4 step kaizen for procurement planning

Product modularity is on the rise. That is, more and more producers of components like compressors or motors or gear boxes or couplings are now being asked to sell systems consisting of all these component parts. This trend is mostly a good idea, since it gives customers fewer vendors to spend time with and more specific expertise focused on the systems that make up a major product. It’s a trend that has been going on for some time, but it made headlines in the auto industry with the advent of "tier 1 suppliers." Now, like most industrial trends, it is spreading across industries and between product lines.

The modular approach is helpful to customers because it allows them to simplify their ordering and focus on the activities they do best. For an automation OEM, for instance, the combination of, say, a standard drill head assembly with some fly-by-wire controls, a standard machine base, and conveying/positioning hardware allows them to design and order components to build a new station for a transfer machine in hours rather than weeks.

If the machine system is well designed, the resulting modules can be retrofit quickly and painlessly. Some can even be introduced as quick change modifications which are moved in and out of position as part of automation setups. Alignment and tuning are controlled within the modules, unaffected by the rebuild or changeover.

Modularization is good business for the module producers because it allows them to sell more components and engineering for each job and to maintain control of issues like alignment and tuning of the equipment within the module.  This is better than putting themselves in the position of having to train their customers and their customers' customers to make adjustments on more general-purpose equipment. They also get to re-use a lot of engineering and provide upgrades on a single-bid basis, since they own the module designs.

Of course there is a downside to modular production. For the OEM it can mean that a lot of components are carried in various states of subassembly for a wide variety of products. Evidence of this problem starts out with production and service parts people fighting over the same purchased components. The worst case of this situation even leads to the company paying to disassemble subassemblies from stock in order to build products or ship service orders with the components that were in the subassemblies. When you are paying your people to un-build products that you built last week, you are engaged in unnatural activities. Managers who do this don’t get bonuses, they get replacements.

The ideal situation would be to have a constant stream of components coming into the plant just in time. The components would be stored at the lowest level of assembly (naked) until an order comes in for them. Then the products or service orders could be made up and shipped without wasting inventory. Of course life isn’t this simple, or is it? This is where the kaizen teams come in.

Conceptually, the fix is a simple 4-step process. For a few key components that show up regularly in disputes –

  1. Figure out how many of each component you will sell in a year, both assembled and as service kits. This is easy, ask the vendor. 
  2. Examine order patterns to see if seasonal or other adjustments are needed and set component forecasts. Again, ask the vendor. Also ask your production forecaster.
  3. Identify subassembly and component stocking requirements for production and service. Add these to the on-hand requirements to fulfill production and service orders.
  4. Perform a spot inventory to determine how many of each component are on hand and compare this to the theoretical total needed to run the current system. Just for fun, calculate inventory turns for this inventory level. Are they reasonable?

What happens next depends on the answer to the spot check and the structure of your supply chains, upstream, downstream and within the plant:

  • If you don’t have inventory to cover the expected orders, start ordering to an inclusive forecast. Service parts are easier to forecast than product orders, and when service orders are received they are always urgent. Get them into the forecast with production parts. Your vendors, customers and stockholders will all thank you.
  • If you have too much inventory and are still fighting over it, you are obviously building subassemblies too far ahead of production orders. Get a kanban or similar system going so that you only build subassemblies for which you have orders, plus a very modest cushion. Don’t forget to include service orders if there are any for subassemblies. Again, drive purchased components with an inclusive forecast and just-in-time orders.
  • Take a very hard look, perhaps another kaizen, at the subassembly system to see if there are ways to shorten the time needed to get from naked components to subassemblies available for final assembly. In high-performing plants, these intervals are measured in minutes, not days. Calculate your inventory needs again and compare with 4 above. See what you’ve accomplished.

Here are a few things not to do:

  • Don’t add layers to your BOM so that you can forecast, schedule, inventory, handle, lose, damage and otherwise abuse subassemblies. Simplify your life by building service kits and subassemblies so quickly that they look to the scheduling system like a single operation with final assembly.
  • Don’t build anything for “earned hours.” You might have to un-earn them tomorrow if someone finds a better use for the parts. If your process or factory layout requires the building of subassemblies days in advance, fix your factory. It’s bent.
  • Don’t allow yourself to become an inspection service for your vendors. Insist on perfect components and plan on them. I’ve seen Japanese plant managers require that vendors’ corporate officers or plant managers deliver replacement parts personally and instantly on a second failure. Then the customer plant manager will walk them and the replacement parts out to the line to show the vendor the problem he is causing and discuss possible solutions. This is uncomfortable.

The ability to supply modular equipment to your customers is an important competitive advantage. It is also fraught with opportunities for inventory mismanagement, service disruption and profit dilution. Use kaizan and JIT tools to keep the modules quickly available without clogging the supply chain through your plant.