The Opinion Page
News and comments about the issues facing today's SCM and Inventory Management professionals.
For the past few weeks, the theme of this Opinion Page has been a commentary on the Fourteen Points crafted by Dr. W. Edwards Deming throughout the latter half of the 20th Century. The Points are as relevant today as they were in 1960, when Dr. Deming was instrumental in the transformation of the Japanese manufacturing landscape into its current position of dominance in the world markets. Mary Walton's book "The Deming Management Method" is an excellent synopsis of Dr. Deming's career and teachings.
His Point #5 is "Improve Constantly and Forever the System of Production and Service." Not only must quality be built into products and services at the design stage, but efforts at quality improvement must be pursued constantly. Points 3 and 4 taught us that defects caught at the inspection stage (say, just before shipping the product to the customer) do nothing to improve the process, and therefore ensure better quality going forward. In fact, catching defects at the end of the line is characterized by Dr. Deming as "fire fighting", a term with which I am sure we are all too familiar. He uses the following analogy: "You are in a hotel. You hear someone yell fire. He runs for the fire extinguisher and pulls the alarm to call for the fire department. We all get out. Extinguishing the fire does not improve the hotel. That is not improvement of quality. That is putting out fires." Catching defects at the point of outbound shipping, for example, is too late. Cost has been built in to the product or service by this stage, and frequently the cause of such defects may be very difficult to find. I am reminded of the years that I worked for a famous manufacturer of high-quality crystal stemware and decor. We would, as a matter of routine, inspect every piece of product prior to final shipment. Fair enough. We did this as a service to our customers, to make absolutely sure that each customer was receiving virtually perfect product. We did, only occasionally, find defects, such as small bubbles within the glass or tiny scratches on the surface. Further, we did experience some small level of customer returns due to defects that they found or perceived. It broke my heart every time we found a defect at either of these two stages. This product had been designed by skilled artists. It had been created from shards of leaded crystal by skilled glass blowers and cutters. It had been carefully cleaned, wrapped and packaged to withstand shipping and travel from Europe to Canada. It had been handled, counted and stored with great care while in the Canadian warehouse, which I managed. So much love, and care, and cost had been built in to that piece of crystal, only to have it rejected and destroyed at the final step. What a shame. But there are two points that I learned: one was that the pursuit of the holy grail of "zero defects" is folly. As a goal, it makes no sense. Focus on the method, as Dr. Deming advises. The second is that by focus upon the method, by building the skill set of its workers, artisans, and involving and encouraging employees from all functional areas (from purchasing to engineering to finance to logistics to sales) in the total quality culture, this company was able to build and maintain a reputation for its brand that was beyond compare. It can be done!
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Late in the 20th Century, the term "GIGO", or "garbage in, garbage out" was popularized, specifically with reference to data management and ubiquitous computerization. There was no computer in the world that could ever make a "silk purse out of a sow's ear": no matter how sophisticated the technology, a computer could never transform misleading and erroneous input data into meaningful and useful information.
Dr. Deming maintained that quality comes improving the process, not from inspecting the finished goods at the end of the production process, then discarding those items that failed to meet specifications. He did not advocate the extinction of inspection altogether. He acknowledged that for some industries, high levels of downstream inspection might be necessary (banks, health care providers, certain military and aerospace operations, for example, might do this to ensure safety or reduce risk exposure). Inspection might also be necessary to gather information or to monitor engineering success during quality upgrades. But, at the finished goods stage, it might be very difficult to determine where a defect took place. It is therefore better to ensure high quality input of raw materials and processes than to wait until the end of the process to find defects. The Japanese, for example, embraced the notion that decreasing variation decreases total cost, not final inspection. Further, they found that the concept of "meeting specification" was synonymous with "high quality" was incorrect. Dr. Deming tells the story about two orchestras playing Beethoven's Fifth Symphony: the London Symphony Orchestra and his local hometown orchestra. Both play the same music, the same notes, and employ competent musicians who make no mistakes. But the London Symphony's work is beautiful, and the hometown's simply competent. "Just listen to the difference". Contribution Analysis (reference my most recent two postings below) can also be used effectively in Quality Assurance, including Vendor Quality Certification initiatives.
Let's say that your firm's QA (and Operations) team has determined that one of the major reasons for suboptimal customer service levels and stock-outs is unpredictable fluctuations in lead time. "Lead time", in this example, is defined as the length of time it takes to fill your stock from the moment you initiate a requisition. This allowance includes the time it takes to prepare the Purchase Order through to physical receipt of goods in your warehouse, and placing (posting) goods into available inventory. Naturally, if you place a PO with a supplier, the quantity in part is determined by the amount that you expect to sell within the lead time. If goods arrive three weeks late, and you do not have enough safety stock to compensate, you will likely run out of stock. Now, your QA/Operations team might have come to this conclusion by using a variety of tools, such as the "Fishbone" (or Ishikawa) diagram, or even Pareto Analysis. But now we want to dig deeper into the problem of lead time variability. Take a statistically significant sampling of inbound shipments that are arriving "late" (that is, beyond lead times that have been negotiated in procurement contracts). Determine what issue, or combination of issues, have led to the shipment arriving late. Such issues might include: - supplier/vendor out of stock - equipment breakdown in supplier's manufacturing process - shipments delayed at point of consolidation at port of exit (for overseas suppliers) - unreliable trucking company - goods stuck in customs due to paperwork problems - delays in rail yards - and so on Count the frequency of each issue within the sampling. Rank the issues top-to-bottom. Apply Pareto's Law and assign A, B, and C classifications. This will allow your QA team to focus upon those few issues that are contributing the most to your lead time variability problem (80%), and fix them first. This is the low-hanging fruit It can be done! Cheers I cannot imagine a planner who manages tangible inventory who does not invoke Pareto's Law as a central tool in his or her analysis. Sadly, I know it happens.
Most will be familiar with Pareto's Law, which has also been known as the 80/20 Rule. It involves ranking the items within a product portfolio based on sales, value, or dollar value of usage. It is also used frequently in Quality Control to determine those issues that are most problematic. Once the ranking has been completed, a percent contribution is computed for each sku within the portfolio. Then, a "contribution code" such as A,B,C is assigned to each item. A items are those roughly 20% of items that contribute roughly 80% to overall sales, while B items are those 30% of items that contribute 15% to sales, then C items are, as Dr. Juran would say, "the trivial many"...50% of the items that contribute only 5% to sales. The objective is to manage the A items with much more care and attention than the C items. In many cases, the inventory status of A items are reviewed daily or at a minimum weekly. Service level targets for A items are set much higher than C items. A items are cycle-counted in the warehouse more frequently than C items, to attain a very high level of inventory record accuracy. A items turn faster than C items. Expediting A items tends to be worth the effort. I have worked for firms that insist on treating all items in a large product portfolio with equal reverance. The result was that, given limited time and resource, attention to the A items, the most important items, became diluted, and the lowly C item that contributes 0.1% to annual sales got far more attention than it deserved. So, let's incorporate Pareto's Law into every planner's tool kit. Use it, and work it. (A little trivia....Vilfredo Pareto (1848-1923) actually received more credit than he deserved for Pareto's Law. It was really quality pioneer Dr. Joseph M. Juran who coined the term "Pareto's Principle", probably because it sounded better than "Juran's Principle"! While Paerto planted the seed, Juran popularized the notion!) Cheers! |
AuthorJohn Skelton is the Principal Consultant and founder of Strategic Inventory Management. Archives
August 2016
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