Some OEM Customers Lack Insight into Market Demand

Ryan Kutz of PMPA member company Aztalan Engineering asks, “Since a better portion of our customers have adopted lean, just-in-time (JIT) or quick-response manufacturing practices where inventory is dock to stock and stock levels are managed daily, making inventory almost none existent, is there any evidence of this in the year-to-year trend? Are sales figures becoming even closer to real time with manufacturing orders?”

Ryan asks this in response to the blog post, “February Precision Machining Shipments Level With January.”

Ryan, we agree with your premise that most of our industry’s customers have adopted programs such as lean, JIT, quick-response manufacturing, and other dock-to-production (as opposed to dock-to-stock) programs. These programs are designed to reduce cost of possession for the OEM. However, we see these as being essentially a blunt instrument used to beat the supplier rather than as a means to truly coordinate supply-chain effectiveness. We feel that despite these programs, our OEM customers lack valid insight into market demand, causing inventories to rise and then their orders to our shops to plunge, concurrently. Take a look at the following chart from Dr. Ken Mayland that shows total business sales versus total business inventories:

These indicators tracked closely in 2014, but not so much in 2015.

This graph shows that in the first three quarters of 2014, our customers had a great handle on their demand and their orders and inventories tracked closely.

From the fourth quarter of 2014 forward, however, the percent change in total business inventories continued to remain in the positive year over year, while the percentage change in total sales year over year plummeted through end of Q1 2015, when they “leveled off” at around -2 to -3 percent.

I think we err when we overestimate the power of lean, JIT and quick-response manufacturing in the hands of our customers. These tools seem to be a blunt instrument, at best.

In reply to Ryan’s question, “Are sales figures becoming even closer to real time with manufacturing orders,” the graph above seems to show the change in sales and in inventories are converging at the end of 2015 and 2016 year to date.

My conclusion is that it doesn’t matter how fine a resolution our customers have in their lean, JIT, or quick-response manufacturing processes and procedures, if their ability to forecast is so poor, especially when the market declines.

Lousy forecasting by some OEM customers beats lean and JIT every time, leaving the OEM’s supply chain bloated with inventory and starving for releases.

Thanks for the great query, Ryan.

Originally posted on PMPAspeakingofprecision.com blog.