Dr. Watson Says: ...you have to buffer variability with inventory, capacity, or time... What Do You Say? Click Here to Send Us Your Comments Click Here to See Reader Feedback

I teach a class on operations excellence at Northwestern that covers the principles of Lean.  One of the key ideas that I like to stress is that a good implementation of Lean involves reducing variability and determining the proper buffers.  This point is often overlooked when people study Toyota and the techniques that they used.  People often miss that Toyota worked hard to reduce variability (by fixing manufacturing schedules, for example) and putting in proper buffers (two 8-hour shifts with 4 hours between one, for example).  Wally Hopp and Mark Spearman sum this up well in their book Factory Physics. 

Hopp and Spearman state that any system with variability (like your supply chain) would have to buffer that variability with inventory, capacity, or time.

When designing your supply chain, you should consider how you will use these three buffers.  If you don’t carefully build your buffers they will be created for you.  Let’s look each buffer.

The inventory buffer is the one we think about the most.  If your vendors have long lead-times and a lot of lead time variability or your customers order very erratically, you may have a large buffer of safety stock.  That way, when orders come in, you can ship them on time and your customers don’t have to worry about your unreliable vendors.

A capacity buffer can take many shapes. If your unreliable vendor usually ships to you via ocean containers and you don’t buffer with enough inventory, you can use emergency air shipments when you run out of product.  Think of the air shipments as extra (and expensive) shipping capacity.  Or, if your unreliable supplier is actually your own plant, you can use overtime or extra lines to meet unexpected demand.  The capacity buffer may be more expensive than holding inventory.  But, in a make-to-order environment, it may be a good choice.

The time buffer is usually the buffer you end up with if you don’t create other buffers.  If your supply chain has variability (and it does), and you don’t buffer with inventory or capacity, then when your demand is higher than expected or a vendor shipment is late, your customers simply have to wait.  Even though you promised the delivery in three weeks, it may be five weeks before you ship.  This buffer avoids the expense of extra inventory or capacity, but comes with the big downside that your customers may take their business elsewhere.

Final Thoughts

There are two big take-aways from this discussion.  One, you should pick your buffers so they are picked for you.  Two, if you don’t like the size of your buffers, you need to work on reducing the underlying variability.