What is Activity Analysis? Part 4, The People Dominant Process

We believe that inventory is the final arbiter of supply chain performance. To get it right takes more than just good clean data and using the proper calculations for Demand Planning, Inventory Sizing, and Manufacturing Planning. It requires well conceived business policies and the people part of the process.

The DemandCaster review is only the first part of our Activity Analysis. When the DemandCaster part of the analysis is complete we review the following people dominant processes:

• SKU management:  How is the number of finished goods determined and managed?  How are products born? How are they phased out? Is there any set review of the product portfolio? If these questions are hard to answer and if the answer to the last question is “no.” There will be room for improvement and there will be excess inventory due to the complexity of the portfolio.  


• This part of the Activity Analysis must be done with Finance and Marketing.  Finance is needed to determine the profitability of the various SKUs.   Marketing is involved to determine what the profitability threshold should be to decide which products in a specific category to keep and which might be candidates for discontinuation.


• Artificial Sales Peaking: This is an issue we have written about before at Cadent Resources. If the monthly or quarterly peaking is significant, it can dominate the planning. If such peaking occurs, it is usually dominated by SKUs and perhaps promotions. This, of course, needs to be verified. Activity Analysis of Artificial Sales Peaking is critical to developing protocols and strategies for sound and viable inventory management. 


• Looking at peaking and SKU classifications are not enough.  Manufacturing capacities and run rates must also be evaluated.  High period end peaking could be too much for make-to-order systems (the kind we all want to operate) to keep up.  This part of the Activity Analysis could easily determine how much of a given period, be it month or quarter, needs to be run in a make-to-stock mode.


• Promotion Management:  Are promotions a significant part of the business?  If so, part of the Activity Analysis must focus on promotions both in terms of planning and execution. How effective is the planning of the promotion?   Were the SKUs to support the promotion or offer availability in the right quantities in the right DCs at the right time? How effective was the sell through?  These numbers need to be available for each promotion so the data can be sliced and diced by product line and the various types of promotions from volume discounts like BOGO style deals to specialty packaging.


• In the case of specialty packaging, which is exclusive truly to consumer packaged goods, the question of selling out the promotion is key.  If these promotions do not sell out, the remaining stock can easily become Excess & Obsolete.


• Again Finance should be involved to help evaluate the effectiveness of each promotion in terms of both sales generation or lift and ultimately the profitability.  These numbers are not often easy to capture even with some of the best ERP systems.


• Demand Planning: The people part of Demand Planning is simply when people think they are smarter than statistical forecasting.  The risk is to impose managerial will, desires, and wishes into the process and overriding the results of the statistical model.  There are certainly occasions where this is called for (e.g. there are extraneous factors in the marketplace such as natural disasters, material shortages, and abrupt economic events).  In lieu of these random shocks, the hardest thing for smart driven managers and executives to do is… nothing.  Let the system do what it was designed to do. This is very difficult to do.

The above processes where “the people part” is significant are often the hardest processes to analyze and evaluate.  This makes them the hardest processes to manage and improve.

What is Activity Analysis? Part 3, Inventory Planning and Optimization

In our previous two blogs, we have discussed Activity Analysis in different ways, now let’s talk about Inventory Planning and Optimization and how it comes into play with our Activity Analysis.

Luckily, many of us have sophisticated computer systems, even Enterprise Resource Planning (ERP) systems like SAP and Oracle to assist in this effort to organize the mountain of data into actionable information and act on that data we do! We plan, replenish, and optimize inventories based on this data… assuming it is correct.  

It is impossible to conduct a meaningful Activity Analysis without good and sound data. This is one of the biggest issues for those first embarking on a serious and in-depth Activity Analysis. The data may not be clean and probably will not be up-to-date. This is part of the natural entropy of something that has not been tightly managed for a few years.  

When we first engage with a client, we use our DemandCaster® software to conduct an Activity Analysis to determine the size and scope of the improvement opportunity. When we begin to load the data into DemandCaster® there are invariably issues with the data structure and the completeness of the data.  The first thing we must do with the assistance of the client is organize and scrub the database. Only then, can we proceed with the Activity Analysis.

In the case of inventory management, the core of the work we do at Cadent Resources, Inc. for our clients, our Activity Analysis covers the following:

1.   Demand Planning: We will evaluate the accuracy of the Demand Plans historically. The Demand Plan is the cornerstone on which all material, manufacturing, and inventory management is built. We will look at Mean Absolute Deviation and Mean Squared Deviation. Using the same historical data, we will best fit a statistical forecast to the client data and compare our accuracy to theirs.  

2.   Inventory Sizing:  We then turn our attention to calculating what the inventory could or should be versus what it currently is. With more accurate data from the above mentioned data cleansing, we use DemandCaster® algorithms to size the inventory by materials based on the ABC classification of the materials and the demand placed on the buffer (again, it only customer demand and variability for the buffers that are used to fill customer orders).

3.   Manufacturing Planning: Manufacturing scheduling must be optimized for lead times, set up times, machine availability, throughput, quality, and demand to ensure the inventory buffers are properly stocked and replenished.  

These three analyses are very detailed. They would be most cumbersome to do using spreadsheets and tare not necessarily easy to do in ERP systems unless they have a specific supply chain analytic module.

What is Activity Analysis? Part 2, Warehouse Layout and Re-Layout

Last week we posted a blog about Activity Analysis, we learned this is basically the task of delving into and capturing the complexities and nuances of whatever complex process you are attempting to manage or improve.

Now let us consider the layout of a new warehouse or the re-layout of an existing warehouse as this requires an extensive activity analysis. For the purpose of this discussion, let us assume our product is consumer packaged goods.  Warehouse layouts cannot and should not be done on the back of an envelope even though this is done surprisingly more often than one might guess. In this kind of analysis, the buffer sizes of the various materials that will be stored in that warehouse must be calculated as they need to be known at the peak demand period. This requires knowing the demand by month on each material. If the warehouse is for finished goods, another level of analysis must be considered.  The demand analysis referred so far is only useful in determining the storage requirements for the materials or SKUs. Frequency of inbound deliveries and size of the deliveries will be needed to determine the number of receiving doors and unloading staging areas.

To determine where in the warehouse the materials will be stored and in what kind of racks requires knowing the profile of the sales orders. This will determine how often an item is picked and in what quantities. For instance, are the goods picked in pallets, layers, cases, or individual units? This will determine if a pick area is needed. The order profile will help determine the number of shipping doors needed as well as the unloading staging areas.

In putting it all together, it can be determined average and peak product movement and flow through the facility. This will be used to determine the variety and numbers of material handling equipment (think lift trucks) and the shift and staffing requirements for the facility.

Even this description does not do justice to the depth and level of data needed to drive a proper warehouse design project.  It does however give a flavor of the mass of information needed in conducting an Activity Analysis.

Is it any different for Inventory Planning? Absolutely not! The detail of the data and the organization thereof into actionable information is the lifeblood of inventory planning and optimization. I will look forward to discussing this further in our next posting.

What is Activity Analysis?

In the world of Inventory Management, there are many classes of inventory. A key component of a robust inventory management process is to define, segregate and measure, from there we need to develop and implement action plans by the various categories. This method of inquiry by segregation is called Activity Analysis.

Activity Analysis is basically the task of delving into and capturing the complexities and nuances of whatever complex process you are attempting to manage or improve. In a process improvement framework it is akin to defining the current status of things by asking and answering the following kinds of questions:

1. What are the activities and/or categories in the process of interest?


2. Who are the owners, customers, and suppliers of each activity?


3. What do they do for the sub-activity and how much time is spent?


4. How is success defined - what are the measures, the KPI’s?


5. What is the value-add of each sub-activity, classification?

The above can be accomplished in a variety of ways including interviews, observations, process mapping, flow charting, Pareto analysis, and any of the litany of tools in Six Sigma and Process Improvement toolbox. The analysis has to be complex enough to capture the details of what is being done.

In inventory management, Activity Analysis may frame the aforementioned questions as follows:

1. What are the various categories of inventory?
   
   
   
   1. Raw Materials and Finished Goods Classifications
      
      
      
      1. ABC Demand Classification of material sub-class
      
      
      2. ABC Classification of sales orders
         
         
         
         1. Frequency, mean time between orders
         
         
         2. Size of orders in terms of items, volume, weight, revenue.
         
         
      
      
   
   
   2. Locations and Categorization
      
      
      
      1. Geography
      
      
      2. Replenishment
      
      
      3. Staging & Distribution
      
      
      4. WIP
      
      
      5. Returns
      
      
      6. Vendor Managed Inventory
      
      
      7. In-Transits for Raw, Pack and Finished Goods
      
      
      8. Incoterms of purchased materials
      
      
   
   


2. Who are the owners, customers, and suppliers? Who are the suppliers and customers for each?


3. What are the specific tasks required to manage these various classifications, locations, and categorizations? What is the value and non-value added of the tasks?


4. How is success defined? What are the measures, the KPIs?


5. What is the objective and improvement challenges for each classification, location, and categorization? Divide the classes, locations, and categories into segments of hard, medium, and easy to improve based on the objectives and improvement challenges.


6. What is the value add of each sub-activity, classification?

There is no wrong way to do an Activity Analysis. The analysis and data collection needs to be as detailed as your business to help determine the decisions that need to be made. Once this is done you will be able to define exactly the decisions that need to be made or the nature of the project at hand.

Check back soon … Our next blog will focus on Activity Analysis for new warehouse or re-layout of an existing warehouse.

Four Strategies to Help You Meet the New Normal, Head-On

Back in January we posted our Supply Chain Resolutions for 2011. In our March newsletter, we shared our four improvement strategies for the remainder of 2011. We are posting them here for those readers that do not receive our monthly newsletter. Our four strategies are:

1. Collaborate! Now more than ever is the time to actively communicate with your customers and suppliers. Where possible use technology to share data and demand plans. Extend your planning process to include your suppliers. Imagine if you and your suppliers were tied together with a taught string. You pulling on supply prompts your vendors to react immediately to your needs. Collaboration via data sharing and active communication eliminates the natural slack in manual processes that introduce delays and demand and supply volatility and inaccuracies.


2. Become faster. Implement lean manufacturing methods to reduce waste and become more nimble. You want to be in a position to respond quickly. Reducing lead times both internally and externally is critical.


3. Measure. We are big proponents of data based decision making. As the economy is slowly picking up, you need to evaluate the following to get peak performance from your ERP.
   
   
   
   1. Are your lead times and run times all up to date?
   
   
   2. When was the last time you did an ABC reclassification your finished goods and materials?
   
   
   3. Take a hard look at your customer service performance. Are there holes in your performance. Often if there are issues inventory is to blame which in turn could mean you have capacity issues or do not have appropriate inventory policies. The new normal dictates a continual review and adjustment of these levels.
   
   


4. Refocus. It is a great time to revitalize your continuous improvement efforts.
   
   
   
   1. Asses your top issues, concerns, priorities? What improvement in these areas would provide the biggest P&L dividend to your business?
   
   
   2. Regarding collaboration, put a joint continuous improvement team in place with your major customer or supplier to improve or implement a Collaborative Planning Process.
   
   

The ongoing uncertainty and the new normal of the economy is rife with challenges. The winners are those companies that challenge their own reality and challenge the very basis they go to market.