Another reason of the high service level of these medical devices is
sets. Customers have the possibility to order products and ship them in two
ways, either by receiving goods one by one once they are available in stock or
by receiving the complete order or set. The percentage of complete shipment orders is.
Therefore, if a single finished good is not available in stock of the complete
order, all other goods must wait until the order is complete; which increase
inventory holding costs for the company. For Flextronics products, customers
that required complete sets orders are usually for business expansions or
special tenders. Last year,
Flextronics had two special tenders that represented a peak of demand of two
times the average monthly demand.
The second part of the question involves the relationship between lead
time, demand uncertainty and costs. De Treville et al.
(2014a) demonstrates that the marginal value of time increases with demand
volatility, and with volatility of demand volatility; but managers had
underestimated the costs arising from lead time, thus, underinvested in cutting
lead times. Therefore, there are different replenishment strategies depending
on the product segment. Based on Table 2, for 60 A and B products, with
low-medium demand volatility, a traditional make-to-stock strategy for finished
goods at the primary hub could be applied. There are 325 items that do not have
a high service level but have high demand volatility; for these products, the
company should include them in the rationalization strategy, as they are
non-value added and are bringing high uncertainty into the business. For the
rest 764 of the products with high demand uncertainty (Y-Z) and especially low
volumes (C), a make-to-order strategy is a good choice but encouraging the
supplier to reduce the lead time. Suri (2010) demonstrates that companies used
to allocate most of the overhead costs for the high-volume parts as they
consider direct-labour hours or machine hours as the key metric. However, for
portfolios such as Flextronics’ medical cases with a large variety of products,
the overhead costs for low-volume parts account for 40% to 50% of the costs of
goods sold. Therefore, using methodologies to reduce lead time, such as Quick
Response Manufacturing (QRM), would achieve a significant reduction in overhead
activities and costs, and increase in quality.