Inventory Improvement Practices

When discussing inventory levels there is a lot of talk about customer service levels, vendor relations, vendor reliability, work in process, inventory turns, and inventory dollars.  These are nice to discuss and provide targets for improvement, but don’t get to the real meat of the problem.  I contend, what is needed is a Part # by Part # Analysis if you are going to impact your inventory and cash positions, and maximize your customer service levels.  Notice this is not titled Inventory Reduction Practices, while Inventory reduction will be a byproduct of the analysis, in some cases it may make sense to increase your inventory levels.  Increased customer demand, vendor reliability, and long lead times may actually cause inventory levels to increase to the optimal inventory level.

When performing a Part by Part Analysis most of the information is already being gathered by an inventory management system.  The real issue is the accuracy of the data, and the incorporation of any future forecast and trend data.  Here are the steps to adhere to do a thorough inventory analysis.

1. Identify Parts to Analyze

• a. Each buyer should target 300 – 500 items to analyze over the next year
• b. Part Numbers should be chosen from

1. High Dollar Volume
2. Excess/Obsolete Inventory position
3. Changing usage rates over the past 6 months

• c. The analysis should ultimately lead to an action plan on each part #, and what your target inventory value should be.

2.      Gather Information you need to know about the part

• a. Cost/unit
• b. ABC classification
• c. Usage rate over the past 6 months
• d. Current Inventory level in Pcs.
• e. Current Inventory $$$
• f. Safety Stock
• g. Current Inventory Target Stocking level (system calculated)
• h. Current Inventory Target $$$
• i. Vendor(s)
• j. Lead time in days
• k. Transit time
• l. Delivery frequency D/W/M
• m. Minimum Order Qty
• n. Std Packaging size
• o. Delivery Performance (% on time)
• p. Quality Performance (% rejects)
• q. Verify data from system

3.      Correct any errors found in the information gathering process.

4.      Identify areas for improvement.  Ask yourself these questions to set inventory targets.

• a. What is your current inventory level?  Is it too high?  Is it too low?  Can it be improved?
• b. How many times does the inventory turn?  Our goal is to increase to 7 turns this year.  10 should be the minimum target if we are going to reach that level.
• c. If we are not meeting current inventory objectives, what are the top 3 reasons why we are not meeting the target?  What are the barriers we are facing?
• d. Can the item be set up on a pull system?
• e. Is the part number obsolete?  How can we eliminate?
• f. Is the part slow moving?  How can we reduce inventory?
• g. Is demand increasing or decreasing?
• h. How often should this part reviewed? (volatility)
• i. What can be done to reduce supplier lead times?
• j. Are there substitute parts?
• k. Can lot size be reduced without affecting price?
• l. Can we get more frequent deliveries?
• m. Has the item moved in the past 6 months?  Can it be returned?  Can it be discounted?

5.      Implement any improvements identified.  Set a time line for completion.

6.      Measure results monthly and report.

7.      Once goal is met, is there more opportunity for improvement? Repeat process.

As more part by part Analysis’ are completed, you will be able to chart your biggest problem areas.  This data can be used to set purchasing improvement objectives for the future. Policies and processes applicable to our specific business will be identified, and problems will start to be identified before they occur.  Eventually inventory and working capital will be optimized, and subtle adjustments will be required as the market changes.

Most experts believe, a Lean enterprise program will only be effective with an undying willingness for it to succeed from top management, and most failures are caused by top management’s failure to drive a lean culture throughout the organization.  Oh it starts off great.  Management announces we are going to have a lean program, there may be a kick-off celebration, a lean committee is formed, and target areas are identified for lean initiatives.  So why does it sputter.  I say the problem is much more basic than lack of top management support.  It comes down to strategy or a lack of a strategic plan.  Every company is unique, has its unique problems, and a solution for one company may not be the best for another company.  What are the company’s financial objectives?  What are the company’s market objectives?  If the people who do the work in the organization don’t understand what these are, how can they be expected to make informed decisions and engage in lean initiatives that make a difference?

We at L&H are living through an example of this currently.  Our largest supplier developed a strategy that they had to increase capacity in order to meet customer demand, and that was more important than keeping prices low.  The organization has succeeded in reducing its lead times, through expansion, but we have seen unprecedented price increases even in these times with an uncertain economy.  The point is, the organization had a strategy, focused its resources at attaining the goal, achieved that goal, but at the expense of other market considerations.  Time will tell if that was a good strategy.

Where do your strategies come from?  They come from the people who will benefit from your products and services.  Notice I said will benefit.  You have your customers, and it is important to keep them happy, but how can get your competitors customers.  That’s what separates you from the competition.  Is it lead-time, price, quality, exceptional customer service, product features, engineered solutions, on-time delivery, time to market, or some combination?  Decide what you want to accomplish and run with it.

You can’t form these market strategies in a vacuum.  This is where the financial end of the business also must be considered.  What are your financial objectives?  These must be considered when forming your market strategies.  If your goal is to have the lowest price, you better have an exceptional cost reduction program in place.  If engineered solutions is your goal, you better be priced to cover the cost of a large engineering staff. 

Don’t make the strategic plan too complex.  Remember you only have limited resources to make things happen, and if you have too many objectives, the same objectives will be competing for the same resources, and you may not get the results you need.  Make sure objectives are measurable.  Don’t be alarmed if the measurements show poor results.  Remember this is a process improvement program, so the trend is the important thing.  Don’t expect instantaneous results.  Expect steady methodical and long lasting results.  Empower the people to make improvements.  Results will be long lasting if the people doing the job embrace the changes.  The goal is not to just meet business objectives, but to develop leaders as well.