What to improve in contractor’s material planning to reduce inventory carrying cost?
DistributorCo wanted to investigate its contractor’s material ordering process due to a sharp increase in its inventory carrying cost. Furthermore, DistributorCo wanted to identify ways to reduce this cost by eliminating material idle time.
The team supported DistributorCo to address this challenge by conducting a current-state analysis on two of its contractors and mapped their material ordering and material estimation process.
The project identified key issues and provided improvement recommendations to DistributorCo. The key issues included:
- Complexity and lack of know-how of material ordering tool
- Contractors prefer to order all the materials before the construction begins
- Materials are ordered before the planning is completed
- Large volumes of materials delivered by suppliers directly at the installation site
- No warehouse to store all the material between delivery and installation
DistributorCo has a 3-5 yrs frame agreement with Contractors for field installation work. As per the agreement, contractors are responsible for project planning and ordering materials.
Currently, contractors tend to order a large volume of materials to avoid running out, while their team is on-site. But this practice leads to the materials sitting idle on the site for an extended time period before they are actually utilized.
This adversely impacts DistributorCo’s brand image as well as leads to high-inventory carrying costs on DistributorCo’s balance sheet. As per DistributorCo, the average time from material delivery to installation is above 200 days, which is very high.
The SprintlyWorks team conducted four-phase project, in which
Phase 1: Collect and review existing documentation relating to contractor’s ordering process
- Collected documentation relating to purchasing, project management, and system instructions
- Prepared initial high level process maps of contractors’ project management process
Phase 2: Conduct interviews with project and field managers from DistributorCo and the contractors
- Understand the project management process
- Map the material ordering process
- Understand issues in each contractor’s processes
Phase 3: Analyze the actual idle time data for four selected projects from the contractors
- Two projects were selected from both contractors
- The selected projects offered examples of both good and bad projects regarding overall material idle time.
Phase 4: Identify key issues of the ordering process and offering recommendations to solve them
The identified key issues:
- The delivery times of material are not changed
- Materials are ordered and before the plan is completed
- All materials are delivered before the start of the project
Based on the findings, the following recommendations were made for DistributorCo.
- More transparency and information flow between DistributorCo and contractors
- DistributorCo to conduct knowledge transfer sessions with contractors to share best practices, especially in case of schedule delays
- Keep track of material orders and delivery dates for contractor projects, and ensure that material deliveries are moved when necessary
- Batch good’s deliveries
- DistributorCo should recommend a batching system for goods deliveries to its contractors.
- Planning process improvements
- DistributorCo should restrict contractors from ordering material before planning is completed, thereby compelling them to create more realistic project schedules
- Created material-ordering process maps
- Identified 7 key issues affecting material wait time
- Offered recommendations to solve the identified issues
First you have to analyse the situation before you make any corrections. You cannot do it the other way around.