This paper will provide a simple how-to approach for reducing inventories and yet maintaining an adequate amount to satisfy customer service. There are two main messages. One is that top management is responsible for determining acceptable levels of inventories. The second is that practitioners are responsible for ensuring that the data is accurate.
In my travels, I often inquire within companies, "What is your number-one problem?" And the answer is usually, "Not enough inventory." Then I will ask, "What is your number-two problem? And the answer will be, "Too much inventory." At the same time I find that almost every company has an inventory reduction program in process. This in itself produces some strange business decisions. Not recording receipts for a period of time is an all-time favorite of what not to do. Too often management establishes a dollar aggregate target without fully understanding the functionality of inventory.
So how can a company reduce inventory without making bad business decisions and send the wrong message to the employees? This paper is aimed at providing a more proactive long-term solution to the "too much inventory" situation.
I think that one of the most important elements to the solution is to know what you already have in inventory.
DETERMINE EXISTING INVENTORIES
First we need to determine our existing inventories. There are many approaches to doing this. However, the simplest is to determine the active from the inactive and sell off or give away the inactive. There are tax consequences to this action that lessens the financial hit and hopefully there is an adequate reserve already established to absorb this expense. The ideas in this paper are aimed at the active inventory. Secondly, we need to reclassify the inventory. Figure 1 provides an example of this reclassification. The idea here is identify the inventory in the buckets of why you have it. That's what APICS defines as the functionality of inventory.
Let's look at the APICS definitions for each element as stated in the APICS Dictionary, 9th Edition:
"Lot-size inventory: Inventory that results whenever quantity price discounts, shipping costs, setup costs, or similar considerations make it more economical to purchase or produce in larger lots than are needed for immediate purposes." Managing this element will be commented upon later in the item master review section of the paper, but suffice it to say this area is usually an excellent target for reduction. To achieve the reduction, it enlists the assistance of the process design group for reducing set up time.
"Cycle stock: One of the two main conceptual components of any item inventory, the cycle stock is the most active component, i.e., that which depletes gradually as customer orders are received and its replenished cyclically when supplier orders are received." The other component is safety stock. Significant reductions can be achieved in this category by focusing projects on reducing cycle times.
"Safety stock: (1) In general, a quantity of stock planned to be in inventory to protect against fluctuations in demand or supply. (2) In the context of master production scheduling, the additional inventory and capacity planned as protection against forecast errors and short-term changes in the backlog. Overplanning can be used to create safety stock." Also commented upon in the item master review section later, this area is almost always being abused and is ripe for reduction.
"Decoupling inventory: An amount of inventory kept between entities in a manufacturing or distribution network to create independence between processes or entities. The objective of decoupling inventory is to disconnect the rate of use from the rate of supply of the item." A shift to continuous production can cause reduction in this category for the factory. Likewise, the shift towards continuous flow, drop shipping, and cross-docking are reducing distribution inventories.
"Pipeline stock: Inventory in the transportation network and the distribution system, including flow through intermediate stocking points. The flow time through the pipeline has a major effect on the amount of inventory required in the pipeline. Time factors involve order transmission, order processing, scheduling, shipping, transportation, receiving, stocking, review time, etc."
"Anticipated inventories: Additional inventory above basic pipeline stock to cover projected trends of increasing sales, planned sales promotion programs, seasonal fluctuations, plant shutdowns, and vacations."
"Hedging inventories: A form of inventory buildup to buffer against some event that may not happen. Hedge inventory planning involves speculation related to potential labor strikes, price increases, unsettled governments, and events that could severely impair a company's strategic initiatives. Risk and consequences are unusually high, and top management approval is often required."
Top management should be establishing all of these levels in the overall operations planning and the staff should then execute to these levels and be measured to that execution. This would include the sales organization establishing demand forecasts and being measured to the accuracy of those forecasts and purchasing managing vendor performance.
To Be Continued
To stay current on Lean Management Basics and
Best Practices, subscribe to our weekly MBBP Bulletin... and we'll send you
presentation, "Introduction to Kaizen Based Lean Manufacturing™." All at no cost of course.
personal information will never
be disclosed to any third party.
what one of our 13,000 plus subscribers
wrote about the MBBP Newsletter:
"Great manufacturing articles. Thanks for the insights. I often share portions of your articles
with my staff and they too enjoy them and fine aspects where they can
integrate points into their individual areas of responsibilities. Thanks
Kerry B. Stephenson. President. KALCO
to Basics" Training for anyone ... anywhere ... anytime
6003 Dassia Way, Oceanside, CA 92056
West Coast: 760-945-5596
© 2001-2009 Business Basics, LLC