Section 5.2 demonstrates that 72% of
the total end-to-end lead time is due to raw components production, as Acme
implements a make-to-order strategy. Having a total lead time of 125 days,
DePuy Synthes’ current marginal value of time caused by a supply-demand
mismatch cost is around $640.000, which represents at least 15% of current cost
of goods sold within the same period. Therefore, the main recommendation for
top management of both companies is that they must work together to reduce
end-to-end lead time of this business. Suri (2010) demonstrates that by
reducing supplier’s lead time, the quality and delivery of finished goods will
improve, and they will be able to produce smaller batches with faster response
times, which at the end it will make the operation more effective as well.
In this section, two alternatives are
proposed to reduce lead time for current processes, which can be implemented at
the same time. The first one tackles the bottleneck of the process: raw components
replenishment. Currently, Acme buys raw materials based on customer orders but
it does not implement a formal model to replenish these goods. Even if their
policy is to not keep stock at their warehouse, they still order a minimum
quantity of raw components, which if it does not match with customer’s needs, they
must hold a left-over inventory. Therefore, the first proposal is to use an
Order-up to model for raw components replenishment. Increasing safety stock in
raw material levels, which are cheaper than finished goods, will reduce total amount
of inventory in the chain, shorten lead time, and increase in service level (Stock
et al., 2000).
The second proposal focuses on restructuring
the business. If both companies agree to reduce end-to-end lead time, they must
redesign the organization’s ability to compete on time. de Treville et al. (2014c)
showed how companies transitioned successfully from cost-based to time-based
strategy by realigning the five dimensions of the Star Model developed by Galbraith
(1995) – strategy, structure, people management, and rewards systems.
Both recommendations should be focus on
those finished goods that have a greater benefit of reducing lead time (measured
by the mismatch cost shown in Appendix) compared to the increase in costs of implementing them.