How to: better manage hard goods and input materials

Many growers like to know they have an adequate supply of input materials in inventory so they won’t be limited in what they can grow.Lean Flow focuses on improving operational efficiencies whether it’s in the office or out in the greenhouse. One aspect of Lean Flow that the green  industry has not addressed relates to the supply chain. An article in the November 2009 issue of GMPro (Page 16) discussed the use of Lean Flow by growers for sizing inventory with their retail customers to ensure that stores are replenished with the products that consumers are purchasing. This article focuses on the other end of the supply chain that deals with input materials.

Reasons for infrequent purchases
Hard goods, seed, cuttings, growing media and chemicals are all input materials that need to be controlled and managed properly. Many of these input materials are purchased once or twice a year. One reason for infrequent buys is that the suppliers offer growers favorable payment terms. Another reason could be a grower wants to make sure that he has these materials available for peak periods. A supplier may not have the capacity to supply all of its customers during peak periods. Another common reason is because it’s always been done that way.

Many growers like to know they have an adequate supply of inventory so that they won’t be limited in what they can grow. However, maintaining excess inventory presents a major issue. Although purchasing an input material a couple of times a year looks financially attractive from a unit-cost standpoint, the reality of that product’s total cost of ownership doesn’t look as attractive.

Favorable payment terms
Have you ever done a cost analysis of how much money your company really saves by buying its input materials at one time? You may save a few pennies per flat, pot or label. Based on the volume your company uses, it seems to add up to a lot of money. But have you counted all of the tags that were not used last season? Or what about those pallets of pots or flats that weren’t used that were left outside in the elements and then had to be discarded because they weren’t usable anymore? Then there is the time and cost of counting, handling, moving and re-labeling excess materials that are not used or discarded.

The real cost of the input materials has to be based on the total cost of ownership:

Scrap. Throwing away a pallet of damaged or obsolete material has a significant cost.

Space. How much space does maintaining excess input material occupy in your facility?

Labor. Every time an employee moves, counts, handles or re-labels excess material there is a non-value-added cost penalty.

Cash flow. You may tie up cash in your inventory. Although you are receiving material now that you do not need to pay for until a later date, eventually you pay for all of the material purchased, even if all of it is not consumed. Excess material carries the cost of money such as line-of-credit interest.

Too much inventory
Few things are more reassuring than seeing all of the input materials that are needed for this year’s peak season in your facility. You know your company is ready to fill orders.

Because of the seasonal nature of the horticulture industry, some growers think they need a season’s worth of materials before production begins. This assumption could not be more wrong. By determining accurate lead times and realistic sell-through rates, statistically calculating inventory levels and adopting pull-based reorder-point replenishment, growers can maintain the proper amount of inventory to replenish based on consumption instead of stockpiling based on fear or speculation.

Limited supplier capacity
One of the major reasons for buying material infrequently is supplier capacity. Some suppliers may not be able to produce all of the products needed during the peak of the season to satisfy all of their customers’ demands. However, suppliers can do several things to address this issue. They can implement Lean Flow to help reduce their lead time and increase their capacity. They can also set up a Finished Goods Inventory Strategy so that they have enough material in finished goods to cover the difference between peak demand and process capacity.

Determining inventory needs
Humans are creatures of habit who don’t like change. So why do many growers purchase their input materials once or twice a year? Their answer often is, “We have always done it this way.” It’s a huge paradigm shift to convince suppliers and growers to change the way materials are procured.

The solution to maintaining the proper inventory is to implement a supply chain technique that ensures the suppliers can replenish the growers when they need the materials. Statistical Kanban is a methodology that determines the correct amount of inventory that needs to be in process at a grower’s site, as well as, the amount of finished inventory the supplier needs to have on hand to ensure replenishment to the grower. The basic steps to calculate kanban are:

1. Calculate the average historical consumption during the lead time (the amount of time it will take a supplier to deliver it). Use the last several weeks of sales, last year’s same week or a combination of the last several weeks of sales and last year’s same weeks.
2. Calculate the standard deviation historical consumption during the lead time.
3. Determine the service level you want to provide (what percentage of the orders you want to satisfy). The obvious answer is 100 percent, but realistically this will require too much inventory. Most companies use a service level in the range of 95-98 percent. This service level is converted into number of standard deviations using a z table.
4. To calculate the kanban reorder point multiply the standard deviation by the service-level factor and add the average consumption during lead time. The reorder point is the total amount of inventory that you need on hand and on order so that you can produce your products and satisfy your target customer service level.

Replenish based on consumption
When you look around your facilities, did you consume all of the materials that you bought from suppliers? Not likely. Growers typically purchase materials based on a forecast -- someone’s best guess at what will be sold. Unfortunately, most of the time customers don’t buy to that forecast.

These excess inventory issues can be solved by statistically calculating your inventory and letting consumption trigger replenishment. By creating a business case that includes not only the volume discount, but all aspects of carrying additional inventory, you might find that your original rationalization is not justified. Incorporating Lean Flow solutions, such as Statistical Kanban, can help to drastically reduce inventory carrying costs and most importantly ensure you satisfy your customers’ needs.

Gary Cortés is one of the founding partners of FlowVision LLC, (561) 301-8740; cortes@flowvision.com.