The 8 Lean Wastes and Their Potentially Disastrous Effects – Inventory

Inventory – any materials or other resources stored or staged until demanded. In this series titled “The 8 Lean Wastes and Their Potentially Disastrous Effects”, we examine case studies for when companies, government organizations, or entire industries have allowed a specific type of waste to escalate to a disastrous effect. In this post, we review the waste of Inventory to understand what causes it, how to see it, and how to eliminate it. Lean.org defines inventory as “materials (and information) present along a value stream between processing steps.”

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The 8 Wastes and Their Potentially Disastrous Effects:

Defects | Overproduction | Waiting | Non-utilized Talent & Ideas | Transportation | Inventory | MotionExcessive Processing

Case Study:

In 2007, Toyota issued a massive recall that affected 9 Billion vehicles worldwide. The recall was triggered by several reports of gas pedals “sticking” and causing unintended acceleration. At the time of the incident, dealerships across the US were holding substantial amounts of inventory, which could not be sold until they were all serviced to minimize the risk of further unintended acceleration issues. A study was conducted to estimate the losses associated with all of this inventory that was placed on “hold”, which revealed that dealerships were losing the staggering amount of $2.5 Billion per month in combined income.

Corrective Action:

In response to this issue, Toyota conducted an investigation to identify the root cause of the unintended acceleration and concluded that the configuration between the floor mat and the gas pedal was defective. They also began to experiment with an alternative supply chain model with the Toyota Scion where a base unit would be built to about 70% at the factory, then buyers would be allowed to customize how the vehicle would be finished. Finally, the base unit would be shipped to the buyer’s local dealer to complete the final manufacturing steps; a process known as Late-Stage Customization. This kept inventory low for the Scion at the dealerships and allowed consumers more control over the features and functionality that would be included with their vehicle. Unfortunately, the Scion did not perform well in the market; however, I don’t think the supply chain model was the problem. It simply isn’t a very good looking car.

Interesting Fact:

Even though Toyota distributes vehicles all over the world, the only reports of unintended acceleration came from the United States. Also, there was never a definitive conclusion for a mechanical failure that was causing the problem. However, once the floor mat / gas pedal configuration was changed, no further issues were reported.

For more details on this case study, check out the 24/7 Wall Street article at the following link:

http://247wallst.com/autos/2010/01/29/toyota-dealers-face-2-5-billion-monthly-loss/

This case study exposes one of the many major problems with building and carrying inventory. Building inventory has the same issue issue as batching, which is a form of inventory in itself. When there is a quality defect that needs to be contained, many times the entire batch needs to be recalled and investigated due to limited granularity in traceability.  This requires the manufacturer to cast a wide net instead of being able to pinpoint the specific units that are affected by the defect.

Another major issue with carrying inventory is that it enables poor manufacturing execution and erodes operational discipline. Part of the equation for determining how much inventory you need is how unreliably your factory performs. In other words, being unreliable means you need to maintain higher inventories to meet service expectations. The path of least resistance is to build inventory as opposed to addressing your factory’s reliability issues. A little trick to kicking off a lean implementation is to cut your finished inventory gradually and challenge your teams to maintain service levels with lower inventory stocks. This will require improving factory reliability and becoming more lean in the process. Finally, inventory hurts your factory’s lead time on special order and rush items. This is because orders often need to wait in inventory buffers in between process steps before the next value-added step can be completed.

Impruver also helps you see waste from inventory, which often manifests itself in the form of unreliability. In Impruver, unreliability shows up as downtime, rate, and yield losses. By addressing these issues, you can increase plant reliability and subsequently reduce safety stocks. When inventory is reduced, working capital is freed up to be invested in other more important matters. Impruver also allows you to quickly estimate the savings to be gained in just one click by driving out efficiency losses. This powerful functionality is made available to everyone from the shop-floor up to be used for justifying continuous improvement ideas.

 

Copyright © Calvin L Williams blog at calvinlwilliams.com [2015]. Unauthorized use and/or duplication of this material without express and written permission from this blog’s author and/or owner is strictly prohibited. Excerpts and links may be used, provided that full and clear credit is given to Calvin L Williams with appropriate and specific direction to the original content.

Why Downtime is so Deadly in Manufacturing

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Downtime is the ultimate disruption in productivity. It not only limits how much can be produced in a day, it also drains the energy and morale of your production teams. When you look at downtime, you have to consider the time that the machine spent down – and the loss in rate while approaching shutdown and starting back up. You can calculate your total labor cost per hour and easily add up what it cost your business for every hour of accumulated downtime. These are the more apparent costs of downtime. However, there are more destructive and insidious factors of downtime that are not as apparent. These are more around the subconscious and reactionary measures that are taken as a result of poor machine uptime and reliability.

The ultimate costs of poor reliability are poor customer service and high operating costs. There are several visible indicators of “out of control” downtime and poor reliability: Finished Inventory, Dis-jointed Processes, and Production Capacity Imbalance.

Finished goods inventory build-up

In a perfect world, factories would not carry finished goods inventory. In this case, when a customer places an order, the factory would quickly produce what is needed from start to finish and then ship within the customer’s expected delivery window. This would lead to a significant cost savings in itself in the form of reduced finished goods obsolescence, reduced administrative costs for forecasting, reduced finished goods damage, reduced finished goods management or handling costs, reduced finished goods storage space and many others. The reason that companies build finished goods inventory is because they don’t trust that their production systems can deliver “on-demand”. This is largely due to unpredictable downtime.

Dis-jointed processes and a lack of continuous flow

Manufacturers often try to “shield” a reliable process from an unreliable process by disconnecting process steps. By doing this, the reliable process can continue to produce while the unreliable process struggles to sustain flow. Subsequently, work-in-progress (WIP) inventory begins to build up after the reliable process as it waits for the unreliable one to get its act together. This WIP is essentially what I like to call “cash sitting on the floor.” It’s almost like a savings account that accrues no interest – only depreciation, and sometimes to the point of complete obsolescence. The value of the WIP is money that the business can’t use for more productive purposes, such as equipment upgrades, product marketing, or even employee bonuses. It also reduces the lead time, or the time required for an order to be processed from start to finish. Finally, it increases operating costs caused by additional material handling, staging, and storage. This is primarily caused by unplanned and unexpected downtime.

Un-level process capacities

When one process experiences more downtime, we tend to seek ways to increase the maximum speed, or line rate, through those processes through engineering efforts. This allows us to consume the huge stockpile of WIP that tends to accumulate whenever we can get these unreliable processes to run. When we increase the capacity through a process step, we incur extra labor, technology, and engineering cost; all this instead of fixing the real problem, which is to eliminate the downtime. Often times, we run these processes at unstainable rates trying to get “caught up” and end up doing further damage – resulting in more unreliability.

Why not take the time to understand the areas that are experiencing the most downtime and attack them head on. It may be best to start with the bottleneck process and then spread up and downstream from there. In the end, you want highly reliable and balanced capacities across all processes. At that point, your true lead time becomes predictable. This allows you to re-connect your production processes, establish true continuous flow, and start cutting back on your finished goods inventories.

Copyright © Calvin L Williams blog at calvinlwilliams.com [2015]. Unauthorized use and/or duplication of this material without express and written permission from this blog’s author and/or owner is strictly prohibited. Excerpts and links may be used, provided that full and clear credit is given to Calvin L Williams with appropriate and specific direction to the original content.

Inventory Reduction: Bringing Your Working Capital Cash Back to Life

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Inventory is a fact of manufacturing life. It is accumulated and maintained for raw materials, work in-progress (or WIP), and finished goods. We like inventory when it means we can be highly responsive when the customer needs us to be. We don’t like inventory when we start to realize that it a) ties up a substantial amount of working capital, b) can be expensive to store and maintain, and last but not least, c) it weakens operational discipline – meaning is cultivates manufacturing and supply chain inefficiency. Thus creating a double-edged sword where you could get burned quickly for not having enough inventory and you get burned in the long run for having too much inventory. The Ideal state would be to not need inventory at all, but this would require you to have a supply chain that can deliver orders on-demand. This means having the right products at the right place in the right quantities and so on. This means immaculate execution on the part of your supply chain in terms of speed, quality, and reliability. Although this is an ideal state and not within short-term reach for most (if any) companies, it should be the ultimate goal of any company’s Continuous Improvement path to world-class execution.

Inventory accumulates for a few main reasons, including but not limited to: unpredictable demand, over-purchasing, over production, unreliable manufacturing / supply chain processes, insufficient manufacturing capabilities, insufficient manufacturing capacities, lack of agility, and a whole host of other reasons. The main thing to understanding is that all of these reasons are driven by addressable gaps in performance; which are ultimately resulting in a “push” manufacturing model. If a company is maintaining any level of inventory, you can be assured that they are suffering from at least one of the items on this list if not multiple. The system-level key to reducing or eliminating the need for inventory is to close performance gaps in these and other related areas.

With that said, some of the root causes that result in the need for increased inventory levels cannot be resolved in the immediate future. You may find yourself with a need to reduce inventory levels drastically within 6 months to a year. It is not realistic, for example, to expect drastic changes in manufacturing capabilities or capacities in such a short time frame, especially if you don’t have the capital readily available to make significant engineering changes. For this reason, I typically recommend a time-phased approach to reducing inventory levels that drives both immediate gains and sets the supply chain on a path to world-class execution. The phases are as follows:

Phase 1 – Crisis Mode – Fire Sale: The goal here is to minimize the damage of further obsolescence which is what happens when excess inventory expires or is no longer demanded. The best case is to aggressively seek new customers who will absorb the excess (and/or obsolete) at full rate. The next best case is to offer the overages to the highest bidder. Another approach would be to donate excess or obsolete product (if applicable) and write-off losses.

Phase 2 – Short Term – Safety Stock Implementation: Apply appropriate safety stocks and tie inventory levels to demand. In Lean terms, this is an intermediate step to creating an actual pull system called a supermarket. Once the initial wave of excess / obsolete inventory has been reduced, the next step is to determine and implement the appropriate safety stocks. Safety stocks are determined through an algorithm of past sales (considering seasonality), expected future sales, and plant production capability among other variables. In this model, the production schedule should be driven by replenishing safety stock levels.

Phase 3 – Medium Term – Safety Stock Optimization: Match inventory to demand by SKU and apply additional reduction based on your factory / supply chain’s delivery capability. In order to execute this phase, you need to understand your factory and supply chain’s capability by SKU. It also requires categorization of product SKU’s into active (A), slow-moving (B), and excess / obsolete (C). A thorough analysis can help to determine the optimal levels of SKU’s in each category considering manufacturing performance and capability. Again, the production schedule is driven by safety stock replenishment requirements. The next step in the process is to provide suppliers with safety stock status information so that their production schedules can be driven by your needs for stock replenishment. This along with synchronizing with your customers effectively establishes a pull system, which the ultimate method for controlling inventory levels.

Phase 4 – Long Term – Inventory Quality Ratio Implementation: Implement the Inventory Quality Ratio (IQR) model that strives to minimize slow moving and obsolete items and maintain active items – measured as a percentage. IQR = Active Inventory Dollars / Total Inventory Dollars; in other words, the IQR would be 100% if all inventory were active. The definition and speed of turns of “active inventory” varies by industry but is generally the fewest number of SKU’s that makes up 80% of units sold. The IQR is a metric that can be implemented immediately or at any of the prior phases; however, the phases leading up to this one provide the foundation and information needed to implement IQR, which then lends itself to eliminating excess or obsolete inventory altogether. For slow moving SKU’s, the supply chain needs to be made reliable enough to execute effectively.

Ideal State – Ultimate Supply Chain / Demand Alignment: Match manufacturing and supply chain capabilities with demand to the point where orders could be filled on-demand with no inventories required. This is the classic model of “don’t even make it until after it’s been ordered by the customer”, which constitutes a pull production system in the purest form. This requires developing your manufacturing and supply chain processes to levels of world-class execution, or 85% OEE. This requires tremendous Operation Discipline and should be the ultimate aspiration of any Continuous Improvement program. Ease of implementation of this model depend heavily on the predictability of demand, but with the right science and analytics, any manufacturer can reach heightened levels of success.

Manufacturers need to establish an effective balance between supply chain reliability, safety stocks, and market demands. Inventory builds as a reaction to supply chain processes being incapable of meeting orders on-demand and the use of a push manufacturing model. In an ideal state, the customer could place an order, the factory could make the product and fill the order shortly afterward, and deliver it on time and in-full to the right location; this defines the supply chain’s level of execution. However, what actually happens is that manufacturers build inventory so they don’t have to rely on their supply chains to deliver within such a short window of time, risking failure to meet customer service expectations. Over time, this practice encourages greater and greater inventory levels, which only serves to hide the very inefficiencies that result in needing the inventory in the first place. Without effective inventory management systems, there is no check and balance to continuously drive down inventories, freeing up working capital (cash) that can be used for more productive purposes.

Copyright © Calvin L Williams blog at calvinlwilliams.com [2015]. Unauthorized use and/or duplication of this material without express and written permission from this blog’s author and/or owner is strictly prohibited. Excerpts and links may be used, provided that full and clear credit is given to Calvin L Williams with appropriate and specific direction to the original content.