantity

Create stock early

Forecast event Capacity added in response over time

200 150 100 50 0 1 4

7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52

Time Periods
Capacity Avg. Demand Unplanned Avg. Demand Normal Demand Unplanned Demand

3M 2006 All Rights Reserved

Summary
Basics Concepts in Supply Chain and Manufacturing
Most manufacturing is a batch process Most finished goods are inventoried in a Make-to-Stock system (Forecast of demand is important) Manufacturing has capacity limits

Just-in-Time Manufacturing Concepts

Designed to be very efficient under normal conditions Not designed to handle large unexpected demand Must be deliberately designed Executed with rigorous planning

For public health emergencies you should have Inventory on hand

3M 2006 All Rights Reserved

Warehousing and Transportation Considerations

Warehousing / storing material is the common method of dealing with variability in the supply chain Where is the best place to position material prior to the public health emergency? Do you possess the capabilities to store some / all of what you need in your POD? What other logistics issues are important for you to consider as you make your decision?

3M 2006 All Rights Reserved

Risk-Pooling
Risk pooling is the concept that demand variability reduces as we aggregate demand
Across Customers Across Products Across Time Periods
Expected Value = 100 Std Dev = 30 Expected Value = 100 Std Dev = 30 Expected Value = 300 Std Dev = 51.9

Customer 1

Customer 2

Expected Value = 100 Std Dev = 30

Combined Distribution

Customer 3

3M 2006 All Rights Reserved

Storage and Planning Options

Advantages
Risk Pooling Public Health manages Shared space

Advantages

Central Longer lead times

Disadvantages

Economies of scale Minimal local overhead Pay based on risk Existing expertise

Transportation concerns

Disadvantages

Physical Storage

Longer lead times Transportation concerns

Advantages

Local

Shorter lead time Fewer transport concerns High level of local control

Advantages

Disadvantages

Shorter lead time Fewer transport concerns Existing expertise

Higher resource requirement Logistics expertise needed Space/storage required No risk pooling

Disadvantages

Space/storage required Less Control No risk pooling

Public Health

Others

Management of Process

Local Storage Self Managed Inventory

POD POD Carries Inventory & Manages Process

Inventory positioned at and managed by POD

Local control of procurement and inventory
POD responsible for and directly affected by degree of forecast error

Requires local ongoing planning and management of resources

People sufficiently trained Facilities - sufficient space for storage, special requirements, e.g. hazardous, temp. control, clean area, aerosol storage, security. Material handling racking, hand trucks or power equipment Systems procurement, inventory tracking/control/records Must manage inventory including expiration dates, lot/serial control

Product onsite during public health emergency

Fewer transportation concerns Fewer product lead time concerns
3M 2006 All Rights Reserved

Local Storage 3rd Party Managed Inventory

3rd Party Manages Process POD Carries Inventory POD

Inventory positioned at POD but managed by 3rd Party

Facilities - sufficient space for storage, special requirements, e.g. hazardous, temp. control, clean area, aerosol storage & security. Outsource management of inventory including expiration dates, lot/serial control

Leverage existing expertise and systems Product onsite during public health emergency
Fewer transportation concerns Fewer product lead time concerns

3M 2006 All Rights Reserved

Central Storage Self Managed Inventory

Carries Inventory & Manages Process
Central Warehouse POD

POD

Inventory positioned at central warehouse and managed by public health

Simplifies managing expiration dates on inventoried items Inventory risk pooling Economies of scale - Requires fewer people or equipment resources

Public Health must manage procurement process Material must be transported to POD at time of public health emergency
Transportation infrastructure issues during public health emergency Transit times (lead times) must be considered

3M 2006 All Rights Reserved

Central Storage 3rd Party Managed Inventory

Carries Inventory & Manages Process 3rd Party Warehouse POD

POD

Inventory positioned at and managed by 3rd Party

No long term physical storage concerns less space & overhead Reduces issues with managing expiration dates on inventoried items Inventory risk pooling Economies of scale Supplier managed replenishment

Minimal Public Health resource requirements

Public health staff can focus on public health issues Leverage existing logistics expertise & systems

Material must be transported to POD at time of public health emergency

Transportation infrastructure issues during public health emergency Transit times (lead times) must be considered
3M 2006 All Rights Reserved

What Do I Need to Know if I Plan to Locally Store Material?

Minimum requirements for local physical storage and material handling
1. 2. 3. 4. Product Information Physical Space & Material Handling Equipment Operating Information System & Process Personnel

3M 2006 All Rights Reserved

Product Information
Why is this important? Product database is basis for material movement and storage requirements
Manufacturer SKU# (Stock Keeping Unit) Product specifications - e.g. description, tape size Space requirements for this SKU
Carton dimensions and weight How will this item be received?
Pallets, loose cartons, broken case

How much will we order?

Estimate average on hand

Special storage requirements (Follow manufacturers instructions) hazardous, medical clean, cool or cold, aerosol, corrosive etc.

Resource type per NIMS guidelines My supplier information Minimum order quantity? Billing vs. shipping units Product lead time
3M 2006 All Rights Reserved

Physical Space & Material Handling

Sufficient secure space for storage and inbound / outbound handling area Slotting - Sufficient space to store each SKU
How much of each product will I have to store? How much space does it require? Special storage requirements, e.g. cool or cold room, hazardous, clean room, aerosol Sufficient Shelving or racks for each item (if required)
Can SKU be stored on the floor?

Material handling equipment

What will be received and how will we handle it? Material totes Pallet handling and movement
Hand Jacks or fork trucks required? High storage requires reach equipment

3M 2006 All Rights Reserved

Operating Information System & Process

What system will I utilize to manage supply chain?
Logistics plan What level of sophistication required? Spreadsheets vs. Warehouse Management or Inventory Systems

Procurement
How much do I need of a product? When do I need it? What are lead times? How do I procure product? Will I need to reorder product?
Reorder point management reorder cards or system?

Receive
Physically receive material Account for material record transactions in my system, including run lot/serial/number Identify damage or discrepancies Prepare for storage secure or prepare for storage
3M 2006 All Rights Reserved

Operating Information System & Process

Store
Transport to storage location- bin, shelf, rack or floor space Account for location on system where did I put it, when, how much & run/lot/serial? Ongoing maintenance & recordkeeping
Manage run/lot/serial expiration Maintain space cleanliness/order

Security

Pick material
How do I manage this process during emergency public health emergency? Pick list? Record run/lot/serial numbers picked Update inventory records

Return & Recovery

Disposition damage Disposition expired material Update inventory record including run/lot/serial Re-supply trigger replacement order
3M 2006 All Rights Reserved

Personnel
How many people do I need to manage receipt, storage and tracking of product?
Ongoing how much and what type of work is required to maintain inventory and supply chain? Public health emergencyWill I need to create kits or will items be used as-is? How many & what type of resources (people & equipment) will I need during the emergency and how will I get them? Small versus large/complex operation Self dispensing?

What skill sets will they have to have?

Basic inventory management? Material Handling? Material Special Requirements?
3M 2006 All Rights Reserved

Conclusions
Work with existing defined resources (i.e. NIMS) Type of resources Making plans to mobilize, de-mobilize, etc Talk with your existing distribution Cant make a plan until you know your demand Dont wait for emergency to buy materials
JIT will not work doing a public health emergency

3M 2006 All Rights Reserved

Q&A