Hey, Watch Where You’re Going

David Edwards . Operations Professionals

As the pace of business change and adaptation continues to accelerate, it becomes more critical to have clear visibility of key performance metrics that tell you where your business is, and where it is going. We solved this problem decades ago in speeding automobiles with the development of the dashboard. Analog gauges and critical warning lights keep us up to the second with our automobiles operating performance without unduly distracting our attention from the critical task of operating the vehicle.

Unfortunately, keeping up with key operational performance feedback in most organizations isn’t as simple. Reports are run, spreadsheets are consolidated, charts and graphs are produced, and by the time the process is complete, the situation has changed. Can you imagine having to stop and print a report to see how much gas you have left? Add to that the potential for inaccurate transposition of information during the more manual consolidation processes, and you get a sometimes suspect picture of where you were some time ago in the past.

Get up to speed. There are dozens of business intelligence and dashboard tools on the market that you can use to get a clear and accurate picture of your business every day. The solution you choose and how much you spend is totally dependent on the size and complexity of your business and how extensive your usage will be. It can be as complex as a full blown data warehouse providing extensive detail to the entire organization, or as simple as a stand-alone dashboard tool (this includes Excel) pulling data directly from an ERP system for a specific process.

While the tools you use are important, it is more important to understand your specific needs first. What critical operating performance information do you need to see every minute, day, week, or month in order to manage your business effectively? Of that information, which is the least timely and the most likely to be inaccurate? Where does that information come from – is it all from your ERP system, or is there additional information managed outside the ERP system on spreadsheets like performance goals? Building a clear picture of where key operational feedback originates is the critical first step to building clear reliable key performance indicators.

Start small. Before you sign up for the full blown data warehouse solution, build some simple dashboards using Excel or other stand-alone tools and evaluate their effectiveness. There are some good stand-alone tools on the market with trial demos you can download and use for a limited time or with some limited functionality in order to get a good hands-on feel for how effective they can be. A good place to start might be a shipping performance dashboard:

One click of the “Update” button and you have an up-to-the-minute picture of your current shipping performance. This makes it quick and easy to see areas you need to pay attention to, and this is where the power of a good dashboard tool becomes apparent. So what happened in fiscal month 9 this year? Click on it and see:

It looks like we had major problems with lines 21 and 31. We click on 21 and switch to the line detail screen to see all of the orders that shipped late:

Just that simply, the dashboard provides a quick and clear picture of exactly what happened. Imagine how much more effectively you could manage an operation with such clear, easy-to-analyze feedback about every aspect of your business.

Get started today. Again, what critical operating performance information do you need in order to manage your business effectively? Of that information, which is the least timely and the most likely to be inaccurate? Where does that information come from? Build a clear picture of where key operational feedback originates and how to access it directly. Then determine the best way to process and present it for clear, reliable, and actionable information.

I’ve been helping companies implement and use dashboards like this for years, and it’s a good place to start. But, it really depends on your organization’s needs – there’s no “one-size-fits-all” solution for operational effectiveness. If you think your organization could benefit from learning about some of the dashboard and analytics options available today, give me a call. I’m not tied to any specific vendor, as always my commitment is to giving you the best information possible about all of the products on the market.

You can reach me at 877.647.4141 or

DavidEdwards@OperationsProfessionals.Com

It’s Simple, Really!

David Edwards . Operations Professionals

Buy stuff, make stuff, sell stuff – or – sell stuff, make stuff, buy stuff. Either way, it’s a simple process at its core, yet it is amazing how complex it can become. Every day your organization makes thousands of operational decisions that all combine to determine the success or failure of your business. These decisions are made based on organizational information, information that must flow accurately from source to use point in order to drive the right decision.

Over time, inaccurate or inappropriate information drives bad decisions, leading to work-arounds used to circumvent bad information sources. And while that’s effective in the short term, it means that information used to drive one area of the operation is different than the “same” information that drives another area – the operation is not in sync. Fire fighters become valued champions and the constant blazes distract organizational attention from the simple solution.

Fix it!

Make it a priority. While fixing an information management process may sound like an “IT” project, it should be an operations priority. While IT may play a critical role in providing information technology resources required to solve a problem, operations must drive the transformation of the information management process as a whole. The information management process drives operational activity, so operations must lead the change.

Build a team, set a goal, and make someone responsible. Get on with it.

What’s the strategy here?

Start at the beginning and walk through the processes (buy, make, sell) from start to finish at a high level. Understand your key operational strategies. Who are you selling to, and what are their expectations? Are you shipping next day from stock, or next quarter after a complex engineered build? Are you making product based on forecast, history, orders, or all of the above? What drives material planning and procurement? Once you have a firm grasp on how it should be working at a high level, start mapping what is actually taking place.

Make it visible!

Process or Value Stream Mapping isn’t rocket science. Start at the end of a critical process (ex: Shipment Completed) and track backwards. What is the purpose and end result of the step, what activities must be performed to complete it, what resources are required to perform those activities? Back up to the steps that supply the required resources (human, capital, and information) and repeat the mapping process until you have tracked back to a key beginning (like a monthly S&OP meeting).

In the end you will have a complete picture of how things currently work. Once you have it documented (Visio, Brown Paper, Post It Notes, Crayon, whatever) it will be very clear how simple or complex it is, and if the complexity can be reduced or eliminated.

Rationalize it!

Get the biggest bang for your buck. Don’t get bogged down trying to create Utopia; the great white elephant will storm in and trample you to an agonizing death. Focus on the big picture and identify holistic changes that will have the greatest impact, and then prioritize them based on impact, interdependence and resource requirements. Set clear expectations for the results of each change and document current performance.

Plan to build momentum. Start out with some relatively simple changes that have visible impact. Early success is organizationally motivating and will build confidence in future changes.

Build it!

How should it work? Start at the high level. What strategies aren’t being executed properly or need to be changed? Review the selected strategies and reconfigure the high-level process flows required to achieve those strategies. That’s actually the easy part.

The more challenging part (it’s simple, but it takes time) is to back-track through all of the newly configured process steps and ensure that each step has the most efficient access available to the resources required for that step. If major strategic changes are required (ex: moving from forecast-driven to KanBan pull-driven manufacturing) a larger effort will be required to completely restructure the existing process. But once all of the detail is collected and mapped out, you have a complete model of how your operation should be working.

Just do it!

Plan to succeed. Change is just like any other process: identify the expected result of the change (ex: manufacturing driven by S&OP demand forecast), what resources will be required to make the change (VP Supply Chain, Planners, Manufacturing Managers, IT, etc. ), and how the change will be executed. Build a plan of what will be done by who and when, and get to work.

A clear plan and constant communication are critical. All resources involved in the change should have broad access to the plan, current status, and expected results. Milestones made should be celebrated and milestones missed must be made up for. If the plan isn’t working, change it and communicate the change. The objective is to achieve the expected result, not to work a bad plan and miss the mark.

Measure it!

The proof is in the pudding. What was the expected result of this change: shorter lead times, improved on time delivery, better manufacturing efficiency, lower inventory, increased ROI? What was it before the change, what impact did you expect from the change, and what impact did you get? If you’re not keeping score, you’re just practicing.

Don’t stop!

Your business is constantly changing – key operational strategies must change to keep up, and those changes must be implemented holistically throughout the organization to ensure success. You can’t stand still while the world around you is racing ahead; you have to keep moving to keep up.

Get Started!

Effective information management processes should be an integral part of every operational activity, not an afterthought. Properly designed processes produce all of the physical and informational outputs required to drive the organization in a single holistic flow. Improperly designed processes generate erratic outputs in an ill-designed web of complexity. Measurable operational variance is driven by improperly designed processes every day, so don’t just stand there and watch – get started!

Please email questions or comments to:
DavidEdwards@OperationsProfessionals.Com

Maximize ROI with Lean Lot Sizing

David Edwards . Operations Professionals

Lean manufacturing theory is rife with formulas for optimizing your inventory levels by establishing statistically valid safety stock and re-order points based on given demand variability, lead times, and lot sizes. Application of these principles using simple KanBan or Re-Order Point tools can have a dramatic impact on average annual inventory levels, lowering them to the absolute minimum required to meet demand at a pre-determined service level. But once you reach that goal, where do you turn for additional savings?

Average Inventory = Safety Stock + 1/2 Order (Lot) Size. This simple calculation makes it clear that in order to reduce inventory, you have to reduce your safety stock and your lot size.

Safety Stock (for a 97.5% Service Level) = 2 Standard Deviations of Demand Variability within Replenishment Lead Time. In most cases demand variability is what it is; it is difficult, if not impossible, to greatly influence the variability of demand for a product. So in order to reduce the safety stock required to maintain desired service levels, you need to reduce the lead time for replenishing that product. In most manufacturing operations, lead time is, to a great degree, a product of lot size. When cycling a production line through a variety of products, the bigger the lot sizes you run, the longer it will be before you can run the same product again (because you need all those other products too).

This makes lot sizing critical to reducing inventory. Both as a direct part of the equation (1/2 Order Size) and because of the indirect impact on the other half of the equation (2 * StDev of Demand Variability in Replenishment Lead Time).

But reducing lot sizes is a hard sell. In most cases, as lot sizes decrease, average cost per unit increases due to the fixed cost of setting up to run the lot. Also, as lot sizes decrease, total capacity requirements increase due to the additional setup time required to run more lots. Of course, if you can cut your setup times in half, you can run twice as many lots with the same capacity, but you could also just take the cost reduction instead. And anyway, capacity requirements should be based on running the optimum lot size , not visa versa, so if running the optimum lot size exceeds current capacity, add capacity. Which means the bottom line decision on lot sizing is all about cost, right?

One of my favorite books about lean manufacturing is “The Goal” by Eli Goldratt. While the term “Lean Manufacturing” wasn’t really coined yet in 1984, the book laid out a lot of foundations prevalent in lean manufacturing theory today. For those who have read it, you should know “The Goal”. For those who haven’t, the “Goal” is simple – make more money with less money. In other words:

Maximize Return On Investment

Return On Investment (ROI) = Return / Investment. The effect of lot sizing on ROI is direct and dramatic. Yes, if you don’t change the setup cost, the cost per unit for a product will increase as you reduce lot sizes . And if cost per unit were the only factor in ROI, you would run the largest lots possible to minimize product cost and increase Return. But there is that other factor in ROI, the “I”, the Investment, which consists of a high percentage of Inventory. So “The Goal” in lot sizing is to maximize ROI by finding the lot size that provides the most Return (Gross Margin) on the least Investment (Capital + Average Inventory Cost).

The traditional method for determining the optimum lot size for a product is the EOQ (Economic Order Quantity). This formula seeks the lowest total cost per unit by balancing the variable cost to make a unit against the variable cost of carrying inventory as order size changes. While it is widely accepted as the best method for determining optimum order (lot) sizes, it has its flaws. First of all, it requires you to determine an average cost of carrying inventory as a percent of inventory cost. This alone can tie an organization into an inescapable knot of analysis paralysis, a never ending struggle to settle on a number somewhere between the current cost of money (say 3%) and the fully loaded cost of  such things as space, obsolescence, handling, and damage that can add up to more than 20%. Secondly, it assumes that the cost of an inventory unit is constant as lot sizes change, which as we have previously noted, the cost per unit changes as the lot size changes, so the carrying cost per unit of inventory changes as well. Plus it does not recongnize the fact that safety stock requirements increase as order sizes increase due to the impact on lead time. Finally, and most importantly, it doesn’t really seek to maximize Return On Investment, it seeks to lower “Cost”.

Lot Sizing to Maximize ROI

So is there a practical way to establish a lot size that maximizes ROI? The obvious answer is yes, the real question is how. Without getting too deep into the math and developing an elegant formula, a simple spreadsheet using basic inputs and the wonderous “Solver” function will do the trick.

In the following example, a contrast of 3 different lot sizing approaches (1 Month Demand, EOQ, and Maximize ROI) will demonstrate the results of each technique. Each technique is evaluated for resulting ROI based on the simple inputs provided in figure 1.  This simple spreadsheet can be loaded with base information for any product and used to determine the optimum lot size, the example product used here is representative of a typical high volume, moderately priced widget.

The first technique (figure 2) we will evaluate is a fairly typical approach where the lot size is set at 1 months average demand (18,000/12=1,500). The analysis of this technique shows that the product will be set up and run for about a week (38.5 hrs) before other products are rotated in succession. The Gross Margin of 15% is based on this 1,500 unit lot size, and as you will see, changes in the subsequent examples as the lot size changes. The total investment will be one half the lot size, plus safety stock (set to provide a 97.5% fill rate), plus capital employed.  So this technique yields a 46.8% ROI based on Gross Margin / Total Investment.

Next we will evaluate the EOQ technique (figure 3). Using a reasonably high 20% inventory carrying cost and the “standard” cost of the product from figure 2 (Remember, EOQ does not recognize the standard cost change resulting from the lot size change, this would create a “circular reference”) along with the fixed setup cost and annual demand, an economic order size of 2,002 is derived. This is higher than the one month supply technique in the first example, and when plugged into the ROI calculator, yields a lower ROI of 43.7%.  So much for using EOQ to maximize ROI…

Finally, the moment you have all been waiting for, the Maximum ROI calculation. Using all of the same inputs as the previous example, we structure the spreadsheet to calculate the ROI percent based on the run size entered in the upper left cell. We then invoke the wonderous “Solver” tool to maximize the ROI percent by changing the run size, and the answer we get is 744 units for a much improved 50.6% ROI. Now thats making more money with less money.

But wait a minute now, yes we increased ROI from 46.8% to 50.6%, but our gross margin went from 15% to 13.3%, we lost $1,388 in annual gross margin. But, our investment was $4,926 lower, which frees up capital to expand capacity and produce more product at a higher margin . If we were shopping for a bank, we would definitely take the one paying 50.6% over the one paying 46.8%, so why do we have such a problem with maximizing our ROI on inventory?

While the final answer in your operations may not be as simple as this, remember that the ultimate goal in lot sizing is to maximize ROI, that’s what you would do if it were your money.

Please email questions or comments to:
DavidEdwards@OperationsProfessionals.Com

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Multi-Echelon Inventory Optimization – Eliminate The Slack

David Edwards . Operations Professionals

As our global supply chain continues to expand the number of layers of inventory between suppliers and the ultimate level of consumption, it is important to look more closely at how this inventory is managed. In traditional supply chain management practices, each level (echelon) of supply and demand is evaluated independently in order to determine the optimum level of inventory to carry at each echelon. Companies that have managed internal multi-echelon distribution networks have learned that this approach will ultimately lead to excess inventory levels in the system as a whole. This holistic evaluation process is now being applied across multi-company supply chains in order to minimize inventory across all levels of the supply chain while maintaining the ability to meet customer demands.

The linked white paper is an article on multi-echelon inventory optimization by Calvin Lee of Evant (Subsidiary of Manhattan Associates). Dr. Lee does a good job of explaining the advantages of the holistic planning process without getting to deep into the technical underpinnings of the process. A good paper for getting the idea and advantages of the multi-echelon optimization process in front of a broad audience.

Read the Article Here: Multi-Echelon Inventory Optimization

By Calvin B. Lee, Ph.D.
Vice President and Chief Scientist, Evant Inc.
The optimal deployment of inventory is a vital business function for an enterprise. The well-documented benefits of running a manufacturing, distribution or retailing operation with leaner inventory range from a permanent reduction in working capital to increased sales and higher customer satisfaction. As Forrester Research pointed out in a recent report, the ability to increase inventory turns is a key differentiator between highly successful and more poorly performing companies (e.g., Wal-Mart vs. Kmart; Dell vs. Compaq).

SAP 2.0 Promises Business Value – Can SAP Deliver?

David Edwards . Operations Professionals

SAP’s new executive Chief Value Officer (an omnipotent title), Chakib Bouhdary, is promising that SAP is prepared to arm it’s customers with exciting new insights into best practices, benchmarks, process optimization, and “creating value along the entire IT investment lifecycle”. Quite a mouthful from the largest provider of enterprise software in the market. Has SAP finally realized that software isn’t the “be all, end all” solution for business success? Can SAP reconcile the gap between information technology solutions and real business performance improvement? Can SAP deliver?

SAP appears to be recognizing the limits of the pure IT market, just like IBM did many years ago. Now, using a vast repository of SAP customer experience, SAP intends to expand into the world of enterprise “Value Engineering”. Bouhdary states “At SAP, we have always focused too much on products: we’re a product company. But we are at a time now when we need to have our conversations with CEOs and CIOs go beyond products and instead begin to help guide our customers on issues of strategic value.”

So what happens when the goals of the business are better supported by SAP competitors? Will SAPs value engineers be able to recommend and support the implementation of non-SAP solutions, or will that situation never arise due to the vast capabilities of SAPs solutions? What if the best solution is to reduce spending on software and consulting, and focus on internal capability development? The competing interests of software solution providers and their customers have always required customers to be diligent in determining the real value of the solutions under consideration, and now SAP wants to help their customers with that determination?

This new direction from SAP should be interesting. You can read more about it in the following article from InformationWeek:

Global CIO: SAP 2.0 Promises Business Value Over Products: Can It Deliver?

If SAP can deliver on the vision of its Chief Value Officer, it will make available to CIOs best practices, benchmark metrics, and breakthrough thinking and innovation.

By Bob Evans
InformationWeek
October 8, 2009 08:00 AM

 Talk can be cheap because the gap between what companies promise and what they deliver is often enormous. On Tuesday at SAP (NYSE: SAP)’s glittering new headquarters in suburban Philadelphia, an executive with the unprecedented title of Chief Value Officer made some sweeping promises about how SAP is prepared to arm customers with intense new insights into best practices, benchmarks, customer insights, process optimization, and “creating value along the entire IT investment lifecycle.”

ERP Taste Test – Don’t Drink the Kool-Aid

David Edwards . Operations Professionals

The Best of Breed Institute (BOBI) has a very entertaining video on their website called “Take The ERP Taste Test”. A really good laugh for those who have been through an ERP implementation, and a very interesting perspective for those who haven’t. While it is obviously a little (ok, a lot) slanted towards the sponsoring vendors product (the whole site is a tongue in cheek advertisement), it is an interesting approach to giving prospective buyers a “taste” of the decision they face when sourcing supply chain solutions. The bottom line is – don’t let ERP/SCM vendors influence your supply chain systems decisions. Do the work, understand your requirements, design your solution, then make them deliver!

Enjoy the video: ERP Taste Test