Season One, Episode Four
Do the Safety Stock Dance.
Have you ever wondered how some bit of knowledge becomes common knowledge? Especially when it’s later determined to be inaccurate? The way we thought at the time made it seem true, but we sometimes aren’t able to connect the newly acquired information with the old knowledge. One I’m thinking about is related to supply chain, purchasing and inventory management.
I think that everyone in every company knows about “Safety Stock.” It’s a quantity of product that is planned to be in stock. If it’s there, it should protect against some fluctuations in supply and demand. Every time that I have run out of inventory, everyone in the company is willing to tell me to add more safety stock. Everyone. Upper management, stockroom personnel, accounting, (i.e., everyone).
But it started to not make sense to me. If my order of 20 pieces can’t be filled, why will the same people suddenly be able to fulfill an order of 100 pieces? It really can only possibly help next time.
Let’s look at the reality of what happens in Traditional MRP.
First, there are some assumptions in MRP. One is that we don’t want to have inventory left over. What we need, is what we need. Traditional MRP drives us to have zero on hand when the order is filled. Two is that you always have enough time and resources. Three is that nothing will go wrong. Yikes. That’s a tough starting point. We turn to the only tool that we can think of - safety stock.
Example, we set a safety stock of 50. This has become the new Zero. What I mean is, Traditional MRP reacts the same if my stock balance hits zero or if it breaches safety stock. The messages to the personnel are the same for zero as for safety stock. Therefore, we must determine which parts truly are in trouble vs those falsely causing us to expedite. This is the first impact.
Then, we send a message to the supplier demanding parts immediately. And, later we add more safety stock and the next day send a larger order with a “louder” message that we need it now. The supplier now runs in circles trying to meet the change in immediate demand. This is the second impact.
Safety stock makes the Bullwhip Effect worse. That’s when a small change on one end makes an increasingly more dramatic change as we react, and info moves to the other end of the supply chain. The Bullwhip Effect, it turns out, is the root cause of many Supply Chain problems. The third impact.
Time to switch to Demand Driven MRP and strategic Decoupling Points. That’s where we disconnect the rate of supply from the rate of use. Most commonly, we use inventory to do it, but it doesn’t cause the chaos of Safety Stock. And the decisions are strategic and proactive, not reactive.
Imagine a world where you receive a warning that your expected inventory is getting low and you can calmly react to the message. And, you also receive a warning when your inventory is getting too high so that you can react to that as well. The determination of too high and too low is a dynamically adjusting range, so you don’t have the usual knee-jerk reactions.
What does a reduced-stress environment look like? Demand Driven MRP helps you to have the right amounts of inventory as a target and provides a methodology to replenish calmly and in a timely manner. Overall, less inventory and higher resulting customer service.
Isn’t it time to give yourself a chance to successfully manage your inventory? Just because it also benefits the customer, helps the business profitability and will ensure your company’s survival in this Volatile, Uncertain, Complex and Ambiguous world is no reason to ignore it.
John Melbye, DDPP, DDLP, CSCP. Endorsed APICS and Demand Driven instructor