Inventory Control Management

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MANUFACTURING BASICS & BEST PRACTICES BULLETIN

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Competitive Knowledge for Manufacturing People 

Inventory Control Management
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August 1, 2005

Hi [[firstname]], welcome back. 


INVENTORY MANIA! It could return and in spades. Is 
your company prepared for a dramatic reduction, push-
out and/or cancellation of orders? Not a concern? 
Wait a minute, let me refresh your memory about the 
"lead-time syndrome." 

Olie Wight, the 1960s MRP guru, was the first to coin 
the phrase "lead-time syndrome," it was a term he used 
to described the affliction of industrial greed created 
by a growing shortage of critical parts, components and 
black boxes. He lectured that as companies become 
concerned about part shortages, they place additional 
safety purchase orders to ensure that their supply 
chain is not caught short as demand increases. 

Because supplier capacities for manufacturing these 
parts, components and black boxes have not been 
increased, suppliers have no choice but to extend their 
delivery lead-times. This in turn puts additional 
pressure on buyers to protect their supply chain and 
they respond by placing additional purchase orders. 
Now their suppliers scramble to buy additional capital 
equipment and hire more people to increase capacity. 
This is what I call the front-end of the lead-time 
syndrome.

This self-generating buildup of sales backlog continues 
until the demand for top level consumption starts to 
decline. This creates a devastating reversal of past 
ordering practice and out of nowhere come the order 
reschedules and cancellations. I call this the back-end 
of the lead-time syndrome.

Because of the tremendous inventory problems that this 
syndrome creates, I decided to provide you with some 
ideas, techniques and methods on "HOW TO" aggressively 
control your inventory to avoid falling prey to the 
lead-time syndrome.

Have a nice day, keep the faith, and stay connected. 

Bill Gaw
Business Basics, LLC
Bg@bbasicsllc.com
760-945-5596

P.S. If your company is still struggling with a shop 
order "launch and expedite" inventory control system, 
your first move should be to have your manufacturing 
team study and understand The 8-Basics of Kaizen Based 
Supply Chain Management™ (KBSCM). To learn more about 
KBSCM, copy the below URL to your browser and click 
on go:

http://www.bbasicsllc.com/scm.htm

Inventory Control Management
==========================================
MANUFACTURING BASICS & BEST PRACTICES BULLETIN

Now serving over 9528 subscribers

Competitive Knowledge for Manufacturing People 
==========================================

STOPPING THE FLOW

There are two methods that produce immediate results 
relative to reducing inventories: The first and best 
method is to ship it as customer invoiceable products. 
The second is to stop inventory from arriving at your 
receiving docks. 

The first is fairly straightforward, if you're 
currently scheduling your factory with an ERP/MRP 
system, investigate the benefits that sequential 
production and point-of-use logistics could bring to 
your manufacturing environment. It may be that a few 
crucial, up front changes could dramatically speedup 
shipments and inventory reduction.

The second method is one that most material managers
dread---turning it off. Early in my career, as a 
materials manager, I was told to stop inventory from 
arriving at our receiving docks---it was in the form 
of an executive order. I was directed by my CEO to 
limit our monthly inventory intake to 75% of the 
previous month's inventory relief.

Such simplicity was not in my standard operating
procedures. How do you keep shipments going out 
the door with such a restriction? What about our 
commitments to suppliers? How do we know what to 
stop from coming in? And, what happens if the 
inventory restriction stops parts from arriving that 
are required for outgoing shipments from arriving.

As a materials manger, I was so directed twice and I 
hated it. I always took the position that I was a 
professional and did not need nor want an arbitrary 
dictate to control the execution of my inventory 
responsibility. As much as I detested the dictate, I 
learned that this arbitrary decision actually helped 
focus our inventory reduction efforts and in one case 
saved our company from bankruptcy. 

To cope with INVENTORY MANIA, you will need to 
consider unconventional inventory reduction actions. 
The arbitrary dictate of limiting input to a percentage 
of output while I agree is not a professional approach 
to inventory reduction, it is one that helps to get 
the job done. So before your CEO gives you such a 
directive, self-impose one on your materials team.


ESTABLISHING LOWER LEVEL CONTROL

If your company is measuring inventory effectiveness 
by inventory turnover ratios, chances are that your 
information is too little, too late, and too distorted 
for effective inventory management. Why? First, 
because financial turnover calculations are based on 
past sales and consequently are a trailing indicator 
that communicates false performance data. Second, 
because the data is aggregate, it does little to help 
track problems to their root causes. And third, because 
the data is provided on a monthly basis, planners are 
always in a reactive planning cycle. For planners to 
become proactive, inventory performance data must be 
provided on a more frequent basis and at the part 
number level. 

To effectively reduce inventories, you need to provide 
planners with valid and timely inventory performance 
data. The first thing that needs to be done is to get 
your materials team to work with your financial group 
to develop an inventory performance measurement that 
is predicated on forward requirements at the parts 
level. Such a system is called Days-of-Supply. This 
type of system takes the net requirements generated 
from a master schedule and calculates a daily 
consumption rate for each part. This rate is then 
divided into the on-hand inventory balance for each 
part to arrive at its designated Days-of-Supply. 

Next is to establish a Days-of-Supply target for A, B 
and C items (e.g.10, 30, 60 days). This information is 
then used to create a report that defines excess 
inventory in terms of $$$. It calculates by part number 
the quantity of parts above the Days-of-Supply target 
and multiplies the result by the part's unit cost. A 
simple Pareto analysis of this data will provide a value 
based priority focus for an inventory reduction program. 
It's not the perfect system but it is far superior to 
using turnover ratios.

AN INVENTORY PERSPECTIVE

For simplicity, let's limit our perspective to three 
inventory classifications: Active...inactive...
obsolete. Active inventory can be defined as the 
in-house inventory purchased and manufactured in 
support of the master schedule and in accordance with 
your Days-of-Supply targets. Inactive inventory is 
valid inventory that is in excess of your Days-of-
Supply targets, (often referred to as slow moving), 
and finally, obsolete inventory is inventory that has 
been declared no longer required in support of your 
products. 

With a Days-of-Supply road map as your guide, 
inventory action should begin by identifying all open 
orders that require immediate action. If MRP is calling 
for the release of new orders for parts that are 
targeted for reductions, an analysis is required to 
determine what is wrong with either the MRP ordering 
parameters or the Days-of-Supply calculation. If there 
are excess orders placed, suppliers must be contacted 
to stop shipments until a reassessment of requirements 
can be made. And, finally where open purchase orders 
are no longer required, supplier shipments must be 
rescheduled and/or canceled. At this time, key supplier 
on-site physical inventories may be in order.

Once the open purchase order situation has been 
brought under control, the next step is to evaluate 
your on site inventory situation. Obsolete inventory 
needs to be isolated from all other inventories and 
written off the financial books in accordance with 
legal and ethical practices. It has a direct negative 
effect on the company's profitability as it directly 
impacts the bottom line. Consequently, it is important 
that prior to inventory being declared obsolete, it be 
reviewed for: Rework into useable inventory, resale 
back to suppliers, sales to customers as heavily 
discounted spare parts, and engineering uses. 

Inactive inventories, especially slow moving 
inventories should also be reviewed for innovations 
for consumption but unlike obsolete inventories, cost 
effectiveness needs to be taken into account during 
such a process.

KAIZEN BASED SUPPLY CHAIN MANAGEMENT™

In the future, more than at anytime in past, the 
management of active inventories will significantly 
impact profit and loss for many manufacturing companies. 
Yes, inventory-carrying costs should be coming down, 
but blindly carrying excess inventories as a means of 
coping with ineffective production practices will be 
the downfall of many companies as we move further into the 
21st century.

What are leading manufacturers doing about inventory 
management? They're moving from ERP/MRP shop order 
"launch and expedite" systems to sequential production 
and point-of-use logistics. Some of these companies 
have reduced their inventories by 50% while increasing 
their on-time delivery performance. 

How are they doing it? By moving from the "Push" 
system of lot size production to the "Pull" System of 
flow technology. We call it Kaizen Based Supply Chain
Management™ (KBSCM). KBSCM incorporates a set 
of proven principles and techniques that can optimize 
supply chain performance and help companies to 
consistently exceed performance expectations. The 
eight-targets of KBSCM provide the foundation for 
world class logistics and the foundation for the lean 
enterprise.

If your team is still struggling with an ERP/MRP shop 
order "launch and expedite" system, we have developed 
a unique e-tutorial that will provide them with the 
strategy and tactical plan for implementing Kaizen 
Based Supply Chain Management™. If on the other hand, 
your materials team is in the process of implementing 
point-of-use logistics and/or strategic outsourcing, 
this tutorial will help them boost their development 
and implementation efforts to a higher level. In either 
case, this e-learning, CD-Tutorial 
will help your team to: 

* Develop a winning materials strategy with relevant 
balanced scorecards
* Optimize your company's MRP and lean manufacturing 
performance
* Eliminate end-of-month chaos...achieve linear 
production ...increase bottom-line contribution
* Implement "Quick-hitting" Kaizen to move from 
"firefighting" to proactive materials problem 
solving 
* Get the right parts to the right place at the right 
time
* Reduce operating costs and active inventories 

This "Kaizen Based Supply Chain Management" CD-
Tutorial features:

* Self-paced, e-learning for anyone...anywhere...
anytime
* A complete 2-day Supply Chain seminar on CD-ROM
* Case studies of a real-world KBSCM success story
* 171 reproducible PowerPoint slides with expert 
commentary and annotated footnotes
* Hard copies of the KBSCM Train-The-Trainer Manual 
and the powerful supplier "ISO 9000:2000 e-Checklist"

If you're interest in ordering or learning more about 
this unique e-learning tutorial, simply copy the below 
URL to your browser and click on go: 

http://bbasicsllc.com/scm.htm

Inventory Control Management

======================================

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