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blog | August 13, 2015

Reduce Inventory without Sacrificing Customer Satisfaction – Part 2

Basic principles of inventory control to achieve customer satisfaction Change the bottlenecks and the rest will follow One of the most blatant issues that cause high inventories and poor...

By WorkWiseSoftware

Basic principles of inventory control to achieve customer satisfaction

Change the bottlenecks and the rest will follow

One of the most blatant issues that cause high inventories and poor delivery performance is ignoring production bottlenecks.  A production bottleneck is any operation in the shop where the expected output of the operation exceeds its capability to meet that output.

For example, if Operation B in a shop is capable of producing 25 parts per day, and we schedule 35 parts, 10 parts won’t be produced that day.  In fact, the 10 input parts for operation B will sit at the operation as work-in-process.

Now we’ve created 10 extra units of work-in-process inventory that were not necessary. And worse, the next operation on the shop floor who expects 35 parts from operation B will now be short 10 units and be idle for the time normally used for the 10 short parts.

Unless MES dispatchers can find a way around this, we may have idled all the subsequent operations for those missing 10 parts.  Our production efficiencies are poor, and our inventories high.  And, guess what also happens to your scheduled delivery time to the customer?  The delivery is missed, and the customer is questioning why he does business with you.

The loud and clear message is to not over schedule your operation capacities.  With a good MRP plan, and a responsive MES schedule, you can correctly schedule your operations.  At a minimum, you can determine where your bottlenecks are, and take corrective actions such as scheduling alternative processes, or deciding on overtime.

Another form of this over-schedule problem is the “special request” from your biggest customer, or from your President to accommodate a special favor for a customer.  Your ERP manufacturing system can quickly tell you whether this will cause a bottleneck, and help you to avoid building more inventory, lowering production efficiency, costing cash, and disappointing other customers. And, you can quickly estimate the cost of the “special order”, to illustrate the true cost of  that order.

No part or operation before its time

One of the strengths and original purposes of ERP manufacturing systems is to plan and execute production so as to minimize inventory.  ERP does this by calculating the precise times to perform the activities so as to delay the process until the last optimal time. This saves investment in inventories, and still meets the customer delivery schedule.

As a simple raw materials example, let say that the customer ordered a product that is deliverable six weeks from now.  The production time on the shop is calculated by the system, and is two weeks. Strong practices of ERP would bring the raw materials in four weeks from now, just in time for the production need.  Now, many manufactures use two alternative costly methods. In one, the manufacturer orders the raw materials at the time the customer order is place.  Clearly, they will have three weeks of inventory that the ERP system would not.

In another simple method, the manufacturer keeps the customer products in inventory, and orders them when inventory drops to a reorder point level.  The order for parts is made each time the inventory drops below the order quantity, which is commonly the quantity which would cover demand for period of lead time to receive the part-three weeks.  In this example, the part would be ordered each time the on-hand quantity dropped to six, to meet the customer order quantity of 6.  If the customer typically ordered once a month, a quantity of six would be ordered every time an order was received.   So, the inventory would have 6 on hand for the first three weeks, and then would have 12 on hand for the next three weeks.  This would cause an excess inventory of six for the entire six week period. In essence, this would cause the inventory to quadruple.

The same effect can be experienced in work-in-process and finished goods inventory. You can see that doubling or quadrupling inventories would cause severe differences in cash flow.  Now, add the cost of obsolete stock for when the customer changes products with ECO’s or experiences rapid declines in demand for his products, and you can see how costly this can become.  Here some numbers to illustrate the results of using each of the three methods used above.

Infographic Table Inventory and Customer Satisfaction

As you can see, the levels of inventory can be vastly different.

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