Sustainable stock reduction

Unresolved problems in the supply chain

From Armin Klüttgen

A sustainable reduction in inventory and an increase in delivery readiness are only possible if the weak points in the supply chain that have been uncovered are not plastered over again, but actually eliminated. Otherwise, many efforts are wasted.

Many companies are tackling inventory reduction projects with great vigor and the best of intentions. The route set out by management is usually: 98 percent delivery readiness with a simultaneous reduction in stocks of 25 percent. This is rightly called increasing profitability and customer satisfaction at a first-class price-performance ratio. These goals can always be achieved with a great deal of effort to optimally adjust scheduling. The project participants are proud of the goals they have achieved: “We are now lean and customer-oriented and have increased our liquidity at the same time.” The best prospects for the fierce battle in the tough competition.

Do projects have to remain flash in the pan?

First disillusionment

However, after the completion of such projects and the initial euphoria about the successes achieved, disillusionment is not too long in coming. Due to a lack of holistic project management, inventory values often return after just a few months, stock turnover falls back to the old level and the targeted delivery readiness, to which all inventory management parameters were tailored, does not materialize as predicted. So there is no trace of sustainability. Did this project make any sense at all? You can’t keep repeating this complex procedure! Does this mean that stock reduction projects are a flash in the pan and ultimately impractical? We are often called to companies that have previously tried in vain to reduce their inventories with their internal team. An analysis of the interrelationships in such projects reveals the real problems of unsuccessful attempts to reduce stocks.

Stock conceals many problems

Inventory management projects can only be successful if the disruptive factors in the supply chain are also attacked, as these are often the triggers for a renewed build-up of inventory. The inventory masks many problems relating to scrap production, supplier performance, a lack of flexibility in the face of changing market requirements, inadequate production planning and control and the management of processes that are prone to disruption because the company is always ready to deliver. In this respect, lowering the inventory level must be understood as unmasking the problems that need to be tackled. They must not simply be cosmetically covered over again with stocks! In practice, however, the symptoms are often treated rather than tackling the causes.

Disruptive variables should be attacked

Problems with procurement

  • Suppliers deliver too late, too little, too poor quality.
  • There are restrictions on the procurement of input material (for example, only a limited number of qualified routes).
  • Delivery concepts (delivery frequency, quantity, order lead time, minimum order quantities, etc.) prevent a low-stock solution.
  • Acyclical purchasing of materials that are highly volatile in terms of price causes alternating supply and inventory problems.

One company in the luxury goods industry recorded a rate of 10 to 20 percent, and in some cases up to 50 percent, of unusable parts for some of its externally procured materials. If permitted by quality assurance, these are revised, which increases the throughput time. The rest of the parts are sent back to the suppliers and are therefore not used for restocking purposes. In addition, this uncertainty is overlaid by delivery date deviations, which can be considerable.

Problems in production

  • What was planned to be produced is not produced.
  • Fault-prone processes (for example in the metal industry) are “made safer” by building up stocks behind the unstable production stage.
  • Process engineering constraints lead to a forced flow of material into production, while predetermined production sequences and campaign formation generate undesirable inventory effects.

At an assembly manufacturing company, the foremen in production fogged out all the planning specifications by combining the orders on their own responsibility for reasons of “economic efficiency” and “throughput optimization” in order to achieve an optimization of the batch sizes. In addition, predefined sequences and campaign formations were also overridden in the scheduling. Unfortunately, the conviction that a batch size must be large is still very much alive everywhere. However, this view is one-sidedly focused on the efficiency of production or often just a single production step. The view of the overall optimum is not given.

Committees (planned and unplanned scrap) are also a sensitive element that are not or only insufficiently included in the planning. People simply don’t like to plan things that shouldn’t be there. However, rejects that are not properly planned are the killer for a high level of delivery readiness. Realistic planning is therefore particularly important here.

The killers threaten everywhere

Problems in sales

  • The sales department maintains its own buffers. The premature loading of orders or the use of “dummy orders”, which occupy capacities and allocate primary material, are popular ways of doing this.
  • The accuracy of sales planning is inadequate and the integration of different, hierarchically organized planning levels is not consistently pursued.
  • A lack of coordination and synchronization at the interfaces between companies can lead to delivery problems in cross-location production.

In a company in the metal industry, the sales department used various means to generate an additional stock range of around one week. They officially worked with an internal and an external target date in order to be able to meet the tough external deadlines. The roots of this system lay in a time when production was not sufficiently structured and the sales department had lost confidence in the delivery readiness of its own production. The result was more stock and multiple daily telephone calls from the sales department trying to intervene in production planning.

When the sales department distrusts its own production

Generic problems

Regardless of these individual aspects and the seemingly hair-raising anecdotes from day-to-day practice, two problems in the planning and control of inventories and delivery readiness ultimately lay claim to having found the widest distribution across all sectors:

  • Insufficient data quality, completeness and interpretation: Master and transaction data are incorrect or incomplete, are not adequately maintained and are interpreted differently. And in heterogeneous IT landscapes, individual isolated solutions are used that are not consistent with each other in terms of content and are not always up to date.
  • Lack of stock transparency: Many companies often fail to answer the question of how high their stocks are. But you can only improve what you know.

Countermeasures through planning

If you do not want to (permanently) pay the price of high stock levels and poor delivery readiness, it is important to attack the disruptions that occur to the maximum extent possible after an inventory reduction project or during the project. If there are no degrees of freedom or the measures have not yet been completed, they must be taken into account in the planning.

  • Suppliers should be qualified, but at the same time deficiencies in on-time delivery or in the quality delivered should be included in the planning through delivery safety stocks. These stocks can then be reduced again as supplier qualification progresses.
  • Reject rates in production should be a reason for quality assurance and process engineering to take countermeasures, but at the same time the reject rates should be planned accordingly and reduced with increasing improvement.
  • Campaign planning, greetings and set-up sequences should be put to the test. The effects of different parameters are often misjudged here.
  • Last but not least, many companies would benefit considerably from a “data quality and availability initiative”.

For inventory reduction projects, it is often not sufficient to carry out an isolated parameter optimization that is decoupled from the supply chain in order to fully exploit the great optimization potential. The close interlinking of processes and structures within the supply chain makes it essential to look beyond the end of one’s nose and take a holistic approach to achieving delivery readiness while minimizing inventories. This makes it possible to make inventory reductions sustainable, fully realize existing potential and also lay the foundations for a continuous improvement process.

The courage to include committees

About Abels & Kemmner

Abels & Kemmner GmbH was founded in 1993 by the engineers and economists Dr. Helmut Abels and Dr. Götz-Andreas Kemmner. The company focuses on streamlining value chains (supply chain optimization) for series and variant manufacturers as well as wholesalers. Supply chain concepts developed with customers have already won best practice awards twice. A&K caused a sensation in 1997 when it founded the first virtual company made up of six medium-sized companies from the automotive supply industry.

The second focus is on restructuring and earnings enhancement projects. Abels & Kemmner has made a name for itself in crisis and turnaround management through the successful restructuring of medium-sized companies. In recent years, Abels & Kemmner has been involved in the restructuring of the majority of major corporate insolvencies in Saarland.

Info: ak-online.de

Armin Klüttgen, Senior Consultant at Abels & Kemmner GmbH, is a specialist in supply chain simulation, Abels & Kemmner Gesellschaft für Unternehmensberatung mbH, Kaiserstrasse 100. D-52134 Herzogenrath, Tel. +49 (0)2407 9565-0, ak-online.de
Armin Klüttgen

Armin Klüttgen

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