Critical? Of course it is!
Have you ever been in a grocery store and overheard people arguing about an item that one person wants while the other pushes back and says no? It could be a couple arguing over that bag of Doritos that “we have to have for the game on the weekend” or a child that MUST HAVE a bag of cookies or they WILL DIE. Usually doesn’t end well but it is entertaining because we’ve all been there!
Well, when discussing the importance (criticality) of a material to the operations, the outcome of the discussion will be different depending on who you talk to. I’ve seen gloves, paper towels, cups, cable ties, etc all branded as critical…to the person that requested them. I once travelled to site specifically to ask shop floor staff when and why they request a material be classed as critical (in the absence of a tool), and all the responses lead to one thing: they simply wanted the material to be stocked in the warehouse; that’s it! One person even said that he was told that you must call it critical if you want it stocked. Now, this was perplexing considering I was responsible for about 120,000 individual stocked materials valued over $450m. How could this be the mindset?
This bothered me for quite some time because this was a behavioural issue not a materials management issue. How could I influence this behaviour for a better outcome for the business as simply and quickly as possible? So, after a few weeks of letting this simmer away in my noggin, and discussing the topic with my team, it became clear that we were working without a tool, or guide, that leads you to a result…consistently. ‘Consistently’ was the key because I also realised that criticality of a material can be a highly emotional decision. For example, if you are the person responsible for maintaining the wiper blades on a fleet of vehicles, those wiper blades are 100% critical to you, the person responsible for them, but are they critical to the fleet of vehicles? I would argue no, they are not critical. Are they important, absolutely yes, they are. Would I stock them, yes, I would, because of the impact to the operation of the vehicle and the relatively low cost of the wipers; but they are NOT critical.
During this journey of mine I was working in the mining industry and needed to organise a meeting with the Mobile Equipment Maintenance Manager at one of our large mine sites. I needed to speak to him about the criticality settings for thousands of materials that I had stocked in the warehouse. While working through the solution to the behavioural issues I mentioned previously, my Team and I built a criticality calculator. The sole purpose of this calculator was to remove emotion from the decision (as much as possible). The tool provided a consistent and simple approach to this decision-making process. And while developing this tool it became apparent that not a single HME (Heavy Mining Equipment) vehicle had a single material that was critical. So, you can imagine my predicament; I had to go to site and tell this senior manager that none (zero) of his trucks, graders, excavators, water trucks, etc were critical to the operations.
When I walked into his office, I made sure that he had zero heavy or blunt instruments sitting near him and then began explaining the work that I was doing to optimize the MRO materials on site AND that none of his materials were going to be classed as critical. Well, if there was ever a time that I thought that someone was to going to jump over his desk and chase me out of his office, this was that time, but after the initial shock of this revelation and he had given me time to explain why, he agreed. I explained that while his fleet of vehicles across the mine site were important, not a single vehicle was critical as per the definition I gave him. He could take any one of his vehicles out of operation and it would not stop the site from producing, ever. This was important, because as I had mentioned above, ALL his vehicles were important, but NONE were critical. Did that mean that I was not going to stock materials for him? Not on your life! My warehouses were full of materials stocked for his fleet and that was not going to change. But we did begin to gain clarity of what was truly critical to the mine site. That was a significant step forward.
Far too often, the term critical is normalised and watered down into something that means less. This is trap that we are trying to avoid, because criticality should not be the stocking trigger and truly critical materials should be closely managed by multiple parties and should have conditions attached. For example, critical materials should:
- Never be out of stock.
- Should be reviewed by engineering, reliability, maintenance, and the supply chain team on an annual basis. This review should be recorded and stored for subsequent reviews.
- Should have a preservation plan and maintenance plan in place.
- Should be stock checked monthly.
- Should be on a contract with a known supplier (not to lock in a price, but to secure supply with an agreed lead time. Price is negotiated when purchased).
Lead Time – What? Why?!
Managing lead times today is as about as easy as catching smoke with your hands! This is concerning because the vast majority of MRO materials (in most businesses) do not have accurate lead times, period. This should not be acceptable considering the impact lead times have on reorder points, reorder quantities, and subsequent purchasing procedures. Could you imagine a manufacturing company not knowing the lead times for key raw materials? Or stocking raw materials in the warehouse but not knowing where they are consumed within production? Issues like this are profit killers on the direct materials side of the business but so many businesses accept it on the indirect material side of the business. Does not make good business sense.
So, let’s briefly explore the intricacies of using, managing, monitoring, and regularly updating lead times; but first, another story! Another wonderful experience from my days in mining. While working with the other managers in our Supply department, I noticed that all the contract line items (Outline Agreements in SAP) that they were loading into SAP, had that same lead time (10 days). Knowing that this was not in the same galaxy as the truth I questioned them on their process and how they had come up with a 10-day lead time for all materials. The response was worse that I had expected, yet eye opening all the same; “We load all materials in the contract with 10 days because it’s a mandatory field, is there a problem?” I don’t think that I controlled my response as well as I should have, but nevertheless, it was very apparent that 10 days for EVERY line item was not correct.
The Category Management Team had no idea of the impact that the lead time in the contract had on MRP and all the downstream processes. I set up a meeting with all the Category Managers and their Manager to show them the impact that this ‘one shoe fits all’ approach was having on the Supply Chain. The initial response from the Category Team was, “We are only responsible to reduce the cost of materials, not manage lead times.” Well this understanding was quickly revised and included lead times as well as the inclusion of supplier part numbers. This was only the first step of the journey. I knew that I had more educating to do for this to sink in.
Table 1 below is an example that I demonstrated to paint the picture for them. I’ll try to explain as clearly as I can.
- When Material A is on a contract, I have assumed a 20% reduced cost since the material is assumed to have been negotiated.
- I have assumed that when Material A is on a contract the purchasing process has been automated, therefore the purchasing cost is much lower.
- When Material A is not on a contract, the purchasing cost is higher because an RFQ process will be required and then the PO manually created.
- I have assumed that the PO created from the contract will need to be expedited as soon as the 10 days provided, lapse. Expediting is a pure cost exercise.
- If the material on contract has been confirmed against work after the delivery of 10 days but before its demonstrated lead time of 28 days, there may be a hotshot (urgent freight cost) required. The $962 was a rate from my mining days 8 years ago, so is likely to be even higher now (and this cost will vary significantly around the world).
- MRP Exception messages were through the roof (which was the trigger for my conversation with the Categories Team).
To sum up, it’s not hard to see that getting all the data right prior to creating a PO is a worthy exercise. PO expediting is an expensive exercise that no one likes to do. Many companies have automated the expediting process using RPA bots, which helps, but ideally, we want to avoid expediting whenever possible.
Stocking decisions, Reorder points, reorder quantities, safety stock, and criticality are all dependent on the lead time of a material, so taking the time and resources to get this right is worth it. Lead Time reduction should be a metric that every member of a Category Management Team should have as a measurable responsibility.
Can you effectively establish a reorder point (ROP), reorder quantity (ROQ), or safety stock if you don't know how critical a material is to your operations and you don't know how long it will take to procure the material?
