Inventory Optimization in High-Mix Environments
06/12/2013 : 0 Comments
Over the past two years, having spoken to countless Inventory Managers and Supply Chain professionals, the same pain is being voiced again and again. It’s particularly acute in high-mix environments where there’s often a long tail of product variety & high-SKU count, and the additional challenges of having shared equipment in your production environment with a long, extended Supply Chain.
The pain is this: there’s too much inventory of the “wrong” stuff, and not enough of the “right” stuff. The fallout is working capital is being tied down in stock that’s often sitting wastefully on a warehouse floor, taking up space, and leading to higher percentages of obsolescence, damage, or even theft. On the other end of the spectrum, often simultaneously, we see that other SKUs aren’t being stocked enough. This is much bigger issue as it can directly affect your customer service level and lead to firefighting & expediting or, worst case, a lost sale.
So how do you ensure your customer service performance in a high-mix environment without loading your stocks to the sky with excess inventory?
Over the years we’ve seen a variety of Inventory Management techniques. On the low end, we see what we call “acoustical” inventory management where whoever is shouting the loudest gets the orders pushed through. Don’t need to be an expert to realize this often a stressful way to manage a business and leaves a lot to be desired in terms of root analysis of where the real issue lies.
The most common form of Inventory Management is “Rule of Thumb.” Where a company will hire an experienced supply chain professional to analyze previous sales history, often comparing new SKUs with similar old SKUs in order to make a good educated guess how much they’ll need to stock for their goods. Often with enough effort, trial and error, and Excel magic, an Materials Manager might get pretty close to optimal levels when stocking a good. However, as the SKU count grows, as new products are introduced, as seasonality rears it’s ugly head, it becomes harder and harder to maintain such an approach. And what happens when that experience professional retires or leaves for greener pastures?
The real problem however is these approaches often neglect a key input that’s necessary for accurate Inventory Management: Variability. A SKU with an average forecast or demand history of 50 units a week with a standard deviation of 5, can and should not be managed the same way as a SKU with an average demand history of 50 units a week with a standard deviation of 100. The coefficient of variation must be considered. The same is true for the supply side, where replenishment or production lead-time is often a fluctuating rather than a static number. This is the reason manufacturers are seen often purchasing from more expensive but closer-to-home vendors, rather than cheaper vendors in southeast Asia, where the variability of lead times if often much much greater threat than the cost of potential savings.
With this variability, and with the challenges of a massive SKU count in the thousands, the answer to good inventory optimization often lies outside Excel spreadsheets and with more complex, more robust forms of Inventory Analysis. And despite the LEAN principle of Keeping it Simple, often times software is simply necessary to crunch a large data sets of numbers, to account for variability in both Supply & Demand, and to return the optimal Inventory levels that will let you operate with high customer service levels and at the same time, just enough Inventory to meet those levels. No more, no less.
For more information, visit our Inventory Optimization page, and see if our company Invistics might be able to share our experience, and our software tools to lessen the burden of searching for and hitting that sweet spot in right-sizing your stock.
Configuring SAP to be Lean Friendly
05/24/2013 : 0 Comments
Continuous improvement remains a high priority across many industries as companies seek to increase flexibility and dampen rising costs. As these efforts mature and expand through an organization, they can take many forms. For information technology professionals in a manufacturing company, it may mean ensuring the company is getting the best use out of its software tools by identifying valuable, unused functionality. For material and inventory managers, it may mean reviewing replenishment methods and tools to be sure that they support Lean principles and fit the current business.
As one of the largest providers of Enterprise Resource Planning (ERP) software, SAP® is widespread in the manufacturing community. However, SAP’s features that relate to consumption-based pull replenishment, namely reorder point planning and part-specific kanban, are often not well known. The consumption-based replenishment functionality in SAP can help companies who are struggling to expand their Lean implementation beyond a handful of manually managed items. Many practitioners will find that even with this capability built into SAP’s core ERP, questions often remain about how best to set the reorder points or size the kanban loop.
Supply chain groups in complex, highly variable environments – with thousands of products and significant demand variability – will likely run into limitations of SAP’s ability to directly support optimal replenishment processes.
There are three known limitations to be aware of:
1. SAP is dependent on forecast and ignores any variability in supply when automatically determin
ing the right Reorder Point level or Kanban size. Both of these aspects can be hurdles, especially for
companies that experience inconsistent replenishment lead times (e.g. suppliers that don’t deliver as
scheduled or internal production times that vary).
2. SAP ERP only supports part-specific kanban. This type of pull is not well suited to high-mix
make-to-order or engineer-to-order companies.
3. Transactional data must be available in SAP. This can be a problem for companies that have
some data in non-SAP systems, or companies who want to create tighter linkage with a customer or
supplier who does not use SAP.
For more information and details on the limitations of SAP when it comes to Lean implementations, you may download our new whitepaper: Configuring SAP to be Lean Friendly or call us directly at 1-800-601-3456 to schedule an appointment to discuss our experience.
Invistics Published in IIE Magazine
05/10/2013 : 0 Comments
Congratulations to Tom Knight and Xing Guan of Invistics who published, along with Donna Ruder of Rock-Tenn, a featured article in the March 2013 issue of Industrial Engineer Magazine.
The article was titled “Electronically Pulled Production”, and it details a case study where an Atlanta packaging company reduced inventory by over 50% and saved millions using the Invistics solution to implement E-kanban replenishment between it’s manufacturing facility and the two distribution centers it fed.
Learn how Invistics designed the new processes with Pull-driven replenishment, structured a pilot to prove the benefits of the design in a “safe” environment, optimized key parameters such as inventory levels with Invistics’ software, and finally scaled out the benefits to achieve a significant return on investment for the project.
An electronic edition of the article is available on the IIE Website: Electronically Pulled Production
Note: you need an IIE subscription to be able to access the article.
How Mature is your Lean Program?
08/14/2012 : 0 Comments
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A recent study by consulting firm Bain, showed that only 19% of high-mix manufacturing companies that tried Lean were actually happy with the results. Surprising, particularly when we consider the pressure to become Lean.
The question is: What factors are creating the dissatisfaction and poor lean results?
Well, it seems there are two different Lean philosophies being discussed.
Traditional Lean versus Holistic Lean.
High-mix manufacturers who have tried to implement traditional lean have ultimately failed. The main reasons for this are:
1. Companies are trying to implement Lean exactly as it was invented.
2. Companies struggle to scale initial successes from pilot projects.
3. Companies cannot sustain initial success.
Notice that within each of these scenarios, you do not see any mention of people, process, or technology, which are the backbone of the holistic method. Simply put, to achieve lean success within high-mix environments, a company needs a comprehensive approach, including their people, processes, and technology.
The above chart compares these three characteristics at a company low on the maturity level scale of implementing Lean versus a company that has achieved competitive advantages using holistic Lean. As this chart shows, it is easy to see why if a company leaves out even one of these characteristics, failure is inevitable.
Look at the chart — where does your company fit? Over the next 3 weeks we will break down each characteristic and its importance within the holistic method.
We invite you to share your thoughts and let us know what has worked for your company.
Tom Knight interviewed on Bold Ventures Radio
07/15/2012 : 0 Comments
Recently our CEO, Tom Knight, was invited to speak with Jean Creech on Bold Ventures Radio. Tom and Jean talked about business, leadership, and Tom’s ill-fated attempts to run a lemonade stand as a kid.
Tom Knight speaks with Jean Creech about entrepreneurship
On Bold Ventures, technology entrepreneurs, manufacturing entrepreneurs, and retail entrepreneurs talk about their companies and their personal journeys. Bold Ventures Radio broadcasts live every Wednesday night on 1620 AM in north Atlanta.
May Webinars Scheduled!
04/30/2012 : 0 Comments
Our popular Webinars are back for May. Join us for our Lean Manufacturing series.
May 17th, Thursday 2:00 PM EST
Join Invistics CEO, Tom Knight, for free, no obligation webinar on the basics of developing a Lean pull design strategy for high-mix manufacturing environments.
May 24th, Thursday 11:00 AM EST
Join Invistics VP Charles Agulla for a concise 1 hour session on Inventory Optimization.
Click HERE to register and check out our upcoming webinar schedule!
Invistics March Webinars!
03/13/2012 : 0 Comments
Our popular Webinars are back for march. Join us for our Lunch-and-Learn series.
March 26, Monday 1:00PM EST
This month Tom Knight, CEO of Invistics, teams up with the Society of Manufacturing Engineers to bring you a concise 1 hour session on Lean Pull Design.
March 27, Tuesday 12:00PM EST
Join Invistics VP Charles Agulla for a concise 1 hour session on Inventory Optimization.
Click HERE to register and check out our upcoming webinar schedule!
Back to Basics: Pull is an essential part of Lean
03/12/2012 : 0 Comments
Pull is an essential element of Lean. The goal is eliminating waste.
Pull allows for just in time inventory management. Rather than pushing inventory to the floor (whether it is needed or not), as some computer-based methods do, pull relies on indications of customer demand to replenish parts – and then in just the right amount. New material is produced only after existing inventory has been consumed, thus eliminating waste.
Pull is traditionally implemented using a Kanban (meaning card in Japanese) system where each widget travels with a card. When the widget is used in production, the card is removed and signals that more widgets are needed. In environments like automotive, cards work well because:
- a limited number of parts are used
- production volume is high,
- customer demand is stable,
- product mix is low and
- equipment changeovers are infrequent.
Pull can be adapted to diverse manufacturing environments, with a just a few changes. To learn more about pull, download our white paper, Four Flavors of Pull Manufacturing for Getting and Staying Lean.
Unhappy customers are bad for business
02/27/2012 : 0 Comments
How does inventory optimization relate to better customer service?
The amount of inventory that you choose to hold strongly effects the customer service level that you can achieve. Optimizing (the better term is ‘Right-Sizing’) your inventory can make the difference between happy customers and frustrated customers. To better understand the level your organization should choose, you have to, first, understand the effects of both decisions. Take the following scenarios as examples.
1) Setting inventory levels too low for some materials.
This is the easy one to understand. When inventory is too low, your risk of stock-outs increases. Stock-outs usually mean unhappy customers. This can also lead to increased shipping costs due to expediting and a company full of stressed-out employees. Not good.
2) Setting inventory levels too high for other materials.
To avoid the above situation from occurring, the knee jerk reaction is to keep inventory levels nice and high. This is usually done by running larger batch/lot/campaign sizes of each material. This often increases lead time and decreases your manufacturing flexibility. Result: unhappy customers.
From a plant management perspective, even if you are able to keep batch/lot/campaigns low, increasing inventory will tie up excessive working capital, and an increased risk of obsolescence, damage, or loss of material. Floor space then becomes warehouse space, when it should be manufacturing space.
Ideally, you want to Right-Size your inventory levels, so that each material has adequate inventory to buffer against variability in both supply and demand without having an excess of safety stock. An intelligent management decision can be made as to what customer service level is desired and the financial implications of this decision should be clearly understood.
Does your organization need help in this area? We are currently hosting Right-Sizing inventory webinars where we provide useful information on this topic. Sign up for one today!
Silos and the silo effect
02/16/2012 : 0 Comments
Growing up in Illinois, I had crisscrossed the “prairie states,” met my share of co-op farmers, and seen plenty of silos. I never gave much thought to the gigantic storage tanks. Until three weeks ago.
It took a trip to rural Georgia and a conversation with a silo manufacturing company to develop an appreciation for the importance of silos in our lives.
- Crabapple Silos – photo by Stephanie True Moss
While traveling through a former farming community, I learned that the farmers who originally inhabited the area built several large brick silos for harvest storage. Homes were built near the silos and up sprang the towns of Roswell, Alpharetta, and Milton, Ga. Today, these historical silos stand as a “link with the past” and have created a sense of pride for the community.
By sheer coincidence, two weeks after visiting the Crabapple Silos, I had a conversation with the largest maker of agricultural silos in North America. During my conversation with a senior manufacturing executive, I learned silos are extremely complex to design, build, transport, and assemble.
A vice president at the company mentioned that even though making silos is complex, even more complicated are the “intellectual silos” that are a daily occurrence in manufacturing plants.
The phrase “silo effect” has become popular in business and especially in manufacturing. It commonly refers to a lack of open communication and common goals between departments in an organization. This “silo effect” gets its name from the farm storage silo. Each silo is designated for one grain or specific product.
To a manufacturing executive, a lack of communication and “silo thinking” causes departmental breakdowns and a lack of free-flowing ideas from other departments. The net effect is confusion and a disruption of efforts toward common business goals.
The “silo effect” is caused by a remarkably small number of people who gradually drain the silo‘s grain. Its negative impact can be huge on the performance of the total team; eventually leading to a loss of business. However, I’ve seen clients successfully deal with these “silo effects” within the walls of their company. I’ve sat in on several Pull Design Workshops and have personally seen this transformation occur.
It takes a concentrated and ongoing process improvement program. During these workshops we gather the thoughts of the leadership team and then, in one to two days, work with them to develop a course of action to reduce the “silo effect” and develop a sustainable process improvement program. The result is improved productivity, right-sized inventories and more working capital. Often workshop attendees see improvements in customer service, too, once the strategies are implemented.
What are you doing to break down organizational silos? What’s been successful for your organization?
Post by Bill Z.
