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Abe Chaves

How to Leverage aPriori to Improve Sourcing and Production Planning

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We have talked extensively about how to use aPriori during your design process, but there are many other areas in your company where aPriori can be useful. In this post, I’ll talk about the top four benefits of using aPriori for sourcing and production planning.

When you’re nearly done with your NPI process and your product is almost completely designed, you have a collection of new parts that you have never made or bought before. There are several questions you need to ask to make the necessary sourcing and production planning decisions.

  • Are you going to make those new parts or are you going to buy them?
  • If you plan to make them, do you have enough capacity?
  • If you don’t have enough capacity, what would be the investment required to build enough capacity?
  • How many new machines will you need?
  • Will adding a new machine or a new process be cost effective for your company?

aPriori can help you answer all of these questions because it provides you with initial routings and time standards that can be used by your production planners as a starting point. It helps you determine how much capacity you’re going to need to make that collection of new parts. It also helps you determine the payback period for a particular piece of equipment that you want to add to your factory. It provides information to help you make better make vs. buy decisions.

A Starting Point for Production Planning

aPriori can take all the geometric information from your CAD model automatically, then add that to the non-geometric information that you’re going to provide it, such as annual volumes and batch sizes. Then it takes all of the capabilities, the machines, and how you use those machines that are available in your factory and it combines that with the rules that you have for using those machines to give you the best routings to make that part in your factory.  It also lists all the different ways that part could possibly be made in your factory using your equipment.

This provides your production planners manufacturing alternatives with the cost of each alternative so that if you, as the production planner, cannot follow the first recommendation for some reason, such as, one of your machines may limited by capacity and you can’t use it, you would go to the next recommendation and you would see exactly what the cost impact is so that you can make better decisions.

Do I Have Enough Capacity for the New Components?

Let’s say you have decided that you’re going to make a particular part that you never made before or that you are going to make parts in your factory that will exceed the capacity that you have on your current machines. What you should do in this case, particularly if it’s a new part that requires a new machine or a new process, is to add that machine virtually to your virtual production environment (VPE) with all of the capabilities that a machine of that type would have.

Or you may select a machine from the library of machines that aPriori has and add it to your VPE. You then take the collection of parts that you want to evaluate and run them through aPriori, choosing the specific machine that you just added. aPriori would calculate the cycle time that it takes to make that part and the next part and the next part until you get your collection of parts done. Then you can take each cycle time for each part, multiply it by its annual volume, add them together, and calculate the total machine hours that you would need on that machine to make that collection of parts.

Once you have the total machine hours, you can adjust that based on your own factory realities, like the availability based on maintenance schedules and how many shifts you run. From that you may determine how many machines you’re going to need and therefore, how much your investment is required. For example, if you calculate, after you total all the cycle times of the different parts that you want to make in this particular machine, that you would consume 7,000 machine hours, and your typical availability percentage is 90%. You divide 7,000 by .9, come up with about 7,800 hours.

If you have three shifts, that’s probably one machine. If you have one shift, you probably have to buy three machines at the very minimum. Hence you get an idea of what kind of investment you need to make in your factory to add that collection of parts to your production.

Is it Worth it to Buy a New Machine?

What if you just want to add a capability to your factory that you never had before? What if you think that perhaps adding a new machine will increase the efficiency of your factory? You can simply add that machine to your virtual production environment. Then compare the cost of making the collection of parts with this new equipment with the cost of making them without this new equipment, so you can determine whether it is worth pursuing this endeavor or not.

For example, if you have several parts that you think would be best made in a turret press (because they have a lot of holes and you know that you can punch them faster than a laser can make them). To determine whether it would actually be more cost effective to add a turret press to your factory rather than continue to make them with a laser, you take the collection of parts, old and new, that you think might be better made with a turret press and you estimate the costs in your factory as is today.

First, you estimate the cost of the parts using the laser, then you take the cost of each part and you multiply it by the annual volume of each part and calculate the total for that list.. Then you add the new machine to the virtual production environment. (As mentioned previously, you can add the machine by simply getting the data that you need to feed the model from the manufacturer, if you have a machine in mind, or you can select one of the turrets machines that are in the extensive library that aPriori provides.) Once you have added that machine, you simply estimate the costs for the same collection of parts and you see which ones actually get selected to go to the turret press and how much it would cost to produce them.

You then take the entire collection and you multiply the new cost of that collection by the annual volume of each part and you get a new total. Now you have the annual totals of how much you would spend to make those parts using a laser and how much you would spend to make those parts using a turret. Take the difference between the two and that’s your economic benefit for one year.

If, for example, your annual economic benefit is $125,000 and you have an estimate from a machine manufacturer that says that buying that machine, installing it, calibrating it, training an operator or two will cost you $300,000, your payback period is less than three years. In that case it’s probably worth moving forward. If, on the other hand, you determine your annual economic benefit is only $50,000, your payback period will be more than five years. In that case, it may not be worth moving forward. This is a rough order estimate, but at least it gives you enough information to decide whether or not you want to go on to that next step of pursuing this capital investment.

Make Better Make vs. Buy Decisions

Last but not least is the good old make versus buy decision. It’s not as simple as price. Most manufacturers have some set of binary questions that they ask before even considering whether to make or buy a part.

Such as, is this a strategic part? Maybe it has company secrets in the design that you don’t want anybody else to know. Even if it’s cheaper to buy it, you’re still going to make it because you don’t want anybody else to have that detailed design.

Or is this an environmentally challenging part? If the manufacturing process has byproducts that you don’t want to deal with or you’re not equipped to deal with, you may prefer to let a supplier deal with those challenges, regardless of whether or not it’s an inexpensive part to make.
After you’re done with those binary questions that I’m sure your company has, you finally ask, “which one is cheaper?” This is where aPriori becomes very helpful.

Initially you can cost the part in aPriori and get an estimated cost to make that part in your factory. Then, using a VPE that represents your supply chain, you cost the part again and get an estimate of what it will cost to purchase that part.
If the difference is small, you may not even consider moving it from your factory. If the difference is significant, possibly because your supply chain has equipment better suited to making that part, then you move on to the next step.

If it is significantly less, for example, 20% or 30% less, to buy the part than to make it, do you automatically move forward with outsourcing? In some cases you may not because you may have idle equipment and overhead you cannot get rid of. And if by not making those parts in house, you’re going to idle some of your equipment, that means there’s cost that will not leaving your factory. Whether you make those parts or not, you’re still carrying that piece of equipment in your factory, you still have to maintain it, assuming you didn’t idle it completely, which in most cases you won’t.

Now, suppose that you idle a couple of pieces of equipment 50% of the time. You still have it in the factory; you still need the maintenance person available; you still need the operator. In this case, aPriori allows you to run different scenarios with an adjusted overhead rate to remove those costs that will not go away even if you outsource the part. Then re-cost the part using that adjusted overhead rate for a more apples to apples bottom line economic impact to your factory or to your company of whether it is really cheaper to make that part or to buy it.

Let’s say that everything being equal, you estimated a part will cost $14 to make in your factory and $11 to buy it, and so it seems worth it to buy it until you realize that you would be idling some equipment. Then when you reduce the overhead rate accordingly and generate a new estimate for the part, you find that in fact, the extra cost of making that part it’s only $11.50.

This changes your decision because if you’re going to buy it for $11 and you still have to deal with the supplier, the uncertainty of shipping of the part, and the possibility of running out of inventory, which you may have less control over, etc, then it is not worth outsourcing the part.

Better Information Enables Better Decisions

The decision whether to make or buy a component is never as simple as asking “which is cheaper?” There are many factors to consider even before addressing the financial issues. Once those financial questions come into play, it’s all about having better information to make better decisions and aPriori can certainly help you with that.

Want to Learn More?

Download our whitepaper, Are You Overpaying for Your Outsourced Parts?, to learn more about how sourcing professionals can leverage aPriori to make better decisions.

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