Category Archives: Lean

Inventory Reduction Tips

Inventory is expensive. Often very expensive. In addition to the storage costs that result from having to maintain extra space, it ties up working capital, which can cost you dearly. Therefore, unless you’re getting a deal too good to pass up on a plastic or metal that is currently skyrocketing in cost, you want to get your inventory as lean and mean as possible. How can you do this? A recent article in Industry Week, inspired by Cornerstone Solutions, had a fairly exhaustive list of what you can do to reduce inventory. The suggestions were:

  • Reduce Demand Variability
    Get a better handle on what you are using, when, and make sure that you order consistently from your suppliers.
  • Improve Forecast Accuracy
    Combine your improved insight into your current usage with upcoming marketing campaigns and market projections to forecast better. Then alter your order sizes and intervals as appropriate.
  • Re-examine Service Levels
    How fast do you really have to service a customer if something breaks. If you’re selling a key component in a production line, then you definitely have to do next day, if not same day, servicing and must have the part(s) in stock. But if you’re selling tractors, and Farmer Joe’s breaks down on a Friday, I’m sure that, even if he is a little disgruntled, he can wait until Monday. And if you’re selling iPods — guess what, your user can go without a replacement for a couple of days.
  • Address Capacity Issues
    Make sure your low-lead time suppliers can produce enough products to meet unexpected demand spikes (that you sense on the front-end because you’re carefully monitoring your sales data with amalgamated nightly feeds through your supply chain visibility solution).
  • Reduce Order Sizes
    If you only use 100 a month, don’t order 1000, even if the discount “looks” attractive — chances are, after you factor in the holding cost and the working capital cost, you’re losing money.
  • Reduce Manufacturing Lot Sizes
    Find a supplier who can produce smaller lot sizes economically, especially for items that you have low volume requirements for.
  • Reduce Supplier Lead Times
    The faster you can get a product, the less of it you have to keep in stock. Work with your suppliers to reduce lead times as much as possible.
  • Reduce Manufacturing Lead Times
    Select manufacturers who can quickly re-configure their production lines and who have short lead-time relationships with their raw material suppliers.
  • Improve Supply Reliability
    Make sure that you either dual-source or have a back-up plan ready to go if something should happen to your primary supplier or its primary facilities.
  • Reconfigure the Supply Chain
    Revise your distribution network to be as efficient as possible. Don’t be afraid to deploy strategic sourcing or distribution network optimization solutions.
  • Reduce the Number of Items
    Standardize on common components across your product lines and across your business units. One type of memory, one type of power supply, and one type of paper when one will do.
  • Eliminate Questionable Practices
    Given that certain types of questionable practices can land you in jail under SarBox, this should be a no-brainer.

Great advice (even if the article itself was a little too brief).

Saving Fuel AND Your Pocketbook – Do’s and Don’ts Part II (Do’s)

Yesterday’s post exposed a number of gas saving myths that are floating around the web. Today, we’re going to give you some tips that will save you gas (if they apply to your situation). So, with out further ado, here are real gas savings tips:

TIPS

  • Don’t idle!
    As much as 1/3 of all fuel consumed is through idling. If you’re picking someone up, unless they’re already at the door on the way to the car, turn the car off and use the 15-second rule. Although it does take more gas to start an engine than to idle it for a few seconds, today’s engines are much more efficient than those built when cars first started to be mass produced and mass consumed in the middle of the 20th century, and the amount of gas required to re-start an engine is roughly equal to a mere 10-seconds of idling time for an average vehicle. (Furthermore, 10 minutes of idling costs you five miles and ten minutes of idling a day adds up to 27 gallons of fuel a year.) Furthermore, don’t idle for more than 30 seconds when starting your car, even in freezing temperatures. (Today’s vehicles don’t need any longer than that.)
  • Don’t speed!
    It might be true that cars are more efficient on highways than on city roads, but that’s because they’re traveling at a constant speed and not constantly stopping and starting. Driving 10 mph faster than the speed limit can increase fuel consumption by as much as 20%! I can’t recall if it’s by design or by accident, but most vehicles hit their fuel efficiency peak somewhere between 45mph and 65mph, a range which covers the speed limit in most states and provinces. (Depending on terrain and, most importantly, wind resistance – which can really start to kick in at speeds as low as 40 mph!) Some tests show fuel savings of over 30% for moderate driving (when compared with aggressive driving).
  • Be easy on the gas and the brake!
    Not all roads are flat, and, for most of us, when we hit a hill on the highway, our natural reflex is to step on the gas – even if the hill is a small one! Furthermore, if we are constantly pushing the limit, our natural reflex is to then brake on the way down. This increases gas consumption by at least 10%. If you’re driving below (or at) the speed limit, the best thing to do is to maintain the current level of fuel flow and rpms. The slight loss in speed on the way up will be mostly made up by the slight increase in speed on the way down, and if you were under (or even at) the speed limit before you started going up, by the time you reach the bottom, you’ll still be under the limit (and have nothing to fear).
  • Don’t be afraid of overdrive!
    On long road trips where you are continually driving at highway speeds at long periods of time, put the engine into a higher gear. Used wisely, the right gear will save gas.
  • Use Cruise Control on the highway
    If you’re a lead foot by nature, or horrible at maintaining a (near) constant speed, use cruise control. Modern systems are incredibly efficient, average fuel savings at 7%, and some systems (especially when paired with lousy drivers) can increase fuel efficiency by as much as 14% on the highway.
  • Change your oil regularly
    A sludge-free engine operates more efficiently, and this reduces fuel consumption at any speed. (However, just like unnecessary air filter changes, unnecessary oil changes have no effect. So, don’t change your oil every three months just because your manual tells you to. It’s a function of time AND mileage.)
  • Don’t use your trunk or flatbed as permanent storage
    Every pound you haul is more work for your engine. Hauling a 50 lb toolbox and 30 lbs of golf equipment around when you don’t need it is equivalent to hauling a youth around all the time. With an average vehicle size of 2500 lbs plus these days, it might not sound like much, but over the course of a year, it adds up. For the really cluttered, it could increase your fuel efficiency by 5% to 10%.
  • Don’t keep your Hummer’s gas tank full in the city.
    Full tanks, like toolboxes and golf clubs, increase vehicle weight, and this is especially true in large vehicles with large tanks that hold well over 100 lbs, or more, of fuel. Although the savings will be negligible in an economy car with a 13 gallon tank, a SUV / truck with a 23 gallon tank can hold 142 lbs of gas (at 6.2 lbs / gallon).
  • Walk to the corner store and bike to your friend’s house.
    If you can walk or bike there in 15 minutes, just do it.

Saving Fuel AND Your Pocketbook – Do’s and Don’ts Part I (Don’ts)

CNN Money recently ran a good article on 6 gas-savings myths which is a good read for any of you who really do want to conserve fuel and the pocket-book it is taking a bigger chunk out of everyday. So, before I get to nine gas-saving tips, here are the six (plus one!) myths:

MYTHS

  • Fill your tank in the morning
    Sure, cold fuel is denser than warm fuel, but we’re talking gas, not water, and unless you’re living in Northern Canada near the arctic, the difference in volume is non-existent. Furthermore, the temperature difference of gasoline coming out of the nozzle varies little over the course of the day, so, as Consumer Reports rightly points out, there is little benefit to pumping during the coldest part of the day.
  • Change your air filter
    Modern engines have computer sensors that automatically adjust the fuel-air mixture as the engine’s air supply is reduced over time by an air filter that slowly clogs. Thus, the fuel savings from replacing your air filter more than necessary will be nonexistent.
  • Use premium fuel
    Premium fuel may be “recommended”, but it is definitely not “required”. Modern engines automatically adjust spark plug timing depending on the grade of fuel detected. You’ll get a slight reduction in horse-power, but you won’t get any fuel savings.
  • Pump-up your tires
    Under-inflated tires will increase fuel consumption, but over-inflated tires will not significantly decrease fuel consumption, because the reduced friction will not be that significant at normal driving speeds. Furthermore, the decreased traction will significantly increase your risk of crashing at speeds where fuel savings (theoretically) starts to kick in.
  • Turn off the A/C
    At slower speeds, modern A/C will cost you about 1 mpg, so, in an average economy vehicle, you could theoretically increase fuel economy about 4% by turning off the A/C in the city. However, at higher speeds rolled-down windows greatly increase aerodynamic drag, which increase fuel consumption, and A/C actually saves you fuel. Thus, if you make efficient use of the A/C (i.e. don’t try to cool your car to 15 and use the recycler feature for a quicker initial cooling once the air in your vehicle reaches a temperature lower than outside), the net is that the fuel consumption by modern A/C technology, on average, is negligible.
  • Use Bolt-ons and Pour-Ins
    Before you buy any device or additive to make your car more fuel-efficient, ask yourself the following “if there was such a device, wouldn’t the car manufacturer or fuel provider be selling this device, especially given the premium they could charge for their car or fuel with today’s fuel prices“? Most are just sugar pills, sold by con-artists who know that many of us will be just as happy with a placebo as a real pill (if we don’t know we’re getting the placebo).

Unfortunately, the article missed my favorite MYTH:

  • Go standard.
    Unless you drive like a pro, you’re not going to save any gas going standard and, in fact, you might actually consume more gas AND wear your engine out faster. Most modern automatic transmissions are so good at detecting when to switch gears that the maximum fuel savings from going standard is about 1 mpg. But chances are, unless you’re a very good driver, you’re not going to see any savings on average.

In our next post, we’ll discuss what you can do.

Capacity, Inventory, and Lead Time

Recently, Supply and Demand Executive published an article called “The Three Things You Need to Get Right in Your Extended Value Chain” by Steve Mehltretter and Vadim Kapsutin which suggested that there are only three critical operational resources that businesses need to balance and get “right” in order to succeed:

  • capacity
  • inventory
  • lead time

Although I don’t agree that the problem is this simple, I do agree that these are three key operational levels that need to be well understood if a business wants to improve its operation and that the authors are right when they state that most companies struggle with effectively optimizing these resources holistically and in an integrated fashion across the extended enterprise. I agree that few companies understand their interactions well enough to make explicit and accurate trade-offs between them and take a “silo” approach to optimizing each resource independently and that this frequently leads to poor cost, quality, and delivery performance. These issues really need to be looked at as a whole, and not as three distinct problems.

The authors also note that operations research experts can derive the interactions and trade-offs on a mathematical basis, but the question of how managers can use the insight to make the right decisions within their organizations still goes unanswered for the most part. They also note that most managers don’t understand how each of these operational resources individually affect quality, price and (reliable, on-time) delivery – the dimensions that matter to the organization’s customers. I have to agree here as well. I also think that until the right optimization & simulation based tools to understand the tradeoffs are acquired by an organization, the situation is not likely to change.

Diving in, capacity is defined as machine capacity, labor capacity, and the physical space required to achieve a desired level of output within a desired period of time. It’s something that every business measures and controls, but few appropriately take the notion of demand “uncertainty” into consideration when planning and fewer still look at capacity in conjunction with inventory requirements and inbound/outbound order-to-delivery lead times. Volatility of demand and order-to-delivery lead time need to be an integral part of the overall resource planning exercise. This is the only way that an organization will be able to accurately determine where capacity should be located, what form it needs to take, and what levels need to be available.

Inventory is defined as the number of finished goods on hand as well as the number of unfinished goods and raw-materials on hand required to produce the finished goods. A high level of finished goods inventory (theoretically) allows for shorter order-to-delivery cycles and better customer service, but can come at a high cost. A low level of raw materials inventory can lead to significant idling of capacity or long lead times when demand suddenly spikes.

Lead time is defined as the amount of time it takes to get new raw materials into the processing plants and get finished goods from the plants or warehouses to the end customer. When not well understood, procurement may grant excessive lead times for piece-price reductions that cost the company more than it saves or finance may require unreasonably low levels of inventory that have the same negative effect when demand spikes.

The authors than include a nice chart that categorizes key trends, their drivers, and the resulting impact on critical operational resources.

Trend Drivers Capacity Impact Inventory Impact Lead Time Impact
Globalization new market emergence & low-cost labor locations more capacity required more transit stock and finished goods inventory longer and more variable lead times
Extended Enterprise technological and functional focus on “core” less capacity required more transit stock and finished goods inventory longer and more variable lead times
Product Complexity niche market, product localization, & shorter life cycles more capacity required more finished goods and raw material inventory longer and more variable lead times
Capacity Consolidation fixed and variable cost reduction, market share, new markets less capacity required less finished goods and raw material inventory longer lead times

Finally, it finishes off with some recommendations of the solutions that companies should employ to come to grips with these problems, which include:

  • Develop Buffers to Improve On-Time Delivery Performance
    Capacity and lead time can also be buffered like inventory. For example, telecommunications and computing always reserve redundant capacity and companies can pad lead time requirements for non-critical or non-fad goods.
  • Make Differentiated Customer Service Strategies a Reality
    Understand what each customer segment values in terms of cost, quality, features, and delivery performance. Don’t promise more than is necessary up-front, leaving room for buffers if needed, and balance inventory, capacity, and lead time to meet each customer need even in extreme situations.

“Demand Shaping” or “Demand Sensing”?

The EE Times ran a great article by Romit Dey and Manoj K. Singh last month on “Demand Shaping” and how it aligns customer trends with supply. But I have to ask, is it really “demand shaping” or is it more “demand sensing”. Is not “demand shaping” what marketing and advertising does? It’s true that supply chain has a supporting role, in terms of letting marketing know how much a product can be produced for, how many units can be produced, and how fast the units can be in consumers hands. However, what supply chain really does, in a company that runs like a well-oiled machine, is sense the demand that has been created, and the demand that is in flux, and adapts to the situation.

So what is “demand sensing”? According to the article, which calls it “demand shaping”, it is a demand-driven, supply-constraining customer-centric approach to planning and execution that aligns process with customer demand at strategic and tactical levels and with an organization’s capabilities which helps optimize use of resources, reducing excess inventory and improving inventory turns. More specifically, at the strategic level, the emphasis is on aligning customers’ long-term demand patterns to long-term resource and capacity constraints and at he tactical level, the focus is on understanding demand patterns and then influencing customers’ demand toward available supply, using the levers of price, promotion and products/services bundling.

How do you sense demand? As the article points out, you need three key capabilities:

  • demand pattern recognition
    who is buying what, when, and in what quantity
  • supply supportability analysis
    how much can be made, when, and how fast can it be delivered
  • optimal demand steering
    if demand patterns suddenly change, and you do not have enough of product A, can product B be used as a substitute and can customers be steered to that product instead

The first skill is obvious – you need to manage inventory appropriately so you aren’t holding too much, and generating excessive inventory carrying charges, or holding too little, and selling out before supply can be replenished. The second skill is less obvious, but easily understood – you need to know how much you can make, and how fast it can be made, to appropriately plan your inventory level.

The third skill is what takes “demand sensing” to a whole new level, to the point that it is almost “demand shaping”, but not quite, and hence the source of confusion. It is, as it’s called, “demand steering”. The Dell example the authors use is the best. By maintaining real-time visibility into its supply chains, Dell knows its inventory levels now and in the immediate future on an hourly basis. If a customer configures an order for a 60GB drive on their web-site, and Dell knows they don’t have enough stock to configure the system immediately, then Dell informs the user of a delayed ship date and presents the customer with an opportunity to replace it with an 80GB drive at a discount – steering the customer towards another product that can meet their needs, even if it is more expensive, but Dell takes a discount on margin to make the sale and keep the customer.

The key to success, as the article points out, is to make sure that all three processes are part of a single, integrated loop. A supply supportability analysis is run on a regular, automated, basis; inventory is updated on a near real-time basis; and short-term forecasts are updated at least daily. Each of these numbers is compared on an automated basis, and as soon as forecasts exceed inventory and obtainable supply, an alert is sent to a planner who determines whether there are alternative products that can be used to meet the need or if marketing and sales needs to be informed that they need to take actions to steer demand on their end. Then, customers are steered towards the alternative products through the appropriate channels – in real-time.

The article also does a good job at overviewing what is required for a demand sensing framework. The elements it outlines are:

  • inter and intra organizational connectivity
  • the ability to capture, structure, and comprehend data from customers and channels
  • advanced business intelligence to identify demand patterns
  • optimization
  • common processes
  • a common data model
  • common performance metrics
  • available-to-process capabilities
  • exception management
  • electronic negotiation and collaboration

The best thing about the framework is that these are basic capabilities and processes a good organization should already have in place. It’s just a matter of tying them together and using them wisely!