I was working recently with a company that is targeting inventory reduction as a top priority. I stressed that reducing the causes of inventory is a better perspective. The analogy of inventory as a deep river that covers many rocks (wastes) is one most of us are familiar with, and one that I experienced firsthand early in my own Lean journey.
When our discussion turned to causes of inventory, there was an outpouring of reasons from the group:
- “We run for absorption,” a production manager exclaimed. “We don’t want idle machines or people.”
- A buyer added, “We order earlier if we think there will be a delivery problem.”
- A machine shop supervisor confided, “We gang parts with similar set-ups to improve machine utilization.”
These defensive postures provided too much inventory too soon. The consensus however was that in these instances too much inventory was preferable to the alternatives.
One inventory planner however suggested a cause of excess inventory that had nothing to do with protection: rounding. “There are so many ways to round order modifiers, but we don’t consider the consequences. For example, if an EQQ is calculated at 27 pieces, I’ll round it up to 30. Or maybe a safety stock of 187 pieces will be rounded to 200.”
The list of round numbers continued: anticipated yield (to cover defects), scrap factors (to cover breakage by the consumer), overage allowance, pan sizes (to cover standard package quantities) and minimum order quantities, safety stock and order point quantities, fixed and variable lead-times, and n-days stock on hand. Every one of these quantities were rounded – always up.
The planner continued, “These round numbers apply to each part, but when you put the part into a multi-level bill of material the modifiers are compounded! It’s much worse. A simple rounding of safety stock at one level, for example, pyramids inventory at every level beneath it.”
As she spoke, I recalled my own experience years before as a materials manager tracking down mysterious purchases of seldom-used parts. No actual customer need had triggered the order of these parts. They were driven entirely by order modifiers rounded up to nice round numbers.
I responded to the planner, “Good observation! Perhaps we should rename order modifiers to order magnifiers.”
How many order magnifiers are there on your part master? When was the last time you reviewed them? Are they nice round numbers? What portion of your total inventory is the result of nice round numbers? Please share a story.
BTW – My next free webinar will be on Tuesday, February 11, from 3:00-3:45 p.m. EST. The topic is “Tips for Manager Gemba Walks”. Hope you can join me. Click here to register.
You can learn about all of GBMP’s public lean training events here – from benchmarking Plant Tours to Lean Accounting Workshops, Six Sigma Green Belt Certificate programs and more.