Background:
Ace Electric Lighting Co. has been in business for 35 years. Their main product is a line of electric “exit” lights for commercial and industrial buildings. Ace is the third largest supplier of exit lighting in the nation. However, their sales volume is only one third of the industry leader. Ace has been profitable for, at least, the past two decades. The product is sold to building supply distributors and to large building contractors. However, the sales effort is directed to architects. Having architects specify the product in their building plans insures the product will be purchased by suppliers and contractors for installation. The products are certified by Underwriters Laboratories and this certification is critical for acceptance by architects. The exit lights are installed in new buildings and refurbished buildings.
Ace Lighting has a sales manager. However, the direct sales effort is through manufacturers’ representatives. These reps take orders from building suppliers and construction contractors. The sales manager oversees the reps and focuses his attention on having the product specified by architects in their building plans.
The product is sold in a variety of different models to accommodate the design requirements of architects. The model variations are based on electrical specifications (there are 4 varieties of voltages and frequencies); frame colors (8 colors) and sign lighting colors (3 different varieties). The combination of electrical, frame and sign colors makes for a large permutation of models to stock. Because of the cost of UL certification, any design change is very costly to implement. The time to gain UL certification is 6-8 weeks and the cost is $30,000 regardless of the degree of the change.
Ace Lighting has no cost accounting system and doesn’t use an ERP software program. All sales forecasting, purchasing, scheduling and production control is done by hand with some spreadsheet programs.
Customer orders come in quantities from 10 to 100 pieces depending on the size of the construction job. All pieces are required to be delivered at the same time to be installed in the building by electrical crews on the construction schedule. Although customers insist on the lowest price and highest quality, the speed of delivery is critical. The contractor or supplier doesn’t want the material to sit on the construction site for any length of time because this adversely effects his cash flow.
The material components have the following lead times:
Electrical components 4 weeks (although the transformers are sourced in China and have a 12 week lead time)
Screen Lights 2 weeks
Frames 4- 6 weeks
The electrical transformers are ordered from a sales forecast that typically extends out to 26 weeks. Transformer purchase orders can not be changed or delayed once the order is accepted by the vendor.
The assembly lead time for the electrical sub assemblies is 7 business days. The assembly of the final product is 4 days. The principal reason for the long assembly time is the number of direct labor workers. There are 5 direct labor assemblers who complete all the assembly work on all models. These assemblers are shuffled between work stations to complete final assemblies and the sub-assemblies. This is considered a semi-skilled job and wage rates are competitive in the geographic area.
Marketing has to quote a lead time of 4 weeks to delivery upon receipt of the order. This lead time is necessary to be competitive with other sign manufacturers. The price of the product is competitive with the other sign suppliers. Quality of the product has never been a customer issue.
Problem:
Ace cannot supply customers in the 4 week lead time quoted by marketing. Production requires 6 weeks to purchase material and assemble the products. Marketing has been losing orders to competitors because Ace cannot deliver within the 4 week lead time. Competitors are able to delivery within this time frame and gain business from Ace because of delivery speed. The loss of market share is becoming acute and the product is becoming unprofitable. Senior management is considering the shut down of the plant.
The proposal by the marketing department to stock quantities of the most highly ordered models for immediate shipment was not considered cost effective by senior management. First, there is no apparent pattern to model demand. Second, the company doesn’t have the space to stock a large quantity of finished goods.
How should the Ace Production Department reduce its time to ship customer orders?
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