Water, water everywhere but not a drop to drink....

I’d like to tell you about a recent project where we helped a customer save lots of money by reducing their stockholding of raw materials, saving space, bank borrowing and ultimately some headcount.

We found a business that seemed to have lots of stock but it was not always the right inventory to finish the shop orders on hand.  They had a lot of people in their purchasing department but they weren’t in control – nearly everyone was involved in expediting. Morale was pretty low because the rest of the business was kicking them for late deliveries.

We spent a little time interviewing the people in the department and then their co-workers in planning and production. Then we had a look at their processes and their ERP data.

Amongst many other things something jumped out that seemed incongruous – the lead times on almost every purchased item was, it appeared, to be generous.  We took the information back to the team and it became clear that a general policy was in place to always add a week to any quoted lead time by the supplier. The reason for this, it was explained, was that a number of suppliers in the past had been tardy with their delivery timings and it had led to shortages on the shop floor which later led to late delivery to customers. By applying this general rule they believed that hey would solve the problems of shortages.

To compound the problem they were also adding safety time, which was in theory, bringing in the stock even sooner.

We did some analysis and explained that all this stock was sitting around unused and that by bringing it in just in time would reduce their inventory significantly. ‘But why’ they asked ‘if we have all this inventory do we not have the stuff we need, when we need it? Why the shortages?’

The reason was this: at the end of each month it was recognised that they had too much stock. So they would, to reach financial targets, speak to all of their suppliers asking them to delay delivery of goods until the following month. It was only by a few days but it helped them meet the narrow fiscal target of stock on hand. They would then ask them to expedite the deliveries to meet production demand. Poor suppliers! They didn’t know if they were coming or going. The good suppliers were suffering and the poor suppliers were taking advantage. They had imposed a blanket policy and they had lost their focus on what was important.

We agreed to make the lead time reflect reality. We removed safety time where suppliers were reliable. We adjusted safety time where suppliers were not reliable. Where there was safety time we put a plan in place to improve supplier performance or change them. We convinced the business that the month end target of ‘X’ stock on hand was a false target.

Very quickly things improved. Stock reduced, the focus on poor suppliers improved their performance and so there were fewer shortages, and importantly, the people in purchasing had the opportunity to manage supplier relationships and gain greater discounts because they were no longer spending all their time expediting.

The important thing is that the company did not have to invest any money in new hardware or software – it was using ‘properly’ what they already had.

If you are looking for ways to save money right now take a look at your purchasing department – do you recognise the problems above?