How to Fix Common Symptoms of Supply Chain Troubles - Part 3

In the preceding two parts in this series, we have covered only the preliminaries (for the most part). We have covered the symptoms (Part 1) and, in the remainder of Part 1, along with Part 2, we have discussed the underlying data gathering that will help you expose the depth and breadth of your supply chain troubles. At least, the metrics we have described up to this point will help you quantify the measure of your troubles from what can be known inside the four walls of your organization.

Now, in this and subsequent articles, we will start attacking the Undesirable Effects (UDEs) you are experiencing with your inventory and supply chain.

Near the end of Part 2 of this series, we discussed the three components of what we called the ToC (Theory of Constraints) Replenishment Time. Those components were:

1. Order Lead Time
2. Production Lead Time
3. Transportation Lead Time

Many, many companies have already proven the dramatic profit-increasing effect businesses experience when they commit time, energy and money to reducing their ToC Replenishment Time (TRT).

Taking Steps to Reduce Order Lead Time (OLT)

To reiterate from Part 2, OLT is the time that elapses between the consumption of a unit of any SKUL (SKU-Location) and the placement of the replenishment order for that unit of consumption. This time period is introduced by a combination of business policies, trade terms, business practices and other more or less compelling factors.

What keeps your company from placing orders every day for the SKULs consumed the preceding day?

Usually several factors are involved, such as:

1. The desire to accumulate sufficiently sized orders to get better pricing from the vendors involved
2. The desire to accumulate sufficiently sized orders with the goal of reducing transportation costs on the items ordered
3. The desire to reduce the amount of time, energy and money spent in the reordering process
4. Minimum order quantities introduced by policies promulgated by either the vendors or by the buyers responsible for replenishment of inventories
5. Minimum and maximum stock policies, or policies governing reorder points, in the firm’s inventory management efforts

These are all well-intentioned efforts. Most of them are focused on “efficiencies”—efficient use of production resources, transportation resources, or even purchasing personnel. However, none of these policies are aimed at increasing Throughput—the one area in which firms have an open-ended opportunity for ongoing improvement. (For the definition of Throughput, see Part 1 of this series.)

Furthermore, it is my experience that, in a great many companies, while a significant amount of time, money and no small amount of consternation, is leveled at enforcing policies regarding “minimum order quantities,” min-max stock quantities and reorder points, not nearly the same amount of effort was spent in determining why those policies should exist or what quantities should be used for min or max values, or reorder points. Too frequently these values were selected for “convenience” or picked out of the proverbial hat, with little or (usually) no thought being directed toward increasing Throughput.

While we recognize the production quantities and transfer quantities are frequently driven by legitimate exigencies in their respective operations, sometimes the numbers are—like the min/max quantities discussed in the preceding paragraph—are “picked out of hat.”

Too often the story goes something like this: Someone decided that 2,500 units in a production run for item X1244 was a good number to use—and that someone chose that number a decade ago. No one has changed it since. Never mind that the resources used in the production of X1244 are not capacity-constrained and six—yes, six!—additional setups could be performed on that line every day without adding one dollar to operating expenses.

Here are my recommendations for ACTIONS to help move toward reductions in Order Lead Times:

• • Stop placing orders based on forecasts – Except for new items, with no sales history, forecasts should not be used for execution. Forecasts are helpful for planning, but lousy for execution—because they are always wrong. When a forecast is too low, quantities supplied will be insufficient and Throughput will be lost due to out-of-stock conditions. When a forecast is too high, precious production and transportation resources will be tied up producing and transporting the wrong stuff, while the right stuff is delayed. As a result, sales of what customers actually wanted will be lost (along with some customers and follow-on sales of other goods). More sales will be lost when overstocks of potentially ‘stale’ products are liquidated and the sales of the ‘old’ product cannibalize the sales of newly released makes and models.
  • Stop accumulating orders – Supply chains function much better when end-user consumption is visible across the entire supply chain. Consider how much better a manufacturer—weeks removed from point of consumption—could make use of its resources if it knew that point-of-sale consumption just leapt by 36 percent on Item ‘A’ (in fashionable green), while point-of-sale consumption of Item ‘Y’ (in black) just dropped off by 22 percent. The manufacturer can begin managing its production quantities based on near real-time data rather than waiting for a huge order from the distribution center that shows up on the fax 30 days later and ends up not being what the manufacturer had planned for at all in terms of product mix. Even if your agreements with the vendors only make sense when deliveries are taken at larger intervals—monthly or even longer, having your vendors aware of actual demand in near real-time will improve supply chain performance. Nevertheless, if you want to see larger gains in supply chain effectiveness and a diminishing of the symptoms we are discussing, collaborating with your vendors to shrink transfer batch sizes (the quantities that get moved from point-to-point during production or across the supply chain) generally leads to dramatic gains. These transfer batch sizes may be shrunk independent of the size of “orders” or the size of the purchase agreement over some contractual period. And, while we will not discuss the matter here, generally the gains in Throughput from taking this action far outweigh whatever additional transportation expenses might be involved.
  • End the practice of “minimum order quantities” – Consistent with the discussion just above, seek collaboration with your trading partners to end “minimum order quantity” requirements. Instead, reach an agreement with your supply chain vendors in which price is based on quantities purchased over some specified period of time (e.g., a quarter, six months, a year), but place replenishment orders based on “pull”—the actual demand in the system—not on some artificially concocted “minimum order quantity.”
  • Cease use of “min/max” order quantities and “re-order points.” – Instead, determine a “buffer size” (the quantity you calculate you need to carry per SKUL) to cover all of your expected variability in both supply and demand. Then, at each replenishment, always replenish the buffer in full (less any open purchase orders, plus any open backorders). This simplifies ordering, even it requires more initial effort in working out supply chain collaboration (as discussed in the points above). (See also our other articles on Dynamic Buffer Management [DBM] for Inventory.)

We understand that making these changes requires a paradigm shift in thinking, and it means spending more time (initially) in working our supply chain collaboration details with your trading partners. However, the rewards for movement in this direction are well-documented and proven in thousands of companies around the world.

Let us know your thoughts and send us your questions. You may leave your comments and questions here, or feel free to contact us directly, if you’d like.