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Basic Business Cents: Optimizing inventory

Excess inventory is evil; not much good can come of it.

It can become obsolete, damaged, lost, pilfered, and cause costs such as interest on capital invested.

Management even has a name for it, called shrinkage, which doesn't sound so bad.

Inventory of any type can be a source of waste in organizations. Inventory requires capital investment, storage space, and people to handle and keep track of it.

In manufacturing organizations, inventory includes raw material waiting to be processed, in-process inventory, and finished goods inventory.

Some years ago, I worked for a manufacturing company who was experiencing an inventory turn of three times a year and struggling to get to four. It was not something we were proud of, but we rationalized that our product was complex.

At that time, I visited a Nissan automobile assembly plant in Japan. The plant manager was conducting the tour and I took advantage of the opportunity and asked him what his inventory turns were.

He replied, "Oh that is very difficult to determine, but at any time we have four hours of inventory in the plant."

Think of it, we were struggling to get four turns a year and he was experiencing two turns per day!

I noted that one wall in the plant was open to the outside and trucks were lined up in front unloading from their sides and the parts were going straight into production. Their suppliers were all located nearby and were delivering parts at the exact time they were needed. Obviously, there was close computer contact between Nissan and their suppliers. They were using a "pull system" of production where a particular product or part is ordered or made to replenish what was just used.

For service organizations, the number of skilled workers available is often the key inventory issue. Extra inventory can result in higher costs with no improvement in performance for an organization. Understanding where the inventory is stored in the system, and then taking action to eliminate the excess can reduce the costs associated with the maintenance of inventory.

One approach to minimizing the costs associated with inventory is to use historical data to predict the demand, collect data, and continue to improve. Using these predictions to optimize lead times and order quantities will lead to replenishing inventory in an economical manner.

Another approach is to simplify the work processes. Many features are added to products and services over time to accommodate the desires and wants of different customers and different markets. Each of these features makes sense in the context of a particular customer at a particular time, but taken as a whole, they can have tremendous impact on inventory costs. A review of current demand for each feature and consideration of grouping the features can allow a reduction inventory without loss of customer satisfaction.

Other approaches to inventory reduction are to reduce multiple brands or suppliers of the same items. If an organization uses more than one supplier for an item, inventory costs will usually be higher than necessary since it results in additional stock. Some organizations believe they need to have back-up suppliers in case of something happening to the single-source supplier. This simply calls for a close relationship with the supplier and statistical data to prove their processes are capable of meeting your needs.

Hunting and eliminating evil excess inventory is a continuing endeavor. It is like an on-going treasure hunt with rewarding results.

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