Sponsored By

This three-part series looks at managing your inventory intelligently, how to determine inventory levels, and how you can use this concept to drive your production schedule.—Richard Puglielli and Sharon Scaramella

Richard Puglielli

October 24, 2008

11 Min Read
Smart inventory management: A solution for ensuring a steady supply of custom parts, Part 1

W_Rick-Puglielli-ProMold-Plastics.jpg

This three-part series looks at managing your inventory intelligently, how to determine inventory levels, and how you can use this concept to drive your production schedule.—Richard Puglielli and Sharon Scaramella



In trying to comply with the concepts of lean manufacturing, many custom parts manufacturers have come to equate low inventory levels as good, and high inventory levels as bad. Under pressure to appear lean, they drastically reduce their inventory levels, and then struggle to keep up with daily demand changes—perhaps even failing to meet them. This strategy can be detrimental to one of the most important goals in custom parts manufacturing: to ensure that the customer never runs out of parts.

What many molders fail to realize is this: Lean manufacturing may result in lowering inventory levels, but lowering inventory levels does not result in lean manufacturing. In fact, it may result in a failure to meet supply. Reducing inventory levels is not a good business solution if it means the customer runs out of parts.

Perhaps the underlying issue is that systems such as lean manufacturing, ERP, and kanban need to be better customized to the world of custom parts. It is faulty to assume that a system that works perfectly within a customer’s environment will work perfectly within its supplier’s environment. The businesses are vastly different, one being a producer of finished products and the other being a supplier of multiple unrelated and highly customized parts. While similar processes and systems may work, they might also need to be modified in order to fit the unique needs, goals, products, and capabilities of the manufacturer.

So what’s the answer? Lean manufacturing, ERP, and kanban, tempered with smart inventory management (SIM). The latter term is used here to describe an approach for managing inventory. The approach is similar to kanban, but it goes a step further in that it takes into account maximum consumption rates. Thus, it is better equipped than kanban to handle erratic fluctuations in demand—something that is quite common in the world of custom parts manufacturing.

Part 1: What is smart inventory management, and why use it?

Understanding SIM merits a quick discussion of kanban, a pull production system based on demand. There are several forms of kanban, but most set a minimum inventory level that, when reached, sends a signal to produce more. In one of its simpler forms, kanban sets the minimum inventory level at zero. When inventory reaches zero, the signal to produce more is activated.

Another form of kanban sets the minimum level to reflect replenishment times. For example, if it takes one day to make 1000 more, the minimum inventory level might be 1000. Thus, the signal goes off when inventory drops to 1000.

In this example, the molder would still have to respond immediately, which is not always practical when it has many different parts going through the same machine. It may have to disrupt a production run and create another setup, which involves material preparation, changing over the tool, and ensuring that all documentation is in place.

Reducing setup times is not a cure-all for such disruptions. It is very difficult for a custom parts manufacturer to standardize its process, since it does not have the liberty to modify part designs, material requirements, or tooling. Thus, it often cannot reduce setup times to the same extent that a company making its own products can.

Another form of kanban uses both replenishment times and demand forecasts to set the minimum inventory level. This is done in the hope that inventory will not reach zero on the day that more parts are being produced. In reality, though, demand forecasts are not always accurate, and unexpected changes can still occur.

Here is where SIM departs from kanban. Rather than using forecasts, it uses maximum consumption rates plus replenishment times to establish the minimum inventory level.

The premise behind SIM is simple. If you know a) the maximum production rate for a part (and thus the replenishment time) plus b) the maximum consumption rate for a part, then you can determine the minimum inventory level needed to ensure a steady supply during unexpected periods of high demand.

This may sound both impossible and scary to someone who manufactures and sells finished products. Who could predict the greatest possible consumption, and who would want to carry that much inventory? However, it makes perfect sense in a molder’s world of custom parts.

Consider this scenario. Company Z makes small appliances. One of its products is floor fans. Molder Y makes a small custom part that is used to make the floor fans. No one could predict with certainty what the consumer demand for floor fans might be at any given time. However, there is one piece of information that can be stated with more certainty: Company Z, running at maximum efficiency, is capable of consuming up to 5000 of the custom fan parts in a single day.

If this information is shared, Molder Y can establish the minimum inventory level needed to meet the greatest possible consumption of 5000 parts per day. Thus, on any given day, it would be prepared to keep up with Company Z’s production.

This does not imply warehouses overflowing with inventory. Custom parts are relatively small, relatively inexpensive, and relatively quick to make when compared to an entire finished product. They tend to be made and used sporadically throughout the year. In addition, inventory levels are defined in days’ supply. Thus, inventory could be anywhere from a supply of one day up to several weeks, but definitely not a year’s supply.

Smart inventory management fits the parameters of custom parts manufacturing better than traditional kanban (which is usually used for regular, ongoing, and fairly steady production). Because it fits the parameters better, SIM has many advantages over traditional kanban and other production on-demand systems. Here are some of its main advantages.

1. A steady supply of parts for the customer. Imagine if, in the previous example, Company Z had planned to use 2500 parts. On Monday, it decides to change its production plans. It calls Molder Y to report that it now intends to start using 5000 parts per day beginning on Tuesday and continuing for several more days.

Molder Y, using SIM, already has at least 5000 parts in inventory—enough to keep Company Z running for a day. Perhaps it even has a two-day supply or more. In any case, it has sufficient inventory to meet its customer’s change in demand, and sufficient time to change its own production plans as needed to ensure a steady supply.

2. Fewer last-minute production disruptions. In a traditional production-on-demand system, last-minute changes cause a disruption in production. In contrast, SIM can handle last-minute changes, since inventory absorbs the impact. The following diagram demonstrates this concept.

 Inventory1_demand_.gif



Using SIM, suppliers will have more time to react, and then plan their production accordingly.

3. Better efficiency. Because SIM means fewer disruptions and more time to plan, it makes for better efficiency. Let’s face it: Interruptions in business flow are inefficient, whether or not lean manufacturing processes are in place. Sure, there are processes that make the transitions easier and faster, but an uninterrupted workflow will always be more efficient than an interrupted workflow.

How efficient is it for someone to revise a current schedule? This task can be like taking apart a puzzle and then refitting all the pieces together in a new way that still works for everyone (i.e., for production, shipping, and other customers). How efficient is it to halt a long run, log where the project left off, and move the old components aside? How much time is lost when a production team has to stop its thought processes and physical motions, start a new routine, and then return to the interrupted routine later?

Smart inventory management buys a little extra time—time to finish current runs, time to react to the requested change, and time to find the most efficient plan for production and delivery.

4. Better quality. Because SIM means fewer disruptions and fewer last-minute rushes, it also means less room for miscommunications, mistakes, defective parts, overlooked variables, or possible errors in judgment. Thus, SIM helps to safeguard quality.

5. Better logistics planning. Consider this scenario: A customer needs part A delivered on Tuesday and part B by Thursday. The molder plans to run both parts on Monday and deliver both on Tuesday, since together they comprise a full truckload of materials to the same place.

The phone rings. A different customer has changed its plan from a half-day run of Part C (2000 on Tuesday) to a two-day run (5000 on Tuesday and 5000 on Wednesday).

If the molder is not using SIM, he may have to start producing the extra Part Cs immediately. To do this, he decides to postpone Part B, since it is not actually needed until Thursday. However, he will still have to deliver Part A on Tuesday—minus the half-truckload of part Bs. A half-loaded truck is not cost-effective, especially when one considers the rising cost of transportation and fuel.

Conversely, a molder using SIM would have at least 5000 part Cs already in inventory, which could be sent immediately. With enough part Cs to keep the customer running all day on Tuesday, the supplier now has until Wednesday to make and deliver the additional part Cs. Thus, he has time to finish running Parts A and B and ship them together as originally planned—the most cost-effective logistics solution. He also has time to find the most efficient logistics solution for the extra Part Cs.

6. Better ability to set reasonable prices. Think about all the wastes and inefficiencies mentioned thus far: disruptions to production, increased room for mistakes, inefficient logistics solutions, and extra time spent halting, tracking, and moving current projects aside. These are the hidden costs associated with on-demand production and last-minute changes to production.

Such costs can be hard to pinpoint and manage, but you certainly feel them, and end up eating them at the end of the year or changing prices to reflect them.

Since SIM reduces the impact of last-minute changes, it helps to reduce these hidden costs. Thus, it helps you to set and maintain reasonable prices.

Even though there is a cost to carrying inventory, these costs can be controlled and kept to a minimum if inventory is managed smartly.

7. A less stressful work environment. Your environment is fast-paced, even under normal conditions. Last-minute changes only add to the complexity, requiring more rushing, more switching between tasks, and more keeping track of additional details. While this is not a huge deal for machines and computers, it can be extremely stressful for people.

Common sense and personal experience should be enough to tell us about the stresses and inefficiencies of multitasking—a hot topic in today’s media. One recent article points to mountains of studies about multitasking and its effects on stress, concentration, and productivity. (“The Siren Song of Multitasking,” Herman Miller Inc., 2007, www.hermanmiller.com/hm/content/research_summaries/pdfs/wp_SirenSong.pdf). Another article raises questions about its efficiencies. (“The Myth of Multitasking,” Christine Rosen, The New Atlantis, Spring 2008, www.thenewatlantis.com/publications/the-myth-of-multitasking). Whatever the case may be, from an employer’s perspective it makes sense to keep multitasking to a minimum, for the sake of their employees’ well-being and for the sake of productivity.

In manufacturing, some last-minute changes (such as those due to machinery and tooling failures, weather factors, and so on) are beyond one’s control. A change in demand is one variable that can be controlled through SIM. Thus, by reducing last-minute changes and creating adequate time to respond effectively, SIM contributes toward a less stressful work environment.

8. Makes sense. Remember, one of the main goals of a supplier is to ensure a steady supply of high-quality and reasonably priced parts to customers. Smart inventory management is a practical solution for meeting this goal. It helps to ensure a steady supply. It helps to circumvent the risks associated with last-minute changes in production. And it helps to control hidden costs, thereby contributing to reasonable prices.

It may not be practical for every part, especially for expensive or very large parts, which may require special orders. However, for many other custom parts, SIM makes a lot of sense.

Author Richard Puglielli ([email protected]) is president of molder/moldmaker Promold Plastics (Portland, CT; www.promoldplastics.com). Coauthor Sharon Scaramella can be reached at [email protected].

Ready for Part 2? Read it here.

Bibliography

Herman Miller Inc. (2007). “The Siren Song of Multitasking” [White Paper]. Retrieved from http://www.hermanmiller.com/hm/content/research_summaries/pdfs/wp_SirenSong.pdf

Hudgik, Steve. “What is Kanban?” [Online Business Tutorial]. GraphicProducts.com (2000-2008) Retrieved from http://www.graphicproducts.com/tutorials/kanban/index.php

Puglielli, N. Richard. Conversations, hand-drawn sketches, and hand-written notes. August 2008.

“Pull Production—Understanding Kanban” [Extended Entry]. BusinessKnowledgeSource.com. (2003-2008). Retrieved from http://www.businessknowledgesource.com/manufacturing/pull_production_understanding_kanban_extended_entry_026156.html

Rosen, Christine. (2008). “The Myth of Multitasking.” The New Atlantis, Number 20, Spring 2008, pp. 105-110. Retrieved from http://www.thenewatlantis.com/publications/the-myth-of-multitasking 

Sign up for the PlasticsToday NewsFeed newsletter.

You May Also Like