For years, lean was it. Every company wanted to remove as much waste out of their manufacturing processes and supply chain as possible.
Lean makes sense until it doesn’t. Shortages and concerns about key supply chain components as well as sourcing from foreign countries combined with growth in e-commerce and JIT delivery are changing how companies look at customer service and inventory management.
If you company loses a sale and customers because you can’t supply when needed, it may not matter how much money your lean operations save the company. Sales are the growth driver for business not cost reductions. So, how has the shortages and supply concerns brought about by the pandemic changed how companies look at lean strategies?
Henry Quesada, a lean thinking and business process expert at Virginia Tech, proposed, “If there’s a lot of uncertainty in the supply chains, the first thing you do is you go out and buy more. Just look at how the first five minutes of COVID-19, consumers went out and bought as much toilet paper as they could to have a safety stock. Companies do the same thing.”
Quesada recommended, “This is a time you have to re-evaluate your purchasing policies. Should you find more suppliers? Should you buy more safety stock or build up larger inventories? Does a company need to rethink lean initiatives that value cost reduction over having extra supply?”
With every business decision, there will be an impact. If you increase your safety stock, you have to buy more insurance, your capital investment in goods goes up, you may face having too much on hand and have to sell it off later at a discount. Extra inventory means more warehouse space, more goods movement and possibly even more product damage or spoilage. Quesada admitted, “There’s a lot of costs associated with keeping extra inventory that a company may not document or consider. They just go out and buy it.”
Extra costs include: more warehouse space, higher insurance requirements, more spoilage, increased capital requirements, more labor needed, extra equipment (such as forklifts). “You have to remember that the highest cost product is one that is already made but you can’t sell for your target price.”
Whenever you make these decisions, there will be uncertainty, and you will make mistakes from time to time. The most important thing is to be right a lot more than you are wrong. There is a value in always having a product in stock because you can easily become the go-to source for a product, particularly when the market is tight. But this comes at a cost. It all depends on your corporate goals and strategies.
It sounds like communication is a key when dealing with tight markets. Quesada suggested, “You need to keep clear lines of communication open up and down your supply chain from sawmills and core sources through to shipping companies and customers. I try to always present this conversation in a manner that seeks to understand the customer. This allows the supplier to better respond to market changes and meet customer needs. If you try to be helpful, you will find plenty of people willing to talk about what they need.”
How do you know if you have enough safety stock? Quesada said that you can use the Economic Order Quantity formula. This looks at how much it costs to place an order versus holding inventory. Another approach he likes to use is the probability model, which seeks to determine what the likelihood is that you’ll run out of inventory.
Not all products are created equal and are something that customers are willing to pay more to get in an emergency. Pallets are the kind of thing though you must have to get products to market. That can put the pallet provider in the driver seat
Quesada advised, “You don’t have to ditch all lean manufacturing principles just because you may need to increase safety stock and change inventory practices. You can focus on things like optimizing your workflow and plant design, reducing downtime and improve maintenance practices, eliminating wasted motion, etc.”
“Lean isn’t just about inventory. It covers so many other areas of your plant. And it is true that some industries are moving toward having more distribution centers and more inventory to supply rush orders,” admitted Quesada. “But some industries will still be seeking cost reduction above everything else, which means you have to get lean to remove costs.”
What strategy should your company take? The Pallet Enterprise in conjunction with Dr. Quesada has developed a basic worksheet to help you brainstorm your process above.
Worksheet 1
Impacts of COVID-19 on Lean and Inventory Practices and JIT Delivery
Hypothesis: There is an increase in inventory stocks and overproduction to avoid supply chain disruptions.
• Inventory: Increase standard and safety stocks to avoid disruptions:
• Revise inventory policy.
• Transportation: less transportation, less frequency:
• Alternative transportation means
• Movements: more stocking, more help needed to stock
• Waiting times: increase lead times. Amount of raw material inventory increases.
• Material yield: no impact.
• Human resource underutilization.: no impact.
• Overproduction: produce more to avoid stock outs. Could affect material yield too.
• Defective products. No impact, but overproduction could lead to more defective products.
Compare Safety Stock vs. JIT Approach
a.) Safety stocks
• Requires holding more inventory to avoid disruptions
• Increase cost of inventory maintenance:
• More space
• Insurance
• Obsolescence
• Capital investment
• Labor
b.) JIT: No inventory policy (or minimum)
• Increase number of suppliers
• Increase size of batches to avoid disruptions:
• Reconsider production scheduling
• Less transportation (instead of 1 a day now 1 a week)
• Requires a high level of synchronization between supply chain partners:
• Evaluate alternative inbound logistics (rail, trucking, ocean, air)
• Communicate more often with customers and let them know about potential disruptions.
