Synergy Between Smart Manufacturing and the Secure Supply Chain (Part 1)


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Since the dawn of the application of main-frame computer systems in assembly manufacturing, the material requirements planning (MRP) function has been continuously supporting the manufacturing process, either as a stand-alone “engine”, or as a component of a wider enterprise resource planning (ERP) solution. The purpose of MRP is really simple: to place orders for materials with sufficient lead-time that the materials arrive into the factory in good time to meet their consumption requirement. Even today, as MRP and ERP functions follow computing trends and start to migrate into the cloud, a fundamental question is being raised as to whether these are still the right tools to use in today’s modern Industry 4.0 driven factory, or whether these need to evolve, be enhanced, or even replaced in order to meet the more extreme requirements of operational flexibility, as well as cope with volatile material availability in the market. Certainly, it appears that unaided, their relevance is decreasing. Is it possible that integration with new tools introduced as part of the digital factory can being a new lease of life for MRP and ERP?

The Ability of MRP to Work Unaided in the Modern Factory

For many, the frustration of having to deal with material shortages and supply issues starts with the apparent failure of MRP to meet objectives. To be fair, the environment in which MRP is expected to work, has changed significantly in recent times. To understand what the effects of recent changes have been, the three key factors required to make MRP work effectively can be examined:

  1. Information about what products to produce and when
  2. Visibility of materials that are already available in the factory
  3. Understanding the flexibility of material usage

Information about what products are intended to produce and in what quantities, is primarily derived from the ERP process. The traditional approach to ERP is to look at the long-term sales forecast, and from it, create a factory plan that would satisfy such demand, ensuring that each node in the distribution-chain of products between the factory and the customer are kept adequately stocked at all times. The ERP calculations are rigid, yet often reflect quite subjective data from the sales organization, as they predict likely sales of each product. When the lifecycles of products are relatively long, most products will experience a steady-state customer demand, which can be easily steered and influenced by marketing promotions. The more demanding areas of the lifecycle are new product introduction, where the stocks of new products need to be built up throughout the distribution chain, based on only an expectation of potential demand, as well as the end of life of a product, where stocks of the product need to be “flushed” without the need for excessive discounting. With a significantly long period of steady state demand, the factory sees little variation between what had been forecast and actual delivery requirement, with their main focus being quality issues, as it represents the most major threat to on-time delivery.

For most areas of assembly manufacturing however, this condition of creating products with long lifecycles represents the “golden age” of manufacturing which has now all but disappeared, due to the global nature of competition in the electronics market that started to erode profits. As technology development accelerates, new and more varied products need to be introduced into the market faster, more frequently, and with lower cost in order to counter competition. The distribution-chain was immediately identified as a key threat to this activity, as the costs related to the distribution of products in many cases exceeds the actual cost of manufacturing. The sheer investment represented by having large quantities of finished goods in the distribution-chain, with associated storage and logistics costs is an easy, but uncomfortable, calculation.

In addition, however, as many more products and variants come into the market more quickly, product lifecycles decrease significantly. The steady state demand period in between new product introduction and end of life decreases rapidly, and in some cases disappears altogether, leaving a very much higher degree of demand volatility. Costs of price erosion of stock in the distribution chain then becomes very much more significant to the overall business. The effect of this trend has been to drastically reduce the quantity of finished goods throughout the distribution chain, to make it as Lean as possible. This has become progressively more significant for the factory, as with less buffer stock in the distribution-chain, the volatility of market demand has a direct effect on factory plans, in terms of the need for smaller batch sizes of an increasing the number of products, leading to a step-change increase in product mix. The impact of this on factory productivity has in turn been significant, with commonly achievable gross productivity levels of 80% or more for long lifecycle products enjoying continuous production, being slashed to 20–40% or even less, for volatile short lifecycle products. The mass-production orientated ERP and MRP are therefore challenged, simply as a result of the awareness of the costs incurred in the distribution chain driving down any long-term commitments.

This trend has now come to a head, triggering the creation of Industry 4.0, which recognizes that a whole new approach to the way in which manufacturing is performed is required to meet the very short-term product lifecycles and customer demand pattern changes. Industry 4.0 supports the close coupling of customer demand and factory supply, which many see as benefiting production operations that are located close to the customer. This is a disadvantage for the indigenous low-cost remote manufacturing model that has prevailed over recent years. Industry 4.0 has been seized upon as the way to reverse the remote manufacturing trend, to create manufacturing jobs and economic value in mainly western countries. Such potential creates strong motivation for the manufacturing business leaders to make the change to Industry 4.0, in whatever form that may take. With virtually no buffer stock between the factory and the customer, and with direct shipping in many cases, the realization hits managers that Industry 4.0 factories need to operate as if they are “making to order”, but of course, with “mass-production efficiency”. This situation is beyond the scope of traditional ERP.

The next challenge for MRP is the knowledge of materials present in the factory. Each of these materials should always be accounted for, and allocated to, the various previously planned products and work-orders. Increasingly however, there are occurrences of “internal” material shortages, that is, cases where ERP expects materials to be available, but in fact, they could not be physically located. The immediate action that this situation triggers has been to increase the quantity of materials available in the factory, to the point where assurances could be made that there will always be enough materials so as not to cause production execution to stop, thereby impacting delivery of products to the customer. This bloating of material stock however only acts to delay the onset of internal shortages.

As internal shortages continue to happen, materials allocated for other work-orders would often be “stolen” in order to keep a line running, which only serves to then cause production in other areas to run short. In many cases, extreme measures have been adopted to make sure that materials, both in the warehouse and on the shop-floor, are not mis-appropriated, with the creation of cages and security checkpoints. Eventually, a reset on the internal material process, in the form of a full stock-count is required. This needs to be done periodically depending on the severity of issues and the limit of investment in, or availability of, additional materials perceived as being needed. As a full stock-count takes two to three days to complete in most cases, the cost of each count represents a loss of 1% of gross productivity to the factory. In practice, one or two stock-counts must be made per year. The revelation that the resultant count is the sheer lack of visibility that ERP has of materials that have been moved to or are located on the shop-floor.

As an example, a reasonably large assembly manufacturing operation routinely found that they had $1 million of stock that was listed in ERP, but it was actually not present in the factory, yet at the same time, $300,000 worth of obsolete stock was found in the factory which ERP had no record of. The source of the problem is in the way that ERP allocates materials, in the form of a “push” of materials to production, as material kits.

A kit usually comprises of all of the materials needed to complete each work-order that it accompanies, either for each machine or for the whole line. The nature of SMT materials is that they are supplied on bulk reels or other carrier, with between 1,000 and 10,000 parts on each. These supply forms were created as a result of the small sizes of components, the large quantity needed for high-volume production, and the speed with which SMT placement machines operate. When considering smaller lot sizes, it is quite likely that with virtually every material in every kit created, the quantity of materials supplied will greatly exceed the quantity needed. A typical lot size can be 200 pieces of product, with just one instance of a material needed per product, coming from a reel with thousands of parts over-supplied. As an additional issue, a certain number of materials are lost as the reel is setup on to, or removed from, a feeder. Additional spoilage of material occurs during the operation of the machine, especially as the initial products are made. The result is that an unknown quantity of materials, exceeding the number required, are actually consumed as the work-order executes. The material reel at the end of the work-order is left with an unknown number of materials. Counting the remaining materials is a time-consuming and invasive procedure, requiring a great deal of material handling, which can damage the material and packaging.

Often, the counting is not actually done, and even if it were, there is little time to manually update ERP with the actual quantity used of each material one by one. The priority for machine operators is to get the machine running with the next work-order, using the next kit of materials. The result is the increasing storage of unmanaged materials with unknown quantities on the shop-floor, out of sight of ERP. The degree of this problem scales with the reduction of lot sizes. The apparent availability of materials held locally near the production lines is something however that production operations accept, or even encourage, as this speeds up their ability to cope with unexpected materials shortages in the kits. The fact is, however, that the effects of spoilage, losses, and damage to materials inexorably leads to an increasing mismatch of inventory levels between ERP records and the physical world, as well as impacting quality. MRP will simply not order replacement materials for losses that cannot be seen.

The third challenge for MRP is related to the degree of flexibility in the manufacturing process in terms of when materials will be needed and what alternatives can be allowed. The bill of materials (BOM) information is derived from the product design. The most often used method for the transfer of design data to SMT manufacturing is in the form of a plot of the PCB image, in a format known as Gerber, based originally on an HP plotter drawing standard, together with many other diagrams, pictures and lists of information about positions of components, electrical nodes and much more. The assembly process engineering team has to take these documents and create a product model that will allow them to create the detailed process instructions and information for each machine and manual operation to be used as part of the assembly and test process. This task can easily consume eight working days of engineering time for each product, and typically results in numerous errors, contradictions and omissions, requiring follow-on engineering checks to be performed on the machines immediately prior to production starting, as well as the creation and inspection of a test product at each operation.

As a result of this long and complex procedure, at a time when more new products than ever are being introduced into the factory, the engineering team have to decide in advance which line configuration will be used to make the product. There is then very little opportunity to change the configuration, or even change which actual materials to use, which would likely require different machine configurations and program settings, depending on their supply format and physical properties. The result is that the product will effectively be run on a dedicated line, with a production rate that is constant—and not at all ever in line with the actual customer completion or delivery requirements—and will use a tightly controlled set of materials. Buffer stocks in the factory of finished goods of each product is the only way to allow such line configurations to run more consistently, defeating the whole purpose of Industry 4.0, as the factory is simply taking over the buffer stock with all the associated costs and risks that was once part of the distribution chain, adding very significant and unnecessary cost to manufacturing itself, rendering it non-competitive.

With the three main drivers behind MRP being affected so much by industry trends, the outlook for MRP, and even ERP, in today’s Industry 4.0 manufacturing world is looking very bleak. MRP does not know clearly what products will be made, or when they will be made, as production demand is now changing continuously. MRP has no visibility of the real quantities of materials in the factory, nor where they are and how they have been allocated. There is little flexibility when it comes to the choice of materials to be used for each product.

The result is that MRP is being forced to work on ever reducing timescales, with frequent, sudden, and urgent need for material orders. This in turn drives the weakening of purchasing policy, to include the purchase of materials from the “grey market” in many situations. There clearly is a very strong requirement to bring some form of enhancement or change to these MRP and ERP tools, in order that they can overcome these challenges.

Michael Ford is the senior director of emerging industry strategy at Aegis Software.

Editor’s Note: Stay tuned for the second part of this article.

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