| INTRODUCTION
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| | reduce the set-up portion of overall run
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| | time is to increase lot sizes.- Labor
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| INVENTORY is the largest single asset on
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| | Content - Reduction of direct labor has
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| the balance sheet of many manufacturers
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| | been one of the few bright spots in
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| and distributors. It is usually the most
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| | American productivity improvements over
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| expensive asset to own and maintain as
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| | the years. The area to look at is labor
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| well, with estimates of carrying costs
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| | variances, due to down time, quality
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| typically running 25-30 cents or more on
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| | problems, material shortages, etc., and
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| the dollar annually. Therefore, any
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| | in indirect labor. In short, reduce the
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| useful suggestions to optimize INVENTORY
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| | overhead due to other factors increasing
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| investment and associated expenses would
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| | labor.The preceding sections should give
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| be most valuable.The paper addresses how
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| | you a better idea of the significance of
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| to manage INVENTORY investment to optimum
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| | INVENTORY, and what affects it. If you
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| levels, which means a reduction or major
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| | have been reading carefully, you have
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| redistribution of it in most companies.
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| | already seen opportunities for reduction,
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| Optimal INVENTORY levels come down as
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| | since knowing the question is frequently
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| management makes the operation more
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| | half of the answer. The next section will
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| efficient by improving processes,
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| | amplify and clarify some of these...
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| reducing lead-time, managing supply and
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| demand better.One can't "attack"
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| | HOW TO REDUCE INVENTORY
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| INVENTORY effectively, but only its
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| underlying causes, which will be
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| | Advice To The Boss
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| discussed. Most INVENTORY "problems" are
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| merely a reflection of management,
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| | Let's now discuss some specifics for
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| design, process or operational problems.
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| | helping to tame the beast. To begin with,
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| Current literature on Just-in-Time and
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| | let's first set up a program to do this
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| World-Class Manufacturing addresses how
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| | with little initial out-of-pocket costs,
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| inventory reduction is a by-product of
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| | a fast payback and subsequent return on
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| doing things right the first time.
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| | investment!Your controller will love
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| | this.It sounds almost ridiculously
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| WHAT IS THE SIGNIFICANCE OF INVENTORY?
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| | simple, but there is a sequence that one
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|
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| | ought to address inventory reduction
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| Why is INVENTORY "bad"?
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| | activities in:- Don't bring it in. An
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|
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| | ounce of prevention is worth a pound of
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| INVENTORY is a major capital investment
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| | cure. Don't order what you don't need.
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| affecting cash flow and profitability.
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| | For existing commitments, cancel or
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| Inventory comprising one-third to
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| | reschedule where practical.
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| one-half of companies' total assets isn't
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| | - If you already have it, ship it. Work
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| unusual. There are significant expenses
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| | on eliminating constraints to getting
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| associated with possessing it. INVENTORY
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| | product shipped. Sell excess inventory at
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| reductions can do more to improve ROA
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| | full price/cost, if possible.
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| (Return On Assets) in most companies than
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| | - Try to rework or substitute. Attempt
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| most other factors. For instance, a 50%
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| | to rework, retest inventory, try to
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| reduction inINVENTORY will typically
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| | substitute it in place of parts that have
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| account for a 10-25% improvement in ROA!
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| | been specified.
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| Certain industries, such as aerospace and
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| | - Salvage it for cash at a reduced rate
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| defense, widely believe that INVENTORY is
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| | - Dump it. If all else fails and it's
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| a non-issue, because they receive
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| | really not needed, throw it away, because
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| "progress payments" from customers or
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| | the tax write-off and lower holding costs
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| because they "write-off" job-end
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| | alone will make it worthwhile.Try the
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| variances and leftover "residual"
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| | specific recommendations contained in the
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| inventories. The facts are that these
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| | sections following...
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| companies need to watch inventories even
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| more closely but first they need to be
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| | Short-Term Activities
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| made aware that there are INVENTORIES to
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| watch.Excess inventories subject the
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| | Since it is an "established" fact that
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| manufacturer to additional liabilities
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| | most managers think "only of short term
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| for things such as obsolescence, rework,
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| | profits," let's cover the stuff we can do
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| storage charges, etc. Most of these
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| | right away first. The author doesn't
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| ultimately end up "written off" and are
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| | believe that most top managers really
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| applied to "overhead", but this
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| | believe this but knows that in order to
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| eventually raises the overhead rate,
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| | keep a business going and to keep your
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| which increases costs of doing business,
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| | job, you do have to show short-term
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| which raises prices, which makes
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| | results.Assign responsibility
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| companies less competitive.Carrying Costs
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| | accountability for inventory reduction
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|
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| Let's look at what goes into INVENTORY
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| | Not just to the materials people, but
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| "cost of ownership", frequently called
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| | production, sales and engineering also.
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| the "carrying cost" and expressed in
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| | This should probably be a team, with ONE
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| terms of percent cost of INVENTORY
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| | person clearly in charge, who should a
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| valuation per year of ownership. For
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| | vice president, rather than a summer
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| example, a 25% carrying cost would
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| | intern.Get Control of The Checkbook
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| indicate that it costs about $.25 to own
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| |
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| each $1.00 of INVENTORY each year. These
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| | This is one of the first things that
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| costs consist of:- Cost of money - The
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| | "turnaround artists" always do to rescue
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| cost of capital to the company or, in
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| | a foundering company. Insist on getting
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| some cases the "opportunity cost" or
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| | justification for all new INVENTORY
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| return that could be earned on the money
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| | expenditures - especially "A" items (most
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| by applying it productively elsewhere.
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| | expensive ones). Sign all major approvals
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| The cost of money has ranged anywhere
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| | and checks yourself. This has an amazing
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| from 6% to 18% in the last 25 years.
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| | and rapid effect on INVENTORY and has
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| Obviously, cost of money has a very
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| | been practiced first-hand by the author
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| significant impact on investment
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| | and customers.Use this process to force
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| strategy.- Obsolescence - The risk of
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| | those responsible to justify what they
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| INVENTORY never being used, or needing
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| | are doing and why and to think through
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| rework to make it usable, needs to be
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| | these policies and their enforcement in a
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| factored into the cost of owning
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| | new light - that of investment
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| INVENTORY. In theory (and practice), the
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| | management. While you are doing this, use
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| larger the INVENTORY is, and the longer
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| | it to study the dynamics of INVENTORY
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| it is held, the more likely engineering
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| | planning systems and to decide what
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| changes, customer preferences and
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| | INVENTORY investments should be and what
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| technological changes will render that
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| | problems really are. You should develop
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| INVENTORY unusable.- Shrinkage - A
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| | a matrix of inventory days coverage
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| portion of INVENTORY becomes unavailable
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| | targets by commodity by product line by
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| to the owner due to loss, damage, theft
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| | planner. Then cost it out and track
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| or spoilage. The longer INVENTORY is
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| | actual performance. Be sure to track
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| there and the more there is, the more
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| | commitments and planned amounts.Conduct
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| likely this is to happen. Steps to
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| | basic indoctrination of people affecting
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| prevent it only raise carrying costs in
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| | INVENTORY most dramatically--planners,
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| other areas, such as security, air
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| | buyers, production management, sales,
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| conditioning, better control systems,
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| | customer service- establish some
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| recruiting policies, etc.- Quality
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| | temporary "edicts" and enforce them until
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| Factors - Allowances for yield,
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| | more formal policies/procedures can be
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| attrition, scrap and rework. This is
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| | established/changed later on. Make sure
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| really more of a function of the process
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| | you know what you are doing before you
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| than the amount of INVENTORY invested and
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| | establish these. Beware of mindless
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| is more related to throughput, but is
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| | "across the board reduction" edicts that
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| usually expressed as part of the
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| | could result in hurting service and
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| aggregate INVENTORY carrying cost.-
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| | profits.Have your people perform a quick
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| Technological or Price Obsolescence -
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| | "thumbnail" INVENTORY analysis
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| Prices don't always go up. In fact, in
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| industries such as electronics, prices
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| | Start with items currently on order, in
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| often plummet due to constantly improving
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| | process, or being planned. As Al Agosti
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| designs, product and process technology
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| | of IQR says, "first stop the bleeding.
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| improvements. Therefore, it is desirable
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| | Then take away the knife." It always
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| to minimize inventories in high-risk
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| | amazes me that companies will spend a
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| areas.- Taxes - There are two dimensions
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| | fortune to analyze INVENTORY, which is
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| to this: 1) In some areas, a tax is
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| | already there, but ignore huge impending
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| levied on inventories, so the more
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| | expenditures, which they can do something
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| INVENTORY, the more tax is paid. 2)
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| | about before disaster strikes. To do
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| INVENTORY is regarded as an asset by most
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| | this, perform a quick "ABC" analysis,
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| accounting and tax rules. Therefore,
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| | identifying only the expensive ("A")
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| building large inventories shows
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| | items initially. In most companies, these
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| "profits" and profits are usually taxed,
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| | are only 5-15% of the total items and can
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| usually by multiple government
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| | be leveraged to provide quick benefits in
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| entities.- Insurance - The cost of
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| | terms of investment management. After
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| carrying insurance on INVENTORY needs to
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| | this has been done, get together with the
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| be considered, as well as insuring the
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| | management team, do a quick brainstorm
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| space, equipment, people and other
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| | and put together a Pareto chart, showing
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| resources needed to control it.- Space
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| | problems in descending order of
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| - Costly storage space sometimes occupies
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| | importance.Start with a calculation of
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| 25-30% of the total facility, when one
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| | what is actually needed:
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| considers raw material warehouses,
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| | - Go through all the arguments of why
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| stockrooms, work-in-process storage,
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| | people need more, sooner and then get
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| receiving, shipping, outside warehouses,
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| | people to agree on how they can avoid
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| MRB and residual storage areas. INVENTORY
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| | doing that.
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| reduction campaigns frequently help
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| | - Cut new INVENTORY scheduled to come in
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| companies avoid the need to move to large
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| | whenever possible.
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| facilities, or permit them to shut down
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| | - Determine right away what can be
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| or cut back existing facilities.-
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| | cancelled, rescheduled, returned to
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| Manpower - All of this INVENTORY needs
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| | vendor for credit or sold for salvage.
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| people to order, receive inspect, record,
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| | Balance the costs of doing this against
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| move, count, store, retrieve, post it to
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| | the relative benefits.
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| the ledger, etc. People are the largest
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| | - Work on getting product shipped and
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| or second largest expense (behind
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| | billed to get INVENTORY relief.
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| material) for most manufacturers.-
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| | - Try to match INVENTORY input closer to
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| Record Keeping Systems - Software,
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| | ship date (reduce lead times and carrying
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| procedures, equipment and paper must be
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| | time)
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| used to stay on top of INVENTORY.-
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| | - Determine if excess/obsolete finished
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| Material Handling/Storage Equipment -
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| | goods can be put on promotion or "fire
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| Conveyors, fork lifts, bar code readers,
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| | sale." Do so if appropriate.
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| scales, AS/RS, trucks, carts, bins,
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| | - Lean on customers who have cancelled
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| racks, shelves must all be purchased,
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| | rescheduled orders to your detriment. Try
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| leased, maintained and cared for.-
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| | to get them to pay for part of these
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| Physical Inventories, Reconciliations -
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| | costs, accept the INVENTORY, or use these
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| Must be conducted to ensure that
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| | incidents as levers to improve future
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| inventories are properly accounted for
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| | terms.
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| and maintained.- Transportation - Must
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| | - Look for obvious bottlenecks in the
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| be provided to move INVENTORY in and out
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| | planning and processing of orders such
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| of the facility, to vendors, within the
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| | as:
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| facility to different workstations and
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| | - Amount of lead-time and queue
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| storage areas.- Energy - Heat, light,
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| | permitted.
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| humidity control, air conditioning,
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| | - Lot size and cycle times.
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| refrigeration and fuel must be consumed
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| | - Scheduling assumptions
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| to make all this happen.
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| | - Major bottlenecks caused by improper
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|
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| | manning, defective or poorly maintained
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| WHAT AFFECTS INVENTORY?
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| | equipment, etc.
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|
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| | - Build-ahead and buffer policiesSet
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| One must "know thine enemy" to
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| | goals for inventory down to the level of
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| successfully deal with it. Now that we've
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| | managers and planners
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| discussed the significance of INVENTORY,
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| |
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| let's determine why it exists and what
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| | Do this "rough cut," for "A" items
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| makes it go up or down.INVENTORY is not
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| | first-- more detailed analysis comes
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| always evil. It usually exists for a
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| | later. Set targets by planner, buyer,
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| reason, however a reason is not always
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| | product line or any other meaningful
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| true justification. INVENTORY is
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| | political or production entity that will
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| frequently kept as a buffer and masks
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| | foster accountability, which you will
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| other problems.Major Reasons for
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| | want to later measure results against and
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| Inventory
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| | enforce.Go for the "easy wins" with the
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|
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| | best payback first. Don't fall into
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| - Net Demand - Demand derived directly
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| | "paralysis by analysis." You can do more
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| from customer requirements or internal
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| | in the first few months than you
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| demand.- Pipeline - INVENTORY needed to
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| | think.Establish formal problem solving
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| sustain the process over its cumulative
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| | methodology
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| lead-time through all operations and
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| |
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| holding points. Also included in the
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| | Use task teams, quality circles, natural
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| pipeline are paperwork operations, such
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| | work groups, tiger teams or whatever
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| as billing, which could increase
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| | they're calling them this month and have
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| inventory if not done timely
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| | these groups identify major problems,
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| enough.- Quality - Yield, attrition,
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| | opportunities and then address the
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| scrap, rework allowances impacting amount
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| | solutions.Perform "stock location audit"
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| of inventory and time inventory is in
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| |
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| process.- Lot Size - Lot size
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| | Simply go out to the shop and write down
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| considerations include vendor minimum
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| | only the identity (part number) and
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| order quantities, raw material and
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| | location of all storeroom and/or
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| manufacturing lot sizes due to setup and
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| | work-in-process and other inventories,
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| other nonrecurring, lot-related cost
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| | then compare to your records. Don't even
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| considerations and run time impact
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| | bother to count it (that's what takes the
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| considerations.- Supply Buffer - Extra
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| | longest).Take your "hits" for inventory
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| INVENTORY carried as a hedge against
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| | early
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| unreliability of vendor or factory
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| |
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| schedules, inaccurate records,
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| | As soon as you have some idea of the
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| unpredictable quality or other
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| | magnitude of excess/obsolete inventory,
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| fluctuations tending to reduce
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| | work on getting financial and general
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| reliability of providing materials on
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| | management to "write it off", in order to
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| demand.- Demand Buffer - Extra INVENTORY
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| | get the tax benefits, where
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| planned due to uncertainty of the true
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| | favorable.That depletes my INVENTORY of
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| requirement need date or quantity, which
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| | quick fixes. Now it gets a little
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| may vary due to poor forecasts,
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| | harder...Inventory Analysis/Target
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| transportation problems, or various
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| | Setting
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| contingencies.- Hedge - Inventory
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| |
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| acquired for speculative purposes with
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| | Joe Barcy of Inventory Performance
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| the exception that prices will rise
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| | Systems calls it the "Divide and Conquer"
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| later, justifying the earlier investment
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| | approach. What he meant is that a company
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| risk.Other Factors Affecting INVENTORY
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| | has to bring decisions and measurements
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|
| |
| | down to the level of accountability and
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| The reasons given above are those that
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| | below (to the person/part/number/cost
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| apply for a given set of circumstances or
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| | element level) and also aggregate this
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| basic assumptions about design,
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| | information up to meaningful levels for
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| processes, etc. The factors below are
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| | analysis by various levels of
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| more basic and can have a more profound
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| | management.First, group INVENTORY items
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| long-term effect on INVENTORY:- Product
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| | at the part number level into categories
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| Design - A product design that minimizes
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| | by responsible planner and/or buyer and
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| the number of parts, picks easily
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| | commodity. Do this in descending dollar
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| obtainable materials and components,
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| | sequence, preferably by projected usage
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| lends itself to manufacturing with the
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| | (historical usage, if that's all you can
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| simplest possible facilities and
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| | find, but it has its disadvantages). If
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| equipment will minimize INVENTORY costs
| |
| | you don't have the ability to do this by
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| over the long pull.- Materials Supply -
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| | computer, do it by hand for the A items
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| Specifying quality materials, well suited
| |
| | first - look up production plans, sales
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| to the process and application, with easy
| |
| | forecasts and buy cards, then extend
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| availability, low prices, reliability of
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| | quantities by approximate costs. Use
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| supply and short response time are all
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| | purchase history, quotes, accounting
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| big advantages that can facilitate
| |
| | department support, or whatever you can
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| INVENTORY reduction. Having the best
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| | get. Getting it done fast and
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| sources for key materials or changing
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| | approximately is much more important than
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| existing arrangements can do a lot to
| |
| | carrying it out to four decimal places.
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| help minimize inventories.- Processes -
| |
| | Remember: money is being wasted while you
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| Good, reliable processes will help reduce
| |
| | delay!Analyze INVENTORY on the following
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| INVENTORY, because they will help reduce
| |
| | suggested parameters:
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| scrap, rework and attrition, and also
| |
| |
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| provide a more reliable flow of supply,
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| | 1. ABCD classification (by annual usage
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| which will help reduce buffer stocks,
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| | value)
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| safety stocks, safety lead time INVENTORY
| |
| | 2. Turnover/investment performance
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| and eliminate much accumulation of
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| | 3. Highest dollars committed
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| INVENTORY on the production
| |
| | 4. Highest dollars in INVENTORY
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| floor.- Facilities Layout/Design -
| |
| | 5. Most longest period coverage planned
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| INVENTORY may be increased significantly
| |
| | available
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| if this is not done properly. Widely
| |
| | 6. Items with coverage/commitments
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| scattered plants, multi-story buildings
| |
| | greater than policyOnce you have all this
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| with inadequate material flow
| |
| | data, set targets, measure and control
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| capabilities and processes distributed
| |
| | performance.Data Accuracy Program
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| over many different departments, all
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| |
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| increase the amount of part travel,
| |
| | Set up a formal, ongoing program to
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| possibility of loss, delays and need for
| |
| | clean up and maintain accurate records
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| manpower and extra equipment to support
| |
| | for inventory, bill-of-material, routings
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| the process.- Service Objectives - The
| |
| | and planning data. See my article:
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| required response time and reliability of
| |
| | Inventory Accuracy in 60- Days!Policies
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| service to customers has a big impact on
| |
| | Procedures
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| INVENTORY costs. For instance, if
| |
| |
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| industry standards allow making to
| |
| | Write/update policies and procedures to
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| customer specifications from scratch,
| |
| | guide your operation. Conduct an ongoing
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| there may be less need to maintain
| |
| | education and training program to ensure
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| finished goods inventories. If customers
| |
| | that people know what to do and how to do
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| or distributors carry stock, that reduces
| |
| | it.How to Optimize inventory Levels
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| pressure upon the supplier to maintain
| |
| |
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| inventories and reduce them
| |
| | If you're expecting a neat formula here
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| quickly.- Planning/Control Systems -
| |
| | to plug in your numbers, you're sadly
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| Systems employed to manage supply and
| |
| | mistaken. It doesn't exist and if someone
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| demand and control the production process
| |
| | tells you it does, it probably doesn't
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| have a large effect on INVENTORY.The
| |
| | work. Here are a few ideas that have
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| systems we refer to are:
| |
| | worked for me:- Estimate target days
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|
| |
| | coverage using the team's best judgment
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| - Front End
| |
| | for each commodity/product line.
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| - Forecasting
| |
| | Obviously there will be some exception
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| - Production Planning
| |
| | items.
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| - Master Production Scheduling
| |
| | - The "one less" approach: Try reducing
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| - Capacity Requirements Planning
| |
| | inventories in doubtful areas a little
|
|
| |
| | bit at a time. Pull back when you get in
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| - Engineering
| |
| | trouble or when you spot a constraint.
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| - Bill-of-materials
| |
| | Continue after you have relieved the
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| - Change Control
| |
| | constraint(s) some.
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| - Routing/Process
| |
| | - The lead time/cost build up chart:
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|
| |
| | Construct a graph per product showing the
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| - Material Planning
| |
| | time phased cost buildup in cost of goods
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| - Time Phasing Tools
| |
| | sold amount. Have the team meet to see
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| - Requirements Calculations/netting
| |
| | where lead times, lot sizes, attrition
|
|
| |
| | factors and buffers can be reduced.
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| - Shop Floor Control
| |
| | - Modeling tools, Advanced Planning
|
|
| |
| | Systems (APS), have some potential for
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| - Data Integrity
| |
| | optimizing certain situations, but they
|
| - Bill-of-material
| |
| | have been a bit oversold and are not easy
|
| - MPS
| |
| | to set up and maintain.Key Points
|
| - INVENTORY, PO, RM, WIP, QA, FG
| |
| |
|
| - ProcessCost
| |
| | To summarize some important points for
|
|
| |
| | your future reference:- Inventory
|
| - Material Costs - Material cost
| |
| | reduction is one of the cheapest ways to
|
| increases (obviously) raise INVENTORY.
| |
| | improve profits
|
| Lowest unit cost does not necessarily
| |
| | - Get control of the "checkbook"!
|
| mean lowest cost of doing business, or
| |
| | - Use Pareto's 80-20% principle to
|
| even lowest cost of material, for that
| |
| | leverage your time and investment -
|
| matter. These can be deceptive, because
| |
| | choose your battles - biggest bang for
|
| as material costs go up, turns do not
| |
| | the buck.
|
| decrease, because they are being measured
| |
| | - Once of prevention = pound of cure
|
| on a new and higher base.- Overhead -
| |
| | - Set targets - "divide and conquer"!
|
| Burden rates of 300%, 500% or more are
| |
| | - Force accountability- Set up a
|
| not uncommon. Having a high overhead rate
| |
| | responsible team- hold it accountable.
|
| is not "bad", only total costs that are
| |
| | Include in performance appraisals,
|
| too high are "bad". Your overhead rate is
| |
| | incentives
|
| a reflection of cost distribution and
| |
| | - Question assumptions - eliminate waste
|
| accounting techniques as well. However,
| |
| | - Doing business right will
|
| if overhead is going up without attendant
| |
| | automatically reduce excess inventory in
|
| drops in other areas and if other
| |
| | most cases, but still needs monitoring
|
| industry competitors are doing better,
| |
| | and control.This article is also
|
| then it's "bad."- Setup and Other
| |
| | available on our website: PROACTION -
|
| Nonrecurring Costs - In most companies,
| |
| | Generating Best Practices. It is an
|
| these are either part of direct labor or
| |
| | excerpt of a paper originally written by
|
| buried in overhead. I broke them out
| |
| | George Miller, Founder of PROACTION. It
|
| separately here because of their
| |
| | has been modified and updated by Paul
|
| differing characteristics. Many
| |
| | Deis, PROACTION CEO.
|
| manufacturing people feel that the way to
| |
| |
|
