The Cheesy Thermometer

A client wanted to cut their inventory from $6.5 million to $4.5 million this year. We devised several strategies to do that, and then I suggested they put a “United Way” thermometer on the wall of the purchasing department to track progress toward their goal. One of the people in the department took a poster board and created a nice thermometer and hung it on the wall. Each week they posted the total inventory balance on the chart, and whether the total inventory actually went up or down. My client referred to it as their “cheesy thermometer.”

The impact was amazing. Simply being able to see the score had a big impact on people’s activities toward inventory reduction and the results have come quickly. Just last month they reduced inventory by $1.2 million. They’ve had a few reversals, but seeing the score prompted an even stronger resolve to hit the goal. They’ve identified where the final reductions will occur, which should put them past their objective, and when that happens, the CFO has agreed to buy them all dinner. Maybe they’ll have cheesy pizza to celebrate.

© 2014 – Rick Pay – All Rights Reserved

How Do Your Inventory Levels Affect GDP?

Last week I was quoted in a article on how inventory levels contribute to gross domestic product (GDP). You may be surprised by inventory’s impact.

The author concludes:

  1. All companies, whether they carry inventories or not, should prepare for business cycles accentuated by inventory swings.
  2. Companies that hold inventories should reevaluate their practices with any eye to trimming inventory levels now.


Inventory Management vs. Inventory Control

Inventory management and inventory control are both vital to improved performance in manufacturing, wholesale distribution and retail operations. Unfortunately many companies confuse the two, resulting in excess inventory and higher operations costs.

Inventory management is the process of making sure the right materials are in the right place at the right time at the lowest possible cost. Good inventory management leads to high levels of customer service, high inventory turns, good use of assets and increased profitability.

Inventory control is the process of knowing how much inventory you have and where it is. Good control results in smoother operations and improved purchasing productivity because knowing what you have (and where it is) saves time from ordering materials you don’t need to order, and from running around looking for parts.

Without good inventory control, inventory management becomes very difficult. Without good inventory management, customer service and profitability suffer. Both are vital to breakthrough operations performance.

© 2013 – Rick Pay – All Rights Reserved

Think Outside the Bottleneck, Part II

Thank you for tuning in to catch the exciting conclusion of Tuesday’s blog post. This is a story of looking beyond the bottleneck to find the real source of a problem. After examining the pacing step and discovering that parts were missing, here is what we did.

We identified the missing parts, which were supposed to come from the paint booth, where they were waiting on parts from the welding cell. Of course! The welding cell was the recognized bottleneck. But to our surprise, when we went to the welding cell, they hadn’t received the parts either. We headed upstream to the press brakes and cutting tables to look for the parts, and learned that the necessary nesting program was missing.

Empty Nest

Next we visited the engineering department where the nesting programs were made, where we learned that the engineer who does the nesting programs didn’t have any programs to nest. He was assigned to a different project.  Shortly afterward the nest came in, but he was told to finish his side project before he did the nests. That decision to change priorities had shut down the entire line and made orders late.

To solve the problem we turned to the company’s vision and their goal of on-time quality. We traced the process from where the order comes in, which in this case was Customer Service. It turned out that Customer Service could do the nesting themselves if they had the right computer program, so we moved the nesting task out of the engineering department and into Customer Service. We’ve never had a nesting problem since.

More Than a Band-Aid

If we had gone straight to the bottleneck, we wouldn’t have found the real problem. A simple Lean approach to engineering would have changed priorities and altered the engineer’s work-around when he didn’t have anything to nest, but that would have been a band-aid on the problem, not a solution. By looking at the condition we wanted to achieve and the vision we were trying to accomplish, which in this case included shipped on time, reduced cycle time and high quality, we eliminated a repeating issue, raised the shipped on time rate, and lowered inventory levels.

© 2012 – Rick Pay – All Rights Reserved

Blanket Purchase Orders – Supplier Relationships and a Fear of Commitment

Many companies tell me they don’t use Blanket Purchase Orders (BPOs) because they fear it creates a major commitment with the supplier. This doesn’t have to be the case.

A Blanket Purchase Order is usually set up to cover the purchase of one or more items from a supplier over a long period of time, usually one year. It specifies terms, conditions and price. BPOs often come into play when the supplier relationship is based on Kanban, Vendor Managed Inventory or other auto-replenishment systems where normal POs would be inadequate.

Why Are Buyers Reluctant?

The apparent stumbling block is that BPOs typically specify a total quantity for the entire purchasing period. Many buyers fear that the quantity is a firm commitment to purchase, and if business doesn’t go as planned, they will have to buy all of the remaining parts on the BPO. This is simply not true; as with most terms and conditions, it is negotiable.

Building a Relationship

BPOs are what I call relationship POs. One of the large benefits is that they forecast a quantity for the year so that the supplier can plan production or buying activities. This can significantly cut costs for the issuer of the BPO. In my experience, any commitment can be limited to the materials lead time for the supplier, usually 30 days or less.

Removing the Fear of Commitment

BPOs have many advantages including better pricing, lower transaction costs, fewer transactions to keep track of, and closer relationships between customer and supplier. Removing the pressure of an annual commitment makes it easier to reap these rewards.

© 2011 – Rick Pay – All Rights Reserved


Operations Discipline – Water Slowly Boiling!

There is an old story that if you drop a frog into boiling water he will jump out. But if you put the frog into cold water and turn up the heat, he will slowly cook to death. While somewhat gruesome, that is an apt description of what happens when organizations lack Operations Discipline. They slowly die due to increased costs, increased inventory, employee frustration and weak customer service.

So, what is operations discipline? It is the willingness to create and follow processes/rules and hold people accountable for performing them. In lean speak, it includes standard work. In standard work, each process is defined and performed the same way every time. This takes randomness out of the process which improves quality and provides a foundation for continuous improvement.

Recently I have seen a number of companies whose culture does not hold people accountable for following process. Things as simple as having standard part number structures are either non-existent or are not enforced. The result is excessive part numbers, increased inventory, increased costs, increased obsolescence and other things that look like the frog slowly cooking. Turn the heat off – implement operations discipline.

© 2010 – Rick Pay – All Rights Reserved

Supplier Partnerships Really Work!

One of my clients retained me to see if I could find cost reductions in their second tier of suppliers.  These are suppliers that are significant but do not provide my client’s vital materials. The suppliers had been somewhat ignored over the past year due to staff turnover and the expectation for cost reduction was low. I met with the first two today and presented an approach that included increased volume through supplier consolidation; increased visibility through vendor managed inventory; a high expectation for shipped on time, product quality and service; and increased communication through use of blanket purchase orders, quarterly reviews and frequent visits from supplier personnel to be sure that service levels are being met.

The benefit to my client would be reduced inventory, increased service levels, reduced stock outs, reduced numbers of invoices and overall cost reduction. The benefit to the supplier would be much higher volumes, a sole source relationship, much longer planning horizons and potentially a broader range of product offerings.

The suppliers responded with estimated cost reductions of 10% to 18%; much higher than I expected!

© 2010 – Rick Pay – All Rights Reserved

Is Freight The Tail That Wags The Dog?

Many purchasing people I talk to place a very high level of importance on the cost of freight. As they develop purchase orders, the cost of freight often drives the size of the PO. In an effort to reduce freight cost, they often increase the size of the order significantly to “make freight”. Making freight might include getting to a full truck load for a cheaper rate or getting to an order size where the supplier pays for the freight. However, if you look at total freight as a percent of total materials purchased, while the dollars add up, it is most often a very small percentage of the total. If you factor in the cost of holding inventory, especially warehousing costs and obsolete inventory (see my article “Avoiding Obsolete Inventory…” on my web site); freight can become the proverbial tail that wags the dog.

The following graph (prepared by one of my clients), shows the impact of warehousing and logistics on total costs. As you can see, once you get to a certain point, order size gets counterproductive, and the freight cost you save can drive up other costs to the point where they are far greater than freight. Be careful to keep freight costs in perspective.

Inventory Logistics Costs

© 2010 – Rick Pay – All Rights Reserved

BOM Accuracy – Why Do So Many Ignore This?

I was talking to three different clients this week when the topic turned to Bill of Materials (BOM) accuracy.  Based on the looks I got, clearly, this issue is not on the top of the list for attention!  The problem is that inaccurate BOMs are a leading cause of problems with purchasing, inventory accuracy and use of MRP.

 Inaccurate BOMs get that way in several ways.  First, take a look at who owns BOMs (here is where everyone suddenly looks away).  Should it be the engineering department, manufacturing engineering, purchasing, operations, accounting (yes I have seen that!) or the guy down the street?  Obviously this is part of the problem.  If no one owns them, no one is accountable for their accuracy.  Second, often changes occur in a hurry and the paperwork just doesn’t catch up.  Customers want the change quickly and engineering runs to the floor and does a quick red-line to the drawings.  Somehow, the updates don’t occur and with the next revision, the red-line disappears.  Third, often problems on the shop floor cause quick changes so the parts can be built.  Then see the second reason above! 

So, how do you keep the BOMs accurate?  Besides assigning responsibility, the key approach is to develop a regular system of BOM audits.  There are actually two kinds.  First, have engineering or customer service compare the current BOM to the current customer specifications.  Second, have people on the shop floor compare the BOMs to the way things are actually built.  I know of a company that every time a part is built, the shop floor prints out the BOM and reviews it.  In both cases, surprises can occur far too often. 

© 2010 – Rick Pay – All Rights Reserved

Supply Risk – Managing for Confidence

There have been a number of recent issues that have increased attention to supply chain risk.  The volcano in Iceland, the riots in Greece, and the political unrest in Thailand all have had significant potential negative impact on supply chains.  The more typical issues of buildings burning down, labor strikes and weather all are cause for concern in maintaining a free flow of materials from your suppliers.  So, what are the vital things to do to help prepare for such situations?

First, identify your critical suppliers.  These may certainly be the ones where you spend most of your supply dollar, but they may also be suppliers that provide critical parts, parts that are hard to find, or parts where the supplier has some Intellectual Property interest.  Normally, this may be 10 to 25 suppliers.

Second, meet with the suppliers to explore what their risk management plan is.  Explore how they plan to maintain or restore your supply chain.

Third, review it periodically to be sure it stays updated.  Regular meetings should occur with key suppliers anyway, and part of the agenda should be review of the risk management program.

Managing supply risk is a critical yet often overlooked part of strong supply chain management.

© 2010 – Rick Pay – All Rights Reserved