Author: David Dehne

How the Internet of Things Can Help You Lower Inventory Levels
McKinsey Global Institute predicts the Industrial Internet of Things (IIoT) will have an economic impact of up to $11 billion by 2025. As much as $3.7 billion of that is expected to come from manufacturing improvements in things like operations management and predictive maintenance.

The word seems to have gotten out. In a 2016 study conducted by Morgan Stanley and Automation World, 70% of respondents said it was important for their company to adopt an IoT strategy within the next five years. In fact, Morgan Stanley expects IIoT-related CapEx spending to increase from approximately 8% to 185 over the next five years.

Predictions like these leave many manufacturers with questions such as: How can the IIoT help my business? How can we get our share of that $3.7 billion pie? If I’m going to increase my CapEx spending on the IIoT, where should I focus those dollars? And, what kind of ROI can I expect?

In a series of posts, we’re going to focus on IIoT projects that meet several criteria:
- They don’t require a major overhaul of processes or retooling the factory floor.
- Capital outlay is often minimal.
- They support key manufacturing philosophies like Lean, Theory of Constraints, and Six Sigma.
- The ROI is real and measurable.
- They can be executed relatively quickly, often providing an ROI in less than two months.
The High Cost of Excess Inventory

Lowering costs will probably always be a top goal for manufacturers, so we’re going to begin our series by tackling this challenge. One of the best (but not always the easiest) ways to lower costs is to lower inventory levels. Here’s a quick way to see how much your excess inventory is costing you:

The commonly accepted carrying cost for inventory is around 20%. (Different industries might have a higher percentage, such as when the inventory requires special handling or is perishable.) If a manufacturer has an annual inventory value of $1 million, lowering that by 10% could save $20,000. If the manufacturer has $100 million in inventory, a 10% reduction in inventory levels could save $2 million. ($100,000,000 * .10 * .20 = $2,000,000)

There are more complicated ways to calculate the cost of excess inventory. Go ahead and use them if you are comfortable with the math, but this simple calculation works well for most accountants. Regardless of which method you use, the bottom line is always this: Excess inventory is costly!

But how much of my current inventory is “excess”?

That question encapsulates the challenge for manufacturing. Manufacturers often feel they need to keep a certain number of weeks’ supply on hand to meet lead times and deal with variability. That may be warranted in some cases, but when we talk to manufacturers about lowering costs, we find that many over-apply this principle by treating all inventory the same way and overestimating how much they actually need to keep on hand to meet service levels.

Implementing a pull strategy for manufacturing, where inventory replenishment signals are based on consumption, can lower both raw material and WIP inventory levels throughout the enterprise

Related Resource: White Paper – Gaining Control: Exploring Push v. Pull Manufacturing

A common way to implement pull-based replenishment signals is to implement Kanban. But, there are a couple of inherent challenges to implementing Kanban manually. The first is that manual Kanban requires workers to do certain things, such as to manage physical Kanban cards which are prone to error or getting lost. The second challenge to manual Kanban is in determining container sizes. How large should they be, and how many should you use?

eKanban is the IIoT in action

eKanban can resolve both of those challenges. The signals are electronic, so there isn’t a card that can get lost, damaged, sent to the wrong place, etc. Applications like SyncKanban (the Snynchrono eKanban solution) also responds instantly to changes in demand, resizing containers and adjusting K-loops.

A K-Loop (Kanban-Loop) is the number of Kanban Cards in the replenishment and usage cycle of an item. The K-Loop is created as a closed loop of activity between all involved in the use and supply of materials.

eKanban is the IIoT in action, using technology to connect people, data and processes for improved operational performance. But, at the beginning of this post, I promised to focus only on IIoT projects where the ROI is real and measurable. That demands an example:

Dynisco is a leading manufacturer of materials-testing and extrusion-control instruments, and they take continuous improvement seriously. They implemented a manual Kanban system in several factories but found it was too prone to disruption to help them achieve their goal of a 30% reduction in inventory levels. After replacing the manual system with eKanban software across four factories, they achieved inventory reductions of 51%, 55%, 43% and 29%. The factory that reduced inventory by 55% also reduced lead times from 12 weeks to 2. Read the full case study.

If you’re ready to reduce inventory levels in your organization, you can schedule a demo of eKanban here or reach out to speak to one of our representatives at info@synchrono.com.

Related Resources:

White Paper: Going eKanban: Moving from a manual to an eKanban system

Brochure: SyncKanban

Guest Blog: Real-World Advice for Getting Started on eKanban
January 29, 2018
FAQ: Can I Use Demand-Driven Manufacturing in a Make-to-Stock Environment?

Demand-Driven Manufacturing seems like it was made for Make/Assemble-to-Order and Engineer-to-Order environments. It’s true that Demand-Driven Manufacturing can be beneficial for manufacturers who already produce goods based on customer demand because it improves their responsiveness to customers and lowers lead and cycle times.

Demand-Driven Manufacturing is a method of manufacturing where production is based on actual customer orders (demand) rather than a forecast.

But what about Make-to-Stock environments? These manufacturers also produce goods based on customer demand, but instead of actual demand, production is typically based on forecasted demand. Considering our definition of Demand-Driven Manufacturing – a method of manufacturing where production is based on actual customer orders rather than a forecast – it seems like that would preclude the Make-to-Stock manufacturer from taking advantage of Demand-Driven Manufacturing principles, right?

Not at all.

The challenge in MTS environments is replenishment lead time.

That is, the lead time provided by the customer is less than the lead time needed to complete the finished good. Given this, MTS Demand-Driven Manufacturers use their forecast to establish a stock buffer. Production execution, however, is based on actual demand. The stock buffer provides just-in-time materials to complete the order, ensuring there are no delays in responding to the demand signal. Here’s how it looks:

MTS manufacturers apply Lean/Demand-Driven strategies to make the stock buffer as small as possible. This reduces carrying costs and the potential for waste. As we’ve covered other posts, eKanban software is a great way to not only reduce lead times, but inventory costs. If considering eKanban, you will want to check out Real-world Advice for Getting Started on eKanban.

Lower lead times are one of the primary benefits we see in manufacturers who implement components of the Synchrono Demand-Driven Manufacturing Platform (see the sidebar for other benefits). For example, Dynisco, an instrumentation manufacturer, reduced their lead times from 12 weeks to 2. Rex Materials Group reduced their lead times from 3-4 weeks to less than five days in some cases. You can read their case studies and those from several more customers on our website.

Other ways MTS manufacturers benefit

As noted in the graphic here, Demand-Driven Manufacturing adds tremendous value to MTS environments in a variety of ways.

For example, one of the strategies of Demand-Driven Manufacturing is constraints management – adapted from the Theory of Constraints (TOC). According to the TOC, there are a limited number of resources in any manufacturing environment that limits the manufacturer’s ability to meet demand (e.g., the constraint(s)). Scheduling production flow to the capacity of the constraint resource(s) improves overall production flow and on-time delivery rates.

To show how we work to manage constraints, we’ve posted a short video on YouTube – Manage Manufacturing Constraints and Optimize Production Flow with CONLOAD.

Here are some additional resources that can help you explore Demand-Driven Manufacturing and what it might mean for your organization. And, as always, reach out to us with any questions you have, or if you’d like to discuss a pilot project.

Website: Why Demand-Driven Manufacturing?

White paper: Demand-Driven Manufacturing—Metrics that Drive Action

Video: What is Demand-Driven Manufacturing?

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January 22, 2018
5 Keys to Manufacturing Transformation

Almost every manufacturer we talk to these days is in the process of implementing (or planning to implement) some sort of change in the way they approach operations: Theory of Constraints (TOC), Lean, Six Sigma, just to name a few. Our focus on demand-driven manufacturing tools and applications has given us a front-row seat to their efforts.

Related post: Is Demand Manufacturing Lean?

While the devil may be in the details, the most successful initiatives all have a few high-level elements in common:

#1 Strong Executive Sponsorship. Executive sponsorship needs to be more than simply signing the invoices. CEO, CFO, COO…everyone in the C-Suite needs to show an understanding of the goals of the effort and what it’s going to take to reach those goals. While they don’t necessarily have to paint a happy face on the change required, they must take a “no turning back” attitude when talking to the troops, some of whom might be in a position to sabotage the initiative either knowingly or unknowingly.

#2 Clear Objectives and Governance. Everyone in the organization must understand the goals of the project and why it is important to the organization. This is especially true of team leads and departmental heads who may not be executive sponsors, but who will be instrumental in ensuring change happens at the execution level. Having strong executive sponsors can help ensure that the objectives of the program are communicated clearly and that the initiative has that next level of support.

#3 Understandable KPIs. KPIs must be measurable and actionable. They must also be understandable. This is easier said than done as some long-time KPIs will need to be replaced with KPIs that may not make as much sense to someone who’s not yet been introduced to the new philosophy. For example, when implementing Theory of Constraints, efficiency no longer matters except at the constraint. To the individual who is always been measured by how much they produce, this can be a disconcerting concept.

Related Video: Manage Manufacturing Constraints and Optimize Production Flow

#4 Early Training. To head off misunderstandings and speed up the adoption of new concepts, project leads and those responsible for ensuring execution need to be trained early and thoroughly. This includes not only the what but also the why as they need to be prepared to provide full-throated support when the initiative is rolled out. Training should also be offered to individual workers, especially when new processes need to be followed, but that training should be targeted and focused.

#5 Change Management. Many of the elements we’ve covered so far are part of any successful change management program, so if you’ve covered these bases, you’ve made a good start. However, the most successful manufacturers understand that change is more a fact of life than it ever has been, and they make change management as much a “center of excellence” in their organization as whatever initiative they’re hoping to implement.

Now it’s your turn. I’d love to hear your stories about change and how you have worked to ensure the success of transformative initiatives in your organization. What challenges did you overcome? What best practices did you develop along the way? Add your thoughts below!

January 15, 2018
It’s Time to Revisit Vendor Managed Inventory

A few decades ago, Vendor Managed Inventory (VMI) was a hot topic. Many manufacturers saw it as a way to reduce inventory levels and costs. If they could get their suppliers to maintain ownership of raw materials or subcontracted components until consumed, inventory levels would naturally drop—on paper anyway. Because they were giving most, or all of their business to one supplier, they were also in a position to negotiate better terms. For the supplier, VMI was a win, too, because it allowed them to lock in the manufacturer’s business.

But VMI came with inherent risks to both the manufacturer and the supplier. On the supplier’s side of the equation, the risk lay in the manufacturer’s ability to forecast demand. Unless the contract between manufacturer and supplier had some sort of “shared responsibility” clause, the manufacturer had no incentive to minimize actual inventory levels. Safety stock and reorder point levels could be set high, with minimal risk. And if the forecast was overstated, the manufacturer didn’t need to worry about excess vendor-managed raw material or contracted-components inventory.

From the manufacturer’s point of view, the risk lay primarily in the reliability of the supplier. If the supplier didn’t hold up their end of the bargain or a shipment had material defects, the manufacturer risked a material shortage and significant production delays. While these problems could occur with any supplier, one of the visions of VMI was to reduce the headaches that come from managing supplier issues.

As a result, many manufacturers limited their use of VMI to Class C items that were relatively inexpensive and easily sourced. That way, high safety stock levels didn’t impact their balance sheet much, and supplier reliability issues had a minimal impact on production schedules.

Demand-Driven Manufacturing Technology Makes VMI Easier

The technologies our customers use to manage their internal Demand-Driven Manufacturing initiatives have the added benefit of making VMI feasible once again. Electronic Kanban (eKanban) software is a classic example.

Most readers of this blog are probably familiar with Kanban. They are the automated replenishment signals that are so vital to Lean and Demand-Driven Manufacturing environments. Kanban comes in multiple flavors such as the manufacturing Kanban that signals the need for internal replenishment of materials; the supplier Kanban that initiates replenishment from external suppliers or outsourced manufacturers; and a customer Kanban signals from the customer to the manufacturer for finished goods or replacement parts. Often tugger routes are introduced into the process to deliver materials as needed (regularly or on demand pull) from the warehouse to point of use.

The eKanban system enables real-time, electronic signaling. As materials are received into inventory, they are scanned into the system – and, they are scanned again when consumed. Upon consumption of a Kanban, a signal is sent to a supplier or contract manufacturer, bypassing the standard procurement process and shortening cycle times.

Demand-Driven Manufacturing Reduces the Risk of VMI

OK, so eKanban can make VMI more functionally feasible and efficient than it was twenty years ago, but what about the risks inherent in VMI?

That’s where Demand-Driven Manufacturing comes in.

Technically, implementing Kanban replenishment signals doesn’t automatically qualify your approach as Demand-Driven Manufacturing. You could be in a traditional manufacturing environment using reorder point planning (ROP) to trigger replenishment. For example, your bin sizes are based on ROP calculations that have little to do with actual demand. Since the signal comes from downstream consumption, some would consider this to be pull manufacturing, but it is not in the same way that Lean or Demand Driven environments consider “pull”. Pull is getting close to the actual demand signal; the more inflated the bin sizes, the further the process is from pull – and the larger the bullwhip the process will create.

In true pull-based or Demand-Driven Manufacturing, replenishment is based on actual demand or consumption. (And some buffer stock which we talked about here.) Projected and actual demand, demand variability, and supplier reliability are monitored and inventory is right-sized to meet these specific attributes of the item. The allows Demand-Driven manufacturers to continually adjust their Kanban Loop sizes so they are always in alignment with demand, supply expectations and actuals. As variability is removed and lead-times are reduced, the Kanban Loop adjusts to become one step closer to demand.

Demand-Driven Manufacturing makes VMI far more attractive for your suppliers. They understand that the signals they receive for replenishment aren’t based on some pie-in-the-sky forecast that will leave them sitting on tons of materials in the supply chain that they will eventually have to write off. And, it puts you in a better position to negotiate the kinds of service levels agreements (SLAs) you need to reduce the risks associated with supplier variability.

If you’d like to learn more about eKanban, here are a few additional resources:

White Paper: Gaining Control: Exploring Push vs. Pull Manufacturing

Article: Moving From a Manual to an eKanban System

Case Study: Continuous Improvement Immersion Plus the Right Tools Proves Profitable for Dynisco

January 8, 2018
Peace on Earth and Goodwill Between Sales and Production
The decorations. The music. The food. The holiday season is a time of cheer and goodwill for many people. Nevertheless, there are two groups who may find each other especially trying this time of year: sales and production. That’s because this isn’t just the holiday season; it’s also the end of the fiscal year for many organizations. While everyone else has visions of sugarplums dancing in their heads, sales has a vision of only one thing: making quota.

‘Tis the Season

It’s common knowledge that not every salesperson reaches their quota, but what you may not know is that that’s by design. Sales management theory suggests that 60 to 70% of people making quota is about right. Higher than that and you’ve set quotas too low.

Unfortunately, sales managers don’t always care about sales management theory. Their compensation is based off making their collective quota. If only 60% of their people make quota, they probably won’t be taking that extended family vacation this year. The actual number of reps hitting quota in most organizations is closer to 50%, which puts even more pressure on sales managers and their direct reports. In the heat of the moment, salespeople often make promises, such as faster delivery dates, without having all the information.

Demand-Driven Manufacturing Puts the “Happy” Back in the New Year

When I talk with salespeople, many of them tell me they don’t like the end of year situation any more than their counterparts in production. The problem is that everything happens so quickly, the customer is playing hardball (buyers know they have the upper hand this time of year), and the rep needs to close the business.

It’s time to break out of the vicious cycle that happens every December and often enough throughout the year as well. To do so, we need to look at the underlying causes – not counting the tremendous pressure on sales to make quota, which we’ve already covered and isn’t going to change. Instead, we’ll focus on what’s in our control:
- Many ERP manufacturing systems only consider material availability, not available capacity.
- Sales doesn’t have visibility into what’s possible.
- Adjusting production schedules to accommodate orders is time-consuming and often creates more problems than it solves.
SyncManufacturing^TM can solve these challenges. The software’s Capable-to-Promise Date (CTPD) functionality looks not only at material availability, but also at capacity. What-if analyses can be performed to determine realistic delivery dates, given the current production load. This helps sales avoid the mistake of over-promising, and it gives them an advantage. They don’t have to turn away business that they could accept if only they had visibility into what was possible.

It’s worth noting that this frees up production planners as well. They’re no longer responding to urgent requests from sales asking for shorter delivery times or readjusting schedules to accommodate sales already made. When an order is accepted, the scheduling engine in SyncManufacturing automatically adjusts the production schedule, improving asset utilization and minimizing lead times for all orders.

Sales and Production are just two groups that benefit from applying Demand-Driven Manufacturing principles. If you’d like to learn more about the enterprise-wide benefits, download: The Enterprise-wide Impact of Synchronized Planning, Scheduling, and Production Execution.
December 27, 2017
Guest Blog Part 2: Start Your eKanban Implementation with Value-stream Mapping and Engaging Your Suppliers
by Jim Shore

Through this guest blog series, my intent is to share some of my experiences implementing supplier quality and Lean manufacturing initiatives by focusing on eKanban systems. My first post offered advice for planning an eKanban rollout (advice that could be applied across any Lean manufacturing project). In this installment, I’d like to talk about strategies for rolling out an eKanban project that have proven successful for me.

Whether you use Google maps, Apple, MapQuest or some other breed of navigation, you know you must enter both a starting location (or allow the system to “know” your current location) – and a desired destination. Too often, I see manufacturers get excited about the destination of best-practice process improvement without carefully considering the starting point.

The Value in Value-Stream Mapping

In my view, the process starts by gaining a clear understanding of the current, “as is” state, because you can’t make process improvements unless you can explain the problem you are working to resolve. With eKanban implementations, this can be any number of problems including excess materials on hand, slow inventory turns, too much scrap and more.

So, once you have universal buy-in on the project (see Guest Blog1: Real-world Advice for Getting Started on eKanban), the first step toward execution is to develop a good process, or value-stream map. For an eKanban project, this would involve documenting the flow of the current, manual Kanban process. (If you’re not using a manual Kanban system, map the current inventory replenishment process.) Next, document the process for the future state – using an eKanban system – and note the gaps. The goal is to identify the processes that do not provide value (e.g. waste) so they can be eliminated or improved upon.

Take the time to ensure you’ve mapped out everything. It may seem tedious, but it is worthwhile. For example, in one facility I worked with, it took us a day to develop a good process map. Over the course of the exercise, we found multiple variations in the current, 66-step process that produced excess waste. For example, they were literally logging 7 miles a year to track down inventory! Once we streamlined our map and implemented the eKanban system, the process was trimmed to just 6 steps. The exercise exceeded expectations, providing all team members with quantifiable value of the project.

Before I move on, I want to take a moment to tie the value-stream mapping exercise to the key take-aways from the first blog in the series: Communication and buy-in. Those involved in developing the process maps will likely buy into its outcomes, hopefully becoming vocal advocates of the eKanban project. As in the example above, the mapping exercise also provides useful data points for leaders and others to communicate across the organization.

Strategies for Getting Suppliers on Board

Some manufacturers experience supplier resistance to a new electronic Kanban solution. This push-back may stem from the perception that they are being forced to adopt new technology, pay the price, and/or hold the risk.

This criticism is based on the idea that when a supplier holds the inventory, they hold all the risk. One manufacturer I worked with had a unique solution to this dilemma. First, they started their eKanban implementation with a software pilot in a controlled area of their organization – and engaged just their top three suppliers. The manufacturer approached these three suppliers and entered into to a contract with them where they would assume half of the risk. Then they created a test environment where they could get the suppliers comfortable with the software. The suppliers received training on various scenarios, became familiar with email communications they would be receiving – and gained visibility into the supplier portal where they could monitor the manufacturer’s consumption and/or receive replenishment signals.

The manufacturer also gave their suppliers an incentive by including their eKanban software usage as part of their performance rating.

By taking more of a partnership approach with their suppliers, the suppliers became more engaged and, in fact, found their own benefits in using the system. One of the suppliers, while finding the software easy to understand, liked the ability to monitor demand through the eKanban supplier portal. Another supplier who was initially concerned about having excess inventory, found the eKanban system allowed them to better level-load. As a result, they reduced their over-time costs and were able to increase capacity without added expense. A win-win for all.

The Pilot Program and Beyond

As was demonstrated in the use case above, a pilot (or vendor free trial) is not only helpful for suppliers, but for internal adoption and continuous improvement. Starting an eKanban implementation on an isolated line or work cell allows you to work out any kinks or issues before rolling out the software to other areas. Internal chatter about the system starts to take hold and, based on my experience, employees start hoping their area is next in line.

Beyond the pilot program, it’s time to start measuring progress toward what you set out to accomplish – and the metrics that will influence those outcomes. The manufacturer in my example established metrics for baseline inventory reductions and increased inventory turns and were able to recoup their initial software investment before implementation was complete.

Metrics typically associated with eKanban projects include:
- Inventory turns/Inventory cost
- Replenishment lead time
- Stock buffer health
- Supplier performance
- Freight costs
Improving these metrics often contribute to corporate-level goals of expense reduction, improved on-time delivery and greater throughput.

Keep the Goals Top-of-Mind

When executing a transformative process, ensure no one loses sight of the mission. Continually reinforce the value of the outcomes and regularly communicate progress toward goal attainment. This not only helps to set expectations as you roll out the project, but creates anticipation for its results.

In summary, for a successful eKanban project rollout, here are the steps I recommend:
1. Map the current and future states of the process.
2. Start focused – implement a pilot in a controlled area, make necessary adjustments and continue rolling out through a pragmatic approach.
3. Partner with your suppliers to make the implementation a win-win.
4. Monitor your metrics.
As you think about eKanban – or similar Lean projects in your organization – I hope you find this insight helpful. Next time, I’ll address post-implementation strategies of “listening to the process” and focused continuous improvement.

Jim Shore is the Principal of Quality Lean Solutions, a Consultant Firm that specializes in Medical Device companies, Supplier Quality and Lean Manufacturing principles. Mr. Shore is co-author of “Proactive Supplier Management in the Medical Device Industry” (2016: Quality Press). Jim has 25 years of quality and supplier management experience in medical devices, semiconductor, aerospace and defense for firms and organizations including Titan Medical, Nypro Healthcare, Boston Scientific, Aspect Medical, Brooks Automation, Raytheon and ACMI Gyrus (now Olympus). He is Six Sigma Black Belt and Quality Manager/Operations Excellence-certified by the American Society for Quality (ASQ), as well as an ASQ-certified Quality Auditor and Mechanical Inspector. A veteran of Operation Desert Storm, he served in the U.S. Marine Corps for more than 15 years.
December 18, 2017

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