Manufacturing Handbook of Best Practices 2011 Part 12 potx

The reasonthat we define the different inventory groups is so that we can apply various tools to control and manage that inventory based on the reasons that cause you to haveinventory..

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R.T “Chris” Christensen

12.1 THE BASIC PREMISE OF INVENTORY

Ever since the pharaohs built the pyramids, humans have been faced with the problem

in production management of how inventory should be used to maintain, balance, andlevel load production In the case of the pharaohs, they needed to have a big pile of bigrocks on hand to maintain a continuous production schedule And since the time of thepharaohs, we hadn’t made any significant inroads into the pile-of-rocks theory ofmanufacturing and inventory control until 1959 That was when Joe Orlicky of IBMdeveloped the matched sets of parts relationship required to get the right parts to theright job at the right time He called it materials requirements planning (MRP).Although we had the tool, we had only a very limited application of MRP Althoughthe work required for processing information in an MRP environment is ideally suitedfor computer processing, the limiting factor in the early 1960s was our limited andexpensive computer power The repetitive work required to process the information and

do the calculations was cost prohibitive This left us with finding the cheapest way tobalance the matched sets of parts We found the method necessary to minimize our

“pile of rocks” — the cheapest way to do it From this point on in the development ofmanufacturing theory, all we have really done is add tools to accomplish the task ofcontrolling the matched sets of parts The primary tool that we use is the computer, so

we can do the calculations needed to control our operations As we continue to increasethe level of computer involvement as our tool, our processing time becomes cheaperthan that pile of rocks When computer power becomes cheaper than inventory, wereduce inventory and add power

This new and cheaper information processing power has brought us to today,where our goals are to run a quicker and leaner operation using the information wehave gained from tools such as the theory of constraints (TOC), takt time, andadvanced planning systems Today’s quick-response manufacturing facility is aninternal cog inside the supply chain, bringing the goods and services to the industrial

or retail consumer at the right time and the right place with the right product To dothis we must use these tools so that we can be “just-in-time” to meet our customers’needs Though holding inventory in the past helped to speed up the delivery cycle toget product to our customers, we must remember that inventory adds no value in itself.This chapter shows how we can eliminate inventory and at the same time meetthe customer’s rapid demands — essentially having only one Big Mac ready just as

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262 The Manufacturing Handbook of Best Practices

you open the restaurant door This chapter identifies advanced and economicallyviable techniques that now involve the use of e-manufacturing, Web-based informa-tion systems, and integrated control systems

12.2 NEED FOR INVENTORY IDENTIFIED BY DEFINITION

The following different definitions of types of inventory will help you get an idea

of why you have inventory and what it really is Once you understand why you haveinventory, you can determine what you need to keep on your shelves The reasonthat we define the different inventory groups is so that we can apply various tools

to control and manage that inventory based on the reasons that cause you to haveinventory The definition of inventory is

Material: In the traditional sense, inventory is the parts and material stocked tomeet your short-term and long-term sourcing requirements

A decoupling activity:Inventory is the tool that decouples the customer’s demandfrom production capacity to enable the organization to flat load the plant

A fixed investment: If you have $2 million in inventory now, you’ll always have

$2 million in inventory You use parts and materials from your inventory supply, butyou immediately replace them with new stock upon consumption

Insurance: What is insurance? It’s being reimbursed for an incurred loss ance minimizes your loss if disaster strikes So, isn’t inventory just that — insuranceagainst an inability to get the parts needed to meet the production order?

Insur-A bet:Similar to insurance When you carry auto insurance for your teenager,you’re placing a bet that he or she will wreck the family car The insurance company

is giving 10-to-1 odds that it won’t happen As a manager concerned about inventory,you’re like that insurance company You bet there will be no downtime, and youstack the odds in your favor by the amount of inventory you carry

A buffer stock against use: Inventory is a hedge against the unknown If youknew exactly when a part was required, you wouldn’t need to carry it in stock You’dbuy the part and have it arrive exactly when needed This sounds good in theory,but because you don’t know exactly when you’ll need that part, you carry it

A buffer stock against delivery: Inventory also protects you from the uncertainties

of delivery If you knew exactly when a supplier would deliver your order, you’dnever need inventory to cover for erratic delivery schedules Hey, suppliers haveproblems, too

Safety stock: How big a risk taker are you? What are you willing to risk by nothaving parts on hand? We’re always being asked to reduce inventory and we come

up with excuses for not meeting the reduction goals The flip side is, if you reduceinventory and then run out, you are past the excuses point in defending your inventorypolicy That’s when you get yelled at

CYA stocks: We all know what “cover your a ” inventory is and why we have

it See above

A quantitative measure of your inability to control yourself: I can always tellhow well a person is able to run his or her operation by looking at the amount ofinventory The better you manage your operation, the better you control your inven-tory level

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Manufacturing Controls Integration 263

“Unobtainium”: There is a layer of parts that fall into the category, “must have,can’t find.” These are rare, almost impossible-to-obtain parts; or the lead-time to

shelf awaiting your need, and there is little you can do about it

Hidden stock: This is the inventory your production people stash under ors, under stairwells, inside parts cabinets, or in their lockers and toolboxes This isthe stuff you call “lost” each year when you do physical inventory It’s a real problembecause you don’t know the condition of those parts This happens a lot in anincentive environment that allows the worker to turn in work for pay while themachine or line is down The operators make this material during breaks, at lunch-time, between shifts, and at other times when they are present and can’t get paidfor their time This not only presents raw material and finished goods problems butalso is a serious safety and quality issue

convey-Rogue parts: These are the parts you don’t list in your system You have errors

in your bill of materials that your schedulers know about, which forces the scheduler

to make manual inputs whenever the problem arises These parts may be good andthey may be useful, but many times you can’t find them when you need them Themechanic has misplaced them, is on vacation, or has quit or retired The parts areout there somewhere

Anticipation inventory:This inventory allows an organization to cope with theanticipated changes in demand Vacations, shutdowns, peak sales periods, salespromotions, or strikes are situations that can lead an organization to produce orpurchase additional inventory

“Cheapest way to do it” inventory: There are many ways to get the parts you need,but what it really comes down to is, “What is the cheapest way to get those parts whenyou want them?” However, you get these parts, there is a cost There is a balancebetween the cost of acquiring and keeping parts in inventory, and your ability to plan

or forecast needs But somewhere along the line it will become clear that the overallcheapest way to get parts is to just carry them in inventory This won’t apply to all yourparts needs, but you’ll find a group of parts here that falls into this category

Lot size inventories:This inventory comes about when it becomes inefficient toproduce or purchase goods at the same rate at which they are consumed

Fluctuation inventories:These inventories are used to provide a buffer for bothdemand fluctuations and supply fluctuations These inventories help smooth out theproduction cycle

Transportation inventories:These inventories are used when stages of the duction cycle are not always adjacent to each other This is true for multiplantoperations; the general rule is that the farther apart the plants are, the more inventorywill be required to keep the system running

pro-Reasons for inventory definitions and answers.We must know why we namethese different groups If you look at the goals and objectives top management givesyou each year, you will invariably see items such as

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Those items are actually the savings that management wants to realize fromyour inventory What management fails to do is give you the tools or a road map to

points and you’ll see an outline for categorizing your inventory for cost reduction.Once you have the reason for each type of inventory identified from the definitionsgiven, you can then work on eliminating that inventory If you can do this, then youcan get the savings you are looking for You can work on the tools needed to answerthese concerns:

Now you know why we spent the time defining inventory Before you can work

on the five “how to’s,” you must define the reason you have inventory in the first place

12.3 MANUFACTURING IS REALLY JUST A BALANCING ACT

In order to understand the different elements in a manufacturing operation, we mustbegin by understanding the interrelations among the functions that make an operationrun The best way to visualize this is to imagine an operation as being a balancingact between the various components of the operation, the systems, and the manu-facturing capabilities Upset this balance, and problems arise Keep the elements inbalance, and all should run fine Understanding how these functions work will helpyou to understand solutions to the problems we face in operations and how thesolutions affect the outcomes

Take a look at Figure 12.1 We have a balance beam that represents the operation

It is a simple balance beam, not that different from a balance scale On the left side

we have the system capabilities These are the tools that are used to run the facturing operation These are the sales plans, the computer system, the suppliers’capabilities, the forecast system, the customers’ requirements, and transportationissues All the items in the systems box on the beam are the issues or constraints to

manu-be dealt with from a planning point of view

On the other side of the balance beam is the box representing the operations inwhich the manufacturing capabilities reside This box contains the production capa-bilities, available capacity, throughput processing capabilities, manufacturing leadtime, capacity constraints, inventory record accuracy, the accuracy and completeness

of the bills of materials, and the route sheets

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Now, looking at the manufacturing system, we will begin with the premise thatwhen each side is equal and in balance, all is fine — sort of like the teeter-totter weplayed on at the park when we were kids When your weight was the same as the person

on the other end of the beam, the beam remained stationary in a horizontal positionand you were in balance If your friend was larger than you, then that end of the beamwent down while you went up and were trapped high in the air The beam was out ofbalance and no longer functional If you had a really big friend, there was no way foryou to rock the beam up and down, as the beam was way out of balance To solve thisproblem, you could have had another friend of yours climb on the beam at your end

so your combined weight could bring the teeter-totter back into balance

Applying this analogy to the manufacturing operations, if the systems andoperational capabilities are in sync, the beam is in balance But if the systemcapabilities are not in balance with the operational capabilities, then the beam tips.When a manufacturing system is not in balance with operations, we can easily seewhat the effects are — longer lead times, stock-outs, missed shipments, or worse,lost customers The system is out of balance and experiencing problems

To get back in balance, we again turn to the playground example When wewere on the light side of the balance beam and up in the air, we had a friend climb

on the beam with us for weight to get us back in balance, and all was working well

In the manufacturing arena we also have a friend we can add to the light side to get

us back into balance That friend is called inventory Inventory is the weight that weadd to an operation to bring it back into balance so everything is back in sync again

It can be placed on either side of the beam as necessary to regain balance It can beused to add weight to weak systems and weak operational capabilities In essence,the inventory box can be moved to wherever it is needed, anywhere on the beam

If placement of the box cannot add enough leverage to balance the beam, then wecan add a bigger box for more inventory This now begins to explain the quantity

of inventory we have in our operations and why we even have inventory Inventory

is a universal equalizer Inventory supports the areas of operations that are weak,and it is essential for keeping us in balance

Look at Figure 12.2 to see how we have added weight to the beam in the form

of inventory Let’s assume that our customer requires us to produce and ship anorder in 5 working days If we can do it in 5 days, everything is fine and the system

is in balance But if the customer wants the order in 3 days and we still need 5 days

to deliver, then we are out of balance and cannot make the delivery If we cannotproduce and ship in the time required, we have only two options The first is to turndown the order The second option is to add inventory to meet the customer’s

FIGURE 12.1 The balance beam of manufacturing — the basic components.

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shipping demand of 3 days by shipping from that inventory Because we are unable

to meet the customer’s demand for 3-day delivery with our present manufacturingand inventory policy, we must increase our inventory as a short-term solution to theproblem We ship from that inventory, and the need to stay in balance begins todetermine the amount of inventory necessary to meet requirements of the customer.The size of the gap between what our customer wants and our ability to deliverdictates the amount of inventory we must keep on hand The long-term solution is

to do something about the size of the systems or operations box to enhance therobustness of the weak link in the delivery chain to meet the 3-day delivery window,but that is a long-term fix and could be costly

If you remember your physics, you will recall that length times weight equals mass

or, in plain English, multiplying the weight of the box by the distance from the box tothe balance point determines how much weight is acting on the beam This tells us howmuch weight is necessary and where to place the weight on the other side of the beam

to keep it in balance From this, we can see that a weak aspect of our operation can bebrought back into balance just by moving the weak box farther away from the balancepoint and lengthening the beam until we are in balance again Although this strategyworks in theory, in reality we have a name for the length of the beam — lead time If

we move the weak link farther from the balance point on the beam by increasing leadtimes, we do, in fact, bring the beam back into balance But we do so at a cost, andthat cost is the amount of lead time necessary to deliver

If business requirements have weakened a link in the system, we could bringthe beam back into balance by adding length to the beam and moving one of theboxes farther from the balance point until the system is balanced again, but our leadtime has now increased Now that lead time has been added to the balance beam,

we have a balance beam that looks like Figure 12.3

We have now identified all the components of the beam that represents our tional capabilities Now we can clearly see what happens to the system when we try

opera-to meet the cusopera-tomer’s 3-day delivery requirement with a 5-day delivery operation Wecan approach the delivery requirement in two ways over the short term — lengthen thebeam and keep the 5-day window, or add inventory and make the 3-day window Ineach case, we now notice that if we change one of the parameters of the balance beam

we will need to change another parameter to keep the beam in balance and meet ourobjectives What we see now is that there is a cause-and-effect relationship to considerwhen working at keeping the beam in balance That cause-and-effect relationship means

FIGURE 12.2 The balance beam — positioning inventory.

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that if we change one of the elements of the beam, another element on the beam mustalso change to keep the beam, and our operation, in balance and in sync

These are short-term considerations In the long term, we need to assess what ourneeds are and the delivery window necessary to meet our customers’ requirements, andthen make the changes necessary to meet the new demands and keep our system inbalance Inventory is the tool we use to keep the system in balance If our goal is toreduce inventory and we install a new order-processing system that makes the systembox more robust, we could then reduce inventory and maintain balance in the system.But, if our sales force starts to promise shorter delivery lead times to their customersbased on the efficiency of the new system, we have really traded a more efficient systemfor a shorter lead time, and our goal of inventory reduction is in jeopardy, becauseinventory is now required to maintain balance to meet the new customer needs.According to a fundamental law of physics, for every action there is an equaland opposite reaction That is true here, too For every change that you make to one

of the elements in a manufacturing system, as represented on the balance beam,there is another element in the system that must also change to keep the operation

in balance There is a cause-and-effect relationship to everything that you do Whenyou want to establish a goal of reducing inventory, remember that there is alsoanother change that must be made to the balance in your operation to attain thatgoal The balance beam represents this concept clearly

12.4 THE PRIMARY CONTROLS FOR INVENTORY

You cannot achieve manufacturing excellence by starting out with poor records.Remember that the first question you ask yourself when you receive an order is,

“Do I have any of this on hand?” The answer to this question comes from yourinventory records That is the place where you go to see if you have any finishedgoods or components in stock to fill the order If you do not have good inventoryrecords, one of two things will happen, both bad You will think that you have inventorywhen you don’t and will make a promise to fill the order that you can’t meet, or youwill think that you don’t have product, thus order or produce more Now you have toomuch inventory One of the things a lot of people do is called “sneaker net.” You put

on your sneakers, go out into the warehouse, and look for yourself In the meantime,your buddy in the office is promising the same inventory to another customer And so

FIGURE 12.3 The balance beam — understanding the role of lead time.

Lead Time

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the story goes What you need is an accurate inventory record program so that you caneasily and instantaneously answer the question, “Do I have any of this on hand?”The first thing you need to do to control your inventory is to stop its continualoutward movement through “unofficial” channels Lock it up and put someone incharge Then, to get an accurate input of data in your inventory records system, barcode your inventory system This will give you the 99.99(+)% record capture accu-racy that you need This will take care of the “midnight acquisition” problem andgive you a tool to minimize data-transfer errors The best tool we have seen to ensurethat you will reach and maintain a high level of inventory accuracy is the old tool

of cycle counting Let’s look at the tool that will help you find, control, and eliminatethe human error side of the problem

Federal law requires us to take at least one inventory each year The tax man iswaiting for this But more important, we need to understand what we have in ourinventory The physical inventory is the most inaccurate way of determining what

we have in inventory It is basically an accounting procedure designed for taxpurposes, and it does nothing for the inventory records necessary for manufacturing

As long as the numbers come close, the accountants are happy and we can all gohome But the big problem from a manufacturing point of view is that the taking ofthe physical inventory does nothing to correct the cause of the problem that createdthe inventory errors in the first place So next year when you take the physical, youwill find the same errors, and make the same adjustments to the inventory record,but you are still stuck with the problem You have gained nothing

One of the biggest abuses we find with cycle counting is that the name is usedwithout understanding the technique The abuse? Calling the taking of a monthlyphysical inventory “cycle counting.” We find people who recognize the need forhaving excellent record accuracy, but all they do is count it over and over again

As we have said, this physical approach does nothing to correct the cause of theproblem

What you want is a tool that will not only give you a higher level of inventoryrecord accuracy, but also lower the cost of maintaining that level of accuracy, whilestill keeping your operation in business Remember that you shut down your oper-ations to take the physical and you lost all that production time With cycle counting,you keep right on going while you’re doing the count And do you know who handlesthe cycle count? The people in your stockroom, that’s who And do you know why?Because they are the ones who are the most knowledgeable in your operation as towhat your materials look like and what the part numbers are, and they are the oneswhose lives will be made the easier by having your inventories under control All

is not free in this world and cycle counting does come at a cost, but the cost savingscan be immeasurable

Let’s take a look at both the physical and the cycle counting methods of checkingyour inventories The following is a list of disadvantages of taking the physical

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Now let’s look at the advantages you can gain by using the cycle countingapproach, in terms of the same items:

Cycle counting is basically very easy Every morning you come in and count aportion of your inventory The cycle counter is given a list of parts to count andgiven all the information about the part that is available except one You never givethe cycle counter the number of parts your records show that you have in inventory.Why? Because if you send someone out to find 1675 “unicroms” in your inventorybin, guess how many unicroms he or she will find: 1675, that’s how many Of course,

it is easier to count an inventory location when the bin is near empty, as there will

be fewer parts to count So this is when you do your cycle count, when it is time

to reorder Because cycle counting is a daily activity, you can then choose when tomake the count, so you do it when the bin is empty This minimizes the workload.After the count is complete, you check the record, looking for a count match

If the counts don’t match, this is the list of items to do in sequence:

Now that the count is complete and you know the reason for the errors in therecords, you then just change the records, right? Wrong! Now that you know thereason for the error, you correct the cause of the error so that it won’t happen again.But this sure sounds like a lot of work that we don’t do now And by the way, howmany times a year do you count your inventory items?

Generally speaking, to meet IRS standards, you must count your entire tory at least once a year So that is what you do to the C stock items only Youcount your B stock twice a year and your fast-moving, high-dollar items at leastsix times each year Sounds like we have added a lot of work, but we really haven’t.Let’s look at the workload for the people in your stockroom As an example, we’ll

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assume you have 10,500 stockroom parts Table 12.1 compares cycle counting

with physical inventory and shows the relative workload of each method of taking

inventory

And, yes, you would be right The workload did go up by requiring an

additional count of 4500 parts per year But look at the workload Cycle counting

should be done every day If your operation works 5 days a week, 52 weeks a

year, then you would work 260 days a year If you cycle counted 15,000 parts per

year divided by 260 days, then you would have to count only 58 parts per day Is

that a lot? Not really First, if you have this size stockroom you probably have

more than one attendant, probably three, one for each shift Now you are looking

at 19 or 20 parts per person per day Not much of a workload here And the

workload gets even less

When you do a physical inventory, you must count all the items at the same

time As such, some of the bins are full and some are empty and on the average

they are half full So you are counting an average volume of inventory items But

when you cycle count, even though you count some items more than once a year,

you can choose when in the year you will do the count How about when the bin is

at or near empty? Count accuracy goes up and the workload goes way down And

think of this: once you have completed a count, the cause of the error has to be

resolved so that subsequent counts will be simple The workload is going down

Now consider this additional information Realizing that the operations will be

ongoing when the count is made, you will save the production time lost for inventory

record purposes Here is a list of how to determine when to cycle count to save you

time and money and to minimize the inconvenience to the operation

have not been pulled for the day’s operations

TABLE 12.1 Inventory Counts

Work Load Inventory Number C/C Counts Total Count Total Count

C 8000 Once 8000 8000

B 2000 Twice 4000 2000

A 500 Six 3000 500 Total inventory counts per year 15,000 10,500

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Why on earth would you want to count a bin that your inventory records show

has nothing in it? Because that is where you misplaced that last shipment of gold

bricks you haven’t been able to find You put them in a bin that your records show

is empty And if you think it is empty and never look at that bin location, you will

never find that pile of gold bricks!

After you have gone through all this and have discovered the errors of your

ways, it is finally time to correct the inventory bin record Accountants may not like

this because you are always changing the value of your assets, but this can easily

be handled with a variance account Do you need to continue with the physical

inventory? Generally speaking, you will need to verify to your auditors that the

cycle-counting procedures are better than the physical It usually takes two physical

cycles to establish credibility and stop taking the physical

So are there savings in the cycle count? Yes, and here they are

And now a final word about the physical inventory When is your inventory most

accurate using the physical count? The record is at its best the day after the physical

count has been completed and goes downhill from there for the rest of the year And

the list of all the benefits of the physical inventory procedure is very short The

savings generated by taking the physical inventory are

12.5 THE TOOLS FOR INVENTORY CONTROL

Take a real hard look at this This is where the theory meets the road We hope you

are beginning to understand that, throughout this book, the concepts that are talked

about are not just concepts They are things that you can and should do in your

corporation that will generate real savings for you The following concept is one of

the best revenue generators and cost-reduction approaches you will discover Taking

something as simple as the ABC inventory concept and applying it to your operation

is something that can generate both profits and savings for your company

First, you have to understand the nature of inventory in meeting your customers’

needs (either an inside or outside customer) If you cannot produce within the

demand window that the customer requires, then of course you must ship from

inventory Inventory is then the medium that you use to meet the needs of your

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customer in both time and quantity Having said that, are we saying that you need

to own the world’s supply of everything that you sell? That would ensure that you

could meet any demand the customer would require of you, wouldn’t it?

Yes, but look at the expense The notion of having an inventory huge enough to

meet any and all customer demands is obviously cost prohibitive But what if we

could “own the world’s supply” of inventory of our products? We would never have

a late, partial, or missed shipment, period But how can we do this? How can we

accomplish each of the following two conflicting objectives? On the one hand, we

want to reduce cost by minimizing the amount of inventory that we have on hand

Balanced against this we also want to meet every customer request by carrying all

the inventory needed to meet their requirements The tool to accomplish both these

objectives and give you the best of both worlds is the ABC method of evaluating

inventory

The first thing to do is to stratify your inventory by an ABC classification This is

the starting point to begin to understand the concept of your inventory The Pareto

principle stated that 80% of your sales come from 20% of your part numbers and,

conversely, the bottom 20% of your sales must come from the remaining 80% of

your part numbers This is the significant few and the trivial many But rather than

use only two categories, we use three, A, B, and C, and then apply different

approaches to managing the inventory based on its category You need to apply

different thinking and tools to manage inventory based on the classifications that

you determined

Once you have your inventory categorized and displayed in descending order

by annual usage value, you will begin to see the cost value by classification You

will see that the A-classified items will represent about 70% of your total dollar

value of inventory and probably the same amount of your revenue from sales Your

B items will be another 15% of your value and the remaining C stock will be the

remaining 15% of value But the number of parts or stock keeping units (SKUs)

represented by the A items, while being 70% or so of value, will be only about 15%

of your part matrix The B stock will be about 15% of both value and SKUs while

the C stock will be the remaining 15% of value but a whopping 70% of your part

numbers So if this is true, why do you insist on using the same inventory tactics

across the board It takes different strokes for different folks, or different approaches

for different inventories

First, we need to understand this basic fact of C items in stock Volume is low

and customer demand is erratic at best This means that you can’t forecast it to begin

with, but not having a C part in stock can cause a missed shipment Remember that

the customer doesn’t care what your problems are The customer just wants what it

ordered and doesn’t care how you go about meeting the demand So, if you can’t

forecast it, then you can’t manage it You can’t develop an inventory plan, so no

matter what you do, you can’t ship it when the customer wants it You have a

stock-out So, what do you do?

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