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Improving Supply Chain Management in the UK Furniture Industry
Hypnos Ltd
A case study on the efficient supply chain management of bed springs
This case study is based on a report prepared by Jamie Blackett MBA of Pye Tait
Ltd for Hypnos Ltd in 2003 as part of the DTI/FFINTO sponsored Supply Chain
Management Project.
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Improving Supply Chain Management in the UK Furniture Industry
The project was initiated to investigate the supply of springs to Hypnos Ltd with the aim
of shortening lead times and reducing materials costs. The approach was to review
Hypnos’s business processes, conduct research from the supplier’s perspective and use
an ABC classification to analyse stockholdings. The following case study is based on an
abbreviated version of the consultant’s report.
PART I - CONTEXT
The Company
Hypnos competes on quality and service at the top end of the British bed market. It prides
itself on being able to make bespoke beds and mattresses.
Size and Turnover
Hypnos employs around 340 people on three sites (in Princes Risborough and Long
Eaton). Turnover is around £20m.
Environment
The bed industry in the UK is relatively stable at around 168 companies. Bulkiness of the
product is an effective barrier to imports for the time being. Where there are changes in
the market place is in the top end with pocket spring products. Where previously this
segment was dominated by the likes of Hypnos, Relyon and VI-Spring, now around 90%
of manufacturers offer pocket spring beds in their ranges.
The spring industry on the other hand has undergone radical change following Leggett &
Platt’s entry into the UK market through acquisition of Wellhouse Wire and Siddall &
Hilton, and the demise of Doric Springs. L&P now have all the UK’s Burnell capacity for
the manufacture of divan springs. They also own subsidiaries that make the machinery.
There are alternative sources for springs on the continent but the weakening of Sterling
against the Euro is likely to make sourcing abroad uncompetitive in the short term.
Volume
Hypnos aims to make about 1,700 beds per week.
Pattern of demand
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Improving Supply Chain Management in the UK Furniture Industry
Demand peaks just before Christmas and there are noticeable peaks and troughs through
the year, although some interviewees believed it is becoming less seasonal.
Range
The range is vast. In 2002 they sold 12,000 different item codes of which 9,000 were
bespoke. This is the way that Hypnos successfully differentiates itself from the
competition, but it is also acknowledged to be a major cost driver.
PART II - ANALYSIS - LEAD TIMES
Supply Chain Hypnos’s supply chain is shown diagrammatically below:
2-4 weeks
Springs
Ticking
5 day call-off C
U
Metal S
components Filling T
5 days
HYPNOS Retailers O
M
8 weeks Wooden E
shipping components R
2 weeks
S
Packaging
5 days
4 –6 weeks lead time
Deductions
The springs have the longest lead time therefore they are on the critical path and
action to shorten their supply times will result in a shorter lead time overall.
Lead times are very long for an item that takes under an hour to manufacture.
The bottlenecks appear to be in order processing, scheduling and queuing for
transport.
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Improving Supply Chain Management in the UK Furniture Industry
The rewards for shortening the lead time would be considerable. For example on
a turnover of £20m cutting out 4 weeks lead time would accelerate the cashflow and
bring forward payment, the equivalent of a one-off cash injection of £1.38m. It
would also make Hypnos’ product offering more attractive and counter an
unknown number of lost sales opportunities caused by customers being put off by
the long lead time. Whilst it is fair to assume that customers are prepared to wait
longer for a bespoke item, all other things being equal they will tend to favour the
product choice that they can have soonest. Furthermore, in an age of instant
gratification, customer expectations of supply chain responsiveness are rising.
It is important to view the whole supply chain through to the customer rather
than focusing solely on the retailers and it may be that greater customer satisfaction
can also be achieved by downstream action, perhaps by bypassing retailers’
warehouses and delivering direct to customers.
Concentrating on the springs, the supply chain in detail is as shown:
Supplier 1 (all
types)
H
Supplier 2 Y
(standard kanban P
Steel Manufacturer Wire Manufacturer springs) N
e.g. Corus e.g. Carrington O
Wire S
Supplier 3
(heat treated)
HYPNOS in-
house spring
manufacturing
(std springs with
non std gauge wire,
all comfort count,
one-off
emergencies)
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Improving Supply Chain Management in the UK Furniture Industry
Although there are 3 suppliers there is effectively single sourcing for different types of
spring. Although most springs are available in 2-4 weeks there are call-offs on 13
standard products arranged with Supplier 2 for next day delivery.
Deductions:
Call-offs are an effective way of procuring components rapidly. Is Hypnos making
the maximum use of call-offs? Could its forecasting capability be stretched to allow
for more agreements without increasing the risk of stock build-ups? For
unusual/one-off beds this would clearly be difficult. Is it so necessary to have so
many one-off springs used in the manufacture of their products? Could more
generic spring sizes be used? Would business be lost if dimensions were to be
offered on a discrete rather than continuous basis?
Communication & information flows
Plan &
schedule
Day 1 Day 2-5
Load onto Supplier
Retailer Order HYPNOS computer Order
EDI/FAX/e-mail
Acknowledge
The current business model is to process orders and plan in week 1, receive materials in
weeks 2 and 3 and make in weeks 3-4 for delivery in weeks 4-5.
Deduction: The speed of information flows is inconsistent with the investment
Hypnos has evidently made in software. Modern ERP systems should be capable of
translating orders into demands for materials almost instantaneously. There should
also be scope for concurrent information processing activity over weekends and
overnight.
The supplier perspective:
Hypnos is perceived as being an important customer and generally working relationships
appear to be good. There is also a perception that Hypnos is ‘getting easier to deal with’.
Any comments should therefore be read in that context and seen as typical of supply
chain relationships. Areas for improvement are perceived to be:
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Improving Supply Chain Management in the UK Furniture Industry
- Forecasting. It is recommended that better communication with suppliers on
demand forecasting for new products, new customer agreements, product life
cycles, trends etc. would reap benefits in greater supplier confidence and perhaps
encourage proactive steps to lay in stock or earmark manufacturing capacity. An
information area, accessible by suppliers only on the Hypnos website, would be a
relatively simple and inexpensive way of setting this up.
- Warning times. There is a perception that warning times are unnecessarily tight.
A transparent system of receiving orders and triggering demands to suppliers
would answer these concerns.
Manufacturing
Hypnos mattresses and divans are typically made in small batches, possibly of one.
Consequently the orders for springs are also for one or a few items. Set-up times in the
spring factories range from half an hour to a whole day. This contrasts with actual
processing time of about half an hour.
Deductions:
The current ratio of set-up time to process time means that a Just-in-Time business
model may be inappropriate for all or nearly all of the product range. The rough
cost of a spring is 40-50% materials: 50-60% assembly costs, therefore a significant
element of the price in terms of labour and apportioned overhead, is in the set up
times. Manufacturing in larger batches is likely to reduce the unit cost of springs
and the trade-off between lower manufacturing costs and higher stocks needs to be
analysed carefully. This may be a rare example of where it pays to have slightly
higher stock levels in the supply chain for certain items. If this could be organised so
as to use up spare capacity during quieter times of the year better terms may be
negotiated. Larger batches would have the advantage of creating stocks that could
be made available on a call-off basis to shorten lead times.
Logistics
- Transport. Suppliers are responsible for the delivery of springs to Hypnos. They
schedule deliveries when there is a sufficient mass of springs to make up a load. In
practice this is once or at most twice per week (with the exception of supplier 2’s
Kanban).
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Improving Supply Chain Management in the UK Furniture Industry
Hypnos’s current
flow of supplies:
Supplier 1
E Lancs
W Yorks Supplier 3
Notts
Supplier 2
Princes Risborough
HYPNOS
Deduction: Time may be being lost between the spring manufacturer and Hypnos
through lack of immediate transport availability or delayed scheduling to meet
available transport runs. A more coordinated approach would ensure daily
deliveries of springs to Princes Risborough with pick-ups from the four locations. It
would be worth doing a feasibility study to look at either the Hypnos transport fleet
or a third party logistics company taking this work on, transporting finished goods
North and bringing springs back. The advantages of doing it this way are that not
only would delays be eradicated but also the springs would arrive at Princes
Risborough exactly when they are required rather than at the supplier’s
convenience. Secondly, capacity utilisation of lorries ought to be greater. However,
it may be necessary to invest in different vehicle types to achieve this. The transfer
of this responsibility from the suppliers to Hypnos is assumed to be cost neutral.
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Improving Supply Chain Management in the UK Furniture Industry
The Solution:
Logistics Planning
Supplier 1
E Lancs
W Yorks Supplier 3
Notts
Supplier 2
Princes Risborough
HYPNOS
A variation on this solution is to use the Long Eaton site as a collection point.
1 Opportunity for Hub & Spoke?
1
HUB HYPNOS
PRINCES RISBOROUGH
2
2
The proximity of a number of other manufacturers of sprung products in the High
Wycombe area opens up the possibility of a continuous spring shuttle between the spring
manufacturers and the bed manufacturers and upholsterers.
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Improving Supply Chain Management in the UK Furniture Industry
PART III – ABC ANALYSIS
The project analysed 768 spring items. We found that 80.94% of the value is accounted
for by just 1.4% of the items (11 stock codes). This would indicate that there is a very
high proportion of ‘C’ items and points to scope for rationalisation. Certainly Hypnos is
paying for greater complexity. In most companies the composition of the inventory
follows the Pareto Law or the 80/20 rule, whereby 80% of the inventory value is
accounted for by 20% of all stocked item types.
Cumulative % of total value
A B C
120.00
100.00
80.00
60.00 Cumulative % of total value
40.00
20.00
0.00
13.80
20.70
27.60
34.51
41.41
48.31
55.21
62.11
69.01
75.91
82.81
89.71
96.61
6.90
cumulative
Extract from Hypnos ABC Analysis
X Axis = Cumulative % of item codes
Y Axis = Cumulative % of total value of inventory
That information on its own, however, is probably of little use and would tend to confirm
what the Hypnos management knows already. We therefore analysed each item category
separately to determine A, B and C classifications within category:
Scoring the first 80% of the value (typically 20% of the items) as A
Scoring the items between 80 and 90% of the value (typically up to 50% of the items)
as B
Scoring the remainder as C.
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Improving Supply Chain Management in the UK Furniture Industry
We recommended that the priority for further analysis, and possibly for the weeding out
of rarely used, slow moving items, should be the item codes that display a higher than
average proportion of C items (where 80% of the value is accounted for by less than 20%
of the items).
In parallel we recommended that the stock should be further categorised to classify:
Consequence of stock-out
Uncertainty of supply
High obsolescence risk
Stock turn
Stock turn is particularly important as it impacts directly on the company’s working
capital requirement. It may be that there are a number of items gathering dust on shelves
and consuming resources as they require storage space and accounting for.
We recommended that each item code has a 4-part rating for example B,A,A,C
Where:
The first letter refers to its position within Hypnos’s overall inventory.
The second letter refers to its position within category.
The third letter refers to its importance as a stock to hold because of the consequences
of stock-out or the uncertainty of supply.
The fourth letter refers to its risk of obsolescence and therefore signals special
monitoring.
Next Steps
Once this categorisation is complete the information, on its own, will only attain value
when it is used. We recommended using it in the following ways:
Ordering/Stocking Policy. Generally A items should be fast tracked. They should
always be available. This may require a re-order point (ROP) system to be set up or,
ideally, they should be negotiated as call-off stocks with suppliers. Finished products
with bills of materials containing A items might be offered to the customers on shorter
lead times. B items should be graded according to other factors and subjected to
economic order quantity (EOQ) tests to determine the correct inventory levels. C items
should not routinely take up shelf space and should be ordered as required. Products
containing C items could perhaps be offered as ‘specials’ on a slightly longer lead time to
customers.
Control. The company should consciously use the ABC analysis to direct the resources
used for stock control most efficiently. It is very important that A items should be
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Improving Supply Chain Management in the UK Furniture Industry
controlled rigorously. Conversely, it is probably not worth spending too much money on
accounting for C items.
Storage The picking and internal movement of materials will be made much more
efficient if materials are stored by classification, so that A items are closest to the
production line and C items furthest away. In parallel to the review of stockholdings it is
recommended that consideration should be given to introducing electronic inventory
management using barcoding to give greater efficiency and transparency to the materials
management function.
Lean design. It is recommended that greater use of generic components would reduce
the inventory costs and the risk of obsolescence. For example by moving from one
coloured mattress label to two (one coloured Hypnos label with Royal Warrants etc. and
one print-to-order black and white one with mattress specifications) there would be an
instant saving.
PART IV – PROJECT CONCLUSIONS & RECOMMENDATIONS
Overview of Hypnos Ltd. Hypnos comes across as a very well run business from a
supply chain management perspective. It is acknowledged that Hypnos is a maker of
bespoke beds and therefore standard approaches would risk ‘throwing the baby out with
the bath water’. However, it is evident that the company’s financial performance could be
improved by moving further away from ‘just in case’ materials management more
towards ‘just in time’, thereby releasing working capital and reducing the costs of
storage. Ideally Hypnos should be in a position of holding close to zero stock - as regular
items would be made from parts supplied on short lead time call-off contracts and
bespoke items would be made from stock-to-order parts that nevertheless arrive within a
4 week lead time.
Inefficient IT. Hypnos is typical of many companies that we have seen that have made a
heavy investment in IT but have yet to capitalise on it fully by populating the data fields
and making it work with maximum efficiency. Part of the lead time can be attributed to
slow passage of information. We recommended that the company took steps to speed up
the flow of information back to suppliers. Long term they should consider investing in a
full Enterprise Resource Planning (ERP) system.
Logistics coordination. There is scope to shorten lead times by coordinating inbound
logistics with suppliers.
Communication with suppliers. Relationships with suppliers are generally good but it is
felt that Hypnos would get a better service from its suppliers if it shared more
information with them.
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Improving Supply Chain Management in the UK Furniture Industry
ABC profile. In most companies the composition of the inventory follows the Pareto
Law or the 80/20 rule, whereby 80% of the inventory value is accounted for by 20% of
all stocked item types. Our analysis of Hypnos spring assembly codes found that 80.94%
of the value is accounted for by just 1.4% of the items (11 stock codes). This would
indicate that there is a very high proportion of ‘C’ items and points to scope for
rationalisation. Certainly Hypnos is paying for the greater complexity. The ABC analysis
should now be used to conduct further exercises to ensure that each item is ordered and
managed in the most appropriate way.
Project Control
In order to monitor progress and evaluate the effectiveness of the policies it will be
important to have detailed performance measurement data. Suggested key measures to
focus on are:
Lead times
Percentage of orders delivered in promised time to correct specification.
In store availability (% of time) (for standard lines).
Stock turn.
Defects/complaints.
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