How to manage inventory to prevent back-ups and slow delivery.
You don't miss your water 'til your well runs dry, as they say. And you don't miss your size 32-57D double-flange widgets until your inventory is gone, your orders are backed up, and your customers are screaming bloody murder.
Things were not quite that desperate at Machine Technology Inc., of Whippany, N.J., a year ago. In fact, the company was going great guns, placing #68 on the 1982 INC. 100 list of the fastest-growing public companies in the United States. There were problems, however -- 15 of them, to be exact -- and each was a high-cost inventory item that the company needed to make and service its main product, a machine used in the manufacture of integrated circuits. "We never had them when we needed them," says Frank Hazeltine, the company's materials manager. "We could get the parts in for production, but we were constantly behind on replacement parts."
Determined to rectify the situation, Machine Technology's president Gary Hillman called in Henry C. Ekstein of Management Resources, a Teaneck, N.J., consulting firm that specializes in such matters. Ekstein soon came back with a diagnosis. The inventory problems, he said, had their roots in a condition common to many growing companies, a kind of corporate nearsightedness. Management couldn't control the process, because it couldn't see clearly what was happening. His recommendation: Draw graphs.
Thus was born the "inventory cardiogram."
An inventory cardiogram is, quite simply, a graph depicting changes in inventory levels over time. Its genius lies in its ability to illustrate a variety of abstract concepts -- order point, safety stock, lead times, and so on -- which are essential to the effective control of inventory. "Many people have difficulty understanding the theory and practice of inventory control," says Ekstein. "But if you can show them graphically -- or, better yet, make them draw the graphs -- they gain a clear understanding of these things."
Consider, for example, the ideal situation represented in Figure I above. In this hypothetical case, inventory declines steadily as the stock of an item is used up. When the level reaches the order point (300 units), the purchasing agent reorders the item; the stock further decreases. After a week's lead time, the order arrives, and the inventory rises to its maximum acceptable level -- in this instance, 600 units. Then the cycle is repeated Unfortunately, the real world is seldom so neat. Figure 2 is an actual inventory cardiogram, showing the peaks and valleys of a particular inventory over a 12-week period. Here, lead times varied considerably, as did demand for the item in question. On two occasions, the item was out of stock, with orders backing up. And once, the item was overstocked.
Ekstein contends that such graphs allow a company to pinpoint the causes of inventory troubles -- to determine, say, whether it is placing large enough orders, or allowing enough time for orders to be filled. (He has, in fact, prepared two papers on the subject, available from Management Resources, 539 W. Englewood Ave., Teaneck, NJ 07666. Please use company stationery and include your name and title, as well as $2 to cover postage and handling. Allow three to six weeks for delivery.) "By looking at the inventory cardiogram, you can tell in five seconds what the problem is, how many times it has occurred in a period of a year, and how to correct it," he says. In addition, management can use the graphs to monitor the lead time of problem vendors and to track the performance of the relatively few important items that account for the bulk of inventory value. And it can do so quickly, efficiently, and cheaply -- whether it produces the graphs on a computer or draws them up by hand.
"We run the graphs off on a copy machine, and then it's just a matter of plotting the points and connecting dots," says Howard Ecker, president of Ecker Manufacturing Corp. in New York, a maker of aluminum windows and doors. "It takes a clerk 10 minutes... It's helped me to be a better purchaser. I know just what we need, and when."
The long-term benefits are striking, according to Ecker, who began using the graphs this year as part of an overall inventory-control program developed by Ekstein. "From the day we implemented the plan to about seven months later, our inventory was down about $500,000 [from a prior level of $1 million] without running out of anything," says Ecker. Inventory storage space was reduced from 20,000 to 15,000 square feet. "We used to pay bills in 60 to 90 days; now we're paying in 30 days and taking advantage of a 2% discount on glass bills -- which we haven't done in five years. And we never hired additional people."
As for Machine Technology, the 1982 INC. 100 company, it also did well by the graphs. "Let me put it this way," says Hazeltine, the materials manager. Of those 15 original problem items, "only I is still a problem on occasion, because the supplier's situation keeps changing. The other 14 are no longer problems."
Which may help to explain why Machine Technology remained on the INC. 100 in 1983, moving up to #55.