Introduction The magnification of information of materials requirement as it flows through a supply chain is popularly known as the “Bull Whip” effect in classical Supply Chain Literature. The longer the chain from the producer to the end user, the higher would be the magnification factor. Transparency and Information sharing along the chain by the stake-holders are the anti-dotes advocated to minimize the effect of the Bull-Whip along the chain. While the Bull Whip effect is explicitly manifest external to the producer of goods (or services) as they receive the input (back-flow) from down the line, often ignored is the bull whip effect that is present inside the producer’s organization. The basis for the Study: This presentation looks into the information flow and sharing or the lack of it, its impact (on the inventory levels and cash flows) and a remedial solution, within in the supply chain internal to the organization, prevalent especially in large industrial, bureaucratic type organizations. Large organizations have large number of components buy, going up to thousands and tens of thousands of components. Over a long time horizon it is not uncommon for large organizations to accumulate slow moving and non-moving inventory. Even with rationalization and standardization exercises that may be carried out in-house either on a continual basis or on a sporadic incident-initiated basis, organizations do end up with slow moving or non-moving inventory. This inventory that we speak is not that which is built up on account of obsolescence or product / inventory material decay. This build-up is essentially due to the material indenting process, the engineering process and other internal processes internal to the organization which triggers the buy-decision. With pressure on margins, organizations and the management of organizations are under severe pressure to meet the investor’s expectation of RoI (return-on-Investment). To this end, methodologies like Design-to-Cost, Value Analysis and Engineering and Optimization exercises are implemented in organizations to optimize the material consumption. Today in engineering organizations, typically materials consume 70% of the revenue, and therefore a lot of thrust is given by managements to optimize the material utilization. It is commonly proved that a 1% reduction in the material consumption can translate into a 5% improvement in the bottom-line. With such a high level of effectiveness and impact on the profits, materials become the first target of attack in progressive organizations to improve upon the profitability. In the process of optimization there could be a build-up of inventory with the less optimized material lying unused. Even where Standardization is the ‘mantra’ there are many instances where the same material or a near-same material/s gets stocked under different nomenclature. For example a steel machine cylindrical component may be purchased and stocked under different names such as “Locating Pin”, “Pin for shaft” and be used for different products that may be manufactured by the organization. This is very common in multi-product engineering organizations. Periodic exercises (may be typically on annual basis) by cross functional engineering teams working with the purchasing team members can be a panacea for reducing such stocking units. While this exercise would yield dividends as and when they are carried out, the focus of this presentation is to stress on the need for free and large scale information availability across the materials management function in the organization so that the Materials Planners / Controllers are able to effectively plan and raise purchase requests on the buyers so as to maintain optimal inventory of the required materials in the Stores. With information freely available, the Materials Planners would be able to tighten the Inventory management by raising the correct quantities of Indents so as to ensure smooth flow of production with the minimum inventory on hand. With such best buy, the inventory carrying costs would come down for the organization and the cash (out) flow on account of making payments to the suppliers also gets streamlined. It is not out of place to mention here, that Cash is the blood-line for any organization. To equip the planners with information at the tip of their fingers, a tight integration of the 3 pillars of material management is required. The three pillars that support the materials buy of an organization are the Planners (material planning), the Buyers (the purchasing department) and the Receivers (the Stores which is responsible for receiving, inspecting and verifying, storing, accounting, preserving and issuing the materials across the organization to the internal customers). This integration can be done only (and easily) by leveraging the power of computers. Information Technology would play a pivotal role as the powerful integrator of the three pillars of materials management. The Impact of Information availability on material buying decision has been tested with a welcome outcome. Pre-test Scene: Information Absent Scenario In this situation, the Planning department was raising purchase requisitions based on the forecast given by the Engineering department, which in turn was based on customer order/s received. Once the forecast was received the planning department was cross-checking the ‘on-line’ kardex stock and based on the ‘kardex’ stock levels the request quantities were flagged for raising the purchase requisition. No cognizance was taken of; on a systematized basis either of the Inventory on float (the materials which were cleared for issue by the planning department but was not yet physically collected from the Stores Department by the end user) or of the pipe line inventory which consists both of orders placed by Purchase Department but not yet delivered by the Supplier and the orders which were yet to be placed by Purchase Department, but which have already been requisitioned by the Planning department. This was creating an information disconnect in the planning / indenting / buying process since the decision on the Indent quantity is hinged only on the Kardex stock, ignoring the “float” inventory and the pipe line inventory. This has resulted in the build-up of inventory for the organization. The lack of scientific material indenting based on all inventory consideration has not only led to inventory build-up but also has resulted in stock-out situations. Both under-stock and over-stock are unhappy situations for the organization. Some of the shrewder Planners, working on their memory or manual noting of the previous un-serviced requisitions were moderating the quantities indented. Thus there was no decision system available for the planner to take a structured view of the availability of various inventories before arriving at the quantities to be indented. It was prevalence of adhocism and the system efficiency was resting on the efficacy of individual planners. It was an unbalanced system with a non-uniform approach on the material requisitions which was dragging down the overall efficiency of the planning system. While some of the planners were on the mark, some were on either side off the mark with the result that the overall effectiveness of the planning process was getting vitiated. Besides the lack of inventory information, the price estimates were also worked out by the Planners. The price estimates were not worked out in a structured manner. In the pre-test period, the ‘system’ was generating the ‘last purchase price’ for view by the Planner. The Last purchase price (LPP) was then the ‘estimate’ for the planner and planners were running with a thumb-rule – “add 5% on the on per annum basis, to make the estimate” And the ground reality of this was – the estimates were not realistic and was not reflecting the market reality. In view of this situation, we have decided to conduct a test – of providing a structured input and a proforma for each planner which he / she has to fill in as a part of the indenting process. The input is designed in such a way that it eliminates the paucity of information and information is now made available not only to the Planner but also to the Buyer so that the Buyer can take an informed decision before placing the request for quotes with the supplier/s. The new development is fabricated for forcing the Planner to apply his mind before fixing the quantities to be indented and putting in the estimates on the Purchase Requisition. The Test proforma: A new module was tagged to the existing online Indenting system. The module consists of 3 parts: In Part 1: the last purchase order references (the order number and date), the last purchase order rate (unit cost) and the weighted average cost of inventory (which is maintained by the Accounts department) per SKU (stock keeping unit) were pushed into part 1 from the data base. On this the user had to input a plus or minus cost (Adjustment Cost). With this input, the system would work out the current estimate. (Current estimate = Last purchase Rate + Adjustment Cost). The system would then round it off to the nearest whole number which would be the final estimate. Example: Material Code: XX999999999999 Last Purchase order number: 9999999 Last Purchase Order date: 99/xxx/99 Weighted average rate: 30.02 Last Purchase Rate: 24.18 +/- Rate: 00.75 (Adjustment Rate) Estimate: 24.93 Rounded-off: 25.00 In Part 2, of the module, the user has to manually input source (references) from which he / she has used for arriving at the Adjustment Rate. The input screen was designed to like this: The selector button has to be selected by the User compulsorily. If “Y” is selected the Reference field will be a must-fill field. If “N” is selected then the screen cursor would move to the next record. This system has been built so that the User is forced to apply his mind to arrive at the Adjustment Rate.
With these 2 sub-modules, the User is compelled to arrive at the “Estimate” in a scientific fashion. In Part 3: the following data is displayed: Unit of measurement: (eg): Metric Tonne The Kardex Stock: (eg): 0.105 The Float: (eg): 561.868 Total Stock: (eg): 561.973 Unaccounted Stock in Stores: 100.000 (Note: The Unaccounted Stock is the material which has been received in the Stores but has not yet been taken into account. Generally they are recent arrivals. If it is a recent arrival, there is always a time lag between the physical receipt of the material/s at the Stores and the acceptance / accounting of the same at Stores.) This is being a vital component of the Inventory, the system is programmed to pick up and display this data also and become a part of the Purchase requisition. Thus in this example the organization is sitting on a yet to be utilized inventory of 661.973 MT. Such an information available to the Planner and the Buyer aids in planning for the quantities to be indented by the Planner and timing the purchase by the Buyer. In addition the Part 3 also displays the inventory in pipe line as follows:
The sum (1) + (2) + (3) is the pipeline inventory. Thus the Planner now has a full idea about the material inventory. Total Inventory = Material in hand + Material indented for but yet to be delivered. In addition to this: One more data is included by us: The weighted average consumption of the SKU in the last 5 years. Each year consumption is weighted with the annual production of that component into which the SKU was used. Thus both the Planner and the Buyer are now able to compare the Inventory and the Present Indent Quantity of the given item with the past consumption data and arrive at a decision as to what should be the quantity that should be indented / purchased. When the Buyer is armed with this data, it provides him / her with an opportunity to negotiate with the Planner the basis on which the Indent Quantity is fixed. Information has now become the powerful tool in the hands of the Buyer to even question the rationale of the purchase requisition. It also affords opportunity for the Planner and the Buyer to function collaboratively to ensure optimal inventory and material inflow. The Test outcome: The system was put into operation for a period of 15 days. We found that information empowerment has transformed the Buyers. Instead of being blind buyers forced to buy the quantities indented by the Planners without knowing the rationale of the quantities, the Buyers became aggressive questioning the indented quantities when they found the available inventory and when convinced by the Planner with data of requirement, Buyers could now time the purchasing inquiries to the suppliers so that the ordering of the material downstream and the inflow was continuous and smooth, ensuring that the safety stock inventory alone is maintained. For the Planners who were working with the concept of safety first with the attitude that they should have 100% service level for the end user the provided data became eye-openers and their planning and estimating has become robust and is able to withstand the scrutiny of the Internal Audits. The basis of Indenting has moved from adhocism to scientific approach of fixing the quantities and the estimates. Conclusion: Thus we conclude that info-amaurosis within the materials management is a bull whip effect which would impair an organization’s inventory levels and cash outflows. The auto information proffering system built up by us is an effective inventory control tool for the Materials Planners and Materials Buyers for the organization under Study.
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AuthorCyril R Fernandez ArchivesCategories |