Case for Just In Case Inventory

1. Case for Just In Case Inventory Presented by Philip E. Quigley, CFPIM, PMP Sylvan D. Finestone, MBA, PMP

2. Presented to Orange County APICS- 8/19/2009

3. Overview • The case for Just-In-Time (JIT) inventory, or lean, has been made for many years now • It’s accepted that manufacturing, service and distribution companies should strive for JIT • But in the world of custom design, engineering development, spares or A&D Space work there is a case for Just In Case (JIC) inventory • The understanding of the need and benefit of JIC has not been made-but it’s as real as JIT

4. When Just In Case is Needed • Just In Case is required when you trade off inventory costs to reduce a project’s critical path • This is especially critical when there are critical engineering design decisions that need to be made before long lead material can be bought • These design decisions made be driven by customer requirements or new technology development. • Successful Just It Case demands careful planning and coordination between planning, purchasing and engineering. • Just In Case also needs management and customer approval

5. Case Study Company was developing a electronic navigation system for oil exploration ships • Project was considered “Critical, must” and had a drop dead completion and implementation date due to cost and contract requirements • The design was complex and potentially called out a series of very (24-28 week lead time parts- cables, connectors, power supplies, etc) • Unfortunately the design decisions necessary to call out the specific PN were weeks away. • There were no prints, parts lists existing when the planner started his planning process. • What does the planner do?

6. Fortunately an design engineer sat down with the planner and went over the preliminary design data • The engineer was experienced and quickly identified were the critical, Long Lead items were in the design. • The engineer also identified that the design engineers had a series of options for their design. • Example • Based on power supply decision there were three different options on cables and connectors • Unfortunately all were long lead and costly • Fortunately they were all off the shelf parts-not custom JIC-Case Study Cont’d

7. JIC Case Study-cont’d • Planner’s action • Planner order all of the parts necessary for any of the options taken • He ordered them at the beginning of the design cycle • He communicated to his distributor that some of the material would be returned and got agreement that if parts were not taken out of the box they could be returned.

8. What happened • Project went along for several months. • Finally engineering design was released with one of the options identified by the engineer-two weeks before assembly was supposed to start • When drawings were turned over to planning department the supervisor was very upset-naturally with assembly was supposed to start in two weeks • The planner then told the supervisor the parts were in stock • When asked how the planner knew which parts to order- he said he ordered all of them • Naturally the supervisor wasn’t pleased- at first. JIC Case Study-cont’d

9. Example-Oil Tool Company • Example-Ordering forgings for undersea design-The Problem • Oil Tool company was producing underwater production equipment for major oil company. • The system had a complex design of piping and valves that were custom designed per customer requirements • There was a tight schedule due to permits and seasonal drilling windows • Issue-customer couldn’t decide on which size fittings were needed- 10 inch or 12 inch • Forging had a lead time of 16 to 22 weeks-then 3 weeks to machine

10. Example-Oil Tool Company • Example-Ordering forgings for undersea design-Action taken • After discussion with customer it was decided to order both sizes of forgings and begin preliminary machining • The issue was that customer couldn’t make a decision until more thorough test drilling was done • Material was ordered and machined and both size were in stock when customer made their decision. • Assembly was delivered on time • Customer did pay for both sets of forgings

11. Example-Oil Tool Company Note- This was a mutual decision made between supplier and customer after the supplier presented the facts and gave customer several options on how to proceed. Option1- schedule would be created after design was released and casting suppliers committed to delivery schedule. This would pull schedule to the right Option 2- large expedite fees would be paid to casting supplier to cut down on delivery time. This would increase cost and pull schedule to right Option 3- procure both sizes of forgings etc and complete both. This would maintain schedule dates but would increase cost Oil company decided that maintaining schedule was most critical element due to weather and permits and paid for the extra material to be procured and machined. Extra material now belonged to the customer and could be used on follow-on contracts

12. Management Case for JIC • The case for JIC • You are trading material dollars to reduce the time on the critical path of a schedule • That means that time is the most important management criteria for the customer • Material cost can be compared to keeping or reducing overall time on the project schedule • This means Just In Case is a deliberate Management Decision based on analysis of Material Cost vs. Schedule on a Time Critical Project.

13. The business situation • You are in the custom design marketplace • You are dependent on the customer completing • their design requirements • The customer is VERY sensitive to time on the project • The customer is also VERY sensitive to quality • The customer will be interested in alternative actions • to ensure delivery to required date.

14. Your ACTIONS • Step 1- Document the design as you know it • Step 2- Document what you know about the design • Based on previous work done, experience in the business • Step 3- Identify where critical design decisions will be made • Step 4- Identify material impact of these design decisions • Both purchase parts, fabricated parts and assemblies • Step 5- Identify where parts may be purchased or fabricated ahead of design • completion • This may mean purchasing different sizes, families of parts, etc • to have in stock • Step 6- Do a trade off or benefit/cost analysis of the trade offs, dollarize them and • present to customer. • Step 7- Reach agreement with customer on extra costs to project or bid and get • agreement on they will accept these charges • Step 8- Execute the plan

15. Step 1 Document the design as you know it Bill of Material, parts lists, drawing tree etc To Be Designed (TBD) used where you know something must be designed (power supply, fitting) Key- get everything documented you know, don’t know

16. Step 2 Document what you know about the design From analysis, previous history document known history, parameters, etc You are trying to get enough data so you can do analysis of what design work is needed

17. Step 3 Identify where critical design decisions will be made Detail in project plan or schedule the key design milestones Have agreement with customers on these milestones

18. Step 4 Identify material impact of these design decisions • Is this long lead purchase material • Long lead fabrication, assembly • Any alternatives

19. Step 5 Identify where parts may be purchased or fabricated ahead of design completion • May purchase families of parts-different size pipes, fittings etc • Different size connectors, power supplies, castings

20. Step 6 Do a trade off or cost/benefit analysis and present to customer • Dollarize options you have identified • Show reduction in critical path if material is available • Show overall impact of reducing time vs material cost

21. Step 7 Reach agreement with customer on extra costs to project or bid and get agreement on they will accept these charges • Formal meeting • Get written approvals, changes to contract etc

22. Step 8 Execute the plan • Make it happen • Document lessons learned etc

23. Summary • Just in Case inventory planning can save time on custom engineering and new product design projects • ERP systems and logic can support a JIC plan without modifying the systems • It must be carefully done and with an integrated team that includes engineering, marketing and sales, purchasing and planning • To make JIC work it needs an upfront agreement with the customer on paying for extra material and who will own the material