Inventory is a necessary evil of doing business, right? WRONG! According to Jim Shepherd of AMR Research, “inventory kills. Companies entering a recession need to quickly reduce raw material, work-in-process, and finished-goods inventory. … Waiting for signs of slowing demand from the consumer end of the supply chain will inevitably lead to warehouses full of unsellable products.”
The Problem with Traditional Manufacturing Systems
Production in traditional manufacturing systems is based on forecasting, otherwise known as “best guess.” You guess how many units you think you’ll sell based on past demand and what Marketing and Sales predict above that. Then Procurement orders everything at once to take advantage of bulk sale prices.
Forecasting works well if you sell a product like facial tissue. Regardless of market forces, everyone gets a cold eventually. But if you’re an industrial manufacturer selling mixed-mode products with lots of variation running through the same cell, then forecasting is about as accurate as a meteorologist predicting the weather.
If the current economy has shown us anything, it’s that markets change ― quickly. And this is not a market where you want to be stuck with a bunch of useless material that you not only already paid for, but one in which you are also paying taxes as well as storage and disposal costs.
Pull Model ― Build Only When They Order
The answer for many manufacturers is the pull model, sometimes referred to as a demand-driven manufacturing environment. In the pull model, your goal is to increase your inventory turns.
Rather than ordering based on forecasts and then pushing built product downstream, actual orders received drive orders for supplies and raw material. Now this will take some adjusting on your procurement process.
Purchasing will need to learn how to negotiate flexible terms with suppliers that provide favorable pricing but also allow for incremental orders over time and JIT delivery.
Companies that are demand-driven can better handle economic downturns. According to AMR Research, those 25 public companies deemed to have the best manufacturing or retailing value chains saw a decline in stock value of 13.6% during a four-month period of this current recession. This compares favorably to the S&P 500 that was down 20.9% and the DJIA that was down 18.0%. The reality is that people are still buying stuff. Companies are still buying stuff. The pull model allows you to maximize your revenue as best you can given the larger market economies.
Yet according to the IndustryWeek/Manufacturing Performance Institute 2006 Census of Manufacturers, a full 21% of small- to-midsized manufacturers (with revenue less than $1 billion) are using no inventory-management techniques!
“Many [small- to-midsized manufacturers] are not attuned to the need for continuous improvement. They continue to focus on ‘doing business’ ― firefighting through their problems because they believe there’s not enough time to work on continuous improvement,” says The National Manufacturing Institute.
If information is the currency in a pull model, then your ERP system is the treasury department. Your ERP system can help identify parts and supply purchases that result in waste. It can show where things move through the process quickly and where things tend to stockpile into dangerous levels.
Your Kanban system (whether a part of your ERP system or separate) should be able to identify parts and supply purchases not carried into a sale. It should facilitate a steady flow of supplies between the warehouse and the manufacturing floor, so there is no downtime.
According to a 2009 Cincom survey, 72% of mixed-mode manufacturing companies that had automated systems had annual inventory turns of nine or greater.
Removing inventory waste is just one of seven back-end wastes that can be eliminated or significantly reduced through lean initiatives, and the results are beneficial. For example, U.S. plants that have implemented lean report a median 35% gross profit margin and $197,000 sales per employee versus just 31% gross profit and $150,000 for those not implementing lean, according to the IndustryWeek/Manufacturing Performance Institute 2006 Census of Manufacturers.
“The ‘lean gap’ faced by SMMs is especially surprising because lean is an approach that small companies can afford, requiring them only to understand the processes, identify wastes, address the root causes of problems, and then improve the process with available resources (as opposed to approaches that immediately throw equipment or technology at the problem),” says The National Manufacturing Institute.
Learn more about eliminating the waste in your manufacturing processes. Click on the Lean Manufacturing Category or the waste tag in this blog or visit www.cincomerp.com.