Supply Chain Illustrated

Excess Inventory

Intentional Inventory Management. The Precise Problem.

I reached out to my friend Jacob the other day.  I said, “How are you doing, Jacob?  And how successful is your inventory management process?”

Jacob replied, “Doing great!  And our inventory management is better than expected.”

“That’s great,” I said.  “Last time we spoke, you were struggling with a stock out, so we didn’t really get a chance to talk.”

“Yes,” said Jacob. “I remember.  This week is much better.  We’ve only had about 13 stockouts this week.  Way down from the usual 25 or so.”
I was amazed.  “I have two questions.  First, what did you do, to have such a great improvement?”

Jacob paused.  “That’s the thing.  We didn’t change anything that we can think of.”

“Let me guess,” I said. “You’ve received a lot of raw materials recently, since you ordered larger amounts when you ran out of those parts last time. And inventory is filling your warehouse.”

“How did you know that?” Asked Jacob.

“Lucky guess.  My other question is more painful.” I paused.  “Do you really consider 13 stockouts a great number for only one week?”

“Well, comparatively it’s quite good,” he asserted defensively. “And I know our competitors are doing worse than us.  The trick is, how do we maintain this level?”

“Yes, indeed.”

“Look,” Jacob said. “Our supply chain lead times are getting longer, our customers are changing their orders more often, expedite costs are through the roof, and our personnel are totally frustrated with the chaos. Considering all this, we’re doing the best we can.”

“Jacob,” I said.  “Let’s take a step back.”

“Consider this,” I continued.  “The enemy in this situation is the dependence on complete precision in the planning, and the expectation that precision will occur during execution. The longer the supply chain, the less we can expect precision to occur as planned.”

“But,” started Jacob. “Precision is the key to the software we are depending on. Material Requirements Planning software calculates our needs, both quantity and timing, based upon precision between the customer requirements and the raw material lead times. And since the lead times are increasing, we must use forecasts (which we know are wrong) to feed into this precise system.”

“Wait,” Jacob paused, eyes wide.  “We’re taking data we know is wrong and using it to predict a precise outcome that we somehow expect to be right.  And we’re trying to cover the difference by adding more inventory, but we aren’t sure which inventory to add. Holy cow.”

“Yes, indeed.”

“Do you think it’s time to consider fixing the root cause, rather than working harder to do the impossible?” I asked.  “I’ve got a different way to think about managing inventory.  It breaks the precision expectations of MRP into manageable blocks, and it creates an expected on-hand range of inventory by individual part number for strategically managed parts.  In between those points, MRP runs as usual.”

“Explore Demand Driven MRP,” I encouraged.  “It’s proven to reduce overall inventory, while improving on-time delivery and reducing the chaos of your employees. It’s too good to ignore.”

John Melbye, BecomeDemandDriven.com for more information.

#inventory #ddmrp #metrics #supplychain

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