Is your Inventory an Asset or a Liability?

Written by Michael Canty

It is estimated that the annual investment companies make in inventory represents between 20% and 40% of invested capital. And although inventory appears in the asset section of a company’s balance sheet it unquestionably acts more like a liability. After all, inventory ties up cash, takes up space, requires handling, deteriorates and is sometimes lost, damaged or even stolen.

Inventory is the result of a number of business activities, decisions and sometimes mistakes. While most companies understand that inventory can become a liability if not properly managed, many inventory strategies and reduction programs fall short of expectations. More often than not this is because the scope of the strategy is too narrowly focused or the reduction program is executed out of sequence.

Right Part, Right Place, Right Time:

In defining the appropriate inventory management strategy, it is important to determine the balance between customer service and inventory investment. The goal is to find ways to reduce inventories without affecting your ability to serve your customer. To do this companies need to assess the entire value chain in a sequence that brings incremental improvement as the program progresses.

Approach:

• Understand Your Customer’s Tolerance Level
• Strengthen Your Supplier Performance Program
• Streamline Your Companies Quote to Order Process
• Improve the Predictability and Execution of Your Production Schedule

Techniques:

• In order to “Understand Your Customer’s Delivery Tolerance Level”, Companies need to conduct non-biased interviews with key sales and operation level employees as well as some of their strategic accounts or customers. Delivery expectations contribute heavily to the segmentation of make-to-stock, make-to-order and adapt-to-order or configured-to-order products. This process also segments and addresses those critically important engineer-to-order products. Companies must also conduct an analysis of existing inventory levels and daily average usage levels, review product and material planning lead times, safety stock levels/replenishment levels and supplier delivery performance from which the team is then capable of developing a realistic approach to inventory reduction and management.

• To help “Strengthen Your Supplier Performance Program” companies need to develop the framework for your Supplier Performance Management Program. This work must cover the key topics of supplier management including; Supplier Qualification, Supplier Assessment, Definition of Supplier Ratings and Levels, Supplier Performance Monitoring, Data Collection for Performance Measurement (Scorecards), and Supplier Certification Criteria. During this phase, it is critical to engage you critical and strategic suppliers in the process.

• BPM (Business Process Mapping) is the recommended approach to assessing existing business processes. This is an interactive, cross-functional activity with process owners and employees to assess your existing business processes. This activity will then help to reveal specific improvement opportunities as well as gaps and/or risks in the current processes. During the workshop the team should also clearly outline the desired future state of each process and the specific short and long term actions needed to achieve this improved state.

• Production scheduling is expected to satisfy two fundamental objectives: prediction and execution. However, often the level of demand or complexity means that the outcome from an execution-led system is not clear or communicated with the speed required. In most cases these “push-systems” create conflict by forcing over-production. This causes bottlenecks, increased WIP, extended lead-times, contributes to material shortages and brings the type of chaos to the shop floor that leads to conflict and late deliveries. Manufacturers today need to both optimize scheduling systems or tools and supplement them with continuous improvement techniques that enable manufacturers to make fast, reliable predictions about capability and capacity. These techniques also help to establish processes that allow for quick response to customer demand.

Summary:

To gain a competitive edge in the market, companies today need to have an efficient and effective inventory management program. Left unattended, inventory can quickly change from a company asset to an unwanted liability.

Companies serious about improving their overall business performance that have the needed resolve to take the necessary action, often seek the assistance of a third-party business improvement partner with expertise in manufacturing operations, Lean enterprise deployment, ERP and other types of business system tools and software. These third-party experts frequently help companies guide the improvement program while providing advice on best practices. Experienced and highly trained third-party companies can also contribute greatly to the all-important change management, a critical component that is often overlooked and frequently the main cause of failed programs.

Synergy can help, contact us to learn more.

How to Select ERP – Scripted Demos

Understanding Your Potential for Better Scheduling

Written by Mark Lilly

One of the main struggles manufacturing companies experience today is delivering to their customers on-time. In spite of the excellent scheduling tools available within ERP, or as standalone applications, on-time delivery percentages often have a hard time getting to 80 or above on a consistent basis.

The problem may not lie in the planning tool, but rather in the execution methodology of the company using it. By ‘execution methodology’, I mean how and when does material get released to production, and when it does, how is it prioritized once there?

What we often find is that jobs and workorders are released as soon as material is available. The thinking, which seems rather intuitive, is “the faster we get material out to the shop floor, the sooner it will come out the other side as finished product, right?” There is also a prevalent metric of “utilization” that drives the immediate release of available material to the shop floor so that all resources – people, machines, tools – stay as busy and ‘productive’ as possible.  Sometimes, if things aren’t busy enough, material is procured for the sake of keeping resources busy, thus driving a higher “utilization percentage”.

Another effect we have seen on occasion is that if a company is frequently late on a six to eight week leadtime job, then we better back it off and release material even sooner, maybe even nine or ten weeks in advance to ensure that it will finish for on-time delivery to the customer.

Unfortunately the effect of these actions is exactly the opposite of the desired result.

Here’s why:

John Little studied Mathematical Queue Theory at MIT. And he proved this seemingly simple, dare I say ‘intuitive’ theory, so now it’s a law:  Little’s Law.  And here it is:  N = cT.  Really all this says is that N, the number of things, items, people in a ‘system’ (think a bank or grocery store for example), is directly related (c, a constant), to T, the length of time that any one of those things, items, people remain in the ‘system’.

Seems kind of obvious, doesn’t it? The more people that enter a bank, the longer any one of those people is going to be in the bank.  A couple of neat things about this:

  1. Little’s Law is directly applicable to Manufacturing shop floor, and
  2. The inverse of the above example is also true, meaning, the fewer people in the bank, the shorter period of time any one of those people will be in the bank.

So Little’s Law tells us, the more stuff we put into production, the shop floor, into Work in process (WIP), the longer any one of those workorders/jobs is going to be in WIP. And the exciting part:  the less we release to WIP, the faster any one of the jobs/workorders is going to get through WIP.  Less is Faster.

Does your company have the potential to use Little’s Law to schedule better and improve on-time delivery? Try these two questions to find out:

  1. What is the average leadtime sales quotes to a customer or prospect for an ‘average’ job in your plant? A common leadtime in a custom manufacturing company is “six to eight weeks”.
  2. What is the actual touch time of that ‘average’ job/product? Meaning, if you have all the material you need, and nothing else is using any machines or tools needed, and all personnel are at the ready (very little if any ‘wait time’ between operations), how long would it actually take to manufacture that part?

For a six to eight week leadtime, we often hear “a week or two”, sometimes “a few days”, sometimes even “hours”.  Take the ratio between your responses to question one over question two.  What is your Little’s Law Potential Factor?

3 or more – you probably have some opportunity to speed flow and improve your on-time delivery with better manufacturing execution and scheduling.

10 or more – you have significant opportunity to speed flow and improve your on-time delivery with better manufacturing execution and scheduling.

20 or more – you should be able to dramatically improve your flow and achieve much better on-time delivery with better manufacturing execution and scheduling!

 

How to Select ERP – References

How to Select ERP – Salesperson