Inventory Isn’t Always Evil.

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Supply planners are often given responsibility for inventory, but few have an understanding of the strategic and tactical role inventory plays. Invariably inventory is seen as evil, it is a mantra of the modern supply chain. Yet many costs are incurred keeping inventory as low as possible, often several multiples of the cost of holding inventory. Here is the first sensible article I have seen on inventory management in a long, long, time. If you are struggling with setting inventory levels, this article spells out why. The usual response to ‘high’ inventory levels comes in two flavours: The forecast needs to be better or the IT system is poor. Cue massive spending on IT systems and yet another study on how to improve forecasting.   And nothing changes. Why?

In our experience, and according to the article’s author, Lora Cecere, now backed with some solid research results, there is a significant lack of understanding why inventory is necessary and the role that it plays in supply chains.

To quote:

‘In the benchmark data, companies that had clarity on inventory goals and understood inventory drivers cross-functionally make the most improvement.’

So what drives inventory levels? Here’s a short list, not exhaustive, but some of the most important factors.

Demand volatility: The forecast is invariably wrong, and by how much is important and will drive your inventory strategy.

Manufacturing capacity: The drive for Lean processes, and the emphasis on asset utilisation means there is less spare capacity to buffer demand volatility.

Out-sourcing and off-shoring: This may reduce piece-costs, but it will increase inventory, usually in finished goods in warehouses and in the distribution channel.

Production cycle-times: To meet cost-targets, manufacturers want longer runs, fewer change-overs and longer lead-times.

In-transit materials and finished goods: Globalisation has lead to significantly longer freight times for many products.

Material costs: Many processes use highly valuable materials, often in small quantities, but the total cost of this inventory can have a huge impact on inventory turns.

Promotions: Marketing promotions can frequently require stock-piling of inventory to meet a one-off demand spike.

Inventory then is valuable, both in terms of the investment in working capital and its role in satisfying customer requirements.   It is therefore getting the right amounts of it that is important.

Decisions about inventory need to be reached based on a full understanding of the business strategy. For example, production cycle times that are too short will increase costs and impact on gross margins. High finished goods safety stocks can both increase inventory carrying costs and reduce production and distribution cycle times, further destroying value. Using a more agile manufacturing strategy to increase manufacturing buffer capacity may be a more successful tactic, especially if asset utilisation improvement is not a key supply-chain success factor.

Inventory decisions are usually trade-offs vs other key business tactics and strategic aims. If demand is highly elastic towards price, then large inventories and long supply-chains may be the only way to survive, as manufacturing in lower-cost locations is essential. The key-point is understanding how your customer’s demands are changing, and how the supply chains need to react. In the UK for example, omni-channel is already real, and those slower to react have taken a beating, not on price, but on customer service.  On the other hand, once mighty players such as Tesco have taken a pounding as newer retail players have cut away vast swathes of customers with highly innovative customer offerings, that demand cost-effective supply chains, and pricing that moves inventory swiftly through their channel.

Inventory management is an important part in how you keep your supply chain Triple-A, and the skill in managing inventory is highly indicative of how successful you are as a company. All functional areas need to have input into the decisions, and the end-to-end inventory level required is an emergent factor of the strategy and tactics of the entire supply chain. Inventory management is not an isolated discipline that supply planners set parameters for based on arbitrary decisions about safety stocks, cycle-times, order-fill rates and the year-end closing inventory targets. Driving inventory down requires changing strategic choices and tactics, and just cutting safety stocks or reducing cycle-times may not always be the process that yields the best results.

 

If you want to learn more about the Cosmapec approach to supply chain development, visit us at http://www.cosmapecsupplychainmanagement.com or contact us

About:  Rob Ward has extensive global experience working in supply chain organisations.  He co-founded Cosmapec to help companies and executive teams establish, develop and optimise their supply chains.

Why Leaders Resist It, Even When They Want Change

One of the paradoxes of change management programmes, and Lean in particular, is that leaders are often responsible for blocking the change they profess to want.  After all, as leaders, we have spent many years building our careers by understanding, and succeeding in, the organisational culture that we grew up in.  We know in our heads that it has to change to adapt to the continuous challenges our customers and competitors place upon us, but deep inside we really want to stay in our comfort zone and fall back on the things that have made us successful in the past.  How should we deal with this?

Ownership is a powerful emotion, as we discussed last week, and as people who have experienced great success on their way to becoming a leader our ownership of the things that worked is highly significant.  Even if now these things are clearly failing, and failing catastrophically, the Euro currency being the current most spectacular example of leadership unable to let go of an idea that no longer works for the benefit of all.  The key to the next phase of our development is humility, understanding that we do not have all the answers, and that our behavior is probably the biggest reason why change isn’t happening.

Improving the process that creates customer value drives organisations that have truly become Lean.  Their leaders understand and value the associates who fulfill the service and product needs of their customers, and they actively work to make these employees successful.  If you have arrived at a leadership position in a traditional business, you have had to demonstrate the strength of your own ideas and performance to get there.  And often battle with your management peers and employees to overcome resistance.  All valuable learning experiences, but the next stage of leadership acknowledges that the game you have just been playing is mostly irrelevant to the customer.  The next challenge is how to focus on improving the customer experience.

Here are a few ways you can do it:  Tie your performance goals to the success of your associates, especially the frontline employees.  You only win if they do too.  If they get their performance bonus, you get yours.  If they don’t, you don’t.  But above all break down the barriers between you and your associates.  Collectively they know far more, have better ideas, and understand your customer more closely than you ever can.  Make service to customers the most important metric, not the cost to serve them.  Get out of your office and experience what it is like to be a customer, and what it means to be a frontline employee.

Also put in place a process to get regular feedback on your own behaviour.  Your peers and direct reports have to be able to trust you enough to tell you when you are doing the wrong thing.  You have to trust them enough to act on it.  Appoint a mentor, and ask them to critically appraise your performance and act as your conscience.  If it doesn’t feel uncomfortable, then you are probably not being honest with yourself.  We all think we perform better than we actually do, if you really do want to be a role model for change getting independent feedback on performance is essential.

 

What have you done to recognise your need to change?  Please do share your experience in the comments section so all readers can benefit from your knowledge.

 

If you want to learn more about the Cosmapec approach to process improvement, visit us at http://www.cosmapecsupplychainmanagement.com or contact us

 

About :  Rob Ward has extensive global experience working in supply chain organisations.  He co-founded Cosmapec to help companies and executive teams establish, develop and optimise their supply chains.

 

 

Listening for Leadership, Make Room for It

Leadership is essential for making successful changes as discussed in last week’s article, and several interesting ideas and examples in the comments prompted this week’s blog.  Adam Payne pointed out that Obeya rooms can provide a structure that will facilitate people getting their ideas heard and support implementation of their proposals.  (Obeya is a Japanese term that literally means war-room, but in a business context is used to describe a space for project teams to work in).  We discussed what we call these rooms when we are implementing projects, and this reminded me of the topic about the importance of ownership.  Researching ownership, Langer conducted the lottery ticket experiment that has significantly changed our understanding of ownership, and I learned a lesson that has personally served me well.  That lesson is that people are sometimes not rational in their behaviour, and they value what they create far more than what is simply assigned to them.

In the lottery ticket experiment, half of the study group were randomly assigned a lottery ticket number, and the other half could write their own.  Immediately prior to drawing the winning number, members of each group were asked to sell their numbers back to the researchers.  The group that had written their own numbers demanded five times more to sell them as they deemed them to be much more valuable.  Rationally this ignores the reality that any number has an equal and random chance of being drawn.  But the selection and creation process adds perceived value in the eyes of the owner that warrants a greater price to reach a fair exchange.  Adam commented that he calls Obeya rooms whatever suits the process improvement team he is working with.  Another approach is to let the team name the room.

In one optimisation project, we had no suitable team room, and I wanted to make a statement about the significance of the project.  As the leader of this facility I had the largest and most extensively equipped office on site.  So I moved to a smaller office on the factory floor, and gave the team the vacated space to create and name their team room.  Knowing the process improvement project was ultimately important to growing company sales, they named the room after the company’s much admired original sales representative.  I never had a problem with convincing them of my commitment with the managers, supervisors and operators from that day forward.

We also re-invented 5S, Kanbans, SMED, Poka Yoke, FMEA, schedule-smoothing and many other aspects of Lean, and the teams had their own names for these as well.  The important point here was that listening to their ideas, discussing them in the team room and on the factory floor was how we got things done, and how the changes stuck.  My knowledge of Lean tools helped them to frame the problems and to design solutions, but crucially they owned the ideas.  Ultimately we far exceeded the expectations of our company’s senior management and made step changes to service, quality, cost and health and safety.  Every single person on the team eventually moved on to positions with higher levels of responsibility.  And it all started with a room with no name.

Finally, don’t let your ownership of what you have created on your way to becoming a leader become a problem.  Many change projects fail because leaders value what has worked for them in the past more than the potential for future success.  Next week I will add in a few ideas on how you can stop this happening.

 

What have you done that increased ownership?  Please do share your experience in the comments section so all readers can benefit from your knowledge.

If you want to learn more about the Cosmapec approach to process improvement, visit us at http://www.cosmapecsupplychainmanagement.com or contact us

About :  Rob Ward has extensive global experience working in supply chain organisations.  He co-founded Cosmapec to help companies and executive teams establish, develop and optimise their supply chains.

 

 

Starting From the Top

Every time I write an article here I get an unexpected bonus:  I am consistently reminded of how much more there is to know.  People who read my blog are kind enough to send comments about the subject I discussed.  They challenge me, add in their thoughts and describe their experiences.  It is a great learning experience.  We hear a lot about what to do to become Lean, but not so much about how to do it.  Mark Berlin sent me a note describing one of the essential ‘hows’ of the Japanese model in response to Lean is About People.  With Mark’s permission, I am sharing his experience with you this week.

Here is what he said:

I would like to share a little different food for thought. The Japanese model does not mention Lean because it is embedded in the culture.  How did it become embedded: It starts at the top with the Executive Team.  The Executive Leadership typically works the factory floor 4x/year (1x/quarter) taking direction, not giving direction. It is part of the performance bonus at year end.  I know, I’ve worked for four companies:  Initially working side-by-side with VP’s, and then as a VP taking direction not giving it.  It was at these companies where Lean was not discussed beyond year one, as we had 24/7, 52 week per year events running at multiple factories.  I can recall at two companies where senior execs did not receive a major percentage of their bonus structure when they only attended 3 of 4 events.  It was this set of leaders that made the rallying cry around their functional discipline to be participating on the factory floors, warehouses, etc.  Happily I can say I never lost any bonus money.

More importantly, the leadership worked cross functionally more cohesively to drive cost out and create solutions to drive top line revenue.  It was at these companies in difficult times, that earnings improved and top line grew on average 25%+ per year.

  Yes, it’s about the people.  However, the reason the process improvement or Lean initiatives don’t stay and a cultural mindset is not built around Lean/Process Improvement – the Executive Staff does not participate.  I can tell you I worked side-by-side with Bridgestone and TRW Executive Leadership on their plant floors running an event that was driven by my Supplier Development Team.  It will never stick with supervisors, managers, and line members if the process does not start at the top.

Presently doing an advisory work with a group, and I told them as much as I want a contract, I would not sign it, unless the Executive Leadership participated in an Alignment Meeting the first week, and they agreed to work the floor across six operations.  They all signed the alignment contract, and they are working the floor taking direction.  Instead of 3 – 5% savings, they are seeing 7 – 22% across various activities.

Leadership is important, and Mark does a great job explaining why.  As Gandhi said, ‘Be the change you wished to see’.  If you are a leader, and you want to make a change, be aware that your people are watching you to see whether or not you are serious about it.  They are quite rightly going to hold back their efforts until they know they are going behind a worthwhile cause.  Many will have experienced disappointment from previous initiatives that promised much but failed to deliver. Being consistently and visibly committed to the change is essential.  Plan how you will do this, publish the schedule of when you will do it, stick to it and track progress.  After your people have got over the shock of seeing a genuine attempt at engagement, they will begin to trust you.

 

Do you have more examples of  leadership behaviour that demonstrated their commitment?  Please do share them in the comments section so all readers can benefit from your knowledge.

If you want to learn more about the Cosmapec approach to process improvement, visit us at http://www.cosmapecsupplychainmanagement.com or contact us

About :  Rob Ward has extensive global experience working in supply chain organisations.  He co-founded Cosmapec to help companies and executive teams establish, develop and optimise their supply chains.

Respect Builds Talent

If you liked last week’s article on Lean, I came across this piece by a very talented writer with a deep understanding of the subject.  The key theme of the article is about respect for people, and again cites Toyota as the organisation that has managed to achieve this better than any other.  One  point in the article is about lay-offs.  A common fear about process improvement and optimisation is that it will lead to job losses.  Indeed this is very likely as wages are a cost to organisations and ultimately to the end consumer.  Toyota, however, has never laid-off any of its staff, yet is by far the most effective automotive company in the world.  So why is respect important, how do you demonstrate it, and what impact does it have on job losses.

For me the answers revolve around the most critical assets for an organisation, the knowledge, skills and experience of the associates.  In a single word, talent.  As a leader, talent development is one of your most important tasks.  It has always been my top agenda item, and the one that keeps me awake at night.  Your organisation and your culture are unique, so you need produce your own processes to develop your talent, and there are many ways to do this.

I will share here what has worked for me in the past, but before I go there, just a few cautionary words.  Process improvement is not what you do to resolve a crisis.  You need to already have reliable processes before you can improve them.  If your processes are broken, and you are losing customers, failing to gain new ones, have high levels of rejects or whatever is symptomatic of a dysfunctional organisation, you need to fix these first and stabilise the situation.  This is a project, treat it as such.  If it requires immediate job-losses be open, honest and decisive and then do everything possible to find alternatives for those you have to let go.  Process improvement should prevent you having to do this again.

Demonstrating respect to achieve process improvement is essential.  This is why:  You have a massive amount of talent at all levels within your organisation that you are probably unaware of. Process operators and technicians I have managed have included musicians, journalists, under-graduates, reservist officers, horticulturalists, sports club directors, race car drivers, skilled photographers and zero-handicap golfers to name just a few.  What has got them there?  Passion and determination to improve; long-term commitment and belief in their abilities; a knowledge that obstacles will be encountered, and the tenacity to overcome them.

If you want to demonstrate respect, you and your management team, and yes the executives are included in this, have to listen to ideas from all levels within the organisation and work to implement them.  Toyota evolved it’s own tools to do this, you should develop yours as well, your culture is different to theirs.  A few things that have been successful for me in many diverse cultures:

  • Hack the existing management and production control system, add agenda items and new team members to existing review meetings. If you are the leader attend every one.
  • Re-structure the bonus system.
  • For those that want to, train them in better-paying jobs, even if there aren’t any vacancies yet
  • Create project teams and make time for the process operators and technicians to participate. Sponsor as many as you can.
  • Push project sponsorship deeper into the organisation.  Chair a sponsor’s committee to guide them through the learning process.
  • Increase recognition events.
  • Appoint someone to be your conscience for when you fail to act appropriately.
  • Create a training package of the key skills required to implement changes, and offer it to everybody.
  • Cross-post to other parts of the organisation outside of the supply chain.
  • Appoint internally, unless it is impossible for legal reasons.
  • Give all the executives and managers a mentoring target as part of their rewards system.

The output of these types of activities is a learning organisation, with the skills and knowledge to continue to improve.  A large number of associates have the opportunity to excel in areas that they were previously excluded from.  These people are extremely valuable and many will move on to new more challenging roles, hopefully within your organisation.  Lay-offs become a thing of the past, your challenge now is to keep them.

 

Do you have more examples of how you can demonstrate respect and build talent?  Please do share them in the comments section so all readers can benefit from your knowledge.

If you want to learn more about the Cosmapec approach to process improvement, visit us at http://www.cosmapecsupplychainmanagement.com or contact us

About :  Rob Ward has extensive global experience working in supply chain organisations.  He co-founded Cosmapec to help companies and executive teams establish, develop and optimise their supply chains.

Lean is About People

Many words have been written about Lean, the benefits and the costs, the successes and the failures.  Lean manufacturing was a term coined to describe the success of Toyota’s Production System, which is widely admired and imitated.  Much of the work we do at Cosmapec could be described as applying Lean principles and tools, but we prefer to call it process improvement.  Why do we do this and not jump on the Lean bandwagon?

The main reason is that we see the process of optimising an operation as far more than introducing a set of tools, which seems to be the predominant way of ‘doing’ a Lean implementation.  There are so many well-documented failures in doing Lean through the tools that it has become in many people’s minds just another change programme that management will ditch once they lose interest in it.  Our approach is to focus on the processes and the people that operate them, and to give them the skills and authority to solve problems.  Lean tools may be included in those skills, but only when the problems to be solved have been identified, the value that can be created is clearly defined, and the priority for implementation is agreed.   Analysis of the current process is the starting point, and involving the process operators and supervisors in that analysis is a key learning.   Supervisors are important because they direct the day to day work, and making changes successfully depends heavily on them.  Operators are the ones doing the work, and it is their application of the improvements that ultimately dictates the success or failure of the change.

After completing initial analysis, we also believe finding the solution doesn’t just lie in the hands of the engineers, functional specialists and management.  They have an important role also, but they are not doing the work, and are often not familiar with the detail of what it takes to get the tasks completed.  When you share the results of the analysis with the operators and supervisors (be positive in the words you choose) then many simple solutions will be suggested immediately.  Often we have found the operators and supervisors know the solution, but there was no process in place to be able to implement it, or a forum to discuss it in.  Frustrating for them?  Absolutely.  So make sure you have a process for capturing their ideas, evaluating them and making implementation decisions.

The final point is one we have discussed before, but is worth reiterating again.  Most change programme implementations are about management deciding to do something about a problem.  Implicit in this approach is a criticism of current performance that destroys trust before the programme has been started.  Becoming a Lean organisation requires trust in operators and supervisors rather than authority over them, delegated decision-making and a focus on improvement rather than fixing problems. Our experience is that almost everyone understands that reducing waste adds value, and are eager to get involved once it is understood that they will be contributing to the solutions, and not just on the receiving end of them.  So don’t set out to ‘do’ Lean. Instead, focus on optimising your processes using the people that know them best, and let them give this programme a name which they can own and identify with.

 

Do you have examples of successfully implementing process changes?  Please do let me know in the comments section, it would be great to hear your thoughts.

 

If you want to learn more about the Cosmapec approach to process improvement, visit us at http://www.cosmapecsupplychainmanagement.com or contact us

Process Integration or Functional Excellence – A Working Example

Last week’s article on the merits of integrating processes or optimizing functions proved to be very popular, with a high increase in traffic to the blog.  One particular question I received deserves further development.  The question asked was, “Could you provide examples?”  So this is a follow-up article to give further insight through a real world scenario from my personal experience in facility leadership roles.  When discussing examples, it is important to understand why the situation developed, because rarely is it the case that it has been done out of neglect or malice, but usually because past events continue to dictate behavior, even if the current reality has significantly changed.

In this particular case, attempting to solve quality and customer service problems associated with a facility start-up in a rapidly expanding market, the management had developed teams dedicated to the individual processes in the facility. They believed that low operational equipment efficiency was the root cause of the problems and were striving to reduce set-up times, minimise unplanned downtime and eliminate rejected production.  Each filling and finishing line had its own dedicated operators and mechanics:  The warehouse, batch processing and quality functions supporting these lines were also included in the process based organisation.  This had clearly achieved its initial aims, quality and customer service were excellent, however costs had run out of control.  The facility had been established to take advantage of low labour costs in the country, but the total costs were now higher than any comparable facility, and productivity as measured by output per labour hour was well below the groups average.  All this in one of the newest and most automated factories in the network.  So what was going wrong?

Multiple reasons were identified, but the over-riding issue was the focus on having dedicated process teams, with no flexibility to move between processes.  The teams were staffed to deal with peak demands, but these happened only on one to two days a week, and demand troughs were 75% lower than the peaks.  This resulted in the highest skilled and highest paid operators doing non-productive work such as cleaning and maintenance for more time than they were making products.  The first step to resolve the situation was straightforward, move work between days of the week to smooth out overall labour demand.  The second was to return to a functional organization with mechanics and operators in separate teams, and the supporting groups were restored to traditional departments.  As part of this change, each group was re-trained to be able to work across several different processes.  The net effect was to reduce headcount by between 25 and 75% in each functional group as a result of these two changes.  The third change was to increase the productivity element in the annual bonus calculation and this further incentivised the new functional groups to work together in the new organisation.

To add a little twist to the tale however, once this had been achieved it was again found necessary to split the workforce into a process organization, but based on two groups of processes rather than individual processes.  One group was mostly semi-automatic processes, and required high staffing levels of mostly unskilled labour, however the second group of processes required highly skilled mechanics, filling line operators and batch processors.  This allowed further control of costs by focusing skilled workers only on those processes that needed them.  Knowing that a functional organization structure often leads to communication difficulties between the different functions, the factory was also re-engineered to establish kanban based control of material flows.

Functional excellence or process integration is in some ways a false distinction, the real question is have we organised the work to add maximum value at the best cost, and understanding that is the key to success.   The example outlined above was not an overnight change to the organisation chart, it took two years to complete.  It affected the working processes of the entire facility, and some of the management team and the process operators decided to leave rather than complete the journey.  But it was highly successful and the facility is now one of the most productive in the group.