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.