Getting the right inventory model

December 6, 2013 3:27 pm
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It is “an unfortunate truth” that most inventory models learned on training courses are not applied in the real world. This is not the result of ignorance; it is because they are unfit for purpose. The three principal issues are:

  • Although the underlying concepts are valid, the formulas rely on “constants” which are in practice either not known, poorly understood or not constant.
  • There are business constraints, such a limited available storage space, available capital or product life, which the formula ignores.
  •  The formulas are impractically complex, principally because if they were simple it would not satisfy the requirement for academic rigour their authors seek.

The consequence of these issues is that businesses frequently abandon the theory and develop their own inventory rules based on pragmatic experience. These establish the common but unhappy balance of too much inventory and disappointing customer service.

A better approach

Rather than abandoning the principles, the approach should be to tailor their application to the specific business and its constraints, never losing sight of the fact that in the end there are only two reasons for holding any inventory.

  • To enable the business to manufacture or buy material in cost effective quantities.
  • To ensure that customers are satisfied despite the uncertainties of the supply chain; supplier delivery (time and quality), manufacturing attainment and variation in customer demand.

Cost effective quantities

The phrase “Economic Batch Quantities” has an appalling reputation. Nevertheless, virtually all businesses do make batches, and by inference believe these to be in some way better than larger or smaller quantities. Perhaps a better term to use is “Best batch size”.

In the classic EBQ model, the formula for the batch size attempt to minimise the total cost of setting up and storing product. The variables involved are:

  • Set up cost
  • Part unit cost
  • Typical annual % cost of inventory
  • Annual demand

No other constraints or variables are considered – and even these are open to widely differing interpretations. For example; how much does a set-up actually cost? At one end of the spectrum businesses choose this to be zero on the basis that the business costs would be the same were the set up carried out or not. This argument is popular with promoters of Lean. At the other end of the spectrum the cost is said to be the full recovery cost / hour of all the resources set up for the batch and the labour costs of the staff involved. Similarly varied arguments can be made about the annual cost of inventory.

And what if the business has other considerations, such as limited product life, limited storage space or limited capacity? How does the formula take these into account?

Where one man can articulate, another can formulate.

The difficulty is now – and always has been – articulating the business constraints clearly enough to enable the solution to be calculated. Part of the reason is that it can be surprisingly difficult to express an intuitive feeling as a logical statement and part is an irrational insistence on the textbook model. The key to getting it right is to spend time properly exploring the business constraints and using them to develop a solution suited to the business. This is usually requires several iterations as some of the stated constraints may well be contradictory, but this process in itself is of value to the business.

Rational Safety Stocks

The aim of safety stock is to ensure that the business has the required material available despite the vagaries of life. The question it attempts to answer in this case is: “How much stock do I need to keep as a buffer against the uncertainties of life to ensure I achieve my customer service targets?”

Safety stock calculations have a better name than EBQs, though perhaps they shouldn’t, as their application is usually as poor. What better place to find a formula for its calculation than Wikipedia?

Safety stock = Zx[ALT x (SDD)2 + (AD x SDLT)2]1/2

Where Z = No of Std deviations required to achieve safety level

ALT = Average Lead Time

SDD = Standard deviation of demand AD = Average Demand

SDLT = Standard deviation of Lead Time

It is worth noting three key points:

  • The particular formula above allows for varying demand and lead times but takes no account of quality (although it can be modified to do so).
  • The part of the formula dealing with the standard deviation of demand calculates the answer to the wrong question. The question it should answer is:

“What level of stock do I need to provide my target level of service?”

The actual question it answers is:

“What level of stock to I need to deliver 100% service in the target percentage of weeks?”

  • In actual fact, the standard deviation of demand is not the right measure anyway, it should be the standard deviation of the forecast error

How much difference does this make? Consider the product with the demand pattern below:

Weekly demand

Assuming a 4 week lead time, the “Wikipedia” formula suggests that 93 units are required to deliver a service level of 95%, and so, presumably, will the system programmed with it. Actually, this level of safety stock will deliver 100% service 96% of the weeks, and an overall level service level of 99.9%. In fact only 54 units are required to achieve the target service level.

So what is the solution?

Achieving the best solution does not depend on a degree in statistics but it does require the ability to convert ideas into formulas. It is worth doing; a little hard thinking can release a lot of hard cash.

 

Written by Paul Eastwood, Director

talk +44 (0)7764 746 902 web www.coriolis.co.uk type paul.eastwood@coriolis.co.uk tweet @Easty_Coriolis

 

Thinking Outside The Box

December 6, 2013 3:21 pm
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By analysing the use of recycled materials, the weight and the shape of the bottle, Dairy Crest reduced the cost of milk packaging demonstrating a clear focus on product re- engineering.

Challenge

The use of product teardowns can extend to a product’s packaging. The challenge is to reduce the cost of a product’s packaging without compromising quality or the brand. The UK milk industry sells around six billion litres of milk a year, generating between 130,000 and 150,000 tonnes of packaging waste.

Discovery

Few companies examine the cost of trade-offs implicit in their packaging decisions, much less look to their competitors for ideas. Such decisions tend to be the domain of marketers, since packaging is a key element of communicating a company’s brand to consumers. Yet we have seen organisations reap considerable savings.

Coriolis have supported Dairy Crest in the program management to reduce their white milk packaging waste by introducing a lighter weight bottle for key product groups. The “relatively” straightforward design changes have allowed Dairy Crest to use less plastic in manufacturing some configurations of the milk bottle. However “relatively” straightforward does not mean easy and the program required breadth of understanding and strong program management.

Innovations Controller Richard Pryor said there were “considerable barriers” to moving to a lighter bottle, having to explore “consumer acceptance, ergonomic grips, ease of opening as well as production, filling and transport trials”.

The “infini” lightweight bottles are now in commercial manufacture.

 

Written by Mark Schubert, Director

talk +44 (0)7725 676 177 web www.coriolis.co.uk type mark.schubert@coriolis.co.uk

The Performance Board Evolution

December 6, 2013 3:20 pm
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I promised a client I would write this story after they said to me……

“Consultants seem to leave a trail of blank performance boards behind when they leave.”

This got me thinking about the life of a Nobo board and its evolution along the business journey. The people, and the information they use to make decisions, progress along a ‘Journey’ as does the Nobo board.

Sometimes Performance Boards emerge when the business is in a critical state, the interval of control is hourly, often demanded by either Health and Safety or Quality Key Performance Indicators. A performance board quickly becomes the point of information. Like a life support machine, it monitors performance to allow the right decisions can be made at the right intervals.

As businesses progress on their improvement journey that board becomes obsolete adding little or no value. Does that mean we should remove it? Referring to last month’s article (The Factory Home) we would say yes, but we should replace it with something different. A good board on the factory floor is amongst the best communication you have.

So as your business develops and changes – how does the Board evolve? Coriolis articulates 5 stages of business performance from ‘Turnaround’ to ‘Excelling’. Below we describe the use of the Board at each stage.

Turnaround

An hourly measurement of one critical indicator – And communicating the importance of this to the shop-floor. Owned by the Shift Manager to ensure corrective actions are taken in the shortest possible time.

Stabilise

A movement to three hourly performance. A review of the day’s progress is often conducted in front of this board, starting to introduce other important metrics. Owned by the Shift Manager, to ensure that Line Leaders are taking corrective actions and understand the critical metrics on their lines.

Standardise

A daily communication of yesterday’s performance for the shift and week to date. Often likely to include graphs and trends of historic performance. Owned by the Shift Manager and the Line Leaders, to ensure the move away from fire-fighting, driving actions to resolve route cause and also promoting healthy competition between shifts.

Improving

A team huddle board, communicating trends, improvements, business news, critical issues and even this week’s birthdays, births or other good news. Owned by the Line Leaders to empower the workforce to be involved, a tool to improve team morale whilst also generating further improvements

Excelling

In addition to improving, an interactive problem solving station, space on the board to complete fishbone diagrams, mind maps or other techniques. Owned by the Shopfloor to show the rest of the business just what impact they have had in leading the business to a “World Class” position.

Like everything in our business it must change and adapt to the environment around it, there is no right or wrong answer to the journey of the Performance Board. What is important is the people that use it and the information that it contains allow the business to progress in its Journey.

However, don’t under estimate the power of having an hourly board you can wheel into and out of the factory. A change in process or a new line installation can drive the requirements to ensure you accelerate though the journey in a critical area.

 

Written by Paul Eastwood, Director

talk +44 (0)7764 746 902 web www.coriolis.co.uk type paul.eastwood@coriolis.co.uk tweet @Easty_Coriolis

Scary Stories from Project Management

December 6, 2013 3:17 pm
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It’s not just ghosts and ghouls that scare us at Coriolis. We are often called in to help turn around a project that has run into problems, and some of the things we find are very scary. Here are some real life examples.

No clear brief

Contrary to popular opinion, most capital projects are not haunted. It’s usually the initial brief that is to blame. How many times have we been told that the project was really urgent, only to find that the client had committed to spending large amounts of money without a clear and aligned view of scope, costs and resource requirements.

It’s not difficult or time consuming to get it right. A structured approach to project initiation will lead to a much higher chance of success and considerably less finger pointing at the end.

Financial tracking

Managing project finances is relatively straightforward so long as you track commitments as well as cash flow. One client had a nasty surprise when they spent the project contingency without checking whether there were any outstanding order payments. Inevitably the project went over budget, all for the want of an updated spreadsheet.

Poor Contractor Management

No, it wasn’t a poltergeist that left the Production Hall looking like that.

Roles & Responsibilities not defined

Projects are delivered by people. Projects are ultimately about coordinating their activity to achieve the specified objectives. So that means everyone needs a clear understanding of what they are being asked to do. Without this the Project Manager will get a nasty shock later when he or she is told ….. “I thought someone else was doing that”.

Scope Creep & Change Control

Many problems have their root cause in poor change control. Projects are often complex undertakings with lots of stakeholders, all of whom may be tempted to change something in the specification or project plan. Unfortunately this usually means spending more money. The change may be the right thing to do, but unless it is managed as part of a controlled and documented process you are asking for nightmares. On average we find that poor change control adds 10% to the cost of a capital project, or even more.

So if you want to avoid waking up in a cold sweat, or you want an independent view on how to improve your capital projects, talk to Coriolis.

Five Quick Ways to improve OEE

December 6, 2013 3:16 pm
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We’ve all done it: Getting lost in the detail and forgetting to come back up to a helicopter view. Usually because you think you know your operation too well. This is the first in a series of articles designed to help you stop and think “Am I focusing on the right things?”

Firstly we look at OEE. Make sure you haven’t overlooked these areas.

Planning Rules

Too often a business can get in a planning routine not because of rules but because of habits. Does your plan really reflect the optimum running sequence to deliver the best performance? Are volumes and run lengths really optimised? When was the last time you challenged the supply chain on this?

Tip Rather than 4 average size runs per week, how about 3 optimum and 1 non optimum runs, the net gain is likely to improve your OEE.

If you are not using the right performance levels to plan production the operations team will drift from the plan, causing enforced changeovers or under production.

Tip A half day workshop with your operations, technical and supply chain teams. Pick a production line and develop the planning rules you want to operate within.

Waste and Giveaway

The time you use to generate waste (or giveaway) is time you could be making good products. Chasing volume without effective control through your factory is a recipe for failure. In a process constrained factory, gaining control of giveaway adds directly back to your OEE and improves your material variances.

Tip Make sure you understand the capability of your equipment and SPC and start chasing that giveaway.

Ask Bob…….or Betty

Bob is the operator who works on the line every day. They see the process repeatedly and quite often help provide inspiration on how to do something differently.

Tip You do not need a complex CI process to walk down the lines and talk to the operators about how you could make their job easier.

Standard Operating Procedures

Start-ups and Shift Changeovers are OEE’s worst nightmares. Different teams often have their own ways of running the lines. To compound this, engineers also change setting to improve performance when required. Therefore, performance lost at these times can often be 15%-25% more than usual running.

Tip Establish the correct settings on one line and install SOP’s by using a cross shift team. When the line is not performing do not change the setting but find the true fault.

Slicker changeovers

Don’t talk about SMED until you are confident your teams all know what their role is during a changeover. Trying to jump from nothing to applying lean tools often fails as the Journey is too complicated for the shop-floor to understand in one go.

Tip Get organised, ensure owners are identified for all tasks in a changeover. Ensure your team leaders are communicating with their operators when a changeover is coming. A 2minute warning allows them to mentally prepare the tasks they are going to complete. Make it fun, get a countdown Clock or Alarm, have a quickest pit stop board. Then introduce SMED.

 

Written by Paul Eastwood, Director

talk +44 (0)7764 746 902 web www.coriolis.co.uk type paul.eastwood@coriolis.co.uk tweet @Easty_Coriolis