Review of A TOC Case Study, Part 3
In my last post I discussed two of the principle lessons within The Goal. One was the concept of throughput accounting and another was the primary objective of for-profit companies. That is to make money, now and in the future. From an organizational perspective, this means that every decision made must be considered based upon potential money-making impact. The team I managed at the Kentucky convertible top plant heeded that advice. We learned that the optimum conditions for maximizing profitability are to have throughput (T) increasing while inventory (I) and operating expense (OE) are decreasing or remaining constant. We also learned the definitions of the three components of profitability, according to the Theory of Constraints, which I provided in Part 2.
I also described a visit from one of our primary customers, a German auto manufacturer for which we made fiberglass hardtops. Using our understanding of TOC, we were able to impress this customer and earn his loyalty. This was a contributing factor to our profitability improvement of roughly $1.1 million in five months.
In the final post of this series, I will complete our TOC case study by examining how we dramatically reduced our incidence of part’s stock-outs while reducing our inventory by nearly 50 percent.
Applying the Min/Max System for inventory levels
Like most companies that manufacture parts, we purchased numerous SKUs that were needed to fabricate our products. To make sure we had enough of each part, we used the Min/Max System of inventory control to replenish our supplies. For those of you not familiar with this system, it is comprised of five “rules”:
- Determine the minimum and maximum levels for each SKU.
- When reordering, never exceed the maximum level for any SKU.
- Never reorder until you go below the minimum level defined for that SKU.
- Total part inventory is held at the lowest level of distribution (usually at point of use).
- Parts are inventoried once or twice a week and an order is 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 needlessly raised our maximum reorder quantity. I say needlessly, because we were tying up excessive amounts of cash on parts we didn’t need. In the first several months, I think our parts inventory increased roughly 40 percent, yet we still suffered from stock-outs.
What were we doing wrong?
The assumptions driving the five “rules” are based in cost world thinking. The premise here is that 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). We scrutinized our purchases and lived by these rules, but at the end of the day, we still had numerous stock-outs which were beginning to impact our on-time delivery gains. We simply could not let that happen.
The best ideas come from the front line
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 one that is completely based upon parts’ 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 reorder two or three 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 percent 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, and he had earned it!
What Jimmie had suggested was a form of TOCs Parts Replenishment System, which, as Jimmie had suggested, uses the concept of replenishment based upon usage. That is, rather than using the traditional Min/Max System which replenishes based upon minimum and maximum quantities, replenishing based on usage.
Coming in the next post
In my next post, I will begin a new discussion on a completely new subject—one (as always) that will help manufacturers to drive operational efficiencies and improve profitability.
Until next time,
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