Inventory: The Root of All Evil

Many people have heard of the term Just in Time (JIT) as it relates to manufacturing, production scheduling, or delivery.  But have you heard of Just in Case (JIC) manufacturing? It is a term I coined years ago.  I coined the term one day while walking through a plant that only produced finished goods to order.  The business did not actively stock finished goods.  They stocked raw material and some sub-assemblies in order to produce with relatively short lead times, but in general they did not stock finished goods.  During the walk through, I looked at a work order for a part that was being machined.  The operator was machining lets say 30 parts, yet the sales order associated with the work order only called for 15 or 20 parts.  I asked the machine operator and his supervisor why they were machining more parts than were called for by the sales order.  The response I received was quite curious: “this is a really tough part to machine and we have many rejects, thus we produce extra parts just in case (italics added) we have to scrap a part.”  At that point a new term was born: Just in Case (JIC) manufacturing.  I asked the operator how often they actually had to scrap a part.  Neither he nor his supervisor could answer the question.

I told the supervisor that I suspected that they were overproducing and tying up unneeded cash in inventory.  Additionally, this was a plant that was trying to improve on-time delivery.  I explained to the supervisor that if they were tying up capacity by producing excess and unneeded parts, that they were impeding their ability to produce on-time with short lead-times.  The supervisor assured me that this didn’t happen often.  I then asked the supervisor to take a walk with me to the warehouse.  I asked the supervisor if he was sure they didn’t overproduce on a regular basis.  He assured me they didn’t.  I then asked one of the warehouse employees to pull up several recently completed work orders for parts that had been delivered to inventory.  When we checked several of the recently completed work orders, we found that a large percentage of them were completed for quantities that were larger than what the sales order called for.  At this point the supervisor was a little embarrassed, but there is more to come.  Employees on the floor ALWAYS and I mean ALWAYS know more about what is going on in a plant than supervisors and managers.  Knowing this, I engaged the warehouse employees in a conversation on this subject and they assured us that this happened on a regular basis.  Once again, the supervisor was embarrassed.  At this point the employees told me about the T location.  Being an inquisitive lad, I asked what is the T location.  Their response: “oh that the is the trailer we have outside where we store all of the production overruns.”  At this point the supervisor was quite embarrassed.

As you might imagine the supervisor was besides himself.  But being a smart guy he put a stop to the overproduction and eventually eliminated the T location.  With several other changes we were able to improve the plant’s on time delivery performance as well as their financial performance.

Key takeaways  / reminders from that day: 1. I learned on that day that Inventory is the Root of All Evil.  If you want to know if you have a problem in manufacturing, check your inventory levels to make sure you don’t have an issue with JIC manufacturing.  2. I learned about JIC manufacturing. It is more endemic than you might imagine. Walk the floor and check your work orders to see if you have a case of JIC. 3. Always talk to the hourly employees, because they know what is really taking place on the floor.

Has anyone else encountered similar issues?

Rindge Leaphart

http://www.linkedin.com/in/rindgeleaphart

What Operational Metrics do you use to measure performance?

What type of business are you responsible for managing?  Is it a distribution center (DC)?  Is it an assembly facility?  Is it a machine shop with assembly and DC characteristics?  Is it a chemical plant? No matter what type of business you manage, you should have a solid set of metrics that measure whether your business is:  A.Meeting customer expectations, and B. Performing in an efficient and profitable manner.  I’m not going to spend time discussing measures of profit.  Instead, I will focus on operational metrics that have served me well in the past.  Many of these metrics may seem like common sense, but you would be surprised by how often they are overlooked and in some cases not even tracked.  Also, I hope not to bore you with an never-ending list of metrics.  Sometimes you  can get buried in the metrics and lose track of how the business is really doing.  There is always a balance that one must strive for.

Below are a list of metrics that I always like to have in my tool bag:

• On-time delivery (OTD): Based on my previous posts, this metric may not be surprising.  You have to measure your ability to deliver products on-time: whether to customer expectations or to promise dates that have been provided to the customer.  There are many different methods to measure customer satisfaction.  And by no means is OTD the holy grail, but for a business that is delivering a product (and maybe even a service) to a customer, this is one of the best operational metrics that you can have in place.
• Percentage of orders past due: What percent of your backlog is past due?  A high percentage of past due orders is typically correlated with a low percentage of OTD.  Both of these metrics must be looked at hand-in hand.  It is very possible to have high OTD and a high percentage of your orders past due.  Look at both these metrics to make sure the system is not being gamed.
• Lead Time: How long does it take you to ship an order from the day of order receipt?  This is another key metric that I always want to view.  You might have an excellent OTD rate, but lead times of 90+ days.  In many industries 90 days is not acceptable.
• Vendor OTD.  Without decent performance from your vendors, it is tough (not impossible) to perform well for your customers.
• Purchase Price Variance (PPV): This metric allows me to tell how the purchasing team is performing. It also provides good insight on material prices (are they going up or down).
• Capacity Utilization:  Are you overstaffed? Understaffed? Do you have enough equipment? How do you tell if you don’t don’t measure?  There seems to be an acceptable rule of thumb that capacity utilization of 85%  and above requires additional capacity.  I like that rule of thumb. Many companies don’t heed this metric.  This is one of many reasons you need a detailed sales forecast by product line.  Without it, it becomes hard to determine how much additional capacity you might need to add.
• Cycle count accuracy: I always joke that inventory is the root of all evil.  Well if we have to keep inventory, lets make sure we know what we actually have on hand.  The importance of cycle counts cannot be underestimated.
• Gross Margin by Product – specifically I look for low margin products: typically below 35% to identify if I have:  1. A sales price issue, 2. A bill of material issue, or  3. A purchasing issue.
• DSO: What good is it to ship a product on-time (or deliver a service) if you can’t get paid in a timely basis?
• Dock to Stock: How long does it take from the day you receive a product to the time you actually put it on the shelves?  You might be understaffed in your warehouse if it takes you 5+ days to put inventory away.

Different businesses use different metrics.  The ones above are ones that I have always found useful. What metrics do you track in your business?

Rindge Leaphart

http://www.linkedin.com/in/rindgeleaphart

Operational Turnarounds Part 2 – What they dont teach you in business school

During my last post (http://wp.me/p2kKle-C), I discussed On-time Delivery (OTD), its importance, and a key step to improving OTD.  Let me take a quick step back.  The thoughts that I am sharing are not brilliant strategic insights.  They are insights learned over the years about how to significantly improve operational performance.  As stated in my earlier post, many small to medium sized companies don’t focus on these small ideas, which deliver outsized gains.  These posts are focused on doing the seemingly little things that need to be done to make sure the big things (revenue generation, customer satisfaction, etc) get done.  Now, back to our regularly scheduled programming.

So you have kicked of your production meeting.  What is next? Or more appropriately, what other activities should you be working in parallel?  Before I move on to answering that, I want to stress the importance of guidance, leadership, and behavior modelling to attendees of the production meeting.  If you have a need to put a meeting like this in place, there is a good probability that people are not accustomed to performing at the level your organization wants or needs.  People may not have an idea of what they should and shouldn’t do.  People may not be sure what to do when they reach a crossroad and have to make a decision to improve performance. With regards to crossroad, I am not referring to a moral dilemma, but instead a business dilemma.  This is where your leadership is most important.  At the early stages of the production meetings you have to consistently and constantly model the behavior you want them to emulate.  You have to demonstrate to them your thinking process when it comes to making decisions.  You have to show them how to do the right thing and not the easy thing.  You don’t want them to become clones of you, but you want them to think and do things differently than what they were doing.  Many people don’t need to be told what to do, but they do need to be taught how to fish.  I do believe this is quite important because it sets the tone for the organization. It also pushes people outside of their proverbial comfort zone and causes them to start thinking differently, and hopefully acting differently.

Okay, I’m off of my soap box.  In conjunction with the production meetings, you probably need to do things differently in your purchasing organization as well. Over time, I have come to find that organizations neglect the data in their ERP/MRP systems.  As such, the data is outdated and causes havoc within your system.  I strongly suggest that the purchasing team scrub the data in the system.  Specifically, scrub lead times to make sure they are accurate.  Scrub buyer codes and make sure each part has a valid buyer code for someone in the purchasing organization.  It never fails that an organization overlooks the purchase of a critical part because it had a buyer code of someone who no longer works for the company.  While you are at it, make sure the manufacturing group is also scrubbing your Bill of Materials (BOM) to insure that routings, revision numbers, etc are all correct.  Cleansing the data is a time consuming task, but it has to be done.  My view has always been to get it done as quickly as possible. Please do not overlook the importance of cleansing your system data.  It is neither fun nor easy, but it pays huge dividends.

I will discuss other steps in future posts.

Rindge Leaphart