The traditional process in supply management is to forecast demand. While there have been significant advancements in the forecasting tools in today’s ERP systems, high forecast accuracy continues to be a major challenge. As a result, inventory is often “out of balance” with requirements.
We reviewed some of the key “Lean” procurement principles previously:
- Reducing lead time
- Reducing order quantities
- Reducing safety stock
- Replenishing inventory as it is used
“Pull” systems…provide a significant opportunity to reduce Total Procurement Cost.”
Applying these principles increases flexibility and responsiveness to customer demand.
The traditional approach in inventory management is to purchase components in order to meet forecasted demand at the lowest cost. In contrast, the “Lean” approach is to respond to current customer needs and to flexibly respond as the situation changes.
The ideal in “Lean” is to develop a flow of material with replenishment directly tied to customer demand. This does not eliminate the need for forecasting. We have to recognize though there will always be forecast error. We can minimize the impact of forecast error by replenishing inventory as close to the customer’s requirements and respond quickly to changes that will inevitably occur.
“Pull” systems triggered by replenishing stock based on actual usage provide a significant opportunity to reduce Total Procurement Cost /Total Cost of Ownership (TCO). Visible indicator (Kanban) systems in the plant serve as a trigger to initiate the replenishment process.
Utilizing “pull” procurement and reducing lead times reduce the need for safety stock. This allows us to quickly respond to demand shifts and address forecast error.
Class “C” components represent a great opportunity to utilize “pull” replenishment. They represent the largest number of SKUs but rarely represent more than 5% of overall spend. They typically are quite varied in the manufacturing processes and sources and have low piece costs. Attempts to manage these parts in the same manner as raw material and other high value commodities often leads to the pendulum swinging between production down time and “just in case” inventory levels. Partnering with a company that can manage these parts often results in the lowest TCO. This will significantly reduce the amount of time the Purchasing staff spends on day-to-day transaction management and allow them to focus on managing the total replenishment process.