Posted by Diane Ramaglia on Tue, Aug 03, 2010 @ 08:40 AM
Some people do not realize the impact of what happens within an Enterprise Resource Planning (ERP) system when your inventory is not accurate. And when I say accurate; I mean at least 98% accurate.
A common issue at companies is they do not have the disciplines in place to assure inventory accuracy. Some common pitfalls of inventory inaccuracy would be that bills of material (BOM) are incorrect. I have a history working with plastic processing (along with other types of manufacturing) and one thing that throws off inventory is incorrect part and runner/sprue weights in the BOMs. A lot of manufacturers also do assembly/secondary processes and the quantity per could be incorrect in the BOMs. There are two different ways I have seen consumption of materials being completed during production reporting.
One is the function of back-flushing material based on parts produced based on your BOM. Many systems that I have used allow for the back-flushing of their materials when they report production. This is the time when you can catch inventory issues due to BOM inaccuracies. You can check your work center location inventory and verify at the end of shift if the computer matches the actual inventory counts. If not, start weighing your parts and checking your BOM.
The other type of system out there allows you to issue material to a job/work order. The downside to this is you can’t see this inventory since it is typically removed from any on-hand quantities. You have to reconcile at the end of the job/run.
Another common factor with inventory inaccuracy is that your users are not moving material to proper locations based on procedures. If your system allows a location to go negative, it's time to check a negative report and get to root cause of what may have cause this. It can come down to material not being moved or inaccurate BOMs. I hate repeating myself on the BOM issue but I have seen issues time and time again. In fact, I have recently worked with two customers who are struggling with negative locations. If a location is negative and other locations are positive, what is your true on-hand quantities? One can only guess.
What happens within your ERP when your inventory is inaccurate? The system might not generate work/job orders for customer orders if it thinks you have finished goods/work in process stock. If you don’t have the inventory or the work orders you will likely miss shipments. Customers won’t be too happy if you don’t have on-time shipments. In addition, if the work orders are not generated the system will not tell you to purchase material. It’s a downhill spiral from here.
Speaking of purchased material, let’s talk raw materials and purchased on-hand balances. If these are not correct, you will not have product to produce your manufactured parts. You will possibly be expediting material which can become very costly to your company. On top of that, it can cause havoc on the production floor. A scheduler has to decide to keep running parts that might not be due for over a month or lose costly production time by keeping the machine in downtime.
Think of the breakdown for downtime costs due to material inaccuracy in this way: If a machine rate if $50 per hour and your machines sits down for 48 hours, the cost is $2,400 for two days. If that happens weekly, the annual lost utilization is $124,800. That is more than a lot of peoples' salaries on the production floor. For this annual cost, you can justify hiring people to fix the inventory issues.
Add to this cost, other factors such as the cost to deal with machines that need to be changed over quickly to fill an order because your finished goods on-hand counts were inaccurate. How much does it cost your company when you have to switch over jobs that you were not thinking you had to run? What is the time it takes to switch over jobs? Depending on the jobs, setup times can range from one hour to ten hours. That is a lot of downtime for changeovers.
What can you do to start fixing these issues?
- Have the right people handle inventory management – they have to care and be analytical.
- Training/education– you need to make sure that people know what they are supposed to do in the system and what the impacts are if they don’t.
- Get to root cause of the inventory issues and have a corrective action to prevent this from happening again.
- Track the downtime costs due to inventory issues (waiting on material, changeover/setup)
- Create a process to validate bills of material.
- Ensure people are following their procedures.
I hope this helps some of you out there in the manufacturing world.
Posted by Diane Ramaglia on Wed, May 12, 2010 @ 03:13 PM
I have been in the manufacturing business for over 18 years. When I first started I was working in accounting and then moved over to operations. It was all about dollars and cents and what we could improve to be more profitable. The plant manager was a great teacher and focused on continuous improvement. He would have us look at the root cause of an issue and tell us to "fix it or else." We all knew that "or else" meant having a job the next day or not so we took this suggestion seriously.
First, we started to look at our plant utilization based on the production reports that were being entered into our ERP system. We started to review our downtime reports to track what truly was keeping our machines from running. We found that setups were not being started when they were supposed to due to a lack of labor and machines were sitting idle due to a lack of material or machine operators.
Next, we started to evaluate why we didn't have enough labor for machine setups. One reason found was that the scheduler was scheduling multiple jobs to be setup at the same time. We started to look at minimizing the number of setups within a shift. We decided to put two people on a setup which allowed the setup to take half the time that it would normally take. So far, so good. But soon reality showed that there were times we truly did need additional setup technicians due to the demand coming in from the customers. After reviewing the cost of the machine sitting down due to setups, we found that it was costing us more than hiring a new setup/process technician. So we hired a couple of setup technicians to keep our shop running.
Our next step was to look at why we didn't have operators to run the jobs. We established that there had been a cut back in the number of operators per shift because of the previously mentioned setup issues coupled with wanting to eliminate having operators being paid to just sit around. Since we fixed the setup issues, we could better utilize our labor capacity reports to determine how many operators we needed for each shift. While we still maintained a minimal direct labor force, we also hired temporary employees as needed for certain machines/jobs to backfill labor where it was truly needed.
Lastly, we tackled the issue of raw material. We found that the machine monitoring system was accounting for cycles that the production report but our actual people were not. This was an eye-opening gap in material consumption and inventory management that would not have been identified without our ERP software. It was discovered that during the setup of certain jobs, more scrap was being produced than what was originally accounted for in the creation of BOM's. There were two things we reviewed: how to cut back on the scrap being produced and should we update the BOM's to more accurately reflect the setup process. Depending on the part being produced we modified our records accordingly and the gains were significant.
To see the changes we had made using the information from the system was great. I still use this information today when assisting other companies with their internal issues.
To view another success utiliation story, we invite you to read about Donnelly Custom Manufacturing.