The Biggest "Losers"

The conversion to a pull process works on the assumption that a company needs to maintain an acceptable quantity of inventory in the DC and the supply chain to meet customer demand but not create large excesses. The need to replenish additional product is driven by the consumption of product at the DC, not a planned (forecasted) future requirement. Once the inventory on hand and on order is reduced below the statistically sized re-order point, additional product is ordered from the supplier. If there is no product consumed, then there is no need to order product and put it into the pipeline.

Choreographing Change

What if we went away from a forecast or fancy formulas trying to predict the future for thousands of items and gave planners/buyers tools that ensured the time necessary to analyze the bulk of the dollars purchased? For inexpensive, low-value inventory items, the design of the replenishment system would make sure those items are, statistically, always available. These items (traditionally, C and D items) would be on a pure pull system, and the signal to replenish product would be an electronic kanban trigger or re-order point (ROP).

This statistically sized ROP would use high service levels to cover almost any variation seen in historical usage. The signal to replenish product would not be forecast driven, it would be just a signal to purchase when product has been consumed. Then, only periodically and by exception — when the recalculation told buyers to review the data — would there be any interface between the planner/buyer and these items.

The B items, those with some dollar value and historical usage, would be sized and replenished the same way as the C and D items, but service levels would be more conservative and the exception management effort slightly higher. There may be some analysis of the forecast projections, consumption history and statistical patterns (review of spike usage), and this analysis would ensure sufficient information to make informed decisions when necessary. However, these informed decisions are again on an exception basis, driven by differences between the forecast, consumption and statistically sized inventory. More analytical effort than a C and D class item may be required, but most certainly less than is being required today.

Finally, the A items are where the experience, focus and 75% to 80% of planners'/buyers' time will be spent. This is where 80% or more of the inventory buy and sales will occur. These items the planners/buyers will manage almost daily. The methodology will still be an electronic kanban trigger (ROP), statistically sized and signaled for replenishment by consumption of product, or a pull. These items will be reviewed often, compared to the forecast and historical statistical projections and influenced by the experience of the planner/buyer, any available market data and feedback or information coming from the customer base. Large consumption or sales will be analyzed, and future inventory builds will be planned carefully to ensure availability, but the statistical ROP will keep inventory as low as possible while meeting desired service levels.

There will be a lot of interaction with suppliers: meetings, e-mails, conference calls and a constant focus on taking waste out of the supply chain. Why so much focus on these items? The reason is, this is where large inventory savings can occur and where lack of attention to details will break the bank. Here, engineering changes will be choreographed like a Broadway musical, and every aspect of these parts will be planned. Planners/buyers can spend all or most of their time analyzing A items because they have relinquished control of the C and D items, which represent 50% or more of the part numbers in the kanban system.

Some companies may already be using a pull system to determine when to purchase additional products. They may call it a reorder point, which, if properly applied, can be an electronic kanban signal triggering a replenishment. The question concerns the methodology used to size the reorder point and signal the replenishment. What is the requested minimum order quantity (MOQ)? The lean flow method of sizing the ROP is based on some of the same data that any ROP-sizing would be based on: historical usage, lead time from the supplier, service levels, etc. The devil is in the details of how the information is used to create the ROP.