The 95/33 Solution

In a previous article, we described the “Common Core” solution in a remanufacturing plant.

The main line business addressed the most frequently used cores, what we called “the common cores.”  But there was another business opportunity that we discovered that had not been tapped.  It amounted to creating an entirely new business to deal with the old car restoration market.  This was a national opportunity and proved to be very profitable.

Here’s how that worked.

The primary business, the remanufacturing the 5% of the products that created 67% of the demand, was a typical inventory management problem.  And the owner managed this very well.  Raw material was consumed and replacement parts were ordered to replace it.  However, when we tried to look at the vast number of cores that made up the remaining available market, we recognized it as a “difficult problem” in our definition.  It required a different look at the inventory problem it posed.  

There were over 800 parts and the demand was totally unpredictable.  This was the market demand created by old car enthusiasts rebuilding their beloved old model car.  We analyzed the demand for these parts based upon delivered product over a 5 year period and we did the same for those orders that couldn’t be filled over those same 5 years.  In all, there were about 800 parts.  So we created a system to manage all the possibilities for those 800 parts.  There were some parts that had almost no demand so they were not included in this inventory management program.  But figuring out how to manage the 800 parts was enough of a challenge.

When old car enthusiasts knew that more than likely this business would have the part that they needed, our client would get the first call from them.  Their market demand grew and it became a mail order business as well as serving the local market.  To do that, we set up a kanban system that contained the 800 cores.  This was the challenge.  So here is what we came up with.

We started with a rack of 1600 cubicles to store the part cores.  That already existed in the plant.  Each part had two shoe boxes to contain the cores for that product.  They remained as cores until the demand came to convert them to usable replacement product.  It was assumed that most cores could be fixed with 2 cores.  Many of the old cores would have badly damaged parts that couldn’t be used in a repair.  So the inventory problem became one of profitably managing the inventory of these cores.  If you take 800 parts, times 2, they needed to have 1600 cores sitting on the shelf.  If they could keep the inventory value less than $8,000 that would amount to less than $5 per core in that inventory.  So a price of $150 to $250 for one of these remanufactured old alternators, starters and generators (plus the returned core – if no core was returned with unit add $100) would generate a huge profit for this part of the business or about 65% pre-tax profits, as it turned out.  

The inventory was managed in two ways.  First, there were two shoe boxes for each core.  When a shoe box was full, you could look at the rack and see that the shoe box was full if the red tape was not showing.  When the box was empty, it was turned around and upside down.  On the back of each box was a piece of red tape to indicate visually that the box was empty.  Finally, the inventory manager needed to order a replacement core.  But he didn’t want to pay more than $5.  If you rushed a core, you might pay as high as $60 to $80.  If however, you ordered the required cores as part of a big order, you could get the right price.  It was a lost leader for the core supplier when 400 or 500 cores were ordered.  And so, over 9 months, this core inventory was filled.  It then became a simple job to keep the inventory filled with a single sheet of paper (both sides) with the 800 parts listed and room for a check mark.  The inventory manager then worked off this sheet. Cycle counting was a snap.  Annual inventory management in this plant became a very easy process.  It took less than 1 hour to establish the inventory of raw materials from the cores.

This new business turned out to be a good idea because it put this company on the national remanufacturing scene and gave the owner visibility to the antique car market.  Additionally, it gave the senior assembler techs an opportunity to do something different when one of those orders came in.  The senior techs found the operation of these old parts to be a challenge and it kept them on their toes.  Every one of the techs wanted an opportunity to work the “95/33” cell.

As a problem solver, this was a difficult but fun project.  We got to solve 2 difficult problems with this engagement, the core business optimization and the Old Car components business.  And that gave us all great satisfaction.  

You can read more about the 5/67 Problem Solving in my recent book with Craig Humphreys with the same name: 5/67 Problem Solving: How to Solve Wicked Problems…correctly.  To buy the book: https://www.createspace.com/7576878.

About Tribal Knowledge Series

In a career spanning over 30 years, Len Bertain has coached over 150 CEO’s to help them understand and correct inefficiencies and lost profits in their business. He created the well-known “War on Waste” program, a preeminent Lean Business tool, to guide leadership teams through the process. He is an author of four books on the War on Waste and a frequent speaker to CEO groups. Since its inception, the War on Waste program has generated over $1 Billion in first-year profits from over 10,000 ideas, all generated by client company employees. The companies involved in the War on Waste have been as small as 10 people with Fortune 100 companies at the other extreme. His books include: How to Win the War on Waste in 90 Days, The War on Waste Paradox, War on Waste Innovation, and The Tribal Knowledge Paradigm. Len's Bookstore In 1994, he founded the Institute for Productivity and, in 1999, CEO University, both based in San Francisco, CA. He holds a Ph.D. in Physics from the University of Nevada and a B.S. in Physics and Math from St. Mary’s College of California. He lives in California with his wife and has 3 grown sons and 9 grandchildren.
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