Sunday, February 23, 2014

LEAN Tip: Pretend Your Inventory is Fresh Fruit!

One of the things I read many years ago was a quote from my hero, Taiichi Ohno (the Godfather). He said forecasts are always wrong. As you probably realize, I am definitely a learn by doing type of guy, so I couldn't wait to apply this thinking in my own company.

We all realize that the primary reason businesses fail is because they simply run out of cash. Healthy sales doesn't mean survival. Good cash flow does. Imagine waking up one day with no money. Oh, there is money. But it's in a few buckets you can't get to. Some of it is with your customers (accounts receivable). Some is with your employees (weekly payroll), some is with your suppliers (accounts payable), and some is sleeping out on your plant floor as the result of the granddaddy of the 8 wastes.....overproduction. I had to buy extra raw materials because I can't get them fast enough, and I had to invest in making extra stuff (materials, labor, heat, rent) because I couldn't make it fast enough.

I know why there was such fascination by Toyota in the 50s with American supermarkets. They fascinate me too (even though it takes me too long to find stuff). You mean whatever we sell, we replace? Replenishment based on consumption. No more, no less. Except for seasonal adjustments, there is always the same amount of soup in the soup aisle. There is never some in aisle 3 and some overflow in aisle 4. Whatever we buy, they replenish. Daily. This is how I think of one-piece flow. I also like the fact I can have it exactly when I want it, without lead time. 99% of the time, it's there. Aha!! This proves the fact that by eliminating long lead times, you can actually see demand for what it really is....relatively stable over time. (This isn't true for new products...their demand hasn't been established yet).  If they sell 100 clam chowders, they don't "make" a truckload!

I understand that you can't set up a supermarket for every single thing you sell. But is every single order brand new? Do some of your customers order the same thing? My company was really a "job shop". Customers could ask for any of a couple of thousand options. (Colors, sizes, additive options). But, guess what? Italian economist Vilfredo Pareto was dead right in 1906. 20% of the items we sold represented 80% of our sales. If I could set up a supermarket for the 20%, I would have time to make the other 80%! On time delivery became 99%+, and 35% of the time, customers got what they wanted the same day they ordered it, and 70% got it the same day or next day. This supermarket thinking allowed us to be market disruptive....our competitors couldn't do that. People would pay extra (keep in mind Amex gets $13 to send a letter).

You need to resist the urge to cave in on 2 very common arguments in favor of overproduction. First, what about the freight cost of buying less more often? Second, if I buy 1000 I pay $1.50 each, but if I buy 5000 I pay $1.35 each! This is the same argument that says to make more because the setup takes a long time. My answer to this argument is......yes. There WILL be items that make more sense to buy more of, and there will be things where it makes more sense to keep making more due to a long set up (until you do SMED!) But, if this is your business strategy for more than a handful of items you buy or make, much of your cash will be in buckets you can't get to!

I have a fun game to play. Make believe all of your products, raw materials and information waiting in any Inbox is impatient, like people at the motor vehicle department. Make believe that at anytime, they will be tired of waiting and throw a fit, cause a scene. Or, pretend that all of your products (and raw materials) are fresh fruit! Talk about just-in-time!

1 comment:

  1. Bill,
    Thanks this is real important.I used to try and get the contractors to Identify where their money was ? They had no Idea they only knew their accountant said "boy you guys had a great year!! Their response was "why am I broke,no money in checkbook"