Dave Turbide, CFPIM, CIRM, CSCP, CMfgE | January/February 2012 | 22 | 1
Supply and demand meet at the decoupling point
The goal of most manufacturers is to reduce inventory, but not at the risk of increased shortages. The key is to have the right amount of the right inventory at the right time and place.
In a make-to-stock environment, the customer expects immediate shipment once the order is received and processed by the supplier. On the other hand, in a pure make-to-order environment, the customer is willing to wait through the full manufacturing cycle before the product is shipped. But, most manufacturers lie somewhere between these two extremes—an environment where the customer lead time is less than the full manufacturing cycle but more than immediate shipment.
In anything but the ideal make-to-order scenario, inventory provides the decoupling point—the location in a distribution network that creates independence among processes—between supply and demand. Inventory is pulled from the decoupling point at the pace of demand, while replenishment into the decoupling inventory occurs at the pace of supply. In the perfect lean, demand-driven world, supply is synchronized with demand, and only a small amount of inventory serves as a buffer for any minor deviations from the coordinated flow. That’s the theory, anyway—in reality, it is necessary to maintain buffer inventory to keep product moving to customers while addressing sources of chaos such as economic order quantities, rejects, scrap, inaccurate records, late deliveries, and late schedule changes.
Any company focusing on inventory reduction first should understand where its decoupling points are and plan to stock at those points according to supply and demand. For example, if the typical customer expects shipment two weeks from receipt of order, inventory should be held at the part or assembly stage that signifies two weeks before order completion. One simple way to determine this is to mark the bill of materials on its side—end product on the right, major assemblies to the left, and subassemblies even further left—and have the lengths of the connecting lines represent the individual lead times. Draw a vertical line at the order lead time. Any crossing line indicates what activity must be ongoing and what inventory must be on hand to support it when the order is placed. The correct quantity of inventory (or order size for ongoing activity) is the amount necessary to support demand through the interval until the next replenishment arrives (plus a safety stock buffer).
Inventory located anywhere but a decoupling point serves only to mitigate the effects of variation—unexpected scrap or rejects, shrinkage, inaccurate counts, or late-changing demand, for example. This buffer against variation and uncertainty traditionally is safety stock; but, in theory, buffer inventory at the decoupling point is sufficient to accommodate variation. A thorough understanding of decoupling points and the dynamics of supply and demand will show you what inventory to keep, where it should be, and how much you need to keep production running smoothly.
Dave Turbide, CFPIM, CIRM, CSCP, CMfgE, is a New Hampshire-based independent consultant and freelance writer and president of the APICS Granite State chapter. He may be contacted at email@example.com.