an effective way to permanently reduce your inventory: reduce cumulative lead times
Most manufacturing companies look for ways to reduce their investment in inventory. Usually when sales are trending downward, inventory levels are slow to follow. As products mature and new products are introduced, inventories become unbalanced until the sales cycles have been adjusted to the new items. A cash crunch will also result in companies taking a harder look at the amount of inventory that they consider acceptable for their business. Inventory reduction initiatives typically focus on improving forecasts, cutting safety stock, pushing inventory back to suppliers, etc. None of these tactics are easy to execute and many times the improvement is temporary.
A Better way
Reducing cumulative lead times will result in less inventory without increasing the risk of impacting customer service or affecting other business relationships with suppliers and customers. Cumulative lead time can be defined as the total elapsed time it takes a company to fill a new order from date of entry to delivery of the order to a customer's site. It includes your suppliers' lead times as well as the internal lead times necessary to get a customer order processed, produced, shipped, and delivered.
We will discuss the process of identifying and then reducing cumulative lead time for make-to-order and make-to-stock manufacturing separately because there are significantly different components to the total lead time for each of those situations.
Internal lead times for a make-to-order company can be significant and may include the following steps:
- Responding to customer Requests for Proposals including engineering, estimating, sales, marketing, and other functions in your process.
- Sales process to finalize proposals and obtain the actual order.
- Engineering, process development, prototyping, sampling, costing to arrive at an approved product configuration.
- Purchasing of required materials, actual manufacturing time, subcontracting time, testing and quality assurance steps.
- Manufacturing time including queue(waiting) time, set ups, actual run time, and move time.
- Transportation time to the customer.
Depending on the complexity of the products produced in a make-to-order environment, there can be many iterations to each of the steps listed, but you get the idea. The cumulative lead time is typically thought of by putting all these steps in sequence, one after the other. A better approach is to examine how many of these can be done in parallel or at least with as much "overlap" as possible. Here are some examples:
- Can the raw materials be specified early in the development process, purchased, and delivered ready for initial production before every engineering detail is finalized.
- Does each department recognize the importance of executing their piece of the process as quickly as possible. Have each department publish a lead time for their activity and then monitor the actual time on each project. Don't forget to challenge each department to reduce their lead time before the next project.
- Assign a Project Manager to each major project or proposal. Empower that person with authority to make decisions and take steps to keep the project moving.
- If there is one engineering activity that is a significant bottleneck, or, if there is one type of manufacturing where your capacity is limited, consider outsourcing or subcontracting that part of the work.
Companies producing products of this type try to balance investment in finished goods inventory with customer service. As the statement implies, measuring inventory turns and customer service levels by product category, customer, Sku, etc. is critical to achieving the optimal balance.
Once you have the measurements in place, there are several approaches to take with regard to lead time reduction.
- Lot sizes - Most make-to-stock products by definition are produced in batch quantities where the batch size is determined based on economical quantities for the process and equipment. There also is set-up or changeover associated with batch production. Internal lead time results from both the set-up and the actual production time for a given batch quantity. Reducing the lot sizes and/or reducing the set-up times can significantly affect your total lead time.
- Materials planning - Virtually every batch or continuous process manufacturer uses an MRP program to time the ordering and scheduling of raw materials and components into their manufacturing operations. Attention needs to paid to what lead times are put into the system for each step in the procurement process. If every step is "padded' by just a day to allow for uncertainty, the cumulative result will be too much inventory.
- Suppliers - Your purchasing group needs to meet with supplier personnel and thoroughly review the lead time assumptions and pro-actively seek ways to shorten the purchasing cycle. If your suppliers are not offering some type of vendor-managed inventory, make and hold programs, etc. they need to be challenged to do so.
- Forecast accuracy - The notion of measuring accuracy of the sales and marketing forecast is often dismissed by statements like "forecasts are never accurate, that's why they are forecasts". Do not fall into that trap. Develop a rudimentary measurement and then explore ways to improve accuracy. Then cumulative lead time can be reduced in proportion to the improved accuracy.
- Warehousing and transportation - The location and number of warehouses, the transportation lead times both inbound and outbound need to be addressed so that the impact on total lead time is understood. Many companies now utilize logistics suppliers that can provide better service at lower costs for these activities.
Good Things will happen
As you reduce cumulative lead time, you will start to see these benefits:
- Shorter lead times typically result in smaller lot sizes. The end game here is to convert to a lot for lot ordering policy.
- As cumulative lead times are reduced, the accuracy of the demand forecast becomes less important. Customer demands are more "predictable" as total cycle time is reduced.
- Customer service levels improve. Your organization is able to deliver the right product mix on a more consistent basis. If out of stocks do occur, the recovery time is much shorter that before.
- The need for safety stocks is reduced throughout the system. with both demand and supply more predictable, the just-in-case stocks can be eliminated.
Inventory exists to allow companies to ship materials to customers when they want it, even if the time from customer order to due date is a shorter time period than the manufacturers cumulative lead time. What I have suggested in this article is that you should follow reductions in your cumulative lead time with inventory reductions of roughly the same proportion. Ultimately, the inventory reduction should be 1.5-2 times greater than the reduction in lead time. This is not an exact science, so make the reductions slowly and monitor customer service. Also, this is not a one-time activity. As your business changes and your customer's become more demanding, lead time reduction should be an on-going activity.