Especially for SME – 67: Select when only: throughput and inventory management and Ensuring your unit’s longevity.

23 November 2022

Mr. Lowe: A very similar approach can be taken for cutting the inventory held in a plant for a given throughput. Normally we do an ABC analysis based on the projected annual consumption value of a component or raw material and control the A inventory closely. There are two aspects missing in this approach. The projection of annual consumption depends on the sales forecast for the product into which a component or raw material goes. We have several ways of forecasting sales: But, as forecasting involves a peep into the future, we work with the tremendous human constraint of not being able to see the future. So even though several methods are available for the exercise of forecasting demand of a product, none is satisfactory. The second problem is we are not considering one critical aspect namely time in our effort to reduce the inventory holding for a given output.

One can define inventory as the value of a component or raw material during the time it spends with us between the time we have to pay for its purchase and the time that we recover its value when we sell and collect the outstanding i.e., recover the sales value from the customer. A component can enter the product at any time from the raw material stage through any intermediate component or sub-assembly stage or finally enter the final assembly shop and spend some time in the finished good go down before it is shipped, then billed and the outstanding value collected.

Now take raw material: it enters at the beginning and continues until the recovery of the outstanding of the product sold. Some components may enter at the stage very next to the raw material say stage 1. Some components may enter at stage 5. And let us say the final assembly is stage 7. These components will spend varying times in the plant. The plant must carry the inventory of these components for the time they spend in the plant. These costs are the costs incurred in carrying the inventory, which primarily includes the interest incurred on the value of the component for the period it spends in the Plant from purchase to dispatch and from thereon to recovery of the sales value of the product after sales.

Now assume a component 1 of value Rs. 100 enters the plant and leaves the Plant after 6 months after it enters. This is because the component enters at stage 1. Also assume a component 2 of Rs.100 enters the plant and leaves within 2 weeks. This is because it enters the final assembly stage 7 straight. The carrying cost of component 2 is 12 times the carrying cost of component 1 though the costs of both the components are the same. This is because we are carrying the component 1 twelve times longer in the Plant.

This thought gave us an idea: why not try and pull the component 1 closer to the final assembly line if not the final assembly itself. In other words, can we reduce the time, the turn- around time (TAT)- of component 1 by trying to assemble it only in the final assembly line or as close as possible to the final assembly line? Of course, this meant reengineering the process and we need to examine the feasibility of doing so with process and quality engineers. If we can do this, not only the carrying cost, not an insignificant cost, of inventory of component 1 comes down but the need to project its requirements 6 months before it leaves the plant, comes down to projecting its requirements only for 2 weeks. As our visibility into the future is severely constrained, it is far easier to know the requirements 2 weeks earlier rather than 6 months earlier. The accuracy of our projection would dramatically increase as requirements 2 weeks earlier would largely come from firm orders rather than projections. We can thus get over the limitation of our inability to go into the future significantly by decreasing the time that we need to go into the future and thus reducing the impact of the inaccuracy in projections. Thus, TAT or turnaround time analysis has significant twin advantages in management of inventory at the Plant.

This analysis need not be undertaken for all raw materials and components. Let us get a “where used” list of all raw material and detailed components of every product. This will give us the whole path taken by a raw material or component from the time it enters the Plant to the time It leaves the Plant. Let us do an ABC analysis on the annual consumption value of raw material or each component x the time taken for the component or raw material to clear the Plant. The top few branches of this ABC analysis will account for 90 to 95% of the product of the total consumption value x the time spent by the component in the plant. After all what is to be controlled is this product if we have to control the inventory, not just the annual consumption value but that value multiplied by the time. Also this has the effect of reducing the throughput time- time taken from end to end -significantly.

This is what happens when we introduce time as an essential element in management of any resource. Let us not fail to include the “choose when” i.e., timing as a factor in any analysis and management decision we are taking, as time is a common factor irrespective of any vertical or function. This is the reason why any management performance ratio and all the indices in any MIS (management information system) is linked to time.

The absence of pro-activation or prevention is responsible for a number of start- ups to go down prematurely. Every start up in the SME sector (Small and Medium scale enterprises) starts with one customer and one product. The owner must make sure that he moves out of the dependence on one customer sooner than later. If your organization is too dependent on one customer, it is like standing on a knife edge or a needle point. He can stop buying from you from any day with hardly any notice and he need not have to tell you why. After all a customer is a Super system and has more options than you have and so more powerful. So, spreading your customer base is an immediate vital task that the start -up owner should not fail to do. If he is unlucky, he will get a big customer as the first one who may be taking all his output, so the owner of the start- up is lulled into believing that he is doing very well. It is more unfortunate if such a customer is from the USA or Europe. We as management consultants insist on expanding the customer base immediately locally within the country and also geographically abroad. This is one of the major reasons for start-ups to die unexpectedly and prematurely.

The next threat is to continue to have just one product for your start- up, after you start necessarily with one. In these days of competition, your product can be outdated by a better one, can be beaten by a superior technology or some unique feature that the user of your product needs but your product does not have. So, we insist that even as one product of yours that you start with is doing very well, that is the time, that is the “choose when only” for you to ensure that more models are designed and developed, and one completely different product is in the pipeline. This is not as difficult as it is perceived to be. We quote Michael Masterson who says categorically in his book “Ready, Fire, Aim: “Consumers aren’t looking for brand-new products. They are looking for clever new adaptations of products they already know and love. When it comes to new, the human brain can take only a little bit of it. Eighty percent of the old and 20 percent of the new is a good ratio.” Here also 80-20 law works.

Imagine all that we have discussed above is available in one system and the system cautions you when the moment revenue from one customer exceeds a certain % of the total revenue of your organization and the moment revenue from one product exceeds a certain % of your total revenue. Not just cautions you, but releases a work order on the owner to force him to expand the customer and product base within a stipulated time, with nagging follow-up. How will you like such a system that ensures your survival and growth and effectiveness of your enterprise in all its running aspects- even for a start- up. This is what QuTMS (Quest’s Total Management system) does. The details are available in thequestway.in.