Maintaining inventory at the right levels has always been an important but most often elusive goal.  The aftermath of the financial crisis has only made it more important and yet more difficult.  Customer forecasts are within more conservative ranges.  Many Suppliers are less inclined to hold inventory.  Reducing inventory without making fundamental operational changes will lead to lower customer service levels, customer dissatisfaction and eventually, reduced revenue.  Carrying more buffer inventory to cover customer ‘spikes’ is a less savory option.

Most operations have some level of excess inventory due to forecast and mix, engineering changes or quality issues.  The low hanging inventory reduction ‘fruit’ is to identify and segregate these buckets until the relieving actions can be completed.   Once this is in control, the key is to keep it from happening again.   Unless processes were way out of control to begin with, the inventory reductions from these areas  will not usually pay for increases in buffer stocks for active customer programs – and until the causes for the excess are eradicated through sound management control, they are likely to return anyway.

The biggest opportunity for reducing inventory is having supply and demand match.    Demand forecasts are never perfect.  Forecasts are either ‘lucky’ or ‘lousy’ or somewhere in between.  We can always work scrub harder, ask more questions to try to get a better forecast, but we can always count on falling something short of perfect.   The only perfect solution to reducing inventory while maintaining (and almost surely improving) customer satisfaction is to reduce lead-time and batch sizes throughout the chain, with zero and one being the respective goals.

Buying in quantity to get the price discount usually costs more in other areas.   In many cases, its of benefit only to the salesperson’s quota and incentives and often has little to do with the economics of manufacture.  In a lean environment, the opposite is most surely the case.  Suppliers manufacturing in lower batch sizes with shorter cycle times often have higher quality and lower costs.   Yield in many cases swamps allocated cost loadings and let’s not even start talking about those on a lean blog.

Making adjustments to the flow and operation of your floor is on the critical path for full improvement but starting that complex and long journey is the subject of another blog entry or two.   In paralell with those efforts, a lot of good can be had by working closely with key suppliers.  Start separating ‘cycle’ time and ‘lead’ time in your discussions.  We often only talk about lead time.  They are very different things and often will help you understand how different suppliers operate, or what lengths they are willing to go for you.   Both of these things are good to know.  

Lead times apply to the normal promise for a new order that was not anticipated.   Cycle time is the amount of time between release of an order to the floor until it is ready to ship.  If you provide a regular and decent forecast, and you have earned trust as a valued customer, you should expect responses closer to cycle time than full lead time – but not always – be careful. 

By decent forecast I mean you can explain dramatic changes from one period to the next.  That way you show you put thought into it and you will be distinguishing yourself amongst the few.  You’d be surprised at the number of companies with fancy computer systems that don’t understand what they put into them.  If the forecast is the music, its no wonder no one recognizes the songs that the plants are trying to play.  

Even for parts with spotty or seasonal usage, suppliers will usually make arrangements to buy materials and have them ready to produce if you agree to take the product within a reasonable time – that is if you have built the trust with them that you will deal fairly with them and not leave them holding the ‘bag’ of parts when the plan changes.   Be careful there.  If you string them along, don’t blame them if that extra material isnt’ there when you need it.


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