There are two types of inventory positions manufacturers find themselves. Inventory positions are characterized as either high-mix/low-volume or low-mix/high-volume.
Low-mix/high-volume environments have demand patterns following a normal distribution curve. Inventory and mix control is simple applying min/max set-points and an occasionally re-adjusted batch or lot size. Using a forecast simplifies the ordering process and an inaccurate one is inconsequential to the product mix outcome.
High-mix/low-volume environments do not follow a normal distribution curve and are erratic in their demand patterns. Following a forecast not only disrupts the product mix levels, it absorbs valuable capacity that may not translate to an immediate sale, or in the worst case, any sale at all. This type of environment is the focus of the paper.
The University of Wisconsin sponsors the Quick Response Manufacturing (QRM) Center for exactly this type of environment. However, generally the typical manufacturer the QRM center attracts is the job-shop environment sometimes leaving the continuous process environment out of its scope. Delta-Driver’s experience suggests that Quick Response Manufacturing theory in a continuous process environment is just as applicable as in a job-shop. In fact, the food and CPG industry is lacking in its LEAN and CI efforts by not applying the principles of QRM. QRM simply defies current paradigms and seems risky to implement. It is operationally riskier not to implement QRM if the situation calls for it. We’ll attempt to explain that in the falling paragraphs.
In more developed environments, companies are seeking a way to decrease inventory, obsolescence and excess handling costs while increasing capacity, inventory-turns and cash flow. This is accomplished by eliminating back orders and by using real sales orders to trigger production. This will drastically change the dynamics of a high-mix/low-volume environment with the theory (and imperial results) that the longer inventory is in the system, the more costs will be incurred (QRM terms this “white-space”). Undoubtedly, QRM theory will deliver those results when implemented in full.
However, Delta-Driver has engaged with other operational consulting groups who are not equipped with QRM training and implementation in a high mix/low volume environment. Because QRM theory often defies conventional wisdom, operational consulting groups are hesitant in using approaches that QRM offers in a high-mix/low-volume environment. Conventional wisdom will direct a CI process to better, more accurate forecasts. In such an environment, the problem is not the accuracy of the forecast but is that a forecast is being used at all. Because a forecast, at best, is generally only 80% accurate, and often between 40 – 60% accurate in a “normal” situation the forecast gets worse in a high-mix/low-volume environment. (There is a place for the use of a forecast but it is not in the “demand” component of the re-order equation.)
So while the QRM workshops emphasize the benefits of reduced “white space”, middle-market, high-mix/low-volume environments struggle with basic customer service performance. An improper inventory mix will not support product availability. Reduced “white space” is helpful for lower inventory, higher customer service and lower costs in obsolescence and handling. The companies I am referring to are not at that level to be conscious of those benefits, yet. They want customer service with an optimal and sustainable inventory mix. What is described above, will provide that benefit.
Delta-Driver knows of a middle-market, CPG company in a continuous process, high-mix/low-volume environment. Even though the company had 4 times the inventory and production capability per month, it was unable to support demand. It short-shipped 10-12% every month. Productivity increased 23% and inventory 14%, still, there was a 10–12% shortage per month. Clearly an inventory mix issue was causing this.
To this day, the same company is employing high-priced consultants who are applying forecast “solutions” to a high-mix/low-volume environment, getting the same result. The results are not expected to change.
This is a common situation in the middle-market. In fact, often middle-market family business’ are built by introducing a large number of SKUs making the firm unique and competitive. While this is strategic in its growth and value, it becomes an operational liability if not managed in the appropriate QRM fashion.
Meanwhile, another firm in the food industry is capitalizing on the scheduling and capacity principles offered through QRM. Below are actual trends during and after QRM implementations both in inventory and in customer service levels:
In conclusion, high-mix/low-volume, middle-market, continuous processing industries are likely to struggle with customer service and high inventory problems. This makes them less competitive not only in customer service but in cost too. Employing QRM strategies can turn a high-mix environment from an operational liability to a competitive advantage.