1966 - Lessons Learned - Inventory & Material Control

As I review my experiences I realize my inate ability to fortell the future when it comes to manufacturing material and production planning has served me not only in the last few years but, indeed, throughout much of my personal, as well as professional, life.


1966 - Lessons Learned – Inventory Control – Material Planning

Mom had told me “If you really want a specific job focus on it and make sure they know you’re interested. Reinforce that interest until they have an opening and you will be on top of the list.” I had decided I really wanted a job at National Tea as a stock-boy. Taking mom’s advice subsequent to filing my application, I had walked to the store every Tuesday and Thursday after school for the last 6-weeks to let them know I was still interested. It was still a couple of weeks before my birthday on Labor Day but I wanted to start as soon as I was available. After the third week Percy, the store manager, would wait for my entry through the door. Without pause he would shout over to me, “Not today,” and I would turn in my tracks and exit out the other door and continue my walk home, by then having missed the school bus. Often mom would pick me up.

Then one day, two weeks before my 16th birthday Percy called me over to the office and asked, “Ok, when will you turn 16?”

“The day before Labor Day!” I replied.

“Ok, come see me the Tuesday after the holiday. You’ve got a job. Now, get out of here! I don’t expect to see you in here again until then unless you are shopping with your mother.”

“Yessir!” I answered and ran out into the parking lot with a big “Whoopee!” I ran halfway home before mom passed me on the road.

Tuesday morning Percy gave me my duties: Bag-boy and general stock-boy, stocking and helping whomever needed the help, with special responsibilities for flour, sugar, and other baking supplies as well as Jello and condiments, which were stocked to the immediate right of the baking supplies. I was also assigned the bread Saturday mornings and was evening assistant to the dairy manager. As time passed responsibilities changed and eventually I found myself the main guy in charge of the dairy and, eventually, frozen foods. This increase of responsibilities came just a few weeks before the Thanksgiving Holiday.

Frozen foods were fairly easy to maintain, as all I needed to do was keep the bin filled to the top and assure I had enough back-up product in the freezer to satisfy customer needs. A weekly inventory of display case and freezer-stock was enough to keep this department well supplied. When Thanksgiving arrived I had already heard how the previous guy had run out of frozen turkeys and Swanson TV-Turkey Dinners, the inventory of which all sold out in quick order leaving the store with no inventory in these items for the 2-days before the holiday. The previous frozen-foods guy had done this two-years in a row but was still quite upset when he was informed just a couple of weeks before the holiday that he would be moved to canned goods and cereals. His complaints were long and repetitive and we got to hear them every day during our breaks. Two days after his change of responsibility I was informed I would be in charge of the frozen foods from that day onward. According to Jim, the previous guy, he was chewed out for running out of product but was similarly chewed out for carrying too much stock. He said he was caught in the middle of a problem that was impossible to satisfy. I listened and sympathized with his plight in order to get any information I could that would help me out, although after my re-assignment this was nearly impossible as he resented my movement to what was, formerly, his area of responsibility. What I did know was there were records of purchases and sales from the previous year. When Percy found me digging through dusty old inventory and sales records he was somewhat skeptical that these old records would do me any good, as “They will only tell you how to do it wrong.” Analysis informed me that about 3-weeks before the holiday sales had increased daily until inventory ran out. The first week had obviously been ignored, as the increase was subtitle. This resulted in too little the second week and impacted the third week when increased ordering was only done to relieve the increase from the previous week. It appeared that when the sales in these items had gone up, most noticeably, the week before the holiday, the previous manager had taken those numbers and used them to plan his re-supply for the pre-holiday week. He also assumed that by the day before the holiday, like his own family, sales would begin dropping as, in his words “anyone buying turkeys has already got one.” His opinion was also “Anyone waiting that long is too stupid anyway. They deserve to have a problem getting everything they need this late.” I didn’t agree.

It turned out I only got this job because frozen foods were near the dairy & because my sales in dairy was at an all-time high and scrap was at an all-time low. The key was understanding the weekly requirements, the seasonal requirements and having enough on-hand to support the forecast. This all seemed very easy. Once I learned I also needed to keep discards low, or those items that had to be thrown away due to expiration dates, I simply tightened my planned requirements by narrowing my forecast. I had learned this forecasting method from the previous dairy guy who trained me after finding out he was drafted into the Army. I found he was the only one in the store to do this type of clipboard analysis and our department continued this level of efficiency after he left. It was this analysis that saved me when applied to the frozen-foods area.

After a couple of minor adjustments to his method I was able to increase this effectively. It was all a very natural process for me as family discussions around the supper-table were often about whichever business dad was saving this week and what his methods were. His secret was mostly cleaning, organizing and communicating when there was any down time. He also stressed careful analysis of customer desires. As dad often said: “If you’re not on your break then you need to be working.” Another of his favorites was, “When there are no customers around there is always something to clean.” He also often mentioned, “If you’re working without knowing your customer’s needs you are wasting your time and the company’s money.” These three philosophical gems have served me well.

In the 1980’s I joined a manufacturing company, which had not shipped anything but repairs over the previous 6-months. Soon after joining the organization I found I was the 5th Materials Manager they’d had in the prior 2-years. It quickly became apparent to me the last few had not survived as they had too much inventory of the wrong type and not enough inventory of the right kind. On hand inventory value was $1.6-million…and we couldn’t ship product. When a little investigation revealed the company’s cash-flow problems had defeated the last 2-managers, I quickly came to a conclusion we needed to free up some of the cash we had tied up in inventory to purchase the items we needed to get back aboard our schedule. I found that 85% of the booked orders were past due. This also affected cash flow, as we had no invoices coming in with checks. What to do?

As a side note I also quickly identified severe communications problems that divided departments making them opponents in a company that seriously needed common goals. This would need attention if any progress were to be sustainable.

First we separated, on paper, those items that made up our repairs inventory, items that made up our current requirements, excess inventory and obsolete inventory. Obsolete inventory consisted of parts, which no longer fit an existing product and was not required for any current repairs and had no history of usage for repairs. Most of these parts were several years old and many were tucked away in a semi-truck trailer sitting in the back of our parking lot and used as a storage area. We also found parts in corners or in the loge where overstock and really old inventory and ancient financial records were stashed. Despite protest we received approval from upper management with the statement “If the unit is over 10-years old it is out of warranty and we should try to either sell them a repair at a reasonable profit by applying the cost of making obsolete components or, even better, we should try to sell them a new more modern replacement.” This took a great deal of negotiating as the Engineering Department felt we should offer repairs and the Sales Department wanted to sell new units. The strength of an upper management team that was derived almost completely from Engineering was challenged but common sense and charts showing the profit difference between stores, repairs and new sales convinced brilliant minds they couldn’t deny the obvious profit vs. loss. After agreement we discovered a large stash in a back room in the engineering area where multitudes of old, unaccounted for samples and first-article components were haphazardly set on shelves and pallets. A few of these were saved for a history display in the lobby – all else – gone.

Obsolete material comprised a surprisingly large pile, which we managed to sell to metal re-claimers and electronics re-sellers. This cash went immediately into the company coffers and we used some to begin buying the components we needed to start shipping orders. The obsolete PC Boards and custom electronic components we donated to a Tijuana orphanage training school and received a tax benefit for our donation. We shipped our first completed production unit that was not a repair 3-weeks after my arrival.

When we began buying components I discovered a new “rule” that had been in place for approximately 6-months before my arrival. The rule was “Buy only what is needed and no more.” I found this rule had been applied to all components, including some electronic components that were only sold in specific lots. An example was resisters that were only sold in small bags of 100 at $.15 each or a bag of 100 for $15. The “rule” was applied strictly so that, if a single resistor was required, a purchase of 100 would be made and, upon receipt, the single resister was removed from the bag & the remainder was trashed.

We found one employee taking advantage of this practice by raiding our dumpster nightly for additional income. Although he was threatened with firing, witnesses confirmed the previous Materials Manager had given him permission to do this. This practice did not continue.

I identified several instances where purchases of identical components were made weeks or days apart, in some cases the parts were expedited at an elevated cost. I changed this rule despite upper management’s protests as this cost-inflation practice made $.15 parts worth $15.

We identified a small number of components that were stocked as two different part numbers. All of these various components came to over $85K in on-hand value and ultimately most were designated as excess inventory, the next category of items to identify.

We identified our excess inventory by examining current orders and the history of sales and repairs for the components we had identified as excess. We identified fairly new products that were on an increasing sales curve. We kept these separate and set up a tickler to re-examine these parts in 3-months. We kept a reasonable amount of the remainder in stock and sequestered an average years-worth in an off-site locked bonded storage area so we could write it off of our inventory but easily obtain it by “buying it from ourselves” at full price if urgently need. The remainder we discarded using the same methods used on our obsolete inventory.

We impressed upon both buyers and our machine shop management that buying or making extra parts was not necessarily desired. The machine shop knew that if they were asked for 10 of a specific machined component, they could decrease costs on the individual part and they just might save an additional order a week or a month later, by making 20. Problem was sometimes, if they were easy parts to make, they might make 100 extra to really get the costs of the individual part down but, of course, this actually resulted in using productive time to make parts that we didn’t need so we could take up storage space we didn’t have to store parts that would be trashed in a few years without ever realizing the profit from the extra units. It also didn’t make sense to take a purchasing price-break on an item of which the extras would eventually become scrap. Buying 5 at $3 is not necessarily better than buying 2 at $5 if the remaining 3 get scrapped as excess. The result of this is extra cost of $5 for buying scrap on top of the cost to maintain and store unwanted material.

We found, over a period of 4-months we had removed $1M from our inventory, leaving only $600K of components and parts that were all valid. The exchange of parts for cash was, of course, not 1-to-1, our-value vs. re-cycling value. But this reduction realized a new available $390K+ for our procurement of components we actually needed plus a reasonable tax-break at the end of our fiscal year. As we realized the ability to tap our newly found funds we began to ship more and more product decreasing our backlog daily.

Despite less stress due to better availability of parts our communications problems continued to make satisfactory on-time shipments difficult with constant bickering and mistrust between departments that reflected itself in the attitudes and constant picking between individuals. This was next on my to-do list.

Increasing attendees at my planning meetings by 1) inviting both engineering and sales personnel to take part and 2) seriously nipping public displays of disagreement and calmly moving them to the conference room. This had the greatest effect on morale and directly affected the communication problems created when not understanding limitations and the ongoing challenges encountered during the procurement and manufacturing processes. They began to better understand the cost of casual change. We established regular reviews of scheduled shipments and identified opportunities to improve. We learned to work together to meet established goals. We started talking to…and trusting each other.

Life was good.