Thimster Remote plant managers have been trying to implement lean tools. Based on what I had been advised, two years ago I instructed them to move forward with lean. I was excited by lean's potential for reducing costs and improving cash flow given what other companies in our industry had accomplished. Some lean improvements have trickled down to our bottom lines: a focus on fewer capital investments has freed up cash during this tough economic time, and quality-at-the-source has cut down our rework and scrap. But our attempts to streamline production have had a disastrous impact on our customers and supply base. We're constantly running out of supplier components and, downstream, we're missing deliveries even though we've got plenty of finished goods — just the wrong finished goods.
I don't know this lean game like one of those "sensei," but even I can see the problems when walking around our plants, talking with suppliers, and fielding angry calls from customers. Thimster used to run traditional production lines with products (wireless radio-control devices) moving from process to process in moderate batches. OK, they were large batches, but we didn't miss deliveries. Now we've moved to cells for product categories, and we've got inventory — components and finished goods — piled around every cell. The sum of the cells' inventories today must be twice that of the old lines.
To make matters worse, logistics established small-batch deliveries from our suppliers. Good thing, right? Wrong. Our forecasting and production scheduling methods have not changed much since two years ago when they looked weeks or months out, but we're trying to schedule supplier shipments by the day. It's a crapshoot what comes in. I watched a cell team scramble to build "whatever they had components for." This has strained cash-strapped suppliers, who say we're making them exhaust more resources to produce fewer goods. We probably contributed to one supplier's demise, and a number of key suppliers are dropping our business. Others are incredibly frustrated, on thin financial ice, and/or not the cream of the crop. Our supply-side inventory is now at great risk.
We need a strategy to manage inventory at both ends of our plants. I'm hoping lean can accomplish that. What are we missing?
* The Challenge incorporates hypothetical persons, companies, and products and does not portray the actions of any actual persons, companies, or products.
By Nari Viswanathan
Thimster's case is similar to a lot of manufacturers who look at lean principles in a myopic fashion. In addition, you and your staff have made a number of errors.
Thimster's plant managers tried to implement lean the wrong way: local reduction of inventory at the plants without considering the impact on the order-to-delivery process from suppliers to customers. Thimster also went about converting to a cell manufacturing approach without revamping the forecasting, production scheduling, and inventory management processes. The reason why the cells have more inventory in the past is that the demand for products is out of sync with the supply of components that are available.
Another flaw is that you have reduced the batch sizes for your suppliers without providing them a more accurate time-phased forecasts, which resulted in suppliers doing expedited shipments and rework with an overall increase in their costs. These problems have resulted in an erratic schedule and delivery performance for the supply base and customer, respectively. The best way to describe Thimster's problem is that demand and supply signals are unsynchronized.
The reality is that today's businesses have the requirement to achieve goals that are in conflict with each other, such as:
- Volatility of customer demand,
- Decrease inventory while improving order-delivery performance,
- Need for increased asset utilization and reduced working-capital requirements,
- Decrease supply chain costs while dealing with a distributed supply chain,
- Pressure to reduce lead times while maintaining minimal finished-goods inventory,
- Reducing total setups investment while striving for small lots, and
- Increased product portfolio complexity.
In order to create the ideal lean plant, pure lean principles need to be coordinated with industry leading best practices in supply chain such as intelligent inventory management, response management, and demand management. And keep in mind that the approach of avoiding software as part of a lean implementation is no longer realistic in today's environment due to the simple fact that there are too many constraints that cannot be handled manually with ad hoc tools. Of course, black box approaches will not be able to handle the day-to-day exceptions that happen and, hence, the solution should arm the plant personnel with data to make informed decisions by providing visibility to operational information and exceptions.
The following are actionable recommendations for Thimster's plant managers and the extended supply chain teams for resolving your existing situation:
Develop standardized information flows from supply chain organization to manufacturing and vice versa:
- Thimster does not seem to have a sales and operations planning (S&OP) process for sharing the ability of the plant to support customer demand on a periodic basis. It could be the case that Thimster's plant managers are not present in the S&OP meetings. Either of the above two cases are serious issues that must be resolved.
- There should be a bidirectional information flow established between the supply chain and the manufacturing organizations, such as weekly customer forecasts, monthly S&OP plans from the corporate supply chain group to manufacturing, weekly delivery schedules, and monthly adherence to S&OP plans from manufacturing to the supply chain.
Determine optimal inventory levels to ensure reduction of wasted inventory, using inventory management solutions to establish optimal safety stocks at the various buffers within the supply chain:
- Instead of keeping excessive work-in-process inventory at the plants, a sufficient amount of finished-goods inventory must be kept in order to meet excessive demand.
Incorporate demand and production variability, inventory levels, and supplier lead time as part of the level plan creation process:
- The goal of the level plan/schedule is to consider inventory targets, demand volatility, and supply process variability to create a level plan that satisfies order due dates and inventory targets.
Develop lean techniques that can support various kanban variations suitable for supplier and internal operations:
- The traditional lean assumption that the demand and mix is constant and doesn't vary more than ± 10% is inadequate for most environments across all industries sectors.
- Simple manual and visual controls are not sufficient to handle demand and mix variation in today's environment.
- Software solutions that enable you to model various kanban variations, including FTVQ (fixed time variable quantity), FQVT (fixed quantity variable time), POLCA (paired-cell overlapping loops of cards with authorization), CONWIP (constant work in process), should be explored.
- Presentation of a time-phased view of inventory and kanbans for advance warning and exception management is possible through software solutions.
Lastly, create a responsive supply chain and not a clogged supply chain:
- Thimster has unwittingly created a supply chain that has badly misaligned the demand and supply signals, thus creating challenges at both ends.
- Management should ensure that there is an effort to create a truly responsive supply chain that allows dynamic balancing of supply and demand. Do this by providing the tools and a corporate process to gain visibility to potential exceptions between demand, supply, and financials in order to execute effective corrective actions.
Nari Viswanathan is Vice President and Principal Analyst for the Aberdeen Group's Supply Chain Management Practice (www.aberdeen.com). Nari heads up the supply chain planning practice and counsels enterprises on their supply chain planning strategies in areas such as sales and operations planning, demand management, inventory management, network design, and customer/supplier collaboration with specific emphasis on financial performance. He can be reached at nari.viswanathan@aberdeen.com
By Randy Littleson
It sounds like your implementation of lean, in particular, and of a pull-based replenishment system (kanban) was not implemented properly. The proof is in the inventory. If the company really had implemented lean, there should not be piles of component and finished-goods inventory in the cells! It also seems that forecast accuracy is very poor. While in a full pull environment, forecast is less critical, it is critical in providing your suppliers with the best information possible on future requirements. The forecast process must be evaluated and improved.
Implementing a kanban system properly will do a number of things for you. First, it will limit the amount of inventory per the kanban design between any nodes in the supply chain. This can be internal nodes — between assembly cells or work centers — or external nodes between suppliers, distribution centers, or customers. If this was done properly you would not see inventory "piled around every cell."
Second, a kanban system authorizes the replenishment of material (raw, work-in-process, or finished-goods). No work will start until a kanban (a card representing inventory, bin holding inventory, or some other trigger) is released by the downstream work center or customer that consumed the material. This is a way to get closer to the customer, regardless if the customer is the next work center, the distributor, or retailer. In the case of finished goods, this will ensure you have the right mix.
The third thing a proper implementation of a kanban system will do, and this is the least understood part of kanban, is that it provides a visual system to identify problems and prioritize which problems should be solved first. Let's use an analogy.
In this example the water represents inventory. The rocks represent the problems Thimster is running into. As you reduce the water, the problems begin to surface. That's actually a good thing. You want to gradually surface problems and resolve them, rather than hiding them with inventory (cash). But many times people beginning a lean program arbitrarily remove inventory and expose more problems than they can handle. You can see how the ship would become grounded.
At Thimster, you've reduced batch sizes before you were ready for it; you exposed problems you weren't ready to deal with. By using kanban to remove inventory "one less at a time," you can manage the improvements and prioritize problem resolution. Each problem requires a decision — can you remove the rock or do you put more inventories back into the system? There are obvious improvements to costs, operations, and flow by removing the rock.
Here is what the visual will look like if you start removing kanban systematically. It will immediately identify problems in the process flow. If you are at a work center with a full inbound queue and no authorization to replenish, this means there is a problem at the downstream node because they are not releasing kanban. If you have authorization (kanban) but nothing in the queue, there is a problem at the preceding upstream node. Kanban immediately highlights flow issues for timely problem resolution before there is negative impact. This will uncover the rocks mentioned above.
All of your kanban work should have been preceded by creating a value-stream map of the process and a kanban design to determine the proper starting inventory levels and limits when moving from traditional production lines to cell-based production.
Another key to a successful kanban design is to be able to re-evaluate, at any time, the kanban limits (number of bins and bin sizes) whenever demand patterns change. An out-of-date kanban design will cause excess or shortage conditions. Re-evaluating the forecast process will provide some benefit, but in the current economic conditions, Thimster needs to get closer to the customer and do a better job of demand sensing. You also need to be able to simulate, on-the-fly, resolutions to problems caused from unexpected demand requests. You need to do this collaboratively and include your supply partners.
Finally, understand that lean is not simply kanban, pull, or removing inventory. You, plant managers, and the entire workforce need to become more adept at using the right lean problem-solving tools and techniques so Thimster can effectively remove rocks and not use inventory to mask problems.
Randy Littleson is vice president of marketing with Kinaxis (www.kinaxis.com), the provider of an on-demand service that empowers multi-enterprise manufacturers with the integrated demand-supply planning, monitoring, and collaborative response capabilities required in today's complex and dynamic world. Randy can be reached at rlittleson@kinaxis.com
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