Inventory and Reducing Supplier Lead Time
Nowadays most companies are asking their suppliers to hold inventory from which they can pull at a moment’s notice. In my fifteen years of service as a Senior Application Consultant for Ultriva, I have noticed a trend of towards Consignment/Vendor Managed Inventories/Supplier Owned Managed inventories. The reality is whether the company carries the inventory or the supplier carries the inventory, inventory is an inventory. At the end of the day manufacturing companies are committed to acquiring this inventory.
This inventory, regardless of who carries it, does not reduce the lead time. The best way to reduce inventory is to find the waste in the process and eliminate it. In most of the cases if the supplier states that it takes X number of days to manufacture, it is not the true manufacturing lead time. It is basically comprised of 85% for planning and 15% for the actual manufacturing.
Here is an example I want to share with you. One of our customers was planning to tell their supplier to keep two to three weeks of inventory so that they can pull from it every day as they consume it in the plant. The Supplier came back and told the company they cannot give them the same price because they need to carry and manage the inventory. The customer said they were willing to take the cost.
No one is gaining anything in that process. I asked the customer to give me 60 days to achieve the same results without any extra inventory and without paying more per part. They agreed to try it out, reasoning that it was worth trying, even if the experiment did not succeed. The supply chain manager was gracious to take my point and willing to pilot one supplier with my method.
My main goal was to change the philosophy of MRP thinking. Contrary to typical MRP based fixed lead time, I told the supplier to ship the parts as early as possible. I recommended to the supplier that when his company got an order and if the part is in stock or if it can be manufactured earlier, ship the requested parts right away. This way, his company will get paid quickly instead of waiting for the “Required Ship Date” suggested by lead time.
The Supplier liked that idea and gave us 15 days lead time. Since the Ultriva solution being used has a collaborative supplier portal, the Supplier started shipping the parts early. After 60 days, when I looked at the cycle time report, I saw it took just 3 days for the Supplier to make the parts and ship. Using the customer data collected on the Supplier, I then went to the Supplier and showed them the actual data. In the last 60 days, the Supplier was shipping the parts in three days. I then asked the Supplier, why do we need to carry inventory for 15 days apart from safety stock? The supplier was shipping the parts almost every day.
Real-time Data Reduced Supplier Shipping Times
The Supplier was shocked at this data. They were not aware that Ultriva had the ability to calculate this in real time. Then they came up with an answer, which was shocking to us. They said, “If we do not have raw material, it will take us up to 15 days to manufacture the parts, therefore we do not want to create a problem.” So I put to them this question, “How many times it happened in the last year?” The Supplier answered that it happened twice in the last year.
My next question was, “If you had that issue just for two times in a year, why do you need to carry 15 days inventory for the whole year?” If we are smart, I reasoned, we can manage this in a better way such as seasonal Kanban signals. Kanban refers to replenishment signals that are sent back to the supplier as parts are consumed. Seasonal Kanbans signals, therefore, are spike orders in addition to the regular amount of consumed parts.
The Supplier was hesitant to go to a lead time of three days. We reduced the lead time to 12 days and monitored the results for 30 days. When that went well, we reduced the lead time further every 30 days until we reached a lead time of just five days. It took three years before the supplier got the raw material shortage they were worried about, and that was due to a reason the Supplier could predict two weeks in advance and was able to notified the buyer.
After this success, I have deployed electronic Kanban such as the case described above in more than 50 plants and preached this concept of moving away from measuring and penalizing the supplier for early shipment. Trust me, though, it is very difficult to break the mindset. Very few companies are willing take this lead time risk. They think it will increase their inventory initially and if they don’t monitor the system, it will collapse.
My point is that buyers are managing day in and day out anyway, and paying for excess inventory. If we do it in the right way, we can reduce the actual manufacturing lead time and reduce the inventory for all, no matter who carries the inventory, as there will be less of it. Manufactures will follow this path because C-level executives in a lean manufacturing environment are looking for ways to eliminate waste. Excess inventory represents extraordinary waste. Please leave a comment about your journey to eliminate waste and reduce inventory, or let me know if you would like to talk more about Ultriva’s Supply Chain solutions.