In its simplest form, EMS companies do two things really well — they are really good at soldering and they are also good at managing inventory. Material requirements planning (MRP) is the production tool used by manufacturers to schedule and control the inventory and manufacturing process, but if not tightly controlled, can create excesses which can have a devastating effect on profitability. Sooner or later, an EMS company is going to have an excess inventory problem (either resulting from internal processes or is customer imposed), so wouldn’t it be nice to have a tool that mitigates this exposure and allows the principals to see the dynamics of forecasts, yields, orders, cancellations, shipments and inventory levels, etc. all in one place?
Robert Freid is the president of Contract Manufacturing Consultants (CMC) and has developed such a tool. The tool doesn’t have a name, but Fried describes it as a proprietary simulation model that allows the manufacturer to calculate expected excess inventory quantities on a part-by-part basis after production ends, and, presents the dynamics and results in an understandable and usable format.
In the real world, the purpose of an EMS MRP system is all about execution — to schedule production and to place parts orders (new and change orders), but they do not allow for dynamic backwards simulation without customized software. The CMC simulation model was designed for this and to develop “what-if” scenarios of inventory that yield practical excess liability assessments, as well as flexibility in allowing, or not allowing, safety stock. It can also incorporate judgement on key input factors such as a vendor’s true cancellation window which may differ from the vendors quoted terms, but also takes into account email communications from both parties which may include data not in the EMS MRP. The CMC model is independent of the EMS MRP which the parties may prefer to mitigate a real or perceived partiality.
Freid has offered several examples of the CMC simulation model in action. The tool helped to resolve an $18 million lawsuit by an EMS company against a customer for excess inventory damages related to sudden product forecast reduction, purchase order cancellation and subsequent switch to another supplier. The CMC simulation model used its backward-looking MRP analysis capability for a part-by- part inventory liability analysis. It illustrated how the contract manufacturer's MRP system should have managed raw materials inventory and vendor orders to support client product-level orders and forecast changes. Model data included the client's rolling forecasts, bills of materials, actual demand, shipments and component lead-times. It also incorporated inventory management algorithms based on common industry practices, including timely buyer corrective actions in response to computer-based MRP generated messages. Lastly, consideration was given to the contract manufacturer for periods of parts supply shortages and for volatility of client forecasts.
Another example involved assessing Nokia share of liability in an assembly program by a mid-tier EMS firm. The CMC simulation model provided analysis that included understanding what procurement actions could have and should have been done by the EMS company to mitigate impact of damages due to business downturn. The "backward looking" MRP simulation looked at all of component materials to quantitatively show reasonable range of liability. The court discovery documents that were reviewed and analyzed included: manufacturing supply agreements; reschedule and stop-work notice history; EMS company past and present claims including supporting inventory records; bills of materials (BOM's) and approved vendor lists for all finished goods; printed circuit board assemblies and components related to contractor claims; manufacturing methods and cycle times; internal and consulting studies.
A final example of the CMC simulation model included a $28 million claim by KBM Enterprises, an Alabama EMS company alleging that excess inventory and other consequential damages were due to its customer’s high frequency of production schedule and product design changes over several years. Products involved were printed circuit board assemblies plus high mix of finished communications products.
A sample of the CMC simulation model can be seen in Table 1. This model was developed by CMC in 2001 to assist both customers and EMS companies evaluate the "share of burden" for excess inventory. The model does not try to replicate or explain all of the many procurement actions that transpire, rather it illustrates how a typical EMS company would have reasonably been expected to manage inventory in response to customer forecasts within component lead-times and with an aim towards controlling excess inventory risk. It treats all parts with the same prudent MRP principles regardless of value. Model projections of excess quantities are later used as benchmark comparisons to actual after returns but before customer part buy-backs.
The CMC simulation model is by definition an explanatory tool. In most cases, it makes it is easier for principles and attorneys to see the dynamics of industry operations so that the accuracy of the results is plain to see. For more information see http://www.cmcseattle.com/