When companies want to reduce waste, a key area to start is with controlling inventory and supply chain costs. This reduces the amount of material stored in inventory and can eliminate over production. Using lean manufacturing principles, companies can better identify areas where they can do more with less.
If you only want to focus inside the organization, you only need to look at inventory control – knowing exactly what you have in the warehouse. This can further be broken down into raw material and finished products inventory control. Going beyond just your facility, companies can look upstream to inbound logistics and downstream to customer needs. From raw materials to production capacity to personnel and transportation, there are a variety of inputs that can be optimized. Smart companies take into consideration their supply network including the location of partners, typical supply challenges, supplier capacity, better demand forecasting, etc.
This more macro approach involves mapping your supply chain, and you can’t do this for everything. You will want to map the most important products in terms of maybe volume or revenue. You do this using a tool called value stream mapping applied to a supply chain. Key data areas to consider include lead times, transportation costs, storage and handling factors, inventory holding costs, product damage or spoilage, overtime labor, rush delivery fees and more.
Mistakes People Make
Not all lean efforts are the same. Many companies make mistakes by leaving out critical cost factors. They lack a good system to truly track costs or customer demands. Many companies will just buy a raw material because it is relatively cheap at the time. But you also have to factor in the inventory carrying cost, storage, handling, etc. Will that product degrade or lose value over time? For example, you may need to install an air circulation system or build more covered storage if you plan to buy more material and hold it. These are real costs that may be ignored if you just look at purchase price.
You need to know how much it costs you to keep a thousand board feet in storage for 30 days. How much does it cost to keep a truckload of pallets stored for 30 days? These are hidden costs that live in plain sight. While this may seem simple, many companies never truly capture or factor in these costs. Or the wrong person knows this information and never shares it with those who need to know to better understand total system costs. These concerns can all be overcome with a proper inventory control system involving a better process, data collection practices and possibly spreadsheets or software to share or analyze that data.
People hear inventory control system and imagine a very expensive piece of software. Much of this can be done using spreadsheets and some basic data analytics. Companies have to measure the right things, focus on it and fix problems based on it. You have to capture the data and sometimes that can involve technology too. You may be able to achieve some good success by just analyzing your process and starting to ask the right questions and track the right things. Then once that works well, you can move onto sophisticated tracking programs or technology solutions if warranted.
Push or Pull Strategy?
What order creation approach are you going to use? Will you follow a pull strategy where customer orders dictate production? Or will you follow a push strategy where the inventory you need to have on hand creates an order even when you may not have a customer request yet?
If you’re selling a product that is more like a commodity, you probably have to have something ready to sell. Getting the order may be about having it ready just when the customer needs it. This requires more of a push strategy. But if you like working on a product that is a little bit different, that is kind of a specialty product, then a pull strategy is better. So, standard 48x40s may be something you already have a certain amount on hand. Odd-sized pallets may be better to produce upon request unless you have a long-standing agreement and forecast model for a particular size for a customer.
With a push strategy, you have a product ready to go and can quickly respond to customer demand. But at the same time, it could be also tricky because then you might end up with a bunch of product that nobody is buying. Another factor is your raw material supply. And in the forest products sector, the weather can have a huge impact on log and lumber availability. This throws a major unknown variable into your decision-making process.
To get the best results you must evaluate your total costs from purchasing to warehousing and inventory management. to operate a warehouse or log yard. Look at everything from rent, labor, equipment, electricity, transportation, buyer staffing, offices costs, depreciation, etc.
Better Forecasting & Correction
There are a number of major factors to consider when evaluating your supply chain and inventory approaches. These correspond to customer requirements and supply constraints. These major factors include: managing demand, reducing lead time, improving quality, and managing your production process, and optimizing inventory control. People and processes are what make these things truly work. That revolve around better training. If people are correctly trained, they will know where things are, they will know how to handle pallets, and how to handle the equipment. So that’s an important part that often is overlooked. You can’t assume that people will know what to do.
Managing for one area can cause a problem in another. If you focus on reducing lead time, this requires balancing between longer lead times and excess inventory. Improving quality can impact speed of production while requiring better inspections and data analysis to identify problem areas. While you may not always lose in one area to gain another, this can be the case in some instances. Better training is a way to help improve the overall process and may allow for gains in multiple areas at once. What mistakes are being made? What training can help get everyone on the same page? How can you monitor progress to ensure consistency and focus?
This article is designed to help you start the conversation on lean improvements to your supply chain. You may need professional help to get the most out of your organization. Consider brining in an expert, such as the lean manufacturing experts at Virginia Tech. They can help you identify what areas to target first and how to address them for maximum benefit.
Editor’s Note: Henry Quesada and his team from Virginia Tech are available for consulting and confidential projects. If you want help with your next lean project, call (540) 231-0978 or email quesada@vt.edu.
