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Lean Manufacturing Articles


Finally, we can aggregate our inventory by relative im­portance. A common technique is known as ABC, Pareto, or the rule of 80-20 (or possibly 90-10), and the most common criteria is annualized cost. For example, we may find that 10 or 20 percent of our raw material items rep­resent 80 or 90 percent of our total annual cost of pur­chases. We would label these "A" items. Another 20 ot 30 percent might be "B" items and the balance of our inventory, maybe 50 percent, would be "C" items. Some companies add a "D" category for obsolete or discon­tinued items. This allows us to set different rules for the different categories. In cycle counting, for example, we might say that "A" items will be counted once every month, "B" once a quarter, and "C" once a year.

Annualized cost, which is unit cost times annual con­sumption, may not be the best criterion to use. You may find that lead time or sole source better fits your needs. I used to use special color paper in my copier. Only one supplier offered what I wanted and the cost was high. Colored paper was my "A" item. Toner cartridges must fit my copier, but they are available from several sources, so I classify them as "B" items. I can get generic staples from any office supply house and the price is very com­petitive. Staples are my "C" item.


We have been talking about types and functions of in­ventory, all topics within the traditional scope of inven­tory management and control. But inventory decisions are made by people throughout our organization. Let's talk about some common inventory decisions.


Accurate forecasting is important regardless of our in­ventory strategy. In make-to-order, we can get the best service and price if we provide our suppliers with planned purchases. With assemble-to-order, we need to plan and build semi-finished inventory. Make-to-stock requires us to produce the finished goods prior to re­ceiving the customer orders. All depend on an accurate and timely forecast.

My handouts are made to stock. I recorded atten­dance from my past presentations, usually at chapter dinner meetings, discarded an atypical outlier, then used linear regression to forecast demand. As you can see, an error in forecasting can have devastating results when it comes to customer service.

Product Design

The design of our product can have a significant im­pact on our inventory levels and, therefore, on our cus­tomer service. Minimizing the risk of spoilage, shrinkage, or damage will help everyone in the supply chain, and maximizing the usage of standard components will re­duce costs and open multiple sourcing opportunities.

My original version of the handout used different page colors for each topic. When I switched to a generic white paper, I had fewer raw material part numbers to manage, which simplified my work, improved my fore­cast accuracy, and allowed me to qualify for some quan­tity price breaks. Further, generic white is available from a large number of suppliers. This helps me negotiate better prices while ensuring availability. I used concur­rent engineering, which allowed me to select paper ven­dors while the text of the handout was still being written. I carefully documented the change in my bill of materi­als (BOM) so my materials requirements planning (MRP) system would calculate orders for white paper rather than the old colored papers.

To Be Continued

For balance of this article, click on the below link:

Lean Manufacturing Articles and click on Series 14

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