Insight courtesy of Waypost Advisors
If you are manufacturing company operating on a system, you’re likely missing out on opportunities to reduce non-value added work from your human employees, and costing precious time to respond to customers with critical information that drive the customer experience.
Imagine an utopia where a customer could submit an order and once it’s digested into the system the system would do the check of available inventory, planned receipts for inbound POs, planned production schedules for new inventory availability, and then spit-back a date that you could commit to your customer.
Seem far-fetched? It’s not. But we’re guessing there are a lot of intermediate steps to take that would drive a lot of value without necessarily needing to get to manufacturing eutopia.
The secret is that success doesn’t start with the system. It starts with the utilization of exceptional business processes.
No system known to humans can fix what start with a lacking process. Below are common inventory management faux pas that need to be addressed before a system can drive value:
- Inventory must be physically received as soon as possible. We recommend within 24 hours or faster, if you can do it. Ideally the inventory moves to its final resting place in the warehouse but even receiving it into a receiving location in the system to show that it’s physically in the building is a helpful step
- Inventory should be verified upon receipt for accuracy and storage locations should be as accurate and detailed as possible to avoid lost product
- Inventory should be consumed into production as accurately and timely as possible. If possible, avoid over-pulling inventory just to have to return unused product to the shelf. The more time inventory is handled, the more likely it is that it will be inaccurate or lost, at some point
- Ensure the process steps are clear and timely as inventory is transformed through the production process. We want to see that raw material inventory is taken out of available inventory in the quantity that will actually be used, we want to see it consumed through the production process, and we want to see it in Finished Goods once it’s complete. These steps need to be clear so that it’s clear when system transactions need to reflectively occur.
Part of making sure the process is clear and roles/responsibilities are clearly defined is to ensure that system transactions can accurately represent reality. The system is how production will communicate inventory status and needs to the broader organization.
For example, if there is inventory showing in raw materials storage in the system but the reality is that the inventory was already removed and sent to production, you’re losing time to replenish stock. And who among us hasn’t experienced that pit in your stomach when an urgent component was supposed to have been delivered 3 days ago but hasn’t shown-up in the warehouse, only to find that it’s still sitting on the receiving dock after a wild goose chase with the supplier for tracking information?
We’ve worked with companies that use a Kanban system, which can be very effective. For example, if a Kanban ReOrder Point is set at 1000 units, the challenge is that no operator is going to count the units every time they pull parts. What is more likely to happen is that someone will finally notice when there are only a few units remaining in the bin, and then see that the ROP was 1000, and then bring the card to Purchasing. Unfortunately that 1000 units was set because it represents approximate consumption during the period of time it takes to reorder parts. Now that you’re down to only a few parts, you’ve lost valuable time (weeks, perhaps), that you could have placed the order and had parts in time. Now you’re facing changes to the production schedule, burned political capital with the supplier when you ask for an expedite (not to mention expedite costs), and delays to customer orders.
It’s not just manufacturing that has to get their transactions right to be successful:
- Purchasing needs to have their POs entered in the system with planned receipt dates
- Customer Service needs to have orders accurately placed in the system
- Planning needs to have Stock Transfer Orders entered in the system with accurate shipping and planned receipt dates
- Scheduling needs to update Production Orders with accurate information for quantities, expected availability dates, and firmness of the schedule.
All of this information is part of the simple mathematical equation that the system uses to tell purchasing when to order more material, and production when to schedule it. As we like to say, it’s just math. But the inputs to the equation need to be correct.
We worked with a client that would pull entire pallets out of inventory and stage them for production, decrementing inventory at the point of removing it off the racks (good!). They would then break-down the pallets and take what they needed as they were consuming and enter it in the system (good!). They would then return whatever inventory wasn’t used to storage (yikes!) and adjust the unused inventory back into stock (not good!).
This was leading to issues with the system triggering for purchasing when it wasn’t needed, as well as shortages
when too much product was pulled into one line for production leaving another line short.
Unneeded inventory can clutter the system, both physically and technologically.
For example: You may be showing 180 days of inventory on-hand when you need 120 days. But what you won’t necessarily be able to see without a deep-dive of the data is that 90 days of that inventory is past its usable shelf life. When the parts are picked, the operators will see that there isn’t enough inventory available, even though the system is showing an overstocked position. And to run this analysis takes a lot of time. We recommend an ongoing process that shows most offending materials with overstocked positions. Plan to tackle a small portion of those materials each month and just start working through them. Do Root Cause Analysis for why the positions are overstocked and then drive decisions at a leadership level for how to right-size the position. An effective Sales/Inventory & Operations Planning (SIOP) Process is ideal, but at a minimum ensure someone is responsible for monthly analysis, driving root cause, and facilitating action discussions with leadership.
With these Pro-Tips in place your company can really drive human efficiency with a focus on the customer experience, as well as right-sized inventory positions that help to manage cash flow needs.
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