The for items with a highly volatile demand and

The objective of the thesis was to
analyse the current business of DePuy Synthes and its major supplier of
finished goods, evaluate the marginal value of time caused by a
demand-volatility exposure and recommend top management to apply lead-time
reduction policies to increase flexibility and agility to react to demand
changes and increase competitive advantage.

The analysis of the business was
focused 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 only
10% accounts for high-medium volumes per business unit. In addition, 70% of active
codes have a service level that is higher than 95%, which demonstrates the importance
of this portfolio, even if the volumes are low and demand volatility is high.  

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Using the Manufacturing Critical Path
developed by Suri (2010) to measure end-to-end lead time, the business spends
125 days from the moment an order is created to the moment the goods are sent
to the end-customer (e.g. secondary hub or hospital). The analysis shows that
72% of this time accounts for raw components production, as the supplier
manages a make-to-order strategy. Furthermore, excluding the raw components
waiting time, the touch time of the rest of processes is 30% of the overall
lead time. Therefore, lead time can be reduced up to 90%.

The second analysis was to calculate
the supply-demand mismatch cost the DePuy Synthes is currently affording every
replenishment period. Using the model proposed by de Treville et al. (2014a), the
results show that the mismatch costs represent around 15% of the total cost of
goods sold of this portfolio. In addition, the cost premium that DePuy Synthes
is willing to pay to eliminate lead time was calculated for every SKU of the
portfolio. Results show that for items with a highly volatile demand and a
higher service level, cost premium are higher, and can even double the current
price, compared to the most-stable demand goods. The risk for DePuy Synthes of
holding inventory or stocking out of a product, increases with lead time, but
also with the importance of the item for the business. This analysis must be used
as a lower bound of the value, because the model only considers demand-volatility
risk and lead time is assumed to be constant. In reality, supply risk also impacts
directly the performance of this business.  

Recommendations are therefore focus
on lead time reduction. The reason behind is that as shown in the Cost Premium
Frontier developed by Professors Suzanne de Treville and Norman Schürhoff,
nearly half of the total mismatch cost is reduced by reducing the lead time by
70% (125 to 35 days), but the same cost reduction is expected if the lead time
is eliminated or near to customer’s waiting tolerance.

The first one focus on the 72% reduction
of lead time. It states that the supplier must apply a make-to-stock strategy
for those components whose cost increase caused by an increase in stock are
lower than the cost premium payed by DePuy Synthes. The thesis proposes an
order-up to model as replenishment strategy and compares it with the current
make-to-order strategy. The comparison shows that for more expensive, critical
for business and volatile items, the benefit reduction is higher as the
supplier must hold a higher stock to cover for any uncertainty in demand; which
is not currently the case as demand is fully met from the supplier’s point of
view and stock is at minimum levels as it is expensive to hold. However, cost
premiums are higher due to the same reasons. Contrary to less expensive items
with a lower demand volatility, costs of current and proposed replenishment
strategy are very similar, therefore benefit reduction is lower, as well as
cost premium for finished goods.

Finally,
the second recommendation focus on reducing the last 30% of lead time. It states
that both organizations change their strategies from cost-based to time-based and
process, 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 Treville
et al. (2012), it is proposed to use a time-based strategy, process must ensure
capacity buffer, lot sizes reduction, and elimination of non-strategic variability;
structure must support flow, rewards must encourage a time-based mindset and people
management must be cross-trained and staffed according to time-based mindset