Look Below the Waterline!
Finding the hidden source of trouble saved my client hundreds of thousands of dollars
Here’s a scientific fact – 87.5% of an iceberg’s mass is submerged below the water’s surface. (1) Now here’s a related Schwartz Profitability Group corollary – Most operational problems are rooted in causes not initially identified.
My engagement’s objective seemed very clear. Understand current assembly and warehouse operations. Evaluate present space management practices. Determine future space requirements. My client was convinced that they were running out of precious warehouse space.
So I hopped on a plane and spent two days visiting my manufacturer/ distributor client. I met with warehouse and production personnel who provided me with insight into current operational processes. I spent time walking the warehouse floor to understand current practices – inventory management, order picking and racking layout. On the surface I could see why they were hungry for help. Their current environment, coupled with projected growth, was about to strangle them if something wasn’t done . . . and soon.
My second day on site was spent in exhaustive meetings. Attending were those with hands-on responsibilities for shipping, receiving, replenishment, order fulfillment and purchasing. As we wrapped up the meetings, I had one last request before calling it a day. “Might I see an Inventory Value Report (IVR)?”
Why an IVR? My eyes were telling me one story but my gut another. Their shelves were crammed. But was that the whole story? There was more I needed to know. I was hoping that the IVR would provide some helpful insight.
An hour passed before an inch thick report was placed before me. First thought was “I was expecting a limb but instead got the whole tree.” I glanced at the top page. Something was amiss. Rifling through the remaining hundreds of pages uncovered similar oddities. Jumping to the last page brought an “oh my!” to my lips.
The total inventory value was negative, well into six figures. Now, I’ve been in the warehouse for two days and there really was inventory on the shelf. So what’s up? Remember that the client was worried about space constraints. But their bigger problems were to be found elsewhere.
Why was the IVR so upside down? In relatively quick fashion the answers became shockingly clear. My client was not using their ERP/ MRP systems correctly. Work orders issued were not being relieved in a timely fashion. And, when a customer order called for a nine month delivery . . . approved by the customer . . . my client would order all components immediately instead of using available forecasting tools and ordering based on vendor lead times, safety stock, etc.
Now, armed with a more accurate understanding of what ailed my customer, I went to work. Working closely with a colleague, a specialist who knew their software inside and out, we properly trained the team to get the most out of the software. The results were startling. Inventory declined. Available space increased. Cash flow dramatically improved. And backorders considerably dropped.
And maybe most significantly, my client didn’t need to move for three years. Instead of building and moving during the economic high point, they instead moved when the economy was in the dumps, saving substantially on their capital outlay.
The Key to Profitability in this case . . . look beyond the obvious. It’s always better to treat the cause, not the symptom.
- – (Source: Office of Naval Research (www.onr.navy.mil))
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