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Unlock your money from Unused Inventory

Manufacturing companies often realize that the raw material or packing items stay unconsumed for several weeks. Such materials are ordered and inventoried after having borrowed money from banks and other sources, at rates of interest equivalent to 12-15 % per annum. Locked funds and the interest thus accrued due to unused inventories can have significant impact on the Net Profit Margin.

Apart from the ever changing demand, other main reasons for locked funds in inventories are:

A. Less than Installed Manufacturing Capacity
Procurement departments assume certain manufacturing capacities as a thumb rule and place an order. Capacity losses due to planned or unplanned maintenance, setup or cleaning downtimes, power and labour uncertainty are not factored in.

B. Missing component of a set
Manufacturing processes involving integrating several materials into semi-finished and finished products are hampered because of missing components stuck in transit or due to Quality Clearance.

C. Asynchronous ordering
Some of the low lead time items (and with low variability in supply) land at the plant before the others (with higher lead time and higher supply variability) and result in unused inventory. This happens due to the fact that ordering is driven by aggregate consumption plan, i.e. material required in a month or quarter instead of a specific week or day.

D. Long lasting impact of MOQ
Ordering sizes are bound by contracts and inbound vehicle capacities. For low consumption items, this could mean money stuck in long lasting inventory. Add to it the shelf life aspects, and such unused inventory often has to be written off.

Better Planning to Unlock Money in Inventory
Advanced Planning Systems from SCMworx can help release cash back into the system while following some simple rules.

Rule 1
Generate a production plan with finite production capabilities while looking at potential lost capacity due to maintenance, labour and power and other uncertainties. You will notice that not material need to reach the manufacturing site.

Rule 2
Determine the precise day/week when the material shall be required for consumption. Do this while considering supply lead times of all materials in the Bills of Material and synchronize the ordering such that all materials are planned to reach the manufacturing site with minimal inventory pile up.

Rule 3
Analyse the implications of MOQ based ordering with help of our long term reports as well as flash reports to help the procurement team to track the goods in transit as well as material lying with Quality Control team.

Rule 4
Use long term reports and flash reports to assess inventory and execution risks to estimate the impact on inventory and production schedule.

TOC Vs Optimization: Verdict – Win : Win

Shop floor operations are complex. Planning with variables like demand, various capacities, run rate, product mix, lead times, material constraints etc. is not a very easy job. Throw in the element of human behaviour and the complexity hits the roof. It is therefore extremely tough to do any type of root cause analysis for poor factory performance. Even though the entire shop floor is a set of interconnected operations and should behave as a shoal of fish that moves in tandem to any external stimulus, the ground reality is hardly that. Division heads, plant managers and machine operators each respond to these changes differently.

Theory of constraints brought in a whiff of fresh air to this complexity by laying down some very simple and easy to understand guidelines for making the shoal move in sync. The concepts of DBR and modified DBR were based on practical observations on the shop floor. TOC concepts encouraged operations managers to walk around the shop floor to visually figure out the bottle-neck resources and then subordinate all other operations to that. There were 5 steps of identifying, exploiting, subjugating, elevating and looping that formed the core of TOC.

The other concept that also tries to streamline operations is mathematical modelling. By representing the physical world in terms of mathematical equations and then trying to find the best possible value mathematically, gained lot of traction in the last couple of decades. Although Mathematical modelling using Operations Research techniques were being used by the military for quite some time, it got lot of visibility and gained lot of traction following i2’s tremendous success.

Proponents of TOC scoff at Optimization techniques as they find these to be rigid and sensitive to slight fluctuations in the inputs. The argument is that, optimization techniques are theoretical and they can hardly be used in practice. There is definitely some truth in that argument.

Optimization experts on the other hand feel that TOC is too simple as it fails to consider the varied product mix and complex production processes that have become the norm in today’s factories. With changing product mix and complex production processes, the bottleneck resources keep moving thereby throwing the basic tenet of TOC out of the window. Moreover TOC misses out on the huge savings that can accrue if the complexities that are not humanly possible to be baked in the plan are captured mathematically and conquered programmatically.

In today’s world where supply chains are getting extended with multiple stakeholders coming in, an idea of identifying bottlenecks by checking the piled up inventory before a machine might sound too simple an approach. With flexible production lines, the battle has moved to the customer which is now considered to be the only bottleneck for a business. In this changed world order, the most probable way to move forward is to capture all these variables mathematically and then make sure that certain checks and balances in terms of sensitivity analysis and scenario planning are put in place so that the flexibility of the plan are maintained.

TOC can still be used in individual factories or in a smaller circle of influence. Using best of breed solutions i.e. mathematical modelling for holistic planning and then using TOC for operational level streamlining seems to be the best bet.

Which Forecasting Technique is good for you?

One of the favourite question of Supply Chain interviewers for the ‘often-nervous’ interviewees is “How do you choose a forecasting method for an FMCG company or a Cement company?” Most interviewees babble about errors (calculated statistically assuming a stable universe!) and dashboards.

To be honest, this is question that has befuddled most of the CXOs of this age and the ancient (tribal heads, emperors, high priests, etc). No machine or a crystal ball, for that matter, can accurately predict what future will bring in terms of rains, prosperity or war and finally how much soap with 44% saturated fat, mixed with rose essence will sale in Jhumaritalaiyya in October 2016!

Coming to statistical forecasting; those provide good guidance to the future, while accounting for trends, influencing factors like advertisement, GDP growth, monsoon performance, etc. Supply Chain heads and CIOs must understand that choosing a statistical forecast method is not a ‘once-a-lifetime’ activity. Data must be analysed for two main aspects; viz overstocking and shortage. Any statistical forecast will cause either of the two results above. One needs to make a decision on which of the two results is acceptable for a specific product line/ group and how much. Choice of the forecasting technique then becomes easier. Revisiting the data every 3 months to determine the extent of oversupply or shortage, and fine-tuning the forecasting method to correct the imbalance is required to keep the supply chain on its toes, figuratively. This approach will help the Supply Chain heads to bid good-bye to crystal gazing.

7 Things to do when adopting an Advanced Planning System

Advanced Planning Systems (APS) score well above the ERP systems in the way those make the Supply Chain Planning processes automated, faster, responsive and cost effective. Such APSs can be extremely costly and time consuming. Some of the well-received APS are offered by SAP, Oracle, Manhattan, RedPrairie, Infor and JDA Software. The CIOs are advised to muse the following before they sign the big check!

Seeing is believing
Save yourself heartbreak by making reference checks on different working APS with companies in the industry and beyond, before taking the big leap. Check with the user community on the experiences. They might have shocking stories to share. Ask your APS vendor for a free trial period.

This or That
Whether it is the Big Bang deployment of APS spanning across marketing, distribution, warehousing, production and production with all business segments involved or a staged deployment approach, consider the implications on risks, project cost, project infrastructure, existing ERP and Analytical systems integration and master data management and communicate impartially to the project sponsor.

Optimized Plans. Really?
Get your execution team involved as soon as possible in the process of adopting the plans made by APS. Release the dummy plans to field sales, shop floors, stores in-charges, vehicle managers for review and trial execution. Get a quick and honest feedback if the output of the APS is practical and optimized.

Being Reasonable
APS are costly. Period. CIOs and Functions heads are forced to get the best of out the money invested. The result is a super complicated, impossible to run, hard to understand and heavily customized APS. Most of such APS are junked soon. Be reasonable with the complexity of solutions. Better to have complete payback of APS investments over long period of time than risking losing the investment in a very short time.

Software is not THE panacea
APS implementations should be looked upon as an opportunity to getting planning processes (re) defined, Suply Chain KPIs (re) established, junk data cleansed and (re)-organization of teams. In fact some of these are pre-requisites for deploying an APS.

OR Training
All the APS software are built around statistical methods and optimization techniques based on Operations Research. Make sure that you and your team has a good handle on these ‘advanced mathematical models and decision making trees’. Hiring a corporate trainer or a college professor for a couple of weeks will do wonders to the comfort levels of your team.

Retain the team
However good the APS documentation is, retention of the implementation team is critical to running of APS over a long period. Many a time, good implementations come to stand still as the implementation team members are returned to core function or leave to find lucrative job opportunities.

Combining the ease of spreadsheet based planning with advanced planning solutions

Excel is the preferred tool for most of the supply chain planners. This is because of the flexibility and ease of use that excel offers and planning being a very dynamic area, most of the planners don’t want to get confined to the limitations of the tool. Moreover simple activities like data manipulation and data override becomes so cumbersome that planners prefer excel to standard planning tools. The flip side of using excel is that every planner ends up with his version of the plan and considerable time and effort is required to drive consensus and get to the single number. SCMworx has partnered with Saddle Point Technologies, a provider of cloud based integrated supply chain planning suite to combine the flexibility and ease of use of Excel with a web based single view-single plan solution. Saddle Point’s web based spreadsheet combined with advance industry standard optimizers and algorithms gives the user the best of both the worlds. Some of the main features of the web based spreadsheet are

  • Availability of excel like formulas makes data manipulation and data entry simple.
  • Features like copying data by dragging and dropping cells.
  • Conditional formatting improves data visibility.
  • Content locking helps in securing data.
  • Sorting, using data filters, insert/delete rows etc. makes the web spreadsheet extremely flexible for data overrides and scenario planning.