The objective of the thesis was toanalyse the current business of DePuy Synthes and its major supplier offinished goods, evaluate the marginal value of time caused by ademand-volatility exposure and recommend top management to apply lead-timereduction policies to increase flexibility and agility to react to demandchanges and increase competitive advantage.The analysis of the business wasfocused on the portfolio characteristics and on the lead time of the processes.This portfolio has 1149 active codes, 99% of them have unstable demand and only10% accounts for high-medium volumes per business unit. In addition, 70% of activecodes have a service level that is higher than 95%, which demonstrates the importanceof this portfolio, even if the volumes are low and demand volatility is high. Using the Manufacturing Critical Pathdeveloped by Suri (2010) to measure end-to-end lead time, the business spends125 days from the moment an order is created to the moment the goods are sentto the end-customer (e.
g. secondary hub or hospital). The analysis shows that72% of this time accounts for raw components production, as the suppliermanages a make-to-order strategy. Furthermore, excluding the raw componentswaiting time, the touch time of the rest of processes is 30% of the overalllead time. Therefore, lead time can be reduced up to 90%.The second analysis was to calculatethe supply-demand mismatch cost the DePuy Synthes is currently affording everyreplenishment period. Using the model proposed by de Treville et al.
(2014a), theresults show that the mismatch costs represent around 15% of the total cost ofgoods sold of this portfolio. In addition, the cost premium that DePuy Synthesis willing to pay to eliminate lead time was calculated for every SKU of theportfolio. Results show that for items with a highly volatile demand and ahigher service level, cost premium are higher, and can even double the currentprice, compared to the most-stable demand goods. The risk for DePuy Synthes ofholding inventory or stocking out of a product, increases with lead time, butalso with the importance of the item for the business. This analysis must be usedas a lower bound of the value, because the model only considers demand-volatilityrisk and lead time is assumed to be constant.
In reality, supply risk also impactsdirectly the performance of this business. Recommendations are therefore focuson lead time reduction. The reason behind is that as shown in the Cost PremiumFrontier developed by Professors Suzanne de Treville and Norman Schürhoff,nearly half of the total mismatch cost is reduced by reducing the lead time by70% (125 to 35 days), but the same cost reduction is expected if the lead timeis eliminated or near to customer’s waiting tolerance.
The first one focus on the 72% reductionof lead time. It states that the supplier must apply a make-to-stock strategyfor those components whose cost increase caused by an increase in stock arelower than the cost premium payed by DePuy Synthes. The thesis proposes anorder-up to model as replenishment strategy and compares it with the currentmake-to-order strategy. The comparison shows that for more expensive, criticalfor business and volatile items, the benefit reduction is higher as thesupplier must hold a higher stock to cover for any uncertainty in demand; whichis not currently the case as demand is fully met from the supplier’s point ofview and stock is at minimum levels as it is expensive to hold. However, costpremiums are higher due to the same reasons.
Contrary to less expensive itemswith a lower demand volatility, costs of current and proposed replenishmentstrategy are very similar, therefore benefit reduction is lower, as well ascost premium for finished goods. Finally,the second recommendation focus on reducing the last 30% of lead time. It statesthat both organizations change their strategies from cost-based to time-based andprocess, structure, rewards and people management must be aligned to this strategy,as proposed by Star Model of Galbraith (1995). As per the adapted of de Trevilleet al.
(2012), it is proposed to use a time-based strategy, process must ensurecapacity buffer, lot sizes reduction, and elimination of non-strategic variability;structure must support flow, rewards must encourage a time-based mindset and peoplemanagement must be cross-trained and staffed according to time-based mindset