Lesson learned # 1 – To stock or not to stock?

How to define and improve your supply chain thanks to an efficient stock management process?

Definitions and examples

In this article, we are going to explore a topic we often encounter, and particularly when working with industries called “project industries”: how to choose the best supply chain method for a given item ?

First, let’s talk about words before going any further: how do we define a “project industry” ? We refer here to all industries with low repeatability from one order to another. Therefore, the manufacturer designs and customizes the product from scratch in order to fit its client’s requirements. Think about trains, planes, construction equipment, etc.

Keep in mind this is about designing something new for each client and not designing a standard product with delayed differentiation on the production line.

Therefore we consider small and medium series (less than 1000 units to be produced) and the production lines have chain pitches rarely under less than half a day and sometimes more than a week.

The choice of the supply chain flow becomes a key element to its robustness. Each part needs to be managed in a specific way from a supply chain point of view. Indeed, if not, it could generate simultaneously some unnecessary work overload for the supply and logistics department, an additional storage cost, as well as an increased risk of missing references on the production line.

Let’s take two examples to illustrate this:

  • A screw or a nut:
    • Small parts, likely to fall to the ground and unlikely to be easily found by the worker.
    • If facing a problem during torque tightening, they may require the worker to replace it. 
    • Stored in workers pockets for the day in order to be easily accessible. Unfortunately,  some parts will end up in the trash to avoid a risk of mixing with another reference 
    • As you can read, these parts are subject to many uncertainties. Wanting to manage them in exact quantities implies a risk of not being able to absorb the over-consumption due to these hazards, and ultimately putting your production system at risk due to a screw or a nut missing. The expediting team will then spend a lot of energy to supply these screws urgently. All this time is taken from working on high-value parts.
  • Fitting parts: 
    • They are often massive pieces, fragile because they are painted, anodized, brushed, etc. 
    • These parts must arrive in excellent condition on the production line, so you want to minimize any handling that could damage them. Trying to store them in the middle of mechanical raw parts in a warehouse increases the risk of having parts on the production line that cannot be assembled because they were damaged.
    • And again, the procurement team will spend their time finding emergency troubleshooting solutions instead of focusing on scheduling the deliveries.

Procurement method

The supply chain method assigned to a piece defines how the part will go from the supplier to the production line. This choice is made by answering the following questions :

  • What are the part’s physical gates from the supplier to the production line ?
  • How many parts leave from the supplier and arrive on the production line and with which packaging ?

First step: ABC classification of the portfolio

Before going any further in defining the flow, it is essential to carry out the ABC classification of the parts portfolio. For this, we take the valued consumption of the portfolio over a given period (one month, one semester, one year) :

Valued consumption = part price * quantity needed for the period

With that by using a Pareto diagram (for more details on this heuristic method: wiki/Pareto_principle) we seek to determine :

  • A-Class area highlights the 20% of the references representing 80% of the value consumed
  • B-Class area highlights the 30% of the references representing 15% of the value 
  • C-Class area highlights the references representing 5% of the value

These categories are decisive in the choice of the appropriate procurement method.

The 3 main supply methods

There are three main supply chain management methods :

  • Kanban, popularized by Toyota at the end of the 1950s. In manufacturing, it is set up thanks to small bins along the production line with the parts required for several assembly operations. Rolls can also be found for cable or bottles for liquid references. As soon as a bin is empty, a label is being placed in the bin to indicate what needs to be put next in the bin. This system brings a lot of flexibility to compensate for demand variation. In addition, due to its pull-flow methodology (we only fill in when the bin is empty), we protect ourselves from any over-stock due to a bad sizing of average consumption. This allows us to manage low-value parts while having a good result/energy ratio.
  • Standard flow (sometimes called PPF for Pick Part Flow): parts arrive from the supplier by batch. They are stored in the factory warehouse before being prepared by internal logistics for distribution in exact quantities on the production line. This flow is very suitable for B class parts which are neither fragile nor massive.
  • “Just in Time” (JIT) flow: parts are delivered directly from the supplier (or one of its advanced warehouses) with matching quantity to the exact needs of the moment. This avoids complex handling in the factory warehouse. This is very suitable for high valued parts as it avoids excessively high inventory valuation levels or exponential storage costs.

We can now define the flow according to the graph below :

Let’s illustrate this with three examples from everyday life :

  • No one would buy pasta by unit, we buy the pasta in packs of 500gr, store one or two in our cupboards and when a pack is finished we buy a new one: we use instinctively kanban.
  • We buy toilet paper in packs of 6 or 12 rolls and always buy a new pack before consuming the last roll, always having a small stock with us because the breakage is expensive: this is the Standard flow.
  • We fill our vehicles with gas when the tank is almost empty and we have no stock at home: it is Just In Time.

Supply Chain Management  Flowchart

There are multiple constraints in a factory and in order to be able to manage flows properly, it’s necessary to take into account more parameters such as the supplier reliability, the part handling requirement or the unit of consumption. We are using this flowchart to define the proper flow for each part.

The first thing to be aware of is the unit used to manage the part. Industrial logistics organizations do not like partial ones. It is also easier to manage in kanban all the references delivered in rolls, reels, bottles or cans. This will also allow better optimization for reducing waste. Chemicals will therefore be naturally placed in kanban, we will come back to the specific case of chemicals in a future post.

The second thing to look at is the part consumption. Ideally, you want it smooth and steady. For instance, adjustment shims have to be managed in a kanban flow because it’s impossible to predict their consumption before the product arrives at the assembly station.

The next step depends on the part size and its ABC class, if a pallet is too small to accept more than one part, then consider a Just-in-Time  flow and think about the following questions :

  • Are my supplier and its products reliable enough ? To answer this question, we can look at the OTD, the number of NCRs as well as the reaction time to deliver an additional part in case of an emergency.
  • In the case of an incident on a part, will I be able to deliver in a very short time a new part to replace it ?
  • Do I have the logistic jigs to be able to deliver in a proper way from the supplier to the production line avoiding any risk of damage along the supply chain ? May I be sure that the quantity is enough ?
  • What are the contractual conditions with this supplier on the size and frequency of the batch deliveries ? If the supplier does not want / cannot deliver the exact quantity, it will be necessary to go through a phase of contract negotiation before considering a Just-in-Time delivery. This is a milestone which is often forgotten and will create disruption along the supply chain.

There are also specific cases. If a supplier provides a kit of parts assembled at the same workstation, a JIT flow is possible with the same prerequisites as before. This will reduce handling operations in the store and reduce inventories. In a similar way, for a C class part, we will consider a kanban setting, with some prerequisites :

  • It should not be a serialized part with traceability requirement or a specific standard (for instance EN-15085-2) in order to keep traceability.
  • The consumption of several takes (at least 3 or equivalent to at least 2 days of production) must be able to fit in a bin.
  • Parts must have regular consumption on the production line to prevent them from being lost or damaged while idle.

You noticed that in this article we are always talking at the part level and not at the supplier level. It is very important to keep this level of details and not to try to associate a supplier with a supply chain method as its scope of references can be very large. It is very common to find suppliers with two types of flows and it is not uncommon to find them all. A supply chain must be defined case by case !

To go further

Once the flow is defined, it can be broken down into sub-flow with specific parameters that will be the subject of future articles : Direct JIT or Advance supplier warehouse, safety stock or safety lead time, procurement batches sizes, etc.

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