Does Purchasing = Planned Confusion
in your Company?

by Dave Biggs

"Order all these parts. We'll use about half of them and inventory will go down."

Say what? Order more parts than we are going to use and expect inventory to go down? Problem is, the inventories actually go up, but I'm willing to bet that is exactly how most people are approaching the situation right now.

Given the performance of the average company, I have a better than 70% chance of being right. It's not that people intend to increase inventory, it just happens in a way they don't recognize.

To understand the process, let's start with the "product build" schedule. If a formal Master Schedule exists, it is the "product build" schedule and drives procurement of materials and work orders that fabricate and assemble parts. Without a formal Master Schedule, the "product build" schedule is a combination of order points, pull signals and shortage-expedite activities.

The order point/shortage/expedite approach always results in confusion, but it can also happen with a formal master schedule. Here's how. Let's suppose customers are going to place orders for $1 million worth of product per week and the annual operating plan is set accordingly. Each week, most of the orders are built and shipped on time, but a few orders have parts shortages, quality issues, or other issues that keep them from shipping. These orders accumulate in the late bucket of the Master Schedule. Each week more orders go late and some of the existing late orders are shipped. It is not unusual to find more than a full week's worth of orders in the late bucket. In fact many people brag when the "past dues" are down to just a week's worth!

In addition to the late bucket, the current week is scheduled for more than one week's worth because we need a little pad to make the numbers happen. The thought process is "If we schedule more than we need, maybe we can still make the dollars when things go wrong or we are behind and need to catch up." An example of this type of schedule is shown below:

If we are running efficiently, how much can we ship in one week? The most efficient method is to budget resources at levels just able to ship at the annual operating plan rate of $1 million per week. So the answer is not much more than $1 million worth of product, because If you have enough resources to ship more than $1 million, that's more than required in the long run.

The source of the confusion? Purchasing is being asked to provide the parts that are required to ship at a $2.5 million dollar rate in the now time frame. A little more than one week's worth ($1.25 million) of product in the late bucket and more than a week's worth in the current time frame. In fact, the company is only going to ship product at a $1 million rate. Is it surprising that some required parts are not available and other parts end up in inventory, rather than on the shipping dock?

"Well," you say, "at least it's a temporary problem. Once we get through this week, the problem will go away." Not so! If your master schedule has product in the late bucket this week and is overloaded in the first week, I am willing to bet it's a chronic problem. Until the root cause of the problem is fixed, the "product build" schedule, formal or informal, will continue to have something in the late bucket and overstated requirements in the near time frame.

One caveat: sometimes the customers get tired of the situation and solve the problem for you! Confusion reigns. Each week, purchasing goes through the order/expedite/de-expedite process on twice as many parts as are actually used. From Purchasing's point of view, it's a good thing some of those parts are already in inventory, but from a financial point of view, the excess inventory is a waste of resources.

Why do such a high percentage of companies have more in their "product build" schedule than they can actually ship? The strong tendency for near term build schedules to become overloaded is quite simple. Customer demand for specific items can be difficult to forecast, and in the name of customer service, more is scheduled than needed. The thought process is "when the actual customer demand materializes, we have a better chance of being covered."

Unanticipated customer demand showing up in the now time frame also compounds the problem. Product is added to the schedule in the near time frame to accommodate the customer order. But, in the heat of battle, the schedule isn't checked for items that aren't needed.

The resulting confusion increases product cost. In some cases, parts are air freighted only to sit in inventory. In other cases, work on some assemblies is stopped and they are moved aside while people run around expediting the shortages. The confusion also makes ship dates unreliable. In any given week, less than half the orders due to ship are actually delivered to customers. Neither of these are customer-friendly!