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[Theory of Constraints] Where there is inventory – there is capacity! #tocot

by Dr Lisa on April 27, 2013

If you have inventory, be it finished goods or work-in-process (WIP), then you have capacity.  I mention this because many of the companies who have inventory also have difficulty delivering on-time.  However, the capacity is being wasted.

Do you KNOW, in your gut, that you have excess capacity but never the less still struggle to get caught up and complete orders on-time?

If you’ve answered yes, then check how much inventory you have – even if it is just WIP.

If you have finished goods inventory and your turns are low, then you are spending your capacity making things that are not yet needed while at the same time, you don’t have enough capacity to produce what is due and needed now.

What are low inventory turns?  If you have much more than a replenishment lead-times worth in stock, then it’s low.  Replenishment lead-time is the sum of your manufacturing lead-time and transportation lead-time.  If you can get or make something in 3 to 4 weeks, why do you only have 4 turns a year?  That is a low turn!

The solution, of course, is to align your production with what your customers are actually consuming.  I’m referring to Theory of Constraints Replenishment.  (If you’re not familiar with TOC Replenishment, comment on this post and let me know you want to learn more.)

And if you manufacture your finished goods inventory, then you probably also have high WIP.

If your WIP is approximately equal to (or greater than) your quoted lead-time (which would constitute high inventory) then you can improve your performance by reducing the amount of WIP you have.

According to Little’s Law there is a direct correlation between the amount of work-in-process we have and our lead-time.  The higher our WIP, the longer our lead-times.

Here’s an illustration showing the relationship between WIP and lead-time:

High WIP = Long Lead-time

 

The more jobs that wait for their turn the longer the average queuing time, leading to longer production lead-times.  Example 1 has the most WIP and longest lead-time.  And, conversely Example 3 has the least WIP and the shortest lead-time.

So, as you increase WIP, you are also increasing your lead-time, not to mention the amount of cash you have tied up in raw materials.

But Wait, There’s More … OnTime Delivery Decreases

The diagram does NOT include the effect of variability.  But if it did, it would show that the variability of production lead-time is increased as the queue grows.

So the effect of high WIP just gets more dramatic the more variability you have.

This directly reduces the on-time delivery because it is more difficult to predict the exact production lead-time and to confirm orders accordingly.

And … Quality Decreases

High WIP can also have an impact on quality.  Many production failures occur early in the routing, but are detected much later in the production process (usually at final inspection).

If WIP is high, the average lead-time is also high causing a long lag time between the production steps and the final inspection.  That means that the final inspection step occurs a long time after the step that caused the failure.

And because so much time has passed, it can be difficult to determine and correct the root cause of the quality problem, making improvement very difficult.

Thus, the higher the WIP, the harder it is to detect and correct quality problems.

So … Pay Attention to Your Inventory

Inventory is a clue.  Too much inventory is eating up your capacity and causing you to miss due dates or in the case of finished goods causing you not have what’s needed in stock.

Wishing you success,

Dr Lisa

P.S. If you’d like to get a handle on your WIP, due date performance and REALLY improve à check out Velocity Scheduling System for highly custom job shops.

P.P.S.  If you’re a small distributor and want to reduce stock outs with less inventory – reply to this email.  I’m working on a new coaching program for small distributors that includes software.  It’s very INEXPENSIVE (for now).

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Kristin September 30, 2013 at 8:50 pm

“(If you’re not familiar with TOC Replenishment, comment on this post and let me know you want to learn more.)” I want to know more!

Dr Lisa October 2, 2013 at 1:45 am

Hi Kristin,
The website isn’t totally ready yet, but watch the webinar here: http://velocityinventorysystem.com/

Dr Lisa

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