Ronin Resources

Developing People to Empower Your Link in the Supply Chain

Advanced Materials Management

Altimeter Based Inventory Management

George N. Wells, CPIM

Principal – Ronin Resources Consulting Services

Copyright – 1998 Ronin Resources all Rights Reserved

Basic Principles

Establish the Mission:

As Peter Koetsenbaum said "A vision without a task is only a dream. A task without a vision is mere drudgery." In order for anyone to perform to his/her maximum level there must be a sense of fulfilling a mission. While this is often regarded as the "touchy-feely" stuff that is classified as a "nice to have" it is essential to the principles of managing the inventory investment as defined in this document. The first thing the manager has to do is cooperatively develop a mission statement for the organization that everyone can, and does, adhere to.

Define Response-Ability:

Note that this is not responsibility but response-ability. The work must be structured in such a way that the individual has control of the elements of the process such that they are able to respond to changing conditions and do what needs to be done to meet the objectives of the company. If the individual is prevented from taking the actions necessary to control the item they are mere victims of the process and should not be considered accountable for the results. When, and only when, these individuals have that degree of control can they be truly Response-Able for their products.

Engendering this in a company is not easy. Many people are used to, and comfortable with, the idea that while they are often held responsible they are not response-able (i.e., I’m a victim) for the process. It takes time for a person to be weaned from the comfort of not being response-able to taking ownership of the process and the results.

In order to do this effectively the manager must:

No, it isn’t easy. However, the entire process is based on the principle of individual response-ability and without it, the techniques described below cannot, and will not, work!

Create the Metrics:

You, as the manger do get to say what results are desired. This must be translatable into objective measurements. And, these measurements must be public display measurements. Since I will be focusing on some aspects of materials/inventory management I do present some preset forms of measurement in this paper. The critical aspect is that of public display. Yes, that makes some people uncomfortable at first. Why? Most of us are not used to either objective measurements nor having them on display for all to see. To be sure, we are "used to" the informal rumor mill measurement systems. The managers counter to the resistance is that these are the facts and that the individual has the ability to improve the measurements by their own actions.

Coach and Train:

What is the task of a manager? Basically to do three critical tasks:

1. Provide the resources necessary to do the job
2. Validate the measurements
3. Monitor the measurements

There is a presumption that everyone "knows the job." That is not always true. As part of providing the resources the manager must Coach and Train individuals in how to do their job most effectively. This, of course, presumes that the mission is understood and agreed to, that the individual has accepted response-ability for the job, and that the measurements are valid.

Each person will have areas where they do not meet the objectives. While it is often thought that across the board (i.e., classroom) training will resolve these issues – that doesn’t usually work. The manager must be looking at, and evaluating the metrics to determine where the individual lacks training and understanding and then provide what is needed. As a person who created this process as well as used it, I found that about 80% of what I actually "did" revolved around training and coaching. As the manager you are presumed to have a better knowledge of how to resolve issues and problems than the individuals in the various jobs. The expectations of you are high.

Manage the environment:

Every day in a business environment there are thousands of things that will call us away from our mission. As the manager you have to be somewhat like Odysseus lashed to the mast of the ship hearing the Siren’s songs while the rest of the crew have their ears stopped. You, and only you, must decide if the hundreds of request to attend to this, that, or the other priority is real. And then, assign it to an individual or team to respond to. Remember that the response-ability of the individual is bounded by the scope of their job. If you allow them to be totally distracted they will drift from the goals and you will hit the rocks and reefs that they hide. As Tom Peters has said "be a mono-maniac with a mission!"

Accomplishment of tasks:

Every job has routine elements, in materials management they include the day-to-day monitoring and response to action messages from the ERP (MRP, et al) system. While people often say that "the system doesn’t work" the fact is often that people are not reacting to what the system is telling them. To be sure, there is a lot of junk data that drives these action messages. However, each individual must take the response-able position to not only review the messages but have the underling data corrected. At Dialogic, it took us months to wash out the extraneous data that was driving bad messages. However, it was essential to managing inventories because the planners had, up to that point, been ignoring the system data and creating individual work environments (i.e., spreadsheets, etcetera) to actually do the work that the system was to have done. So, this must be measured before going on to the next steps.

Technical data:

ERP/MRP systems have all the data necessary to create these plans imbedded in the system. You will need to have or get a data extraction tool that will allow you to collect all of the system planned orders for each item along with their planner code. In addition you will need the standard cost for each item. If that cost does not exist for each item it must be populated later as we will be calculating inventory dollars, not inventory units. Copy this to a spreadsheet to process the data. If possible, break these out by categories of FGI, WIP, and Component/Raw Materials. In our practice the Altimeter is re-calculated on a quarterly basis to reflect changes to the forecast and demand status.

Step 1:

Using a "Pivot Table" summarize the total dollar value of planned orders by planner code by inventory category (as each will have it’s own target, etcetera). Then annualize the data to represent and estimate of one year worth of requirements for each category of inventory. (See Example #x)

Step 2:

External to the pivot table, but on the same spreadsheet, calculate columns for Upper Control Limits, Target and Lower Control Limits. To determine the values of these cells divide the appropriate turns figure into the annualized dollar value of inventory for the UCL, LCL, and Target inventory.

Step 3:

Create a multi-tabbed spreadsheet with a tab for each planner. Load the summary values for all inventory categories of UCL, LCL, and Target Inventories in the appropriate cells (see example #X). Then create a summary page that will auto sum for the department(s) being tracked. There is a column for the actual on hand for each week of the quarter.

Statement of demand:

The standard materials management discussion is classically "How much inventory do I have?" "Too much!" How much should I have?" "A lot less." Okay, we’ve all "been there and done that." Yet, the reality of most businesses is that we must have a sufficient level of inventory to meet customer demand at a level they consider satisfactory. How much is that? Here is a way to determine the number:

Extract the demand from the MRP system for each item with the planner code attached

Accumulate that demand on a part-by-part basis over the planning horizon

Upper Control Limits:

What is the absolute minimum number of acceptable turns for Finished Goods, Work In Process, and Raw/Component Inventories? Based on the minimum acceptable turnover calculate what this means in terms of each class of inventory. On a planner-by-planner, summed to an organizational level, calculate what the upper level of inventory investment can be to satisfy minimal goals. Is this "sub-optimized?" You bet it is! But this is not the target, only the Upper Control Limit.

Lower Control Limits:

Now what is the minimal level of inventory needed to support last minute shipments and to keep the materials flowing through your processes. Yes, this is an absolute idealistic condition that you will probably never achieve. Close, perhaps, but rarely if ever living there. It is assumed that all replenishments will happen as planned etcetera. To drop below this level is to court disaster and sacrifice both efficiency and customer service.

Target Inventories:

What are the actual goals for inventory turnover? In the same way as the UCL was calculated, calculate the "target" inventories to be consistent with goal of the company. Note: this will be a major culture shift to most senior managers, in particular those who see numeric goals as axiomatic "sub-optimization" of any process. You, the manager, have to glean out of all the verbiage, what management really wants. Keep in mind that amorphous goals do not lend themselves to people assuming response-ability. Why? Because the amorphous world is one where "you can’t win because I keep moving the target!"

Creating a "Flight Plan":

Now the individual adds her/his input to the process. In general the individual should be planning and scheduling their inventories at or near the target levels. The deviations from the plan come from the individuals knowledge of the products and particular strategies to be used. The individual may know that it is possible to get more frequent deliveries of product than the goal. Or, the individual may be stocking up on an item in anticipation of a supply interruption or for an anticipated large order. Or, the individual may be working off previously built up inventories. In any case this becomes the individual’s own inventory plan and sets up their goals. Unless there is a huge variation that the manager negotiates with the individual this becomes the basis for their performance measurement in this area.

Managing with the Altimeter

Regular (weekly) One-on-one meetings:

The key to making this process work is one-on-one contact between the individual and the manager. The standard agenda of the meeting should include (but not be limited to):

1. Review of completion of current action messages
2. Review of current inventory positions
3. Assessment of areas that need to change and what needs to be done
4. Training in a new technique of planning/scheduling

Most managers who apply this level of detail work with their staff are usually surprised at the uneven skill sets in a department. Clearly some people know particular areas better than others. Most need training and/or coaching in some aspect of their work assignment. Over time the results become obvious, skill shortfalls are built up, and inconsistent performance becomes more consistent.

It is imperative that the managers reject "victim stories" and impress the individual that they are, indeed, masters of their own destinies.

Problem identification

Following the principles of quality control, the first step is to get the process in control. While the inventories may not be in the quantities desired, there should not be wide swings of inventory from week-to-week. If there are, that is generally an indication of a process that is out of control. In general this is usually due to planners either not responding in a timely manner to the action messages from the ERP/MRP system or a product that is totally out of control on the sales end.

When the process is clearly in control then the manager and the individual can begin to work on the other issues that prevent the individual from achieving their plan. (Note: meeting the PLAN is the objective and the plan can [and often will], with the managers agreement, be different from the TARGET.) The weekly meeting becomes integral to this process as the individual takes an action agreed to at the meeting and then the results are seen the next week.

Problem resolution

Many of the problems associated with achieving inventory management consistent with the target and plan lie outside the control of the planning department. That means that the manager must lead the effort to coordinate the changes necessary to achieve the goals.

Shipping Performance Management

What to measure

There are two critical elements to shipping performance:

Performance against current schedule

Value of past due orders (to schedule date and/or request date)

Therefore, these two elements must be measured simultaneously.

How to measure

Technical data:

It is essential to create a mechanism for recording the reasons for failures to ship to either schedule or request dates and store that information in a file where the data can be retrieved. On a daily basis the individual responsible for the item must indicated why (by reason code) a shipment failed to be executed on the previous day. The daily nature of this is essential in that the trail becomes cold as each day progresses to the next.

On a weekly basis, the manager extracts both the list of failed shipments and total requested shipments for the previous week. You will need to create a spreadsheet with multiple tabs for both individuals and departments as well as summaries of data. You calculate the shipments requested versus the shipments missed to determine the percent of orders shipped on time.

There is the issue of reasons that are beyond the control of the company. (e.g., the customer fails to pass credit check so the order does not ship) these may be filtered from the measurement. If that is the case, you will need to add a matrix of hits by reason code so that you can separate out the filtered from the un-filtered hits.

On a weekly basis the manager(s) who controls inventory meet to review the shipping performance measurements. The focus of the meeting is on addressing what actions can, should, or are being taken to reduce and/or eliminate the underlying reasons for the failure to ship product to the customer on time. Graphical presentation showing both percentage of shipping performance as well as actual revenue that is currently "past due" to scheduled date. Minutes and reporting on action items needs to be maintained from week-to-week in order to assure progress.