Can you reduce inventory by rescheduling late demand?

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A fact of life for many manufacturers is that there are customer orders or forecast for products that are going to be late because one or more of the components will be received late from the supplier. In many cases, the components that are not late are received from the suppliers and held in inventory and the suppliers are paid or in the process of being paid. Furthermore, there may have been sub-assemblies built and sitting in inventory awaiting the late component(s) from suppliers.

Since the end products cannot be built and delivered until all the components are received, there is excess inventory being carried. The obvious first approach is to fix the situation with the late supply, but a lot of times this cannot be accomplished. Many different strategies are in place at some manufacturers to mitigate this type of situation, such as: vendor managed inventory, lean manufacturing, schedule sharing with suppliers etc. but, regardless, I have seen at many of the customers I have worked with a lot of late and past due end product demand.

So when late supply, and therefore late end product demand is inevitable, what is the best way to deal with this situation and reduce inventory? From my point of view, to effectively plan and reduce inventory, there are some key capabilities required:

  1. Ability to identify the gating components and determine when they will be available. Required here is a tool to easily identify gating components as well as an effective way to collaborate with and get reliable commitment dates from suppliers.
  2. Visibility into the gating components far enough in the future to reschedule the end product demand so that purchase orders and production orders on other components can be delayed in time to realize inventory savings.
  3. Capability to determine if the rescheduling of demand is worth the inventory savings given the administrative effort involved, as well as the change and disruption at the suppliers. This implies an ability to simulate the change and calculate the potential inventory savings as well as the amount of rescheduling that will need to be executed.

I would like to know your thoughts on this subject. If this situation is applicable to your manufacturing operations, how do you deal with it? What tools or applications do you have that assist you in effectively managing late supply against customer satisfaction and inventory levels?


Eric Reidenbach
- March 17, 2010 at 5:04pm
Some really good points and this clearly describes situations that I have found to exist in numerous supply chains. I would add one more point - the impact that these issues have on value creation and delivery for the end user. I have seen a customer's order for a tractor come in but can't be delivered because an attachment hasn't arrived. He can see the tractor but can't take delivery of it until the attachment arrives and is attached. And, to add insult to injury, the dealer will ask him to fill out a questionnaire regarding how satisfied he is with the service. The dealer will get knocked but really has nothing to do with the problem. Coordinating the supply chain offers a solid way of enhancing the OEM's and delaer's value proposition and a good way to grow revenues and share.
Shiraz Ahmed
- March 18, 2010 at 3:23am
This is a very serious issue we face, particularly in our part of the world i.e. South East Asia, as the suppliers have little or no literacy, and the businesses they are into is what they have learnt from their families or friends. In Pakistan, we are the sole manaufacturers of Shocks & Struts for the automotive industry. Our major customer is Toyota Pakistan and their production lines are operating on KANBAN system, therefore it is all the more critical for us to ensure uninterrupted supplies to feed their plant.
We do provide our firm order for the month to our suppliers with two months forecast, they are bound to manufacture 50% of the first month forecast in the running month, and have these delivered to our plan by end of each month, this way we are assured of covering next fortnight of production. We do have a couple of monopolistc suppliers, with whom we cannot afford not having the material, therefore we maintain one months inventory, though it does have an impact on our inventory holding cost, but that we are willing to bare rather than having a production or sales loss. However, there are situations when part/s are not supplied which are part of the BOM (Bills Of Material) and production cannot be undertaken, in such situations we coordinate with our production department and reschedule that product to the next production slot when we are assured of having the material in our stores. Obviously, very strong follow up with the suppliers has to be maintained. We have also put a penalty on non supply i.e. 5 % of their invoice value, this factor obviously hurts them financially and they try to ensure meeting our PO requirement.

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