Maximize the value of inventory.
March 14, 2013
by Matt Powell, Assistant Editor
Holding excess inventory is a symptom of bad process. So says Richard Kunst, the CEO of Cambridge, Ont.-based Kunst Solutions Corp. and a disciple of the Toyota Production Process.
“Companies hold excess inventory if throughput time cannot meet customer demand. Too many operations aren’t focused on the velocity of production through their value streams.”
Improving processes along the supply chain is more necessary than ever, he asserts, now that just-in-time production is a post-recession norm.
“Manufacturers are no longer cannibalizing multiple production lines into single ones. Business is coming back, so excess capacity needs to be brought back up.”
Kunst, a management consultant who helps companies become more agile, develop evolutionary management and implement lean solutions, has practiced what he preaches. Previously, he worked as the director of production at Ingersoll, Ont.’s CAMI production plant where he oversaw the production of the Suzuki Tracker and Chevrolet Equinox SUVs, and he cut inventory hold times from 14 to four hours in less than a year using lean tactics.
“Just-in-time is now the norm. A company that a few years ago had three weeks of visibility now has two or three days. It’s a reality of doing business now.”
Inventory is kept to address supply chain variations and minimize disruptions. Companies have to maintain certain levels to handle lead times or time lags along the supply chain. It also acts as a cushion during those times of uncertain supply and demand. Efficient inventory management is a balancing act, but it can be achieved by maintaining sound operational processes along the supply chain.
Here’s how to maximize the value of your inventory:
Think lean. Maximize flexibility by implementing lean concepts to reduce lot sizes and lead times. Reducing those variables reduces inventory.
“More customers are placing orders they want within 24 hours,” says Kunst. “Cycle times have sped up, and by truly adopting lean concepts, you can keep up.”
Improve velocity by understanding how it increases uptime and by getting closer to suppliers.
“For every person working in a factory, there’s 10 people producing the components your factory needs,” Kunst adds. “Consider the supplier base because it reduces variables along the supply chain.”
Collaborate. Managing inventory requires focus along the entire supply chain. Michel Girard, partner of strategy and operations at Deloitte in Montreal, says companies need to develop a collaborative sales and operational process that includes all silos of the business.
“The goals need to meet customer demands while reducing inventory,” he says. “But, a lot of companies abandon this strategy because they’re convinced they will never reach a common number. This is a major opportunity companies are missing out on.”
The collaborative process between sales, manufacturing and finance allows the team to meet a common goal. This strategy is most successful if it’s addressed consistently. Variables along the supply chain must be considered and concerns voiced.
Push to pull. “Don’t think of inventory as units. It’s time,” says Kunst.
A pull system forces companies to react to customer demand.
“Don’t make stuff and hold on to it hoping people will buy it. When the customer knocks on the door, know how to make it quickly and get it out the door.”
Push-based supply chains produce goods that travel through a channel from production to retailer, and production levels are set to react with historical ordering patterns. This strategy takes longer to respond to changes in demand and often lead to overstocking inventory or production bottlenecks.
Toyota’s production model is based on a pull-based supply chain. Procurement, production and distribution are demand-driven, but the strategy doesn’t always require make-to-order production.
Reduce variability. Forecasting is vital to meeting customer demand, especially in today’s shifting markets.
“The objective for manufacturers should be to have the right inventory,” says Robert Tousignant, partner of business advisory services at Ernst & Young in Toronto.
A lot of companies consider inventory as a target, but he says it shouldn’t be a target that’s set. Instead, inventory needs to be a calculated goal that reflects your company’s ability to predict demand and variations in capacity and supply demand.
“In a perfect world, you’d have just enough to make what you need, but the world is not perfect.”
Inventory is there to compensate for variations. If your goal is to reduce inventory, reduce variations.
Boost reliability. Managing inventory is easier if you have a manufacturing process that’s predictable, says Tousignant.
“If you produce an amount one day, make sure it’s consistent. Reliability reduces variations in supply.”
This includes considering factors such as changeovers and set up times.
“Reducing changeovers and set-up times is critical to managing inventory,” he adds.
Consider supplier variations. How is their manufacturing and supply process adaptable to yours? How much can they produce? How do they deliver?
Keep ‘em close. Border challenges are still a variable manufacturers need to consider to manage inventory successfully. Girard advises assemblers to stay within four hours of their suppliers to ease any fluctuations in demand.
“Assess variations along that supply chain. Be ready for delays and account for them,” he warns.
Vendors further away also make practicing just-in-time more challenging. This can be overcome by pushing inventory to vendors and reducing transportation variations, says Tousignant.
“Being farther away introduces more variations, such as transportation and border clearance. Limit them as much as you can by keeping key suppliers close by.”
Get smarter. Girard advises companies against setting inventory as a target independent of desired service level. That requires firms to get smarter about how they’re managing their supply chains.
“Companies need to manage themselves more rigorously,” he says. “Think about inventory in the context of desired customer service level. Work to get as close to 100% as possible. That will depend on how your company is managed.”
Tousignant suggests managing inventory beyond big principles. Apply processes and implement them to ensure they cater to your market or industry.
“The devil is in the details,” he advises. “This is not a one size fits all environment.”
This article appears in the March 2013 edition of PLANT.