Lean inventory management

Improving Your Supply Chain By Gerson Cortés and Mike Henderson

How can you manage inventory efficiently using lean material strategy techniques?

Lean flow techniques have been implemented in the production and shipping processes in many greenhouse and nursery operations throughout the country with a lot of success. One of the areas of the business that still needs to further improve is how inventory is managed — inventory all the way from the big box stores or independent garden centers back to the grower’s facilities.

Lean is not only used to improve your process, it is also used to improve your supply chain and the way you manage your inventory. The same techniques that are used in manufacturing companies to manage inventory should be used in the green industry.

Lean Materials Strategy (LMS) is a lean technique that is used to efficiently manage inventory while at the same time increase the service levels to respond to your customers. LMS is a technique that was developed by FlowVision more than 20 years ago. These LMS techniques have been used in hi tech, medical device, outdoor equipment and countless other industries to manage inventory efficiently. We believe that the only difference between the manufacturing company’s products and the grower’s product is that it is a living product. Many of these companies have the same challenge growers face — seasonality.

FORECAST VS. HISTORY

Many companies use a forecast to determine their production plan. As we all know forecasting accurately is impossible. It’s someone’s best guess on what they think the customers will buy. Instead of using forecast we believe that historical data is a better indicator of what should be produced. A vice president at Cisco Systems (networking equipment manufacturer) once said that “Eighty percent of the time history is a better indicator of what will happen in the future than forecast.” What’s the other 20%? When they are releasing a new product or have no history. Cisco spent a lot of money trying to better forecast. Using LMS at Cisco, we greatly improved their on-time delivery (think of sell through) to their customers from 82% to 98%, reduced their on-hand inventory by 30% and improved their cash flow.

HOW LMS WORKS

1. Use historical data. The daily sales to your customers (IGCs, brokers, landscapers, big box, etc.) is best because it can be aligned with your actual lead-time to grow your product or pick it and ship it to the customer.

  • For example, if your lead time to pull product from the greenhouse or nursery and ship is two days, looking at weekly sales doesn’t provide the detail you would get if you analyzed your sales in two-day bucket (your lead time).
  • Don’t just think of a single year’s worth of sales; look at multiple years. Looking at just one year of data can be deceiving. Maybe there was a late frost or early spring and there will always be fluctuation from year to year. Looking at multiple years of sales will give you a better historical basis to build upon.

2. Make adjustments to unique (unusual) historical activities where required. The rule with data is always “garbage in, garbage out.” For example, if there was a planned one-time promotion last year that will not happen again remove the sales from that promotion or you will overproduce products that aren’t going to sell this year.

3. Plan for any upcoming promotions or growth. Just like you planned for promotions last year, identify in your plan what promotions you will be having in the upcoming year that will be unique from past years. Also, document any plans for growth or new products.

4. Determine the lead time to supply to your customer. If your customer is a retailer or wholesaler your lead time could be just the time to pull and ship the product. If you think further upstream and you want to know when to plant product and have it available for shipping the customer is your shipping department and the lead time is the products grow time. Using this simple example most growers have at least two lead times:

  • The lead time to pull and ship your product
    to your customer
  • The lead time to grow your product and
    have it available for shipping

5. Decide the service levels you must have to meet your customers’ requests. Service level can be defined as “how confident you are that material will be available to service a customer’s order.” In other words, if you set your service level for 98%, you would plan to have the product available for the customer 98% of the time. Service level is the throttle that drives customer satisfaction and for key products additional inventory you want to carry to satisfy your
customers. Service level can also be referred to as sell-through.

6. To determine how much inventory you need, use the historical data. The basics are to take your historical daily sales, add or subtract any known events, sum the daily usage based on the lead time to supply to your customer, and add a service level factor to meet your customer requirements for the key products.

Because of the seasonality in this industry, inventory levels will change throughout the season. We will calculate the amount of inventory required on a rolling basis to allow you to plan through the season what products are required. The inventory value that is calculated is the target level that we strive to achieve. This inventory level is what we call a Re-Order Point (ROP). The ROP includes the amount of inventory that covers the time to replenish material based on the lead time and your service level. A simple example would be if your lead time to pull and ship product to a retailer is two days and the amount of material consumed per day at your 98% service level was 200 units, we would take two days x 200 units and your ROP is 400 units.

7. After the ROP is calculated, you will replenish the product to the retailer based on what was sold. If your ROP is 400 units and when you see the customer only has 200 units in stock, that is your signal to ship them 200 more units. We call this a “PULL” you replenish based on what the customer actually pulled from you not what you forecasted they would sell. Every store and item in the store will have its own ROP. The higher velocity stores or higher selling “A” stores will get more product than the “B” stores, and the “B” stores get more than the “C” stores. For those of you that are old enough to remember the milkman, think of this as the milkman replenishment. If you put one empty bottle of milk out on your door step, the milkman would replenish it with a full one. If you had two empty bottles, the milkman would replenish it with two. Simple, isn’t it?

WHERE TO USE LMS

Where should LMS be used and what are the benefits? If you are selling to a retail customer, the first thing you should do is to tie demand between you and the retailer. Once you have sized your ROP for your products you would begin by placing that amount in the supply chain (between you and your retailer). Using the example from above, if the ROP is 400 units you always want to have that amount within the supply chain. Since that inventory was sized based on a two-day replenishment to your customer and your service level is set at 98%, you have a very high confidence that the 400 units will cover customer demand 98% of the time.

Now let’s implement the PULL. When the inventory at the customer falls below 400, you need to replenish enough product within the next two days to get back up to 400. The replenishment amount is calculated by subtracting the inventory at the store from the 400. As an example, if the inventory at the store is 235, you need to replenish 165. What if the replenishment time is weekly or you want to target the inventory for a 12-week grow time? All you need to do is adjust the lead time variable and that will change your ROP.

The use of these tools helps improve planning decisions, leading to higher fill rate, less shrinkage and better sell through.

The ultimate goal in managing inventory is to have a supply chain that is connected all the way from your customer (retail store) back to your production lines. The illustration in Figure 3 shows how we manage and replenish material throughout the entire supply chain.
For information about managing your inventory and improving your supply chain using FlowVision’s LMS methodology and its supply chain software — Inventory Optimization Network (ION) — contact FlowVision at 970.262.6536.



Gerson Cortés and Mike Henderson

Gerson Cortés and Mike Henderson are co-founders of FlowVision and can be reached at [email protected] and [email protected], respectively.



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