Author Archives: jadetrillium

DOES YOUR INVENTORY FLOW LIKE WATER?

damI regularly get accused of not having much of a life outside my work.  While I personally disagree with this, I do understand why people would think it since I have a habit of equating most day to day occurrences to supply chain equivalents.  For instance last fall I was driving through the country when I noticed that all the dams had their sluice gates wide open dumping water from the reservoirs.  This prompted me to look closer at the rivers and notice that they were all had very high water levels (probably due to the amount of rain that had fallen locally over the last couple of weeks).  I assumed they were lowering the water levels before the winter snows in order to have room in the reservoir for melting snow next spring so they could avoid a repeat of the flooding in the area.  As I was thinking about this I started comparing the water, rivers, dams and sluice gates to inventory movement processes.  If we think of water as the inventory moving through our supply chains from supplier to plant to customer we see a very similar movement pattern.  In an ideal world, water would move smoothly from its source (rain, glaciers, artesian wells…) through creeks, rivers and lakes to their final destination in the oceans.  The water level in the total network would remain exactly the same with no droughts (drops in water levels) or floods (increases in water level).  For those of us that live in the Inventory world, isn’t that exactly what we try to do with our inventory flows?  And just like with the water, we are not always successful, leading to the equivalent of droughts (stock outs) and floods (Excess, Dead & Slow Moving stock).  So how do we try to assert better control of our inventory flow?  Just like the dams on the river we create reservoirs of inventory at strategic points in our inventory flow.  We fill warehouses close to our customers or in front of production processes and when demand gets ahead of the normal flow or if we are expecting large inputs of inventory, we open the doors and out floods some of the stored up inventory until we get the desired level.  To push the analogy even further the inventory usually trickles in to our main supply flow from a number of smaller sources just like streams into rivers leading to larger and larger amounts of inventory in the system.  Once the flow has moved through our system it breaks into a number of smaller flows that inter-twine until eventual they all empty out into that large ocean called the consumer.  Take a look at an aerial view of a river delta to understand how this looks like the different channels we used to distribute our products.

So how is this useful to our understanding of inventory?  The key concept here is FLOW, or more specifically, smooth flow of the inventory through the system.  If any part of the system speeds up or receives an input larger than the output we automatically build up inventory levels behind the faster process.  If part of the system slows down we automatically build inventory in front of that process.  Build too much inventory anywhere is the process and eventually it spills out of the containment area, making a mess of all the surrounding area (warehouse) and generating additional costs for everyone.  This is where something such as Lean Methodology can come into play.  By eliminating waste, using pull technology and tools such as KanBan, Value Mapping and Takt Time we can control and smooth the flow of inventory by controlling the flow of material through the processes.  Regarding Value Mapping and Takt Time, I realize they are usually used as internal operational tools but there is no reason the same thinking could not be applied across several companies as the inventory moves along the supply chain.  If you can synchronize movement of material from one organization to another with the required Takt Time for the receiving process it will tend to smooth the flow and decrease inventory levels within the supply chain.

Having issues with your inventory?

Always remember that inventory is a symptom not a cause.  You have inventory because of issues with your processes.  In the end the only reason to have inventory is when it is cheaper to have it than to not have it.  Do you understand why your inventory levels are moving up or down?  Do you need help understanding and getting control of your inventory?  Contact Ed White at Jade Trillium Consulting to discuss whether we can help your organization and how best to proceed.

Hope you enjoyed this posting.  Talk to your friends and co-workers about their experience and thoughts on this topic, especially what it means for your organization.   As always, I would love to hear back on your (and their) thoughts.  Just fill in the comment box below along with your contact information to let me know what you think.

Is it Your Fault The Forecast Is Wrong?

crystal ballWe all know that the first principle of forecasting is that it is always wrong.  The second principle is that it is more important to understand what the estimate of error is.  It is this estimate that we use to plan for risk, inventory levels and production planning.  While it is true that the forecast is always wrong one of the important points about this error that often gets overlooked is that while most of the time it is not your fault, some of the time IT IS YOUR FAULT.  Most of the time the error is due to the fact that, no matter how we try to improve our information, math, and processes, ultimately, forecasting is just another term for crystal ball gazing.  If we truly could calculate a correct demand number every time it would be called calculating not forecasting.  No matter how good we are, something is going to come along and knock all our lovely processes totally out of kilter and we will just have to find a way to deal with the aftermath.  My point here though, is that sometimes we cause the errors to happen.  Definitely not deliberately but by not consider certain consequences or by not having a process that is flexible enough to deal with non-normal circumstances.  This year most of us who live in southern Ontario and many other parts of North Eastern North America are living a perfect example of uncontrollable forecast error and I am wondering how many organizations will deal with this properly in future forecasts.  I would even go so far as to suggest that in this particular industry there is going to be a lot of excess inventory in the system come Spring of 2015.

So what am I talking about?  SALT.  The weather this year has been truly abysmal which has led to a significant and on-going shortage of salt for peoples driveways,  Most stores ran out in late December, there was none to be found for weeks and while it is available now, the supply is noticeably sporadic and undependable.  Is this the fault of the salt producers or the retail channels they distribute through?  Absolutely not.  Nobody was calling for the type of weather we have had (and if you do not believe that call any friends you may have in the Atlanta area and ask them how their weather has been).  Normally in Southern Ontario the retail outlet as a whole start out the season with total stock levels of most of a year’s usage plus additional levels of inventory available at the producers level.  In this case that supply was totally used up in the first couple of storms because they were more ice storms than snow.  So was the forecast demand wrong?  Absolutely, but it was not their fault because the external factors were too far from normal to anticipate the amount of true demand.

So why am I predicting high excess stock levels next year?  A couple of reasons such as the fact that averages are just that, averages, which means that when you have a data point significantly off the mean then it is unlikely the next data point will also be that far off the mean in the same direction.  In layman’s terms, it is unlikely next year will be as bad as this year.  Most forecast systems, however, are based on history with a higher emphasis on recent history.  The recent history in their systems is going to show a huge uptick in actual demand for this year and if they do not smooth out that jump in the historical record the system IS going to forecast higher than normal demand for next year.  Also, people being people they are going to lean toward a higher number during the qualitative part of the process as well.  Once burnt, twice shy type of thing.  All of this is going to lead to higher levels of salt in the system for next year and if the weather is closer to normal (which is very likely) they will be left with a large excess stock situation in the spring.  If this actually does happen it will be an example of an incorrect forecast being the fault of the forecast process rather than true demand variance (you creating the error).  The key here is that the forecast is the wrong tool for dealing with significant, uncontrollable circumstances.  In this case it is actually a job for Risk Management.  The industry needs to look at how they reacted to the weather and the shortfall, what other options they have, and how they could do better.  The retail channels cannot carry enough inventory to deal with all circumstance or to store large quantities of items like salt during the off season.  The challenge is to keep inventory low, without stocking out, and having the flexibility to react as necessary.  For those of us in Supply Chain Management, just a normal day at the office.

Having issues with your inventory?

Is your forecast driving your inventory issues?  Do you understand what other Drivers are biasing your inventory levels to move up or down?  Do you need help understanding and getting control of your inventory?  Contact Ed White at Jade Trillium Consulting to discuss whether we can help your organization and how best to proceed.

Hope you enjoyed this posting.  Talk to your friends and co-workers about their experience and thoughts on this topic, especially what it means for your organization.   And, as always, I would love to hear back on your (and their) thoughts.  Just fill in the comment box below along with your contact information to let me know what you think.