The tensions between inventory and OEE

by | Iter Insights

The tensions between inventory and OEE

OEE Featured Image

“What gets measured, gets done” is generally true in business and where measures are well thought through and managed, they are key to delivering consistent levels of performance, service and improvement.

Unfortunately, this is infrequently the case, and where inventory levels and OEE are used as prime measures of performance, these potentially conflicting objectives can easily build tensions.

Why the Conflicts?

A well-managed supply chain works to deliver service commitments with an optimised balance of working capital and operating cost. The optimal balance varies according to product and segment and will change over time as demand patterns evolve.

However, in our twenty years’ experience of modelling client inventories, we have found that almost without exception there is too much inventory of high volume, predictable SKUs and too little inventory of lower volume but more variable products.

The outcome is too much working capital and associated corporate pressure to reduce inventory despite the inability to meet service commitments. This is exacerbated where OEE is another key measure as the approach to improving OEE is often based on reducing changeover time by pushing for longer runs and creating the “perfect storm”:

  • Low OEE
  • High inventories
  • Poor service levels

And to make it more challenging to address, each measure has a different owner with diametrically opposed resolutions of the performance gap!

 

Addressing the Structural Conflicts

A recent client of ours is a perfect illustration of this set of circumstances and despite a dedicated and exceptionally hard-working team, they were at best standing still with blame being directed in each direction.

With our support this is being addressed so that each measure of performance is improved by:

  • Segmenting demand and agreeing how often each product is made:- High volume, low variety – every product
    wheel cycle (Runners)
    – Low volume, higher variety – up to every
    6th product cycle (Repeaters and
    Strangers)
  • Designing product wheels to minimise the numbers and size of changeovers
  • Setting inventory profiles to reflect production frequency and variability of demand so that there are fewer unplanned supply requirements
  • Establishing rigorous planning disciplines and ensuring they “plan the work and work the plan”

This is far from an optimised solution, with working capital higher and overall OEE levels lower than desired. However, the critical foundation upon which to build improvement is in place and optimisation can start

Optimising from a Sound Platform

We find that organisations start to look to use lean to optimise what is an unstable platform and are then surprised when the expected benefits are not delivered, or unable to be sustained.

With a firm foundation we can look to apply lean to reduce changeover time and drive the product wheel to turn more quickly without loss of OEE.

This reduces resupply lead-times allows production of smaller batches and delivers greater responsiveness and lower working capital.

Summary

Working capital and OEE can be mutually reinforcing measures of performance but all too often parochial driving of one measure at the expense of the other creates a dynamic that is unstable and ultimately undermines the ability to provide a consistently good service optimised operating cost and working capital.

Tim Richardson
Development Director
Iter Consulting

Iter Insights

Welcome to Iter Insight, this is one of a monthly series of articles from Iter Consulting addressing the most critical operational and supply chain problems businesses face today.