An “A” Business’s Ultimate Constraint

An “A” business is one that buys many different materials and components to make relatively few final products. An “A” business may also have a “V” on top of it … a few semi-finished products are customised to the final product.

Most such businesses have a raw material and components problem. It is very difficult to ensure all parts necessary for the final product will actually be available for production when production wants to start work on a replenishment order. Because there are so many materials and components in such products the likelihood that one or the other is missing is very high. Stated another way the likelihood that all parts are available when production should start is very low. If every material is a 99% certain to be available and the final product contains 100 materials and components, then only 36% of the time will all 100 be available (if every item is 98% certain of being available, then there is only a 13% chance all 100 will be available). Suppliers to “A” businesses must be extremely good. If you run an “A” business, how good is your raw material and component availability? How often does your production plan change because one or another component is missing? Just remember it takes only one component or material to be missing to cause a delay.

I am guessing. but am willing to bet, that in such “A” businesses there is considerable amount of pressure and blaming between purchasing, production, sales and maybe even management. Suuch blaming is a good symptom, together with the knowledge the business is an “A” business, to recognise that the "A" company needs (is looking for) a good solution.

Before we talk about the solution, we need to consider the extent of the problem. Purchasing is faced with 100s of articles to source and make available for production. The 80:20 Pareto rule does not apply because the materials and components are not independent – production needs them all. It is more like the 9980:20 Pareto rule! So, every article must be immediately available when production wants to start a run.

The problem can be broken down into the following issues or factors to consider:

1.    Supplier performance:

• Do your suppliers deliver reliably?
• Is their reliable lead-time almost a constant?
• Do they frequently change lead-times (without warning)? BTW, what will happen to a supplier that announces a longer lead-time? What will happen to demand from his clients? If a supplier does announce a longer lead-time, has he initiated a vicious cycle?
• Is suppliers’ quality ‘ perfect? By that I mean at a constant level. If a supplier’s quality is variable your purchasing must take that into account.

2.    Purchasing:

• Does your purchasing department have the right and enough resources to chase all orders?
• Purchasing has other jobs, for instance to negotiate (better) material and component prices. Do they get to do that? Or do they seek better prices, because that is the way they are measured, and thus neglect availability?
• Does your purchasing department sometimes pay premium prices for very short (emergency) lead-times? How often? How much?

3.    Production:

• Does production plan according to material availability? Or. Do they plan according to market demand?
• Does production consume large quantities of components in big production batches thus causing shortages for production runs of other products?

4.    Inventory management:

• Are finished product inventories too high? Are they high because somebody decided that more inventory ensures a better chance of product availability?
• Are some finished product inventories sometimes too low so that market demand cannot always be met?

5.    Sales:

• Do salespeople encourage clients to buy in larger quantities? There could be 3 reasons to buy in larger quantities; 1) to ensure availability at the customer, 2) for the customer to get a better price through a high-volume purchase or 3) for the salesperson to quickly fulfil his sales quota or achieve a higher commission.

There are therefore many things that tend to cause poor raw material and component availability in your warehouses. All of them can be dealt with in order to improve the raw material and component situation dramatically. They include:

1. Reflect upon and change batching rules – make batches smaller. For sales, production and purchasing to reflect upon.
2. Manage your inventory dynamically – your target stock levels adjust ‘automatically’ to the latest demand levels. Stock targets fluctuate with demand, always in the direction of the current optiimum inventory target level.
3. Create a system to warn purchasing and inventory management of an impending problem.
4. Rather than blaming whoever might be responsible for lack of availability, recognise that it is not your people you should blame, it is the way your system has been set up. Systems like raw material and component replenishment follow existing (normal) common practice and paradigms – that obviously do not work as you or anyone would like. Elsewhere I have written the time has come to challenge the way your business (your supply chain) is run – the policies, the rules, your KPIs and everyone’s behaviours. So challenge or get someone to help you challenge!

There is no physical ultimate constraint. The damage comes from the existing common practice, the way things are done ‘around here’.

Solutions do exist that can dramatically improve raw material and component availability both the concept how to do it and the necessary software support. Managing 100s of materials and components is a huge task - you need a compter to point out where action is needed

If you want, you can contact me to discuss.

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