If you have had an opportunity to read my book the Lean Game Plan, you know that I talk about implementing pull systems within the organization to improve inventory turns and increase cash flow. I saw firsthand how powerful pull systems are when I worked with a family-owned company in Cincinnati that had very poor inventory turns and they were struggling with cash flow.
After we placed the parts that supported their top 80% of sales (Pareto analysis) on a pull system, one year later they had twelve inventory turns and increased their cash flow. Given the timing of the work, it saved them when 9-11 happened and demand for their product took a downturn.
How do you implement this system in your organization? The following are the steps that we used to increase cash flow in that organization.
1. Conduct a Pareto analysis
Understand the 20% of your items that make up 80% of the demand by conducting a Pareto analysis. Focusing on the top items will allow you to have immediate gains in inventory turns and improve cash flow quickly. This is great for today’s environment when you might not be sure what your demand will be. Chances are your customers will still order your top items.
2. Review the BOM’s for these items
After you understand the top sellers, review the Bill of Materials and understand what parts are consumed by the top items in the Pareto analysis. Realize that some parts may be used in multiple items. This is important because we will aggregate demand for these items.
3. Develop Pull Chains
Decide if you are going to use a supermarket to supply parts to the line or pull directly from the warehouse. A supermarket is just like it sounds. It is a location close to point of use that holds a wide variety of parts your line can pull from when the line runs out of parts.
A supermarket is useful when you have a very large facility or when your suppliers are not as consistent as you would like. They are also useful if you have a lot of internally machined components that have long lead times.
One example of a pull chain might look like this:
In this example, assembly is pulling material from the supermarket, the supermarket is pulling from the warehouse and the warehouse pulls material from the supplier.
Each part type may have a different pull chain and that is okay. Another example might be:
4. Calculate the Pull Chain Quantities
Now that you know the locations that each piece part goes through, you need to calculate the pull quantities for each location. The good thing about setting this up is that you are in control of the internal location quantities. The only quantity you cannot control is the warehouse quantity.
For the warehouse quantity, you have to keep enough material on hand to supply the supermarket while the supplier prepares your order. Ideally, you will partner with your suppliers and bring them into the conversation about what you are working to accomplish.
Every time you order a pull quantity’s worth of material it will always be the same quantity and roughly the same replenishment interval which will help your suppliers in planning and enable them to level their demand as well.
In our first example above, let’s say you want to keep 2 days worth of material on the line, 4 days worth in the supermarket, and 8 days worth of part ABC in the warehouse. This would mean that our supplier for part ABC can re-supply our order in four days. We will set up the system using a two-bin system.
There will be two bins of part ABC at each location with half of the total days worth of demand. So at the line, there would be two bins each with one day worth of material to cover the two days. There would be two bins in the supermarket with two days worth of material in them to cover the four days. The warehouse would have two bins with four days worth of material in them to cover the eight days.
The system works by rotating the bins when they are empty. This is the signal to replenish the empty container. The system reflects actual consumption, and you only order more material when you have a signal to do so. This is how you flush out a lot of excess inventory and keep it out for good! This is the first step to help you increase cash flow.
Next time, we will cover the calculations that will allow us to size our demand at each location in the pull chain.
As always, it is an honor to serve you and I hope that you and your company are getting better every day!
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