Variability is abundantly prevalent in our world. For example, we very rarely leave the house at the exact same time every day. Why is that? Variability in timing includes what we had for breakfast, whether or not we set the alarm clock or how late we stayed up the night before. For this blog post, we are collaborating with Dan Creinin of EMNS, Inc to set the stage for understanding variability, discuss the financial effects of supply chain variability and describe proven solutions for dealing with variability.
Variability Is a Fact of Life
Variability is not intrinsically evil. Variability just is. That’s the physics of the way our world works. Managers and companies trying to completely eliminate variability are on a fool’s errand. The secret is to align variability and the three variability buffers (inventory, capacity, and response time) with the goals of your company.
In a Perfect World
In a perfect world demand and supply are completely aligned. There is no waste and resources and people are 100% utilized. All demand is met exactly on time with minimal resources. The result is maximum profitability and cash flow with perfect customer service. On the supply side, there is NO raw material inventory because just when you need something, the supplier shows up with exactly what you need in the exact quantity and 100% good quality.
Sound nice? Sure. Ever happen? No way.
Following are reasons there will always be variability in supply:
- Your customer demand changes so you have to change your supply requirements
- The supplier doesn’t deliver on time
- The supplier delivers too much or not enough material and, last but not least,
- There are quality problems with the materials delivered
You will never be completely rid of these problems but there are a couple of actions that can be taken to ensure best possible profitability and cash flow:
- Reduce the amount of bad variability (quality defects, poor inventory ordering policies, low inventory accuracy) as much as possible.
- Buffer the good variability (demand variability, different technology requirements, product variability) with the most cost-effective set of buffers.
Sources of Bad Supplier Variability
The best means to address supplier variability is to address it at the source, with the supplier! This requires effective communication and collaboration with the supplier community. Without effective and real time or near real time communications, additional buffer investments will be needed to meet customer demands.
On the supply side, there are two primary sources of variability:
- Material Quality Variability – Variability in the supplier’s ability to produce materials that consistently meet specifications.
- Non Quality Variability – Variability not associated with the inbound material characteristics. Examples are shipping damage or planner/buyer behavior in setting and controlling inventory policies.
Material Quality Variability – Increases Buffering Requirements
Material quality variability has a major impact on buffering costs. Quality inconsistencies produced by the supplier’s production processes require that manufacturers test each incoming lot to determine its material characteristics. Additional personnel and resources (capacity buffer) are required to test lots and manage the test results. Poor supplier quality requires additional on-hand inventory (inventory buffer) to ensure production is not interrupted. Inventory carrying costs go up, draining capital from other potential investments. If additional inventory and quality control resources are not used to buffer material quality problems, companies pay with decreased on-time delivery (time buffer).
Good Data Management Reduces Material Quality Variability Effects
Ensuring that inbound materials conform to the specification before it leaves the supplier’s dock can reduce the pre-production inventory buffer. This is exactly what Energizer did. By collecting certificate of analysis data before the lots shipped to Energizer, GSQA created a “virtual supplier dock”, ensuring that every inbound material met their specifications. After initial supplier qualification, a supplier would move to a skip lot testing regimen with the validation test results being shared with their customer to ensure accountability. Note that this requires electronic specification distribution, and accountability within the supply chain surrounding specification signoff.
Over time, the consistent COA data, as measured by Cpk and Ppk, formed the basis of trust, enabling Energizer to reduce its pre-production inventory qualification activities.
Non Quality Variability Requires Excessive Process Investments
This variability source stems from poor and inconsistent communications between the manufacturer and the supplier. It presents itself through the following:
- Parts shipped against outdated material specifications
- Late deliveries
- Damaged shipments
- Missing documentation
- Incorrect quantity
- Mislabeled packaging
- Incorrect safety stocks
- Poor control of order policies and order control
These issues increase buffering costs. A manufacturer cannot respond to demand adequately if supplier material does not conform to the manufacturer’s specifications and processes. If information does not flow quickly between the manufacturer and the supplier community to address issues, additional investments and processes will be required, resulting in higher costs.
Improve Collaboration to Reduce Variability
A collaborative platform that highlights issues in near real time will reduce supplier quality issues. In most cases, suppliers are in the business of pleasing their customers. Simplifying the issue identification process enables the suppliers to know about issues and to put a fix in place going forward.
With an online/collaborative corrective action plan process, GSQA simplifies a manufacturer’s ability to easily initiate and track supplier corrective action activities. Once aware of issues demonstrated by the manufacturer, suppliers work to resolve them quickly to maintain their customer. Goodyear found that, by using GSQA, they were able to significantly reduce supplier corrective actions to less than 1% of all inbound material shipments.
Ultimately, reducing supplier variability comes from bi-lateral communications across all aspects of the manufacturer/supplier relationship. This includes collaboration on material specifications, supplier qualification activities and corrective action management. By streamlining these, issues will be quickly highlighted and resolved, reducing variability at its source.
Inventory optimization and collaboration with planner/buyers will ensure that the right amount of inventory is ordered and properly managed for whatever levels of variability are encountered. Factory Physics Inc. has helped many companies reduce their inventory investment and manage the effects of supplier variability without loss of service.
Benefits are Measureable and Financial
Finally, it’s important to understand the potential benefits of reducing variability. Operations science enables companies to determine the best “bang for the buck” opportunities in addressing supply chain performance. If the supply side presents an opportunity, and it very often does, the methods mentioned above provide very strong return on investment.
To Learn More
To learn more about how Energizer and Goodyear reduced their supply chain variability, click here to get a copy of their GSQA customer success stories.
Goodyear also used the Factory Physics approach to transform its product development process—the science applies to all aspects of business management. Norbert Majerus, in his 2016 Shingo award-winning book Lean Driven Innovation, writes, “When we first came upon Factory Physics, about half of our R&D projects were unprofitable. Today, nearly all projects confirm the positive business case that justified their start in R&D, and in 2015 Goodyear’s operating income exceeded $2 billion.” This was a 14% increase in operating margin.
To find out more about Goodyear’s transformation through application of the Factory Physics approach, click here. For more case studies and articles on successful application of practical operations science to reduce inventory, improve cost and service, click here to see the Factory Physics blog. —DC, ESP
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