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Giving Up the Crystal Ball – Enough is Enough

If driving actual production from a forecast is insane, what should we do instead?

Not using some plan for production would produce even worse results.  How about this?  Let’s stop being afraid of not having enough.

MRP logic, using time-phased netting techniques, begins with whatever quantity we happen to have on hand of an item, adds in existing supply orders, subtracts out existing and predicted demand and predicts when the future on hand balance will dip below zero.  At these critical points, MRP recommends orders to increase supply to prevent the future on hand balance from going negative.  It is designed to prevent the state of not having enough.  This is a fear-based approach.

The biggest fear of material planners in the 1960’s was kitting a complex assembly and finding out they were short even a single part.  If you don’t have ALL the parts, you can’t make it!  This fear was so deep because such shortages were not an uncommon occurrence.  Material planners routinely stashed expensive parts in their desk drawers “just in case”.

The designers of MRP acknowledged both this fear and the fact that predictions of future supply and demand are unreliable in their design, with the inclusion of “safety stock”.  This single data field in the part master is a “fudge factor” that tells MRP to order more when the future on hand balance dips below the safety stock value.  The assumption being that this single, constant quantity will give us sufficient additional quantity on hand to make up for all of the inadequacies of the planning method.

Safety stock is a number that is usually increased and seldom decreased.  Very few planners take the time to re-visit safety stock numbers, unless they run out of a part.  Then the number is updated to a larger quantity to make sure the shortage doesn’t happen again.  Memories of painful consequences when they ran out discourage them from lowering that number.  With so many items having safety stock numbers that seldom get lowered, is it any wonder many companies carry excess inventory?  It’s easy for the folks in accounting to say we have too much inventory.  They never feel the pain of running out and they don’t have to decide which items to cut and by how much.

I propose thumbing our nose at fear and using a confidence-based approach. Instead of starting our planning with whatever we have on hand at the moment, we begin our planning with a starting quantity for each item that is enough to protect us from running out until we can get more.

We begin our journey through the dangers of unpredictable supply and demand toward the goal of on time delivery of everything with our shields of protection at 100%.  As we proceed, our shields are diminished by actual consumption, real demand rather than forecast demand.  When protection remaining crosses a critical threshold, our command center tells us to order more.  When we react to these signals in a timely manner, additional supply arrives in time to prevent us from ever reaching 0%.  We never run out.

In this approach we never have too much of any item, therefore we never have too much inventory in total.  Because we have defined for each item how much enough is, our command center recommends that we order a quantity that gets us back to 100% of enough and no more.  Enough is enough to prevent us from running out.  Too much is more than enough.  We never have more than enough.

So the trick to never running out and never having too much is to define and begin with enough.  Enough is not going to be a single, constant quantity for each item because actual usage is both unpredictable and variable.  So how much is enough?  Come back soon for my next blog post.