Tag Archives: safety stock

Nice Round Numbers

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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.”

roundnumbersThe 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.

O.L.D. 

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.


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Thankful for Inventory

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ThankfulI heard a tongue-in-cheek radio ad for a local tobacco shop yesterday extolling the secondary benefits derived from tobacco, namely the tobacco sales tax.  Supposing the moneys actually go to fund their publicized causes (road and bridge improvements, aid to expectant mothers and of course a mandated marketing campaign decrying the dangers of tobacco) we should be “thankful”, according the ad, for tobacco.   The bizarreness of this premise inspired the following parody:

Be thankful for inventory!

  • It’s an asset, like ‘money in the bank.’ Though not quite as liquid as cash, this asset can be used as collateral to borrow from the bank – perhaps to buy more equipment to build or store more inventory.
  • Larger inventory lots reduce the need for costly changeovers.   Optimizing these quantities is axiomatic to absorption and equipment utilization.
  • Inventory is a protection against machine downtime.   Who would risk deliveries to customers by producing only what is needed when pesky machine breakdowns are likely?
  • In slow periods, building inventory to forecast keeps our workers and equipment busy.   (And once we figure out how to forecast future needs accurately it will reduce overtime in peak periods as well.)
  • Purchasing economical lot sizes reduces piece costs, which of course increases profits.  Right?  Is a container load such a bad thing?  In any event, ordering overseas purchases would be problematical without pallet load lot-sizing.
  • Larger lots reduce sampling inspection costs and associated paperwork. Our quality system requires minimum lots to conform to sampling standards.  We’ve calculated the EOQs and these are our targets.
  • Larger lots reduce stock-outs.  If we are constantly running out of parts our customers will be affected.  We should be thankful for safety stock.  After all, safety is one of the most basic principles of Lean.

These premises unfortunately have about the same validity as those in the tobacco shop advertisement.   Inventory, like cigarettes, is an addiction with short-term perceived benefits but long-term negative consequences.  And bizarre as these premises may appear, they’ve all been uttered to me recently by well-meaning managers who struggle to see inventory as a symptom of many business problems.

Can you add to the list?  What are some other reasons that we are “thankful” for inventory?  Please share a couple.    And have a Happy Thanksgiving!

O.L.D. 

BTW:  My next free webinar is fast approaching.  Sign up here for “Tea Time with Toast Dude.”  The topic will be “Killer Measures”, traditional measures that can derail your lean implementation.  Hope you can join me on Tuesday, December 10 from 3:00 – 3:40 p.m. EST.  Read more & register.