Lean material strategy

Lean has been implemented in many nurseries and greenhouses throughout the country with the main focus being on improving productivity, quality and optimizing floor space. The aspect of Lean that many companies have ignored is supply chain.

Yet, the focus of the Lean Materials Strategy (LMS) is the optimization of the supply chain. As we mentioned in the August issue, growers need to think more like manufacturers, such as Ford and John Deere.

So how do successful companies optimize their supply chain?
 

Smaller batch purchases

While working with growers for the last 10 years, we continue to hear a common refrain when it comes to the supply chain side of the business: “We buy our hard goods once or twice a year because we get favorable payment terms, and by purchasing in large quantities we get a price break.”

The argument for buying once or twice a year is that if you don’t get the material in the fall or winter for spring, the supplier won’t have the capacity to supply all of its customers during the spring, and you definitely don’t want to be short of material in the spring. Although there may be some truth in this, the real question is how efficient are the suppliers’ processes?

Just like other suppliers in other industries, horticulture suppliers should be looking at Lean Flow techniques to improve efficiencies, improve machine utilization, and shorten lead-time. Like many traditional manufacturing companies, the suppliers, in a lot of cases, like to set up a machine and run large batches. However, in a Lean Flow environment, we look at designing processes that are flexible, enabling multiple products to be produced in smaller batch quantities. While some might argue that smaller batches require more setups, the art of the Lean Flow strategy is to look at ways to reduce the setup so they can run more varieties of products.

The second argument for fewer buys is that the grower gets a break on the per unit price. So the grower might say, “If we buy “X” thousands we get it for one or two cents cheaper. And because we are going to use thousands of these items next year, we can save a lot of money.”

This logic is seriously flawed as evidenced by a financial term that most growers don’t think about. That term is Inventory Carrying Cost (ICC) and it’s made up of several components: cost of capital; warehousing cost; inventory damage and shrinkage; obsolescence; and insurance and taxes.

Because the grower doesn’t have to pay for the material until the spring, when cash flow is good, the cost of capital is really not an issue for them. However, all the other components are what growers don’t think about.

Warehousing costs are composed of additional space you need to store material. You may not have a warehouse, but you keep that inventory somewhere in your facility. In most cases we see that material outdoors, where it gets subjected to the elements, rain, snow, ice and heat. These elements cause damage and shrinkage, which is another component of ICC. How many pots, trays, etc. do you throw away every year because they were damaged?

Obsolescence is another big component that affects growers. Every time we visit a grower we ask to see the tag room, and what we see is typical – shelves of tags that are no longer used, because the variety is no longer sold. Eventually the grower will go through and dump all of the obsolete tags to make room for new tags. The same holds true for custom printed pots. So the question for the grower is, did you really save any money on the per piece cost? Other components include taxes and insurance, since inventory is an asset that needs to be insured and on which taxes are typically paid. These additional costs are often not taken into account.
 

Lean Flow solution

The Lean strategy for supply chain is to replenish material based on consumption, utilizing material kanban techniques. Kanban is a Japanese word for communication signal. The simplest form of kanban is from back in the day when milk was delivered to your house. The milkman would drive down the street replenishing empty milk bottles with full ones. The signal was the empty milk bottle. This is kanban, and replenishment based on consumption.

This means that buying material once or twice a year is not the solution. As mentioned above, it may cost you more to purchase these items a couple times a year than when you actually need them. The Lean material strategy is to use historical consumption, (one or two years’ worth of consumption), and statistically analyze the daily consumption. The analysis includes average daily usage, and variability, which allows a standard deviation to be calculated.

The other key factor in analysis is a service level factor that is determined by the grower. This service level determines what percentage of customer orders you want to satisfy. The obvious answer is 100 percent, but that would require an enormous amount of inventory. Typically, most customers utilize a 95 to 98 percent service level. Based on the analysis, a re-order point (ROP) is calculated. When inventory falls below the ROP, a trigger (order) is generated to order more. The amount that is ordered is based on a minimum order quantity. This statistical kanban ROP logic drives down inventory and improves service levels. We have seen customers reduce inventory by 40 percent while at the same time increase service levels from 86 to 98 percent.

This ROP logic for hard goods is also used for finished product. Although growers don’t carry finished goods like traditional manufacturing companies do, they need to replenish their products at the retail end. One additional variable added to the logic is availability of material. Looking at availability and at historical sales and then analyzing both statically can help drive the right products to the right stores. This helps increase the sell-through, which is similar to the service level. The analysis is done by item by store to make sure that the right product goes to the right store.

Bottom line: You can’t sell what you don’t have, so all these steps are critical to your business, even if you don’t realize that yet.

As the now-familiar tagline challenges: “Just do it.”

Gerson “Gary” Cortés is a partner with Dillon, Colo.-based FlowVision LLC.

This was the last of a two-part series on implementing Lean Flow techniques in nursery production. The first story appeared in the August issue.