How to Create a Lean VMI System (Part I)
If your operation is suffering from raw material inventory problems such as excessive stock, stock outages, frequent transactions and inaccurate inventory counts then ask your suppliers for help in managing your inventory.
Creating a successful Vendor Managed Inventory (VMI) system starts with an assessment of your current state of operations and the best method to do this is a Value-Stream-Map (VSM). As with any Lean project, documenting the “current state” of your operation is a great starting point for identifying your list of continuous improvement activities. Creating a current state VSM is the best way because it outlines the flow, timing, value-adding activities and non-value-adding activities in any manufacturing or business process.
I was working for a very large private label diaper factory when I was fortunate enough to lead a value stream mapping exercise and to lead the project through to successful completion. This diaper business was doing almost $1 billion in annual revenue, selling private label diapers to a variety of retailers such as Walmart, CVS, Rite Aid, Walgreens, and many others. You see, in a private-label manufacturing business, every retailer gets to design their own packaging labels. And because each retailer carries their own packaging labels, inventory management can be very complex. The private-label business model is unlike that of branded companies such as P&G and Kimberly-Clark, who manufacture Pampers and Huggies and have only limited product labels.
In performing our current state VSM, we learned some really valuable information about our business. Here are just a few of the facts that we uncovered about our packaging management process:
- Packaging inventory management was done by our corporate planners, and they used a forecast to order the packaging for each plant.
- Corporate planners were assigned to a series of retailers to manage. The planners’ primary job was to manage the finished goods inventories of their assigned retailers. This structure provided our retail customers with a high-level of on-time delivery. However, ordering packaging wasn’t a high priority for our corporate planners. It was easier for the planner to over order packaging such that they did not need to worry about stock outages. So that’s what they did: over-order packaging.
- Over-ordering packaging resulted in an inventory level that represented over 12 months of supply. In other words, we had over a year’s worth of on-hand inventory (yikes!).
- Because the packaging inventory levels were so high and given the fact that retailers were allowed to change packaging designs and artwork on a whim, our obsolete packaging was over $1 million per year. That’s right, we tossed over $1 million of obsolete packaging into the dumpster every year.
- On an ongoing basis, packaging was transacted back-and-forth from the warehouse to the production floor. Every time bags were needed on the floor, warehouse personnel would need to pick up the inventory, make an MRP transaction, then deliver the materials to the production floor. Then, after a production run, any left-over packaging from the production floor had to be returned to the warehouse in reverse sequence. In other words, a lot of labor was applied to the delivery and restocking of packaging.
- Our physical inventory cycle-counts were time-consuming, and the counts were often inaccurate.
- Our suppliers complained about the number of color changeovers that we required of them. This was very disruptive and costly for our suppliers. They really wanted us to order our packaging in blocks by retailer, such that they could maintain longer printing press runs by color.
If your business is struggling with long lead-times, poor customer service or large amounts of inventory, start by creating a current state Value-Stream-Map. By doing so, you will clearly identify your path to recovery. Continue reading this article series to find out exactly how to go about this VSM and see how VMI can help you!.
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