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Topic 2: Pulling From Overseas

Welcome to Topic 2 in our 10-part series. This subject is of special importance, because without optimizing material flow from outside suppliers and especially from overseas suppliers, it will be very difficult to achieve high overall inventory turns and reduce working capital. (Note: I’m using the term “overseas” to refer to imports from outside of your country. Yes, I know that they may not literally come from across the ocean!)  Reducing the amount of material at a workstation is important to save valuation production floor space, improve operator productivity, and reduce part selection errors, but the Point of Use inventory locations represent the smallest part of your total inventory.

Does your company procure a significant percentage of its material from overseas? Take a look at the trends in imports into the US since 1950.

Looks like an exponential growth curve, doesn’t it? Even since the 1990’s, the volume of product entering the United States has increased by more than 500%. July 2018 was a record high. I would be willing to wager that the same profile fits many other countries as well. The challenge is that the volume of parts coming from various parts of the world, while not something new, has increased dramatically over the past 20 years.

One of the principles or “North Star” goals of the Toyota Production System is One-by-One Production, also known as Single Piece Flow. Moving material one unit at a time is easy to accomplish on an assembly line, but more difficult for raw material, and virtually impossible for material coming from overseas. JIT Kitting methods are being used to get closer to this goal on the factory floor, and we’ll discuss this strategy in this series. Since it is not expected that a North Star goal can be fully achieved, we need to look at what is being done in the Lean world to move closer to that goal for overseas shipments.

The two biggest challenges in managing overseas shipments are time and distance. The lead-times from overseas suppliers is usually longer than from a domestic supplier. The physical transportation time is also longer, especially if the material is shipped via sea container. The combination of these two times may mean that the combined lead-time exceeds the order backlog horizon, so that purchase orders will need to be place based on a forecast instead of demand based on actual orders.

The Golden Key to inventory reductions, and this is true for both internal delivery routes as well as external ones, is the Frequency of Delivery. If you want to reduce inventory without increasing the risk of running out, you need to delivery more frequently. The illustration below shows the concept.

For internal deliveries this means designing delivery routes with a frequency that is 6 to 8 times more frequent than the maximum target inventory (in hours of usage). This is the rule of thumb that we use to determine optimum delivery frequency. For domestic external suppliers that are geographically close, strive for a delivery frequency that is daily or a few days. But here comes the challenge: what to do with overseas suppliers. Deliveries in large quantities from overseas will kill your inventory turnover gains, but at the same time you can’t be delivering daily from overseas. Or can you?

Here is what we see leading companies do: instead of receiving large quantities of a single item at a time, they mix shipments of various items into a single shipping container in weekly quantities (or less). The total number of shipping containers remains the same, but the containers include a mix of materials instead of a single item. This may require a cross-docking process in the country of origin, and yes it will require some additional effort on the receiving side. The benefit is a radical reduction in the amount of inventory from these overseas suppliers. And if a ship goes down, you lose a week’s worth of material instead of a month’s worth.

Is this a “pull” from overseas suppliers? That depends on whether you have enough order backlog and lead-time to base your overseas orders on actual demand, or if you have to rely on a forecast of demand. But either way, mixing materials in overseas containers is the #1 that we’ve seen to reduce imported parts inventories, and tying receipt of material more directly to actual consumption.