Focus and Leverage Part 171

In this posting I want to share some experiences that were not so successful, but that we were able to learn from and do them right in the future.  This first experience has to do with a part’s availability problem and what we thought we were doing correctly, but obviously weren’t.

Like most companies who manufacture parts, we purchased numerous SKU’s that were needed to fabricate our products.  So to make sure we had enough of each part, we used the Min/Max system to replenish our supplies.  For those of you not familiar with the Min/Max system, there are several “rules” as follows:

1. Determine the minimum and maximum levels for each SKU.
2. When re-ordering, never exceed the maximum level for any SKU.
3. Never re-order until you go below the minimum level defined for that SKU.
4. Total part inventory is held at the lowest level of distribution (usually at point of use).
5. Parts are inventoried once or twice a week and order placed, as required (i.e. when less than the minimum target).

We religiously followed these rules, but it seemed as though no matter how diligent we were, we still had stock-outs.  And when we did, we “stupidly” raised our maximum re-order quantity.  I say stupidly because all we were doing was needlessly tying up excessive amounts of cash on parts we didn’t need.  In the first several months I think our part’s inventory increased something like 40%, yet we still suffered from stock-outs.  What could we possibly be doing wrong?

The assumptions driving the five “rules” are based in cost world thinking.   This thinking believes that in order to save money and minimize the cash you tie up in inventory you must minimize the amount of money you spend for these items by never buying more than the maximum amount and not spending any money until it’s absolutely necessary (i.e. Order parts only when they reach the minimum level).  As I said, we scrutinized our purchases and lived by these rules, but at the end of the day, we still had numerous stock-outs which was beginning to impact our on-time delivery gains and we simply couldn’t let that happen.

One day, one of our hourly supply guys (Jimmie) said he wanted to talk to me about an idea he had to reduce these stock-outs and asked for a one-on-one meeting with me in my office.  I asked him why he wanted this kind of meeting and he told me that everyone thought his idea was silly and that he didn’t want his co-workers to know he had suggested it.  I smiled and invited him into my office and shut the door.  He asked me if he could use my board to draw while he talked and of course I obliged.  Jimmie and I talked for over two hours and I was convinced that his idea would work because it was all based upon common sense.

Jimmie suggested that we go away from the Min/Max system and replace it with a system that is completely based upon part’s usage.  What he really pushed for was ordering more frequently based upon what we had used.  He told me that he got the idea from watching canned goods at a grocery store where he observed as one can is purchased, a replacement can is ordered using their bar code system and they never seem to have stock-outs.

He further explained that the grocery store keeps a minimum amount of stock in their stock room to replenish what was used that day, but they frequently re-order 2-3 times per week to replenish their stock room.  I thought the idea was fantastic and asked Jimmie if he would lead the effort.  He was hesitant at first, but then agreed to do so.  We tried it and over the course of the next six months we reduced our total inventory by nearly 50 % while virtually eliminating stock-outs.  It wasn’t all smooth sailing, but as we ran into problems, Jimmie always found a way to fix it.  What I didn’t know was that Jimmie had worked for a grocery store as a stock boy, but had obviously paid attention to his surroundings.  I later promoted Jimmie to the new job title of Logistics Manager.  It was such a proud day for Jimmie, but he had earned it!!