Philips Electronics Improves Production Efficiency, Inventory Management
The Problem
Like most companies that supply basic components for finished or semi-finished products, Philips Semiconductors (PS) was finding its operations disrupted and efficiencies undermined by the Forrester or bullwhip effect. Those terms describe the tendency of demand variability to increase as one moves up the supply chain, away from final consumption. The bullwhip effect, first described in academic literature in the late 1950s, has become more acute — and costly — in recent years for many manufacturers like PS, a subsidiary of Philips Electronics. This intensification is due to shrinking product life cycles (particularly in the electronics industry) and the fact that global companies increasingly are outsourcing manufacturing and assembly activities, creating a more fragmented and operationally independent supply chain.
The Analytics Solution
One important customer of PS is another Philips Electronics subsidiary, Philips Optical Storage (POS), a maker of optical disk drives, subassemblies and components for computers, CD and DVD players. Because both of these Philips subsidiaries were receiving financial welts from the bullwhip effect, they initiated a project to create a new framework for cooperative planning and an analytics-based software tool to support the effort. The project's goals were to improve customer service, sales and profits, and reduce inventories and obsolescence. Both companies agreed to share key supply chain information, synchronize decisions on capacities and materials flows under high volatility, and resolve supply chain questions quickly.
The effort focused on short-term supply chain operations planning for chip wafers, dies, integrated circuits, circuit boards and optical pickup units. Data about production lead times and sales plans were funneled into forecasting models that rely upon stochastic multiechelon inventory theory, which seeks to optimize planning parameters to cope with uncertainty in demand, lead times and production yields. When planning parameters are established, determinations of when to release critical components into the supply chain are easily accomplished.
The Value
Software created through this process enabled the rapid creation of multiple plans during the cooperative planning meetings, establishing an interactive planning environment. Potential supply bottlenecks could be identified and corrective action taken to prevent that result. Financial benefits of the system include $5 million in annual savings from reduction in excess inventory and a 1.5% increase in annual profitability.
