DESIGN AND ANALYSIS OF A MATERIALS MANAGEMENT SYSTEM FOR BOEING COMMERCIAL AIRPLANES’ (THE BOEING COMPANY) METALLIC RAW MATERIAL SUPPLY CHAIN WITH A FOCUS ON LEAD TIME MANIPULATION AND CORRESPONDING EFFECTS ON INVENTORY AND COST by HENRY LU A Senior Project submitted in partial fulfillment of the requirements for the degree of Bachelor of Science in Industrial Engineering California Polytechnic State University San Luis Obispo Graded by: ____________________________ Date of Submission: _______________ Checked by: ___________________________ Approved by: _______________________ Table of Contents Abstract ............................................................................................................................................ 2 Introduction ..................................................................................................................................... 3 Background ...................................................................................................................................... 8 Literature Review........................................................................................................................... 15 Design ............................................................................................................................................. 22 Experimentation ............................................................................................................................ 36 Results ............................................................................................................................................ 50 Conclusion ...................................................................................................................................... 53 Appendix ........................................................................................................................................ 58 References ...................................................................................................................................... 62 1 Abstract The purpose of this project is to identify the costs associated with an aggregation strategy run by Boeing Commercial Airplanes. In order to identify these costs, a rudimentary replenishment system must be designed for the supply chain due to the fact that there is currently no such system in place. This replenishment system will be used to create a model (created in Excel) to calculate the total annual costs of the system. The model must allow changes to some of the important inputs such as mill performance measures and lead times and report the resulting changes in the total annual cost. Boeing has contracted out the responsibilities of operating the aggregation strategy to an outside company called TMX Aerospace. TMX operates the system out of warehouses that also act as distribution centers (metal moves from the metal mills to the TMX warehouses and then to the suppliers). Among the many benefits that demand aggregation provides, TMX also provides a service known as lead time manipulation. This service essentially transforms a long lead time from the mills to TMX into a dramatically shorter lead time between TMX and the suppliers. The costs of this service are particularly important for this project. The results of this study will be used to identify an optimal replenishment strategy and the costs of running the operation. In addition, this project will pave the path for a supply chain management software package to be implemented at the distribution center in the future. 2 Introduction As a manufacturer of commercial aircraft, Boeing Commercial Airplanes (BCA) orchestrates a complex supply chain. The following project is meant to initiate the creation of a general tool that should eventually be capable of analyzing all components that Boeing makes or buys. Due to the interests of the stakeholders, the priority of this project is on the metallic raw material and as discussed later, this will be scoped down even further. Boeing utilizes an aggregation strategy that pools together the metal demand from all of BCA’s internal manufacturing functions along with the demand from the company’s suppliers. Boeing takes on the responsibility of purchasing the metal and distributing the metal to its suppliers. In the process, Boeing offers lead times to their suppliers that are much shorter than the lead times between the mills and Boeing- designated storage and distribution locations. This requires precise forecasting and coordination on Boeing’s part. The project described below involves a model and a sensitivity analysis that are intended to expose the effects of lead time variations throughout the company’s complex supply chain. However, before this analysis can be performed, the model must be developed to best represent the current situation. Boeing absorbs increased costs in order to reduce risks and provide reduced customer lead times. The main objective of this project is to determine how much the costs are increased in order to provide these benefits and whether these increased costs are worthwhile. In addition, the sensitivity analysis will reveal how factors such as bad customer forecasts impact the stability of the system. 3 Along the way, modifications will be proposed to the current system and a new materials management system will be designed to best support the operation of managing the metallic raw material supply chain. Problem Statement There is currently no way to identify the costs of operating the described aggregation system (through TMX) and the use of lead time manipulation. The reason for this is that the system described is actually not currently in operation. Project Scope  Conduct literature review to determine if previous research has been conducted on the same or similar topics. Utilize findings in such literature as a baseline for performing current research study. This previous research will be used as an aid but the results from this current study will also be contrasted to those of the literature.  Create a model that would simulate lead time variations within BCA’s supply chain (including both internal and external components which mean both internal and external suppliers are involved). o First step is to document and model the current state  Data to be provided by The Boeing Company  Utilize one example product to start and create a steady state model of the product 4  Experiment with different variations within the system and observe the change in cost, risk, and performance (possible lead time to promise the customer, the lower the better)  Use these results to develop a model that would effectively represent subsequent scenarios o Priority is to focus on metallic raw material supply chain  Present and examine “what-if scenarios” o Unlike in the previous task, these what-if scenarios are presented for individual situations and observed in order to collect data and not for the experimental purpose of developing a model o Consider economic implications of each model (inventory costs, shortages) o Perform sensitivity analysis to determine which factors are most influential o Perform in-depth analysis on factors that are most likely to derail the current state  Customer LT  Customer forecasting effects  Random LT variations that results in a disruption in the relationships between the Mill and BCA and BCA and the supplier  *Fixed Mill LT - * to indicate that Mill LT will not be one of the factors to be examined. Mill LT’s are assumed to be fixed. 5 Project Deliverables 1) Model an interface that would allow users to input lead time variations and be presented an output showing the changes to the current plan. This output will include the severity of these discrepancies and reveal possible methods of dealing with the situation. 2) Analysis of presented “what-if scenarios.” 3) Complete technical report including literature review. 4) Business presentation of problem, analysis, and findings. Technical Approach 1) Model current state – create fabricated representation of the system that would produce the best results 2) Introduce changes to the current state 3) Analyze effects of changes 4) Determine methods to resolve issues in the supply chain and improve it 5) Verify proposed improvements At the moment, it seems that this analysis is best done in Excel. Additional statistical analysis is conducted in either MiniTab or JMP. ProModel will be evaluated as a possible tool for modeling the situation. Data will be supplied by BCA Supplier Management and be processed utilizing concepts from inventory management learned in classes such as the Operations Research series, IME 410, and IME 239. The most prominent of the topics covered in such classes involve materials 6 management principles such as EOQ, MRP, inventory costs (including storage and obsolescence), and manufacturing systems (Build-to-Stock, Build-to-Order, etc). 7 Background The initial phases of this ongoing project will deal with Boeing Commercial Airplanes’ metallic supply chain. At the very beginning, the project will be even more specific and narrow the scope down to only aluminum. Aluminum has been and continues to be Boeing’s most utilized metal within its aircraft production (including the metal used by their suppliers). In order to account for the amount of metallic raw material that Boeing uses, one must move further upstream in the supply chain. Those who have taken a tour of the Boeing facility in Everett, WA will have only witnessed the final assembly stages of the aircraft production process. The Boeing plant in Everett is the largest building in the world by volume (www.boeing.com: recognized by Guinness Book of World Records) for a reason. This expansive manufacturing facility is the culmination of extensive planning and execution by tens and tens of thousands of employees (From Boeing’s website: www.boeing.com, the combined amount of employees working for any of The Boeing Company’s two major business units and three supporting units is over 170,000). Parts and services are routed from all over the world to this facility where the finishing touches are put on the airplanes so that they can be delivered to the customer. As such, very little raw metal is consumed in this facility. A majority of the metal is fed to internal and external suppliers. In turn, these suppliers are responsible for feeding the Everett plant with the necessary parts and assemblies. Internal suppliers are defined as manufacturing organizations that are owned by The Boeing Company. These suppliers are allocated a different company 8 number for accounting and logistics purposes. For example, a Boeing manufacturing plant that is responsible for manufacturing the empennage of an airplane from raw aluminum is assigned an LC (Logistics Company) number and considered an internal supplier. External suppliers are defined as companies that are independent of Boeing ownership but who have signed contracts with The Boeing Company to produce parts for the company at an agreed-upon price. As mentioned before, Boeing not only manages the supply chain of metallic raw material for its internal suppliers and machine shops but also for many of its external suppliers. Boeing has offered this service to their external suppliers for many years. The supply chain relationship that Boeing orchestrates begins at the mills from where the raw material is purchased. (Note: Although the metals that Boeing and its suppliers acquire from the mills are not the very most raw material in the grand scheme, it is considered the raw material for this relationship.) This relationship is represented in the process map below (Figure B-1). 9