Thursday, December 24, 2009

The fastest way to reduce on-hand inventory balances is to ship it


Seeing more supply chain writers commenting on how JIT and Lean don't coexist well in a world where supply chains are growing increasingly longer geographically, and they do a better job than I did 2 years when I wrote that Cycle time is undervalued in offshore manufacturing decisions. I started noticing this a couple weeks ago when I noted more commentary on total cost of ownership in outsourced manufacturing.

In the last week or so, a couple more articles popped up thanks to the magic elves in the Twitter Box.

From DemandCaster: Whatever happened to JIT?
...The dominant term was JIT. But, JIT and Lean were bandied about interchangeably. There was no different save for the marketing spin of one author or consulting firm over another. But that has changed. The change resulted because the manufacturing base moved, mostly, to Asia. This was contrary to the principle of reducing lead times so central to JIT. The lead time for goods from Asia dramatically increased to four, five, six, or more weeks. Just-in-Time simply did not fit.No matter what the lead times, one could be “lean” by taking the slack out of the lead times. But as the overall lead times increased so much that planning was once again based on forecasts.

Not to mention the additional inventory in the supply chain pipeline thanks to the longer lead times.

From @chrischip: Just in Time Just Isn’t
...But don’t pull your hair out over inventory. Your customers won’t wait for you to ramp up to fulfill their order, and your forecast won’t save you because it isn’t correct. The answer is a buffer. What I hear time and time again is that the cost of a buffer is well worth eating when you can promise delivery from stock. Without that assurance, you may well lose the order, and that’s a heavier price to pay in terms of dollars and reputation.

Buffers are consistent with, and I would argue REQUIRED, to lower inventory investment. Several weeks ago I revealed my personal view with regard to maximizing inventory turnover:
The secret: The fastest way to reduce  on-hand inventory balances is to ship it.
Many supply chain professionals are penny-wise and pound-foolish: They focus on reducing inventory investment by slowing the delivery of component inventory and insist on sticking to corporate strategies, goals, and metrics with regard to ordering and stocking policies. This is the domain of ivory tower academics and corporate theorists. I work in a Manufacturing Plant, where we Build Things Customers Pay For.
It is far better to grasp the universe as it really is than to persist in delusion, however satisfying and reassuring.
~ Carl Sagan

If the sales exist to consume the finished goods, the proper strategy is to ensure 100% order fulfillment. Unless your forecast is perfect (it's not), your inventory accuracy is 100% (it's not), your suppliers deliver exactly what you need exactly when you need it with no quality rejects (they don't), your machines have 100% up-time (they don't), and you have 100% yield (you don't), then you have to be honest with yourself as a material planning professional and do the right thing: Buffer.
Better never than late.
~ George Bernard Shaw

That doesn't mean you start writing blank checks, however. At the risk of sounding arrogant (too late, I know! ;-) ), this is the domain of Smart People. Data-oriented decision-making. Bounded risk. Iterative modeling. Yeah, I can spew the buzzwords with the best corporate policy wonk. If you don't have robust simulation tools, buy them. If you can't buy them, build them. They won't be perfect starting out. Probably won't be right, either. But the second iteration will be better than the first. You'll do it faster, too. Same with the third, fourth, fifth, sixth... Models will never be perfect, but like a good spouse they get better with age.

When strategies, tactics, and actions are set, execute in the real world using proven, time-tested material management techniques.

How?

Use inventory stratification and manage by exception. Remember ABCs? Remember Exception Reports? Classical stuff. Material Planning 101. APICS Basics of Supply Chain Management.

I don't worry about C-items. Period. I want tons of C-items. If I go line-down because a penny-part wasn't in stock, that's not the cost of doing business - that's a DISASTER: Shipments are missed, Revenue goals aren't met, and all of the on-hand inventory associated with the assemblies that now can't be built will just sit on your books, festering. I watch B-items to the extent that I don't buy excess but I try to buffer with time; instead of coming in just-in-time, I try to pick up extra days/weeks whenever I can. Finally, I focus completely on A-items. I have a number of homegrown tools I developed to track the supply/demand of A-items over time and any volatility is ruthlessly drilled to root cause and strategies developed to balance the supply with the demand.
Better three hours too soon than a minute too late.
~ William Shakespeare

Most importantly, I am disciplined about reviewing data versus plan and taking action with a sense of urgency. You can't set up your plans and walk away expecting your great plan will be executed flawlessly. You have to constantly check, double-check, triple-check. Plan and re-plan. This is where Exception Reports are worth their weight in gold. In most companies where bills-of-material are complex and just plain LONG, it's impossible to do a top-down or bottom-up material analysis on any kind of cycle that permits rapid decision-making. Exception reports separate the wheat from the chaff. By definition, the A-items consist of ~80-90% of your inventory investment dollars. Planning and re-planning ~5-10% of your components offers an increased likelihood of successfully managing 80% of the dollars, rather than attempting to manage 100% of the component investment with no likelihood of success.
A good plan violently executed now is better than a perfect plan executed next week.
~ George S. Patton

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