I just realized what buying a new home and production management have in common. Our family is looking to buy a new house, and we have put our current home on the market. Ideally, we would like to buy our new home and sell the old one at the same time, because that way we could avoid the risk of ending up with one too many (or one too few) houses. In practice, however, doing the deals simultaneously is difficult. Therefore, my wife and I need to consider and balance the risk of having to pay two mortgages, and the risk of having to move to a rental apartment until we find the right place for the right price.
Now you might be wondering: what does this situation have to do with production management or planning? While I was contemplating homes changing owners, I started thinking about material flow through a production plant. I realized that in both cases the ideal is the same: minimize the time between buying and selling. A manufacturing company should buy its raw material as late as possible in order to minimize the cost of carrying extra raw material inventory. Likewise, manufacturing operations should be performed as late as possible to avoid accumulating work-in-process inventory. These are some of the cornerstones of Just-In-Time (JIT) production philosophy.
But just as it is difficult for my family to sell our old house right at the same time as buying a new one, for many companies across various industries it is difficult to adhere to the JIT production ideal. There are many factors that prevent companies from getting rid of their inventories, including:
- Lead times demanded by customers are shorter than production lead times
- Batch production processes with large lot sizes compared to customer order sizes
- Preparing for periodic demand peaks
This means that companies are forced to keep safety stocks of raw materials, semi-finished goods and/or finished goods, hoping that there eventually will be demand for those stocks.
Considering that stocks are prevalent in most companies, I’ve surprisingly often seen that management of these stocks is not well integrated into planning systems. Planning systems often seem to be designed for make-to-order production, and they handle that well. The shortcomings become apparent when a company wants to add make-to-stock and finish-to-order production into the mix. These modes of production introduce new planning decisions that need to be taken, such as
- Do we start the production of a certain order from raw materials, or can we use semi-finished materials? How does this affect the promised delivery date?
- Do we reserve semi-finished stocks only for our key customers, so that we can serve them with shorter lead times? Or is any customer eligible for a shorter lead time when there are suitable semi-finished goods in stock?
- When should we launch new production orders to replenish safety stocks? How do we handle prioritization between stock replenishment orders and orders with immediate customer demand?
When a planning system does not support making these decisions, companies have to make these decisions with the input of the tools they have at their disposal (i.e. their ERP systems, or a bunch of Excel spreadsheets). While giving all due respect to companies for making best use of what they have, these solutions don’t usually offer the visibility and decision support needed for optimal use of stocks. A common symptom is that these companies have higher stock levels than necessary and low inventory turnover rate.
To give an idea of the inventory reduction potential, we can take our customer Sapa Heat Transfer in Sweden as an example. Sapa recently reported that their WIP, coil and sheet stocks decreased by 20% after implementing the Quintiq Company Planner.¹ According to Sapa, one of the key benefits is that, with the Company Planner, they have better visibility into what material is needed when, which gives planners the confidence to work with lower safety stocks.
If you are responsible for production planning or inventory management in your company, go ahead and re-read the questions above. Are those questions relevant in your company, and are you getting the decision support you need from your planning systems?