Reduced Inventory Can Increase Your Share Price

Dan Gilmore at The SupplyChainDigest reported on a study that showed the importance of good inventory control:

“…permanently reducing your level of inventories relative to sales and sales growth can have a dramatic impact on a company’s share price.”

Inventory is a very visible way to measure a firm’s supply chain efficiency.  However, inventory is a great way to control for variability in the supply chain.  So, if you want to permanently reduce inventory, you need to go after the underlying variability.

 

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SKU Rationalization

Companies with a wide range of products always struggle with the question of how many SKU’s (unique product IDs) they should make.  Should they cut the number of different SKU’s? Should they increase the number of SKUs?

If you only offer a few SKUs, then you are potentially missing parts of your market, giving your competitors a chance to make inroads, and possibly losing shelf-space at the retailers.

On the other hand, if you offer a lot of SKU’s, you may be confusing your customers and adding extra costs through extra inventory and increased manufacturing costs.

Usually, the sales side of an organization wants more SKU’s and the supply chain organization wants fewer.  Our experience has shown that the sales side usually wins.

Two years ago, the Wall Street Journal published an article arguing that firms have too many products.

However, I don’t think there ever can be a right answer to this question.  But, posing the question and analyzing the situation should lead to better informed decisions.   Interestingly, the techniques of mass customization are an attempt to break through this dilemma.  If you can offer customers more choice, but without the extra cost, you can create a lot of value in the market.

WSJ Article on Harley Davidson’s More Flexible Plants

The Sept 21 WSJ ran an article on Harley Davidson’s efforts to improve their manufacturing plants.

It was interesting that the article was not just about reducing costs in the plants.  Instead, it focused a lot on their efforts to be much more flexible.  That is, the plants needed to be competitive when demand was low and competitive when demand increases.

When you look at the revenue graph they presented in the article, you can see that revenues decreased by about $1.5B from the peak, but are now increasing.   In such a market, you see why they want to emphasize flexibility.

The article ends with a nice quote about the new mix of automation as well as jobs done with a human touch:

Robots now do most of the welding and metal slicing. They slide flat sheets of steel into an 80-ton press that molds metal into fenders. A computer takes snapshots of each frame or gas tank moving along the line, relaying that information to the painting equipment so it can prepare needed hues.

Automation has its limits. People, some wearing biker garb such as muscle shirts or U.S. flag head scarfs, still do quality-control and assembly work. To check for leaks, workers plunge gas tanks into water basins and watch for bubbles. It’s the same method used for a century at Harley. Mr. Magee shrugged. “It works,” he said.

Top 3 Lessons from The Economist Article on Honeywell’s Version of Lean

Earlier this year, The Economist published an article on Honeywell’s dramatic plant floor improvements through their lean efforts.

The article quoted the improvements at one plant:

It used to take 42 days to make and deliver a sophisticated toxic-gas detector, for clients including Intel and Samsung; now it takes ten. The production process used to consume the factory floor; now, it uses merely a quarter of it. This has freed up the rest of the factory to make lots of other products.

The factory therefore makes more stuff, generating more revenue, with essentially the same headcount, square footage and energy consumption.

The article mentions that Honeywell developed their own version of Toyota’s production system after visiting Toyota for two weeks.

Here are my top three lessons learned from this article:

1. Toyota was the pioneer of Lean.  It is good to understand what they did and why it worked.
2. It is important to adapt Lean to your environment.  Toyota created a great system for themselves. Other firms needs to build their own system to suit their needs.
3. You need to take Lean deep into your organization.  To make Lean work, you need to spend time and effort educating everyone in your organization.

 

Classic Article on Mass Customization

Over 10 years ago, the economist published a long article on mass customization.

I find that the article still rings true today and covers the main principles.  Since the article’s publication, more firms are getting better at mass customization, but some firms have tried it and failed.

It is interesting to discuss how mass customization principles align (or don’t align) with lean principles.  In some ways these two contradict each other and in some way you can’t implement a mass customization system without being lean.

How To Buffer Against Variability in the Supply Chain

Every supply chain manager must deal with variability.  Of course, there are techniques for reducing variability, but even the best program cannot eliminate it completely.

In Feb of 2012, we were able to publish a guest blog post at LogisticsViewPoints that addressed this topic.

The idea is that safety stock can help you buffer against this variability.  What is interesting is that that is really not a solution about inventory, it is about reducing lost sales, reducing late shipments (and upset customers), and reducing expediting expenses (and headaches).  Here is quote from the article:

Safety stock allows you to seamlessly meet unpredictable spikes in demand, and it allows you to protect your customers from production breakdowns, supplier failures, or unusually long shipment times. Safety stock helps increase sales, reduce late shipments to your customers (keeping them happy or avoiding contractual penalties), and reduce the cost of expediting by minimizing the times you are short on stock.

In the end, you may not be able to control variability, but you can control what you do about it.  The blog takes an idea from Hopp and Spearman’s book, Factory Physics:

In this book, they mention that you can either choose how you will buffer against variability or it will be “chosen” for you. When it is “chosen” for you, it shows up as lost sales, late shipment penalties, expediting, and a more chaotic supply chain.

Using Lean Techniques To Turn Around Troubled Manufacturing Firms

In April of 2012, BusinessWeek published a nice article on how lean techniques are being used to help turn around troubled manufacturing firms.  In this article, they were focusing on manufacturing firms with around $100 million in revenue.

The article discusses how they were able to turn around these firms.

Earlier this year, I was talking to a manager at a major retailer.  He mentioned how they are now seeing vendors in the US offering better prices than the vendors from China.  He attributed this trend to the US manufacturers becoming more efficient by using lean techniques.

The field of lean is very rich.  There are very simple techniques that can be used, their are more advanced principles (around understanding variability), and there is a big effort to apply these concepts outside of the manufacturing sector (where they were pioneered by Toyota).