Measuring Your Material Flow

I love this story. Taiichi Ohno confessed during an interview (after he retired and after Toyota was already wildly successful) that he had tried to misdirect Westerners to the idea that the Toyota Production System was all about “eliminating waste”. His true focus was on the creation of a total “river system” or “total conveyor system” to connect all processes into a continuous flow. Of course waste is a part of this effort, but Ohno said that waste elimination by itself was not the goal. The principal goal was to reduce the time from start to finish, and achieve an evenly flowing chain of interconnected processes. Waste and bad quality are obstacles to be addressed, but time was the primary metric. This story sounds believable, and if the total river system includes outside suppliers (and not just internal processes) one can begin to appreciate the size of the challenge! Ohno worked on this for 40 years.

Measuring the velocity of the work flow inside a factory is relatively easy. Simply follow a product from launch to completion, using a paper traveler or your manufacturing execution system, and you will have a good measure of what that time is. Measuring your river performance when it comes to material flow is not as easy.

There is a metric that is commonly used, and that is not new: inventory turnover. Divide the dollars consumed on materials during a time period by the average inventory during that period. This will tell you how many times your inventory investment dollars “turned”. Cost of Goods Sold (COGS) is sometimes used instead of Material Dollars Consumed, but this is a less desirable measurement since it includes other costs like labor.

An aggregate inventory turnover number for a factory or company is interesting to know, but it is not very useful in pointing us in the direction of Continuous Improvement since it doesn’t tell us where the inventory reduction opportunities are. Is it on the factory floor? In the warehouse? In transit? We will need to drill down to a finer level of detail to know where to focus.

The need to know where your inventory is leads you directly to an underlying requirement: high inventory record accuracy. Unless material receipts, transfers, and issues are transacted correctly, you won’t really know where things are. Target an inventory record accuracy greater than 98%, based on a robust cycle-counting discipline. How to achieve this is the subject for another time.

In designing your river system for optimal Material Flow, start at the end closest to your customer and work your way upstream. Here are the main segments of your Material Flow that will need to be measured and improved individually:

Material on the Factory Floor: Goal: +100 Turns/Year

This includes material stocked at individual workstations and material stored in any Kanban Supermarkets. The reason we are suggesting that you combine these two is because you don’t want to require an inventory transaction between the supermarket and Points of Use if you can avoid it. Because material will be flowing very quickly on the factory floor, this would be a high number of transactions monitoring a low amount of inventory. Excessive transactions increase the chance of introducing errors into your inventory system and fall into the category of “non-value adding work”.

You should be able to control the amount of inventory on the floor very precisely, because most of this material will be under Kanban control. You won’t be replenishing this material unless there is a pull signal based on consumption of what was there. Toyota plans on only a few hours of usage at the workstations and several days in the Supermarket. Kitting will reduce this inventory even more, but will require more coordination and effort. Once your Kanban system is in place, it will be running at optimal velocity from a Material Flow perspective. You will be turning material in this area +100 turns per year. You can then shift your attention upstream.

Material in the Warehouse (Domestic): Goal: +25 Turns/Year

Unless suppliers deliver material directly to the factory floor frequently and in small quantities, additional material will be stored in a controlled area that we call a warehouse or stockroom. Everything that goes in and out of the warehouse will need to be transacted. This is your next big Material Flow challenge, and one that you probably won’t be able to improve overnight. That’s because while the floor material is organized with a pull system, materials can arrive at the warehouse based on a push from a purchase order or MRP-generated order. The transformation that will need to take place is to convert external suppliers from a push relationship to a pull relationship. Of course suppliers need to be provided with a long-term projection of demand, since they also need to do their own planning. The signal to deliver, however, will be a pull signal instead of a Purchase Order with a specific delivery date. This will allow you to better control the material arriving to your warehouse and ensure that it is more closely aligned with actual need.

This is what companies like Toyota have developed over many years with their domestic suppliers: routine milk runs that pick up full containers, drop off empty containers, and manage a Material Flow process that keeps external material under control. The amount of inventory on-hand in the warehouse will be more (in terms of days of usage) than on the factory floor, but inventory turnover can routinely exceed 25 turns per year.

Material in the Warehouse (Overseas): Goal: +12 Turns/Year

The toughest nut to crack for Material Flow is material coming from overseas suppliers. These could be sister factories in other countries, or external companies on the other side of the world. Not only are the transportation times much greater, the factory lead-times may also be longer, and you will need to add time for customs and transportation once the material arrives in your country. What is important is the Total Cost of Procurement, not just the unit price, and you may find that it is cheaper to pay more for a domestic supplier that you can integrate into your domestic milk run. Measure your inventory turnover for this category of material separately, and it will almost certainly be slower than any of the other categories. Remember that you should be including material that is in transit, not just the material that has been received.

Another way to keep your inventory investment and inventory turnover under control for overseas material is the strategy of mixed shipments. If possible, combine different parts in the same shipping container so that you are not transporting large batches of any one item at a time. The total number of shipping containers may remain the same, but under this strategy each one will contain a mix of different items in much smaller quantities. In this way you will not be impacting overall shipping costs, while at the same time you can reduce inventories. This strategy is not always feasible, but it is in common use with larger companies that are sourcing different items from a specific country.

Improving material flow is not difficult for a single item, following the recommendations above. The challenge, of course, is that you have thousands of items to manage, and new ones are being added to the list all of the time. If you don’t have one already, build a Plan For Every Part database so that you have a consolidated and flexible tool to analyze your Material Flow. You can then apply the 80/20 rule and look for the low-hanging fruit opportunities. Compare your calculated inventory goals against the actual inventory numbers, and chances are very good that a relatively few items will be flagged as opportunities. Understand that improving your Material Flow is not a one-shot effort, but something that is never finished.

The best example of Material Flow that I have seen is at Toyota Material Handling in Columbus, Indiana (and I'm sure there are many others!). Join us for a 3-day Mixed Model Line Design Workshop hosted at the Toyota plant, where you can experience this for yourself. Find out more about the agenda and dates at our website.