Fall 2013 Issue of Horizons

terms of increased customer satisfaction and cash flow can make it worth the effort!

attending use some type of ERP or forecast to drive their purchasing.

One of the primary lean principles is continuous flow. Anyone who has spent time on the plant floor may be very familiar with this concept – but it is not as well known on the distribution side of the business. Lean seeks to create constant flow of product. So in distribution, the questions we must ask ourselves are: ∙ How best to replenish and deploy inventory as close to the customer’s buy signal as possible? ∙ Recognizing that we will have forecast error, what can we do to immediately offset that error? Answering these questions will allow us to create a “pull replenishment” system – where the purchase of our product from a location “pulls” an inventory replenishment right behind it. Now, our replenishment is based on actual customer demand, rather than just relying on a forecast.

Most experts agree that this generally results in too much inventory, and not enough of the right product at the right location.

Inventory Management While improvements have been made in forecasting, the use of Sales, Financial and Operating Planning (SFOP), and the establishment of various performance metrics, it is still very difficult to reduce the investment maintained in inventory. As soon as the first order is missed due to such a reduction, the emotional response outweighs the potential cash flow that might be freed up from reducing inventory levels. As a result, investment in inventory continues to grow. Over one-third of the attendees at the Lean Roundtables indicated they planned to increase their investment in inventory by more than 10% over the next 12 months and almost one-half of the attendees planned to expand their warehouse space.

The system depicted (right) is referred to as a “push” system. It requires accurate forecasting information to predict what location will need stock and when it will be needed—a very daunting task and one that few (if any) companies do well.

Demand Creation & Planning

Purchase Order Processing

Goods Stored or Produced

Goods Receipt

Sales/Order Entry

Deliver Goods

PUSH SYSTEM

Too Good To Be True? An ideal state – where one sale triggers one replenishment – probably is too good to be true. In reality, we rarely know exactly when a customer will want to purchase an item and exactly when to order it from our vendor so that it arrives on time. To move closer to a “pull system,” we have to think differently.

It still does not account for the one constant in the supply chain, which is variability of demand, as well as how to react quickly to that variability. A lean approach seeks to create flexibility in the distribution of products that can respond to this variability. This all sounds too good to be true and while it is not easy, the benefits in

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