Project Paper: Procurement and supply management Filton Aerostructures

Skopje, 2011

Table of Content
Executive summary ....................................................................................................................................... 3 Step 1: Analysis of the existing situation ...................................................................................................... 4 Step 2: Identification of major issues and problems .................................................................................... 5 Categorization of problems ...................................................................................................................... 7 Prioritization of problems and issues ....................................................................................................... 8 Step 3. Generation and evaluation of alternative solutions ......................................................................... 9 Step 4: Recommended solution and Justification ...................................................................................... 10 Step 5: Implementation .............................................................................................................................. 16

Executive summary

Step 1: Analysis of the existing situation

At the beginning of the 1990s, the aircraft industry was growing rapidly with a booming market for air transport and projections for further rapid growth and sales. The main constraints for the companies in the industry were more of capacity nature, rather than cost or quality. The huge market was mainly divided between few big market players. The difficulties for the companies came in the mid of the 1990s, with the world wide recession, Gulf War gave additional negative impact, which resulted in fewer flights and lower investments by the airlines in the aircraft industry. This situation brought all of the industry on the edge of profitability. The result of this was continued reorganization, disruption, redundancies and closure programs for the aircraft industry. Thus, many smaller manufacturers merged or went out of business, and therefore only a few major makers could effectively compete in the final assembly of aircraft. Filton Aerostructures as part of British Aerospace felt the impact of the crisis, even more the governmental support was removed during this period, which resulted in severe pressure for change. The leader in the industry and biggest competitor of British Aerospace, Boeing, already made plans for undertaking measures for significant improvements in the fields of design, time to market and cost of production. If Filton Aerostructures wanted to stay in the game, it required for them to achieve significant improvements in the overall production process. They identified desired areas of improvement and set the following improvement targets: 35% reduction in unit costs within two years stock-turn ratios to be improved from around 4 to 12 production lead time to be reduced by 75% overhead costs to be reduced by 66% within four years In order to achieve these targets, they identified and undertook the following actions: Cost cutting Reduction of staffing levels through wastage and redundancy programs Introduction of continual improvement programs Reduction of staffing levels caused internal moral issues. Other problems included communication between internal customers and suppliers, leading to blaming Procurement function and the continual reorganization processes. A realization overtook the management of British Aerospace that in the medium-to-large aircraft sector they were unlikely ever to assemble another aircraft. As such their future was as a leading partner within the European Airbus consortium. The company employed 2300 staff and was split into five manufacturing units, each of which required a generally distinct set of parts and raw materials that had to be serviced by the Procurement function.

Figure1: Graphical presentation of Filton Aerostrutures procurement function

Step 2: Identification of major issues and problems

Defining the problems and issues is critical step in order to provide proper solutions. Having all the previous stated, it is obvious that Filton Aerostructures is facing with huge problems that have to be carefully reviewed. First of all he provides a list of the problems and issues that have arised for the company: 1.

The industry The whole industry was undergoing strategic change Significant downsizing took place in all the industry Decline in the flights leading to declined demand for aircrafts The government support for Filton Aerostructures was removed Remaining assemblers were making plans for huge improvements (design, time to market and cost of aircraft) trigger for change make improvements to gain market share
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2.

Internal situation Staff Insecurity among the employees They were not sure who they worked for Unclear tasks, undefined tasks Lack of moral Not motivated Lacks of training shop floor workers were drafted into the stores as and when they were available. The Structure Four tiers in the Procurement department alone the structure no longer supported the business The internal customers, despite having a representative from Procurement within their sections, were facing an unacceptable degree of disruption to their supplies The satellite Procurement members were not given the power to make decisions and address problems directly Physical distance between the remote location of Procurement (minor problems were not passed back until it was too late to avoid a serious situation) Metal Stores - Lack of systems for checking, quality inspection, storage and delivery to internal customers. Problems in the materials management task Informal system for making decisions ad hoc decision making The System of Communication, Coordination and Handling orders lack of coordination between Procurement and Manufacturing with consequent poor forecasting, so that raw materials were often overstocked and potentially almost half of the stock was redundant Difficulties in communication with purchasing Procurement frequently were not aware of what another section had been doing with any particular supplier Difficulties in managing the large number of suppliers Last-minute changes to orders Lack of system for disputed invoices Not synchronized system for payment of invoices (often quantities differed from the order owing to Filton's late schedule changes) History of poor relationship with suppliers trigger build close longterm relationship and improve communication o return of excess stock to suppliers for the latter to store (and depreciate) at their own cost until it was required o suppliers had to deal with many or all of the sub functions within Procurement, o Suppliers were often dealing with buyers, expediters, schedulers and sometimes even staff from Manufacturing.

Categorization of problems
Problems that must be solved Opportunities seized Four tiers in the Procurement department alone the structure no longer supported the business The internal customers, despite having a representative from Procurement within their sections, were facing an unacceptable degree of disruption to their supplies The satellite Procurement members were not given the power to make decisions and address problems directly Change the Structure Physical distance between the remote location of Procurement (minor problems were not passed back until it was too late to avoid a serious situation) Metal Stores - Lack of systems for checking, quality inspection, storage and delivery to internal customers. Problems in the materials management task Informal system for making decisions ad hoc decision making Insecurity among the employees They were not sure who they worked for Define Clear Tasks for Unclear tasks, undefined tasks Staff Lack of moral Motivational Programme Not motivated Reorganization of Staff Lacks of training shop floor workers were drafted into the stores as and when they were available. Lack of coordination between Procurement and Manufacturing with consequent poor forecasting, so that raw materials were often overstocked and potentially almost half of the stock was redundant Difficulties in communication with purchasing Procurement frequently were not aware of what another section had been doing with any particular supplier Implement ERP Difficulties in managing the large number of suppliers Last-minute changes to orders Lack of system for disputed invoices Not synchronized system for payment of invoices (often quantities differed from the order owing to Filton's late schedule changes) History of poor relationship with suppliers o return of excess stock to suppliers for the latter to store (and depreciate) at their own cost until it was required o suppliers had to deal with many or all of the sub Built sustainable longfunctions term relationship with within Procurement, Suppliers o Suppliers were often dealing with buyers, expediters, schedulers and sometimes even staff from Manufacturing.
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Prioritization of problems and issues

Although, all of these problems have to be solved, they can be prioritized and classified according their importance and time needed for the solution. Some of the problems listed above, requires immediate action, and some must be considered thoroughly and requires long term solutions. These long term solutions will lead the company towards achieving the goals and already defined improvement targets. 1. In order to achieve this targets and ensure market share, through improvements in time to market and costs, problems related to the lack of coordination and consequently poor forecasting, should be considered as first step in the process of overall improvements. Introducing ERP system, for example, will cover most of the coordination, correlation and forecasting problems, like: Lack of coordination between Procurement and Manufacturing Poor forecasting and overstocked row materials - return of excess stock to suppliers Difficulties in communication with purchasing Difficulties in managing the large number of suppliers- history of poor relationship with suppliers Last-minute changes to orders Lack of synchronized system for payment of invoices 2. As second step, and very important for smooth and painless implementation of all changes, has to be considered Reorganization of staff, followed by some motivation program. These changes should be in direction of reassigning staff in direction of the new organizational structure, rather than staff reduction. This step can solve the problems like: - Unclear and undefined tasks - Insecurity among the employees - Lack of moral and motivation - Insufficiently trained staff 3. After successfully realized staff reorganization and satisfactory level of motivation and moralization among employees, next steps related to organizational structure can be considered, covering problems like: - Difficulties to support the rest of the business adequately, by traditional four tiers procurement department - Internal customers - facing an unacceptable degree of disruption to their supplies - Lack of power for satellite procurement members to make decisions and address problems directly - Physical distance between the remote location of Procurement is very big problem since usually minor problems were not passed back until it was too late to avoid a serious situation - Lack of systems for checking, quality inspection, storage and delivery within Metal stores. - Problems in the materials management task - Informal system for making decisions ad hoc decision making

Step 3. Generation and evaluation of alternative solutions

Once we identified the problems in the previous section here are proposed possible alternative solutions: 1. Vertical (backward) integration with suppliers Filton Aerostrustures as a part of British Aerospace group of companies produces wide range of products. To be able to perform its operation, Filton Aerostructures has established relationship with large and diverse group of suppliers, relationship that does not promise successful future. The history in this collaboration says about the poor relationship that prevails between them. This poor relationship in front row is generated from the inappropriately set procurement information system in general, and from there to the specific areas like destocking system or not using the expertise that the other has in certain area. In order for this situation that Filton Aerostructures have with its suppliers, one solution is the vertical (backward) integration. Through this action it will be achieved centralized procurement function, and that means one procurement information system with right and on-time operations, which promotes possible implementation of JIT method in future. 2. Horizontal integration The newly situation in the aircraft industry, forced Filton Aerostructures as well and every other company in the industry to cut down costs, improve productivity, production lead time, efficiency and effectiveness. Taking that in consideration, Filton Aerostructures downsized itself in terms of employees and the rest possibilities that are on available for achieving the upper mentioned are improvement of technology and the know how inside the company. The fastest way to do this is through horizontal integration of Filton Aerostructures with other smaller participants in this industry. These smaller players will provide the needed technology and more important the needed know how for the purpose of achieving the newly set economic and operational targets. 3. ERP implementation The problems that Filton Aersoturctures faces like already previously mentioned inefficiency and ineffectiveness in the operations, poor information system, bad collaboration with its suppliers, etc., can be overcome with implementation of ERP system. Although the previous solutions are not bad suggestion, but every one of them is focusing only on one area internal operations or procurement function. On the other hand implementing ERP system in this company will solve all problems from internal inefficiencies to improvement of information system to synchronizing the procurement function.

Step 4: Recommended solution and Justification

As the problems have been identified and prioritized, the next step is to come out with a clear idea of how the problems should be solved. Having in mind that our top priority is fixing the procurement function, forecasts and inventory control in order to lower the costs as much as possible and gain more control over the whole production process, we have to use a solution that will cover whole this area at once. The best way to do this is by implementing an ERP solution. The ERP will solve not just procurement department but almost the whole company. Only several areas will be covered by other means instead of ERP. The driving force behind the acceptance of ERP is to streamline and automate enterprise-wide resource planning and quickly maximize cost savings. In practice, much of ERP success has been in facilitating operational coordination across departments as we need in Filton Aerostructures, having in mind the week coordination. A benefit of an implemented ERP system is facilitation of day-to-day management. Since all the data are gathered in one large database, ERP offers better accessibility to data so that management can have up-to-the-minute access to information for decision making and managerial control. ERP systems are module based (functionally based), so that each department can benefit from its use. We will describe each module separately and how will it help to improve Filton Aerostructures`s way of doing business. Another reason for this implementation is the growing power of the rivals, so that the ERP will be just an inevitable tool without which no company can compete in the future. Filton`s procurement function deals with procurement (supplying) and inventory management for the purchased items. That is why these three modules will be explained as a complex one. The company faces enormous pressure to reduce costs while improving customer service and responsiveness. 1. Supply Chain Management (SCM) software module enables collaboration, planning, execution, and coordination of the entire supply network, empowering the company to adapt its supply chain processes to an ever-changing competitive environment. SCM tool can help transform a linear, sequential supply chain into a responsive supply network in which communities of customer-centric, demand-driven companies share knowledge, intelligently adapt to changing market conditions, and proactively respond to shorter, less predictable life cycles. The company need to balance supply and demand and run its businesses based on actual vs. forecasted demand. With SCM tool, Filton can model their existing supply chain; set goals and forecasts, optimize, and schedule time, materials, and other resources with these activities: Demand planning and forecasting Safety stock planning Supply network planning Distribution planning Strategic supply chain design
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Improving order, production, and execution tracking with RFID-enabled processes Seamless integration and global visibility of different transportation process steps, and higher transparency Improved warehouse efficiency and extend real-time visibility and control of warehouse operations Reduced costs of goods sold

SCM can also facilitate supply chain collaboration with: Suppliers Give them easy and seamless access to supply chain information to facilitate the ability to synchronize supply with demand. Contract manufacturers Provide easy, seamless access to supply chain information by extending visibility and collaborative processes to their manufacturing processes. The purchase module streamlines procurement of required raw materials. It automates the processes of identifying potential suppliers, negotiating price, awarding purchase order to the supplier, and billing processes. Some of the most important benefits that this module has are: Perform the complete procure-to-pay process, including requisitioning, purchase-order management and invoice verification. Manage catalog content and enable employee self-service procurement of material and services. Integrate all business partners, including designers, suppliers, manufacturers, and customers. Collaborate efficiently with suppliers on product development, purchase-order management, invoice processing, and payment management

2. The Inventory module facilitates processes of maintaining the appropriate level of stock in a warehouse. The activities of inventory control involves in identifying inventory requirements, setting targets, providing replenishment techniques and options, monitoring item usages, reconciling the inventory balances, and reporting inventory status. This module benefits from: Record and track the quantity and value of all materials, perform physical inventory, and optimize all warehouse resources. Plan, enter, and document warehouse-internal stock movements by managing goods receipt, goods issues, storage, picking, physical stock transfers, and transfer postings. Manage workload planning, wave picking and order consolidation, radio frequency and barcode scanning, handling-unit management and real-time monitoring of all activities.

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By using the ERP software the company will benefit by increasing demand accuracy and order fulfillment satisfaction level, reduce inventory level and increase inventory turns, productivity and profitability as an ultimate goal. How can these benefits actually be used and how will the whole system actually work? Simply explained, after putting the system in use, filling all necessary data about suppliers, items they sell, defining locations, warehouses, lead times, processes, time to process goods (manufacturing process), bills of materials and all relevant costs associated with the whole process, the management and control can be increased and costs will be decreased. We will describe each problem, one by one and the way that ERP will solve it. 1. Lack of coordination between Procurement and Manufacturing with consequent poor forecasting, so that raw materials were often overstocked and potentially almost half of the stock was redundant Solution: Since the process is automated, all information are known, process steps are defined and the system monitors all actions taken, now it will be easier to coordinate the activities, because human errors and factors will be decreased. By increasing the order cycles per month, instead of per quarter/year and using better forecasting methods on lesser time than before, the problems with overstock will be radically decreased. Also, redundant items will no longer be present since the system will track the inventory levels and show how much and where an item is situated. Safety stock and minimal order quantities will also be used. 2. Difficulties in communication with purchasing Solution: Communication will be used for creating orders, monitoring orders status, finding problem origins, receiving goods, place goods in warehouse, use goods, track inventory levels. All this will now be easily seen and made trough the computer`s interface by making only several clicks. Every aspect of the business will be recorded in the system. Communication problems will be also decreased by using standard language. In case of emergencies, alerts will be sent to higher distances in order to rapidly take a course of action to bring back the process on track. 3. Procurement frequently were not aware of what another section had been doing with any particular supplier Solution: By using ERP software, procurement employees from all sections can view all orders (items required), statuses, projected delivery times. With the new model of work, the internal customers (sections) can only create order and send it only to the Procurement center. The procurement center will than place the order to the supplier. This way, procurement will be in charge of placing orders and individual sections will not be able to contact directly to the suppliers. Procedures will be defined and penalties will be set for offenders of the process defined. 4. Difficulties in managing the large number of suppliers Solution: Information for suppliers, items they provide, process, lead times, orders sent dates, order receive dates, active orders, financial statements, invoice numbers and other data will be stored in one database. This database will provide information in standard forms by using
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standard queries and open ones (sorting by user needs). The process of ordering and orders status will be tracked by the system and only alerting notes will be sent to managers (by previously defined lead times, manufacturing times, BOM etc) to take preventive action or correct the process itself. 5. Last-minute changes to orders Solution: Changes to orders or cancelations can be done through the ERP in much faster way than traditional channels. The status of orders is transparent and known and orders can be easily cancelled or changed (if they can). Yet, there will also be a procedure for this type of events which will state who will be responsible and liable if change/cancellation cannot be done or it is done too late. 6. Lack of system for disputed invoices Solution: ERP is a system in which disputed invoices can be defined as tasks and controlled, managed and be seen transparently. Each status change or information can be recorded so that everyone involved can easily track changes and be informed. The company can also set timetable for changes in status of debt/credit and use the filtered data to take actions previously defined. 7. Not synchronized system for payment of invoices Solution: Payment of invoices can be synchronized by getting status information for order completion and payment terms (due payment dates). If an order is complete and last payment date is knows, the system can easily filter all invoices that need to be settled by supplier and sum. The process can be additionally automated by creating payments directly through an e-banking system. After payment is done, the task will be closed. 8. Return of excess stock to suppliers for the later to store (and depreciate) at their own cost until it was required Solution: By using more order cycles with lesser order quantities, better forecasting methods, using minimal order quantities, calculating safety stock levels to a minimum, controlling inventory level, tracking inventory status and automating that whole process, excess stock will no longer be present. 9. Suppliers had to deal with many or all of the sub functions within Procurement and were often dealing with buyers, expediters, schedulers and sometimes even staff from Manufacturing Solution: The automated process will be centralized. All orders will be sent to suppliers by electronic means only by Procurement center employees. That way, suppliers will communicate only and directly to procurement center purchasing staff. In case of delays or changes, information will be sent to managers of purchasing staff but also to employees of inventory and expediting staff in order to make correction to the lead times and the process itself.

10. Poor relationships with suppliers Solution: By creating a business which is automated, precisely and timely measured and set, where procedures are identified and put in practice, relationships with suppliers will only be positive. Have in mind that creating such a system requires huge involvement from them.
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Suppliers have to provide the prices, delivery times, promises that they will have to respect In the future. In order to work this way, some kind of lock-in is needed. Using the same software to track orders, inventory levels, bar scanner tags and readers are only part of the technology that will be used by both sides and will be invested in. So its a mutual benefit to have active and strongly build relationship between the channel members. The ERP`s SCM application automates, simplifies, and accelerates procure-to-pay processes for goods and services. With SRM, Filton Aerostructures can reduce procurement costs, build collaborative supplier relationships, better manage supply bases, and improve your bottom line with innovative offerings and a faster time to market. 11. Inadequate organizational structure Solution: Implementing an ERP solution and automating the whole process of procurement will significantly affect the organizational structure of the whole company. We will put the focus on the procurement department since most of the problems are identified at this sector. The department, now consisted from 45 employees, should be reduced to 38 or even less (as the plan for cutting costs suggests). This can be easily done because most of the tasks will be automated. Most of the lay-offs will be done from the inventory and expediting staff. This function will be needed mostly when the ERP solution will be created in order to set the process of expediting and scheduling. After that, only small changes will be made and, that is why less work-force will be needed. The staff managing the inventories will follow the same logic. After setting the system less people will be needed, who will only make corrections, insert new data, change process flows and etc. The new proposed design of the procurement department is shown on the figure 2 below:

According to the new design there will be 4 sections in the Procurement department, Change management, Supply/Purchasing, Logistical support and Administration. Change management will be held responsible for implementing the change, implementing the ERP solution and changes that will take place after. This section acts as an ad-hoc section and it is consisted from the Procurement manager and 2 employees from each of the new three sections.
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The Supply/Purchase section has 10 employees managing the supplies, placing orders, managing the supplier relationships, find new suppliers, negotiate price and conclude purchasing deals. Additional 5 employees are situated in each of the manufacturing units (internal customers), which create supplying orders, send them to Procurement center and track their status. They act as a link between the Procurement department and the manufacturing units. Logistical support section is responsible for creating the timetables, inserting the BOM, inserting lead times, costs, making expediting plans, insert the process steps and insert and make changes to the data in the system (making corrections). Administration section will deal with all the paperwork and act as a support to all the other sections. The total number of employees will be reduced to a number of 30 employees. Communication and data transfers between manufacturing units and suppliers will be centralized through the Procurement department, instead of the previous practice where everyone was communicating with everyone.

The physical distribution will remain the same. Metal stores will still be present but with an inventory control mechanism like the ERP offers, they will no longer be bottlenecks for the manufacturing units. Once read by the bar scanner, the inventory information will be stored in the database and each change will be tracked and recorded. The satellite purchasing employees will have complete control over their orders. If anything goes wrong, the automated alert system will send a note to a higher representative. This way the problems will be directed to the right people responsible for solving the issues. Decisions will be made based on real time reports and also on predefined formal procedures between the sections and also between the company (mostly procurement department) and its suppliers. 12. Motivation, uncertainty and training problems Solution: This area of problems cannot be solved by using the ERP software. Uncertainty will decrease after the new team will be created, having in mind that it will come to its peak point at the moment of choosing the best employees who will remain in the company. Creating formal procedures will define the responsibilities and job descriptions to all the employees and also the hierarchy structure. They will also be acquainted with problem escalating and resolution procedures.

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Training will be most done in the period of creating and testing the ERP solution. This way, the employees can participate in the design and also get familiar with the system even before it is set on-line. Motivation will be given through achieving periodical targets and making above the average norms.

Step 5: Implementation
In order to overcome the implementation phase as easy as possible, strong commitment and support from the management is required. Actually, the management itself should be involved in motivating the change itself. They will have to explain all the benefits that the new system and organization will provide to the stakeholders, especially the employees but also the negative aspects like losing jobs. CEO and the functional department managers should be in charge of the management of whole process of finding a ERP provider, selecting the software modules, negotiating the terms with the provider and controlling the implementation process, while the functional managers and operational managers should be in charge of managing each individual software modules, according to the function they control. Operational managers and employees from their departments will be responsible for customizing the software module to their actual needs. All the people involved will coordinate their efforts with the provider`s employees. Working groups will be defined and also basic problem escalation and solving procedures. The cost of implementing an ERP solution together with IT infrastructure and training should be around 8-10 million pounds, which is about 10% of the company`s income. This in turn is not considered to be very expensive because it can be seen as 1 year investment for lifetime benefits. The decreased cost, but also the control gained over the whole process will definitely worthwhile. The implementation period, on the other hand is considered to be even more important, having in mind the competition intention and promise for lesser delivery time. The average time to fully implement an ERP is considered to be at about one and a half year, but making it operational, can be done in no more than 6-9 months. If benefits from the system and organization are to be seen as the software vendors says, this is not a long period for implementation. To truly realize the benefits that the ERP will provide, the management from all levels should clearly define performance measures in an operational level since these benefits can be measured easily and can be seen as targets for motivating the employees. Example of benefits will be: Reduced inventory Better inventory management Reduced purchasing time More accurate predictions and forecasts Reduced operational and overhead costs Faster response time to problems Better responsiveness to customers and on-time delivery Better relationships with suppliers Better visibility and control Improved coordination among functional departments
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Improve operational efficiency and effectiveness Support day-to-day management decisions and strategic planning Higher ROI Higher profits

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