How to reduce inventory with safety lead-times (part 1)

Part 1: how to reduce inventory with safety lead-times (Part 2 here)

I discovered the electronic component supply-chain in 2008. Back then, I was in charge of a French set-top-box OEM manufacturing & supply-chain. What struck me was how complex the electronic supply-chain was compared to my previous experience in the automotive industry. The explosive cocktail? Capital intensive foundries, poor demand accuracy, wafer steep learning curves, supply lead-time volatility, lack of inventory, huge number of references… and many many many Excel files 🙂

At that time, I tried to convince my factories that we went too far in stock reduction and that we should set safety lead-times in the ERP to actually decrease our stock level.

How could you ask for a 30 day safety lead-times on 90% of our references?!? You’re going to increase our inventory!

I’ve been trying to convince my factories for over 3 years. With almost no result. But entrepreneurs are as stubborn as mules, so I’ll try to convince you in a few lines!

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The Elon Musk meeting metaphor

Let’s say you have to organize a meeting between Elon Musk and 9 young new interns. Meeting is scheduled at 2 pm. All 10 attendees have to be there for the meeting to start. Knowing that you can not afford Elon to be waiting… when would you request the interns to come? at 2pm? 1:45? 1:30? 1pm? Would you take the risk to have Elon waiting for a late intern?

you cannot start production with any missing components

It’s exactly the same for electronic board manufacturing. You need all the components for the production to start. Even the cheapest component in shortage would delay the production, and thus, heavily increase the inventory. Should you take the risk to have your expansive chipsets waiting on the shelves for the cheapest ones to come?

Few figures to keep in mind:

  • 90% of an electronic board value lies in less than 10% of its components;
  • about 50% of a board’s components weight less than 1% of its value.

Please check your ERP safety stocks and lead-times! Most EMS-OEM I’ve worked with are running with no or very little safety lead-times on low value components.

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We went too far and often got it wrong

While trying to reduce their inventory, most companies are running without any safety stock! Stay tuned for part 2 where we’ll make a simple Excel simulation to see how efficient safety lead-times can be to significantly reduce inventory.

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Photo via Visual Hunt

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