Category Archives: Supply Chain Concepts

Inventory Drivers – Start Your Engines

Inventory driverWhat is the one thing every non service company has in common?  Inventory.  Without it you basically do not have a business but there is always a love / hate relationship in any company with its inventory.  Why do you have inventory in the first place?  Because it is cheaper to have it than not have it.  You need to have lots of inventory so you can respond faster to customer requests yet you can’t have more than absolutely necessary because the cost is too high.

Now obviously that is a very broad brush I am using with that statement and I am not taking into account what type of inventory (Finished, raw, etc), what type of business model or industry you are in, or any number of other factors.  Regardless of most of these factors there are many truths about inventory that cut across the various differences between companies.  I call these truths “Inventory Drivers” and they are what determine how much and what type of inventory you have.  There are many different drivers such as accuracy (inventory, forecast, production…), lead time, batch size, financial directives…  Keep in mind that the relative importance and effect of each of these drivers changes with each organization, over time, with changes in the economy, with changes in the competitive environment and any of hundreds of other factors.  This means that there will never be a list of 5 or 10 things to do that will guarantee perfect inventory control.  There is as much art as science here and the interactions between these factors is probably the most important factor of all. When dealing with inventory control, as with so many other aspects of Supply Chain it is imperative that you be constantly monitoring the situation, understanding the current and potential future conditions, thinking about alternatives and proactively adjusting your inventory controls.  Since successful and effective inventory control has a huge effect on any companies’ bottom line the better we understand these drivers and how to deal with them, the more successful the company will be.  In essence, to effectively control inventory levels you must control the drivers, not the inventory itself.  If this sounds like something from lean six sigma you are right.  While lean six sigma does not actually express this reality directly it is definitely about control of the process interactions.

The next several discussions that I plan to post will be about these various drivers, what they mean and how best to deal with them, so sit back, relax and let’s start this series with a short discussion on FACTOR INTERACTION.

Facture Interaction

So what do I mean by factor interaction?  Most of us prefer a world where one plus one equals two.  Unfortunately that is rarely the case with inventory drivers.  As a specific example, if your forecast is wrong (and it makes a difference whether it is wrong high or low) then your inventory will either build or shrink by a factor influenced by the inaccuracy.  This is the one plus one world.  Now if you add in another factor such as batch size (let’s say a very high batch size) and combine that with a forecast error on the high side (expected demand is higher than actual), what is likely to happen?  In the worst case scenario you may end up ordering one or more batches of material than you really need which will cause your inventory to go up.  Now add in long lead times which reduce your ability to correct in a reasonable time.  Suddenly one plus one is adding up to substantially more than two.

Another way to think of this is to imagine a pond of water.  What happens when you toss a stone into the pond?  You get ripples in the surface.  These ripples spread out across the surface and eventually damp themselves out.  If the pond represents your inventory level and the stone an inventory driver the ripples are what happens to your inventory levels with time.  Some ups and downs but relatively predictable and controllable.  Now what happens if you toss two stones at the same time?  You get two sets of ripples that interact as they cross each other.  At these points the effects become even more pronounced than each of the original waves were (Look up “standard wave theory” if you want to understand this better).  Now the situation is neither as predictable nor controllable as it was with just the one stone but still not disastrous.  Finally, imagine throwing a double handful of gravel in the pond.  There are so many interactions going on that there is no way to control it.  Welcome to the typical day of an inventory controller.

Enjoy thinking and talking to your friends and co-workers about this, especially what it means for your organization.  I would love to hear back on your and their thoughts on this topic.  See you at the next posting.

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Three questions to drive Continuous Improvement

ProcessContinuous Improvement is one of the backbones of Lean Thinking but it is extremely difficult to maintain that focus over any length of time.  Part of the problem is identifying what needs changed, how to change the process and finally, implementing the identified changes.  Of these, the most difficult is identifying what needs changed.  In physics, Newton’s First Law states that objects in motion tend to stay in motion unless an outside force is applied.  It is the same with processes.  Any existing process will tend to continue unless an outside force such as Process Review is applied to it.  (I’m sure someone has expressed that as a Supply Chain law somewhere.)  The trick, of course, is to identify those processes that require review and change.  How can we do that?  One good way to accomplish this is to change the Corporate Culture so that everybody in the organization is constantly asking themselves the same three questions:

  • Is this really necessary?
  •  Is this the right way to do it?
  •  Am I the right person to do it?

So let’s look at each of these questions separately and try to understand what they mean and how to apply them.

necessary

 

Every time you start a new process, whether it be in an office or on the manufacturing floor everybody involved should be asking themselves whether this process is really necessary.  Are you doing the process simply because you have always done it or has something changed to invalidate the need for that particular process?  As a specific example, do you send out reports to people within the organization that are not even looked at?  There is always a reason why a process was created, such as a request for specific information but is that information still needed.  If not, then the report should be discontinued or at the very least the number of recipients reduced.  Far too often processes just keep rolling along because no one ever questions the need to continue them.

Way

 

If the process really does need to continue then the next question that needs to be considered is whether the current methodology is the best one.  Has technology, process or other changes invalidated the current process?  Is there a better way to achieve the same result?  For instance, very few companies would consider sending a telegram to a customer.  While that technology still exists there are other, better ways, of achieving the same results such as an email or even a phone call.  Note that a telegram may actually be the best way if the recipient is not connected to any other direct communication system and a quick message or answer is required.  That is however, a very rare occurrence.  More often the legacy methodology continues because no one has ever questioned whether there is a better way.

person

 

Finally, if the process needs to be done and this is the correct way to do it…are you the best person to be doing it?  Companies, departments and even sub-groups are constantly being re-organized.  When I first started in production scheduling it reported to the purchasing department.  I strongly doubt there are many companies left where that is still true.  As organizations get re-organized the different processes move around in the company.  Certainly, with new technology the methods change, sometimes dramatically.  How often does your organization sit back and look at the bigger picture to determine if the right department or people are assigned to perform any given task?  Since many companies today, as through most of history, are still afflicted with some managers that are empire building, the answer to that is very often, no.

So there you have it.  You need to develop a corporate culture where everyone is encouraged and required to be constantly asking themselves these three questions and if the answer to any of them is no then changes must be made.  This, of course, highlights one additional aspect of this corporate culture.  It is critical that people feel empowered to actually bring any issues up and make suggestions on how to change the existing process.  If they feel they will be ignored or worse, considered to be trouble makers, then nothing will change and your organization will slowly (or maybe not so slowly) become less and less competitive in your market.  And how do the people in the organization become capable of both identifying areas of improvement and in implementing these changes?  That would involve a process called Root Cause Analysis and will be a topic for different posting.