Inventory is a waste that plagues every organization and usually hides a multitude of sins. In fact, inventory has been called the root of all evil. Excessive inventory occurs when material is pushed through a process rather than being pulled by customer demand.
Excessive inventory occurs in all organizations in the form of raw material, supplies, spare parts, work-in-process (WIP), finished goods, and office supplies. Warehouses and valuable space are needed to handle the extra inventory requiring additional investment, resources, and expense and in addition tying up cash.
In manufacturing, inventory is measured in inventory turns which is the number of times a company turns over its inventory annually. It is the financial measure of the cost of goods sold (COGS) in a given period (annually) divided by the average inventory for the same period. A company that turns its inventory more frequently will always deliver more value to customers at a lower cost and higher quality.
Inventory examples in an office environment include the following:
- Orders queued at a fax machine
- Applications, forms, etc. laying in people’s in-boxes
- Work stored in emails, i.e., messages, request for information, files, etc.
- Design projects in queue or in-process
- Line items awaiting processing, purchasing, etc.
Manufacturing examples include:
- Excess stock of anything
- Purchasing excess raw material to take advantage of bulk discounts
- Excess finished goods sitting in a warehouse in anticipation of a customer ordering them
- Obsolete material
- Increased carrying cost due to the need for additional transportation, receiving, stacking, storing, insuring, and monitoring of excess inventory
Some tools and techniques you can use to reduce inventory are:
- kanban
- visual controls
- 5S
- pull systems
- one-piece-flow systems
- vendor-managed inventories
To reduce inventory start first by focusing on reducing and then eliminating WIP. This will happen as you move everything into one-piece-flow cells. Try to get as close as possible to the ideal of one piece of WIP per machine or one piece of paper on a desk at one time. Then work on reducing raw material in parallel with creating flow. Work with your suppliers to deliver every day.
Implementing kanban requires a different thought process that may take some time to adjust too. A traditional MRP system is a high-inventory model, whereas kanban is a low-inventory model. Different kanban cards are used to link the organization together, i.e., customer kanban, conveyance kanban, production kanban, and vendor kanban.
Examples of inventory reduction:
- A company set up its supplier to dial in several times a day to get access to metering fluid levels in storage tanks.
- Using cameras to review inventory levels that are physically sitting on customer shelves.
- Use of vending machines for the distribution of expendables such as work gloves, lubricants, etc.
- A Cleveland area hospital conducted 5S to organize their freezers allocating space for meats, vegetables, etc. This made the pick process more productive and efficient while reducing overall inventory and spoilage.
When trying to reduce your inventory here are some things to consider:
- How can you simplify inventory control through the use of visual control systems or 5S at the point of material use?
- What will be the impact of smaller, more frequent deliveries from suppliers on your inventory control activities?
- Have you thought about better ways to control inventory that require less effort and still achieve the desired results?
- What effect will the use of pull and kanban material replenishment systems have on purchasing and inventory management systems?
- How can you use the newly available time of purchasing and inventory management personnel to improve supplier management?
- What is the impact on the value stream if you eliminate purchase orders or replace them with blanket order agreements?
- What activities will change and what impact will the incorporation of vendor-managed inventories have on your organization?