Recently I was working with a client who was struggling with all too common maladies in its internal supply chain. The company operates three Midwestern plants where products from one plant are frequently consumed in the production of finished goods at another plant.
The following was my follow-up to a couple of pieces of written communications and a tele-conference with members of their management and executive team.
Thank you for arranging today’s tele-conference. I genuinely appreciate the value of each attendee’s time.
In fact, it was in appreciation of that time that I felt it most important to cut to the chase—as the saying goes. In my opinion, it is impossible to really troubleshoot and resolve what have become complex and involved [manufacturing and supply chain] issues and processes by discussing them at a high level and in the absence of concrete working examples—accompanied by the data and parameters in the system that drive decisions and execution. (By “system,” we are speaking of the entire enterprise, and not just technological systems.)
As we work with more and more small to mid-size manufacturers and other supply chain participants with whom we come into contact, this simple axiom becomes ever more to the point:
All benefits accrue to the system (that is, the enterprise or the entire supply chain) from the flow of relevant information and relevant information.
We believe that you and your team have begun to see this clearly even through the simple example that you provided during our conversation and in the preceding correspondence. When you issue a work order that calls for the production of 100 parts, when only 25 of those parts are actually needed in the flow of materials from a demand perspective, then the extra 75 parts become the flow of irrelevant materials in your system. When you put enough irrelevant materials into your system, these irrelevant materials begin to clog up the flow of relevant materials. Furthermore, the action messages that are triggered as the result of the confusing flow of irrelevant materials become a stream of irrelevant information that simply add noise and confusion to your processes.
When you indicate, “We are always running out of parts;” what is that?
That is merely the symptom of two related issues:
- The relevant information that should have triggered the acquisition or production of these materials was missing from the system
- The missing relevant information led to the STOPPAGE of the flow of relevant materials
When you say, “We need to be able to create pull sheets for our in-house departments to pull part made in-house…;” what are you saying?
You are declaring that you have a LACK in the flow of relevant information which is leading to a breakdown in the flow of relevant materials.
There are really five (5) critical and sequential steps we apply in moving companies toward being more demand-driven. The first of which is to being making strategically aligned decisions about WHERE and HOW MUCH inventory should be stocked at various positions in your process. The following is a simplified example*:
We would like to call particular attention to the inventory buffer for component Part 200 and purchase Part 50. These two strategically-sized buffers provide three simultaneous benefits to the system when properly implemented:
- They absorb variability. They function as “shock absorbers” both for variability in supply (Part 50 absorbing variability from supplying vendors and Part 200 absorbing all of the variability in processes A, B and C of production.
- They decouple lead times. These positions mean that the lead-time for production of the end-items can be reduced significantly.
- They provide a measurable R.O.I. (return on investment). We can talk more about how this ROI can be calculated for each SKU-Location.
Absorbing variability on the supply side is particularly critical for Parts 50 and 200, because they both feed the flow of materials into critical resource E. Generally, a critical resource is a capacity-constrained resource, but it is not necessarily so. Sometimes it is just a resource that functions well as a control point for processes flowing into and out of it.
As we said in our tele-conference, traditional MRP has both good and bad aspects. It is good in that it gives you a way to see all of the connections between top-level produced items and the lower-level components and raw materials. This is good—even, essential—from a high-level planning perspective.
However, MRP is very bad about giving proper signals for production! Why? Because it wants to plan everything from end-to-end. It wants to look at top-level demand, all of the supporting data, blow through the BOMs, and then provide you with all of the action messages for every item you should make or buy. This may mean looking out into the future week or months based on invariably incorrect forecasts of demand.
But, if you look at the diagram above, you can readily see that, if you have sized your BUFFERs correctly, planning for processes A, B and C really only need to be concerned with the status of the BUFFER for Part 200, and cover only five days into the future. Similarly, planning for Part 300 really only need be concerned with the status of the Part 300 BUFFER and a seven-day planning cycle. All of the action messages can be derived from the (virtual) state of the BUFFER. Priorities at any shared resource can be easily determined by simply comparing the (virtual) BUFFER status of all of the buffers fed by any given process (or vendor).
Creating a system like this means you no longer need a single, massive technological system, dependent upon hundreds of parameters and variables, and attempting to guess what might be happening weeks or even months into the future, to drive every make and buy decision. Instead, planning time horizons are dramatically shortened (we call this, DECOUPLED* DEMAND-DRIVEN MRP) for most items and clear—absolutely unambiguous—action and priority signals flow up and down the supply chain.
Of course, this leads to HUGE BENEFITS at the FLOW of RELEVANT INFORMATION increases and the FLOW of RELEVANT MATERIALS increase. This also increases profits as the WASTE associated with the flow if irrelevant materials and information is taken out of the system.
What are the steps* to get there (regardless of the technologies involved)?
These steps need to be address in sequence in order reap the maximum benefits—read: profits and ongoing improvement, leading to improved morale and higher quality, too.
We believe that taking a look at DBR+ is a good start, but don’t forget what we said about the need for “new thoughtware*.”
Companies that take this approach virtually all reap benefits in
- Improved service levels
- Increased revenues
- Reduced inventories
- Falling operating expenses
- Improving cash flow
Let us know when you are ready for next steps.
Thank you, again, for your time today.
* CREDITS: I must give credit for many of the concepts presented herein to Debra Smith and Chad Smith in their outstanding new book, Demand Driven Performance: Using Smart Metrics published by McGraw-Hill Education, 2014.