The books that have been written about "Lean Enterprise" would constitute an imposing library by themselves, but, a few very important aspects seem to have gone unexplored, and are "conspicuous by their absence" once the "journey towards Lean" has begun. To fill these gaps, Eric Matson is writing the "Schmidt-Creek Paddler's Guidebook Series" which will address these issues, and the first, "ASWO!" or "Ah, Shucks, We're Out!" examines the often naughty question of how to plan and manage inventories (of all sorts) in a "Lean-Enterprise" environment.

ASWO! ("Ah Shucks, We're Out!")

Lean Enterprise Inventory StrategiesBy Eric Matson

AuthorHouse

Copyright © 2009 Eric Matson
All right reserved.
ISBN: 978-1-4490-1121-5

Contents

Page Chapter Key Topics.........................4About the Author............................................................................5Introduction................................................................................6Table of Contents...........................................................................8- Back to Basics Forward to Fundamentals!...................................................18- New/Lean Inputs...........................................................................42- Lean Considerations.......................................................................50- "Value Stream Managers" ?.................................................................54- Problems & Resolution Strategies..........................................................66- Problem Resolution Strategies.............................................................71- Alignment with "Lean" principles..........................................................82- "Stochastic strategies & tools"...........................................................86- "Days-of-Supply" calculation..............................................................93- Finding database problems.................................................................105- "COPIRA"..................................................................................116- Cautions before "signing".................................................................122- Retaining Competent People................................................................125- Einstein et al............................................................................128

Chapter One

"Lean Inventory"?

So, just what do we mean by the term "Lean Inventory" ... an empty warehouse? Idle forklift trucks? Purchase of a "Star Trek Synthesizer & Transporter" to replace the manufacturing and distribution system? Hardly!

A notorious oil-well fire fighter named Red Adair is reputed to have told a potential customer, "We can manage this problem better, faster and cheaper than anybody ... just pick any two."

By achieving "Lean Inventory", we hope to get away from fire fighting, and surpass Red ... manage the problem better AND faster AND cheaper ... ALL THREE!

SOME inventory is usually good and necessary to satisfy customer needs, but to qualify as "Lean", it needs to be wastes-free, flowing (materials and product), and scheduled in accord with actual customer demand (ideally "pulled" from a standardized & reliable production / delivery process by the customers).

Some Consultants portray "Lean" as a sort of mystical Eastern philosophy requiring years of meditation and sacrifice to master. Note the term YEAR$ ? Actually, the basics of becoming "Lean" are quite logical and straightforward. It is only the details of execution and deployment that can seem mysterious without a guide or "Sensei" (Teacher, who has "been there and done that.")

So, just what are these logical steps, and which details of execution are key, especially with regard to inventory management?

Lean Step 1) Understand Demand

A lean system is focused on and matched, in time, to customer demand ... Everything happens to customer specification, and "just in time", so being able to define that demand, both qualitatively and quantitatively, is crucial. What product families, models and options will be wanted and when? Not sure? What do history and market trends suggest?

Is forecasting (the "F-Word") an issue? If so, do you measure its accuracy ... and if not, how do you expect to improve or at least intelligently apply adjustment ("Kentucky Windage")? Do you have "PBOMS" (Planning Bills Of Material) to help "explode" models and options from (easier to predict) product family demand?

Do you know historic customer-desired shipment or delivery or lead-time requirements? If so, making your production cycle time shorter (lean manufacturing & distribution) might allow confusion-free "building-to-order" with no finished-product inventory. Plus ... even if make-and-deliver cycle time is greater than SOME demand, knowing how much "some" is defines the upper limit to needed finished product inventory. NOTE: Historic production or shipping data is practically useless because it contains all historic "lateness" and customers' "patience factor". The goal should be to ship or deliver when customers actually want that.

Lean Step 2) Map and Identify Opportunities

Value stream mapping depicts and quantifies the performance (wastes and flow) of the entire process ... end-to-end ... order entry, credit check, planning & scheduling, procurement, production, packaging, distribution & delivery ... so that "choke points" (wastes and delays), and their relative improvement priority become clear.

How to do a VSM is beyond the scope of this work, but an excellent first reference/guide is "Learning to See", a Lean Enterprise Institute guidebook by Mike Rother & John Shook.

Perhaps my greatest learning, from leading literally dozens of VSM sessions, is that the greatest time & money savings opportunities are often beyond the production floor ... in the information-handling, procurement, distribution or product-design arenas!

But even if your operation has NOT (yet) constructed VSM's, all is not lost. Odds are VERY good the key opportunities and priorities are "communal knowledge" if you ask the right people and ask the right questions. The right people are the ones who do the day-to-day work of planning, procurement, and getting product on its way to customers. The right questions include:

* If somebody didn't provide daily work orders, how would you know how to best utilize your knowledge and skills in meeting customer needs? * What prevents you from doing your job immediately and correctly on the 1st attempt? * Where in our processes are we wasting time and money that would be better spent to satisfy customers and better compensate employees? * When Management asks for things to be done "better, faster and cheaper", what are they missing? What, specifically, don't they seem to understand?

Lean Step 3) Get Clean & Organized (5S)

It is very hard to see wastes and choke points (bottlenecks) if the workplace is totally chaotic and jumbled. Whether in the office, production floor or warehouse, "tidiness is next to Godliness". There should be a place for everything, everything in its place, and nothing unnecessary taking space or creating obstacles to visibility, movement and material flow. The acronym "5S" refers to 5 Japanese terms beginning with "s-sounds", but which loosely translate to:

* Sorting: Identify what's needed, what isn't, and get rid of the latter ... ruthlessly! * Storing: Identify the best place for what's needed, put it there, and label the space or location. * Shining: Clear away dust, debris & litter, Get product presentable for customers, facilities suitable for productivity, and equipment cleaned enough to easily determine readiness or maintenance needs. * Standardizing: Make the "S's" the "norm" ... the accepted way of working ..., and make all needed tools or aids readily accessible. * Sustaining: Establish ownerships, management reviews, metrics and rewards or reminders for sustained performance. Also: Create a FORMAL time allowance for people ... before starting, mid-day and before quitting production for the day.

This is much more than simple "housekeeping". Done properly, it can drastically reduce required work area and people movement, speed the flow of information & material, and make next-improvement-opportunities highly visible and obvious.

I recall escorting a Japanese Consultant onto a supplier's production floor, and having his translator say, "I see a combined land-fill and materials warehouse. Where is the factory?". He was right, and simply correcting that situation worked productivity and capacity miracles. (He also asked how many people worked there ... to which the Plant Manager replied, "About half.")

Overproduction: Building or procuring more than the customer wants (yet) is clearly wasteful from an inventory standpoint. The excess consumes capacity and materials for production that IS wanted, takes space, ties up capital monies, risks obsolescence, and makes the resolution of quality issues more difficult. Regardless of customer order levels, apparent economic batch sizes or historic scheduling/buying practices, DO NOT OVER-PRODUCE! The one possible exception to the rule is when pre-season production is needed to cover short capacity during peak demand periods ... but even then, it could be better either to cap orders or to streamline operations, reduce batch sizes, and boost peak capacity.

Note that procurement timing is as key as production timing. Global sourcing may SEEM to have cost advantages, but beware of lot sizes and lead times dictated by long-distance transit needs. "Just-In-Time" almost always remains the best/fastest/cheapest total-cost solution, and favoring suppliers within a 1-hour delivery distance usually pays dividends.

This is difficult to prove without full "Activity-Based Accounting", but the probable lack of that is Finance and Accounting's problem. Don't let them make it yours!

Needless or Redundant Transportation: An obvious waste of time and resources, but with inventory management ramifications that are not always "painless".

Storing materials off-site? Why not reduce days-of-supply from reliable suppliers and use any on-site space to keep "every day" items? This could drastically reduce "shuttle" costs.

Taking multiple weekly deliveries from 10-12 local suppliers? Why not contract a single trucker to make a daily loop route or "milk run", and only need to deal with one delivery per shift?

Why not spend a a few hours intercepting and challenging every truck and container that arrives ... asking, "How could we have received this material in a smarter, more timely & more cost effective way?"

Delays: Whether considering material, product or information, "time is money" and delays are deadly. Late deliveries require bigger safety stocks. Batching of orders or production creates delay and "in-process" inventory by definition, incurs extra cost, and slows customer response. In a "lean" operation, material and information never stop moving except to have actual value added, once they enter the process.

Over-processing: This doing more than is actually required. In a manufacturing environment, it might take the form of painting or polishing a surface that cannot be seen after final product assembly. In the Inventory and materials arena, it might include having to remove padding from individually-wrapped components, full-wood crating of products that are being loaded to containers, or staging product from a delivery instead of putting it away immediately (all that's needed is bar-coding and advance-bills-of-lading so the crew can "make a hole" where it will be needed).

I know one manufacturer who pays large sums to have his company logo printed on all 4 sides of his product containers, but these are immediately removed and scrapped by the installing contractor once on the job site, and are never seen by the end customer. This inflates both product and inventory holding costs, but adds no real value ... MUDA!

Inventory!: In theory, material or product not actually moving or being worked on is non-value-adding and wasteful (the customer would object to the cost if he or she knew). We all know that SOME inventory is inevitable, because different processes have different cycle times, and "buffers" enable them to work as a system. This does NOT, however, excuse weeks or months (even years) of supply of materials, components, supplies, or finished products.

I recently (March of 2009) bought "new" Japanese tires for my car (a 2004 model), and discovered DOT date stamps indicating they were made in "0702" (week 7 of 2002). What is wrong with this? How much of the exorbitant price I paid was due to inventory holding costs for 7 years? What's the quality like after so much aging time? MUDA!

Non Value-Adding Motion: Doing anything more than once is wasteful ... MUDA! A classic example in the inventory arena is "burying" one product with another (due to space limitations or lack of assignments). Every need for a (buried) unit requires non-value-adding moves of other material, and inflates holding costs.

Similarly, trucks or containers need to be reverse-loaded ... first-delivered items loaded last. Random loading creates delays and incurs NVA motion or handling, which in turn risks damage or "shrinkage".

Location strategies and systems will be examined in a later section of this guide, but clearly, where material is held can make or break handling efficiencies, and difficulty finding the needed items is an automatic DELAY (Muda).

Defects: This clearly includes "poor quality that escapes" to the customer, but also includes the waste of time and/or material anytime an intended action fails on the first attempt ("turnbacks and/or rework"). From an inventory standpoint, it includes any material or product damage, type or quantity mistakes in order processing, AND any information-based mistakes such as with receiving/shipping/invoicing/location records

"Value-Adding"?: In summary, a "waste" or "muda" is anything that does not "add value"... anything the customer would object to paying for if they knew about it. The exception is actions or costs that are "NVA but necessary or mandated", such as verifying shipment weights or inspecting & testing items for code compliance. This begs a "logic-tree" and matching "Lean Strategies":

Lean Step 5): Establish Flow

Reducing lot sizes and eliminating wastes and delays will dramatically improve the flow of materials and information, but additional measures will still usually be needed.

Physical layout is an obvious element. Organizing people and equipment by product group or mission creates better flow than organizing by technical function or activity. Likewise, positioning people, equipment and storage to minimize moves and transports will aid flow dramatically. Finally, consider co-locating functions with shared missions. Housing Engineering or Order-Entry in different locations from Production hurts flow. Info-Technology does NOT compete with "eyeball-to-eyeball" connections.

All processes have natural "bottlenecks" or "choke points" because certain steps take longer than others and cannot be easily subdivided. Reducing batch or lot sizes helps, but where step-subdivision proves awkward (e.g. run-testing or painting), it may be necessary to completely duplicate that step or work station and split production across two or more parallel paths.

Also pay attention to scheduling logic. A "perfect" final-assembly-based scheduling system is doomed if a fabrication or sub-assembly operation is the slowest element in the overall process. A "correct" scheduling system focuses on the slowest component or step, AND, continuous improvement effort is focused on that bottleneck.

Remember, also, the "Law of Constraints" (Resolving one bottleneck only results in the next one taking its place). This is why Value-Stream-Mapping helps so much.

Ultimately, flow is only optimized when we implement Step 6) ...

Lean Step 6): Incorporate "Pull"

Ideally, Customers draw from (small, temporary) inventory, and Production replaces what is withdrawn. Likewise, Fabrication, Sub-Assembly and Suppliers simply replace components consumed by Final Assembly and/or Distribution.

In this way, inventories are kept small, "forecasts" become less critical, and everyone is simply replenishing consumed items rather than chaotically producing material that may or may not be needed.

In the real world, customers behave erratically and "change" their preferences, so inventory (assortment and level) tends to be larger than theoretically necessary.

The point is to target and enable "pull systems" wherever possible ... including at the finished-product warehouse or store-room!

If an item is infrequently wanted, offer it on a strict build-and-ship-to-order basis ... NO stocking!

Similarly, it is not uncommon that "50%" of the produced and offered models represent only "5%" of sales. Here, "weeding the garden" and enforcing intended product super-cessions is vital (see the prior comment re infrequently-requested items).

Lean Step 7): Integrate Suppliers

Help key suppliers implement 5S, Waste Reduction, Flow and Pull (unless they are already well on the path to "Lean"). If we do not, they will become the ultimate "bottleneck or choke-point". If this seems like "investing in somebody else's business", think objectively about the alternatives, and switch any suppliers who are also key to competition.

As with Quality: If 75% of your challenges are supplier-based, at least 75% of your improvement resources & people should be supplier-focused.

Lean Step 8): Integrate Distribution

ALL parts of the value chain need and will benefit from becoming "Lean", but leave Distribution for last. Production reports to "Headquarters", and Suppliers want to please Production, but Distribution tends to think and act like the "Customer". Its needs must be satisfied and (product-source) problems resolved before internal improvement can be discussed or motivated.

Lean Step 9): Standardize "Wins" and Successes

Anytime a change has positive results, do what's necessary to make it the "new and official way of working". Dismantle old policies, measures, instructions, practices and incentives, and replace them with the new.

Reward compliance as warranted and deserved.

(Continues...)

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