Other Voices: 4 steps to get inventory costs back on track

Editor’s note: The following column by William Crane, founder and CEO of IndustryStar, is part of Modern’s Other Voices column, a series featuring ideas, opinions and insights from end-users, analysts, systems integrators and OEMs. Click here to learn about submitting a column for consideration.

An organization that hasn’t undergone a lean journey should expect to generate up to 50 percent reduction in inventory costs on average. However, lean enterprises that have undergone a transformation, or haven’t audited their inventory systems and processes in a while could unlock similar cost reductions.

Further, inventory cost reductions can be realized when organizations undergo a lean supply chain transformation that extends beyond their four walls and encompasses their supply base to allow them to attain a lean extended enterprise.

Commonplace business challenges that will impact plans need to be understood and accounted for to accomplish results like the above. Deeply understanding of the many variables, interdependencies, and real-world risks will allow you and your team to succeed in realizing sustainable inventory cost reduction.

4 Actions to Reduce Inventory Costs

1. Define goals

   Invest the time upfront to train your team on the inner workings of the variables that impact inventory costs, this will ensure once inventory levels are reduced, they are preserved. Breakdown whether the organization wishes to reduce inventory; cost, type, or location.

   Set granular quantitative inventory targets by part using a bottom up approach, this will be exponentially easier for teams to execute. Focus on quick low risk wins, most businesses are amazed by the bottom-line savings once uncovered, a phased approach to build team momentum is usually best. A software tool called an Automated Plan for Every Part is the perfect tool for teams to define quantitative inventory targets and calculate ideal variable inputs that will reduce costs.

2. Audit maximum inventory levels

   Before rushing into action to reduce inventory, audit actual inventory levels, establishing an inventory cost baseline is critical to calculate the inventory cost reduction and to foster leadership support. Download a list of current maximum inventory levels from the company’s enterprise resource planning, ERP, system to outline planned current state maximum inventory levels by part number.

   Utilize Automated Plan for Every Part to calculate the maximum target inventory levels then compare these numbers verse current maximum inventory levels. This analysis will highlight the deltas, where the top inventory cost reduction opportunities lie. Next, conduct a thorough plant walk through to count the actual inventory levels, this will highlight additional areas of inventory cost improvement. Lastly, adjust your ERP system to reflect the ideal maximum inventory level by part calculated in Automated Plan for Every Part.

3. Review buffer stock levels

   As with maximum inventory levels, if your ERP system is automatically reordering inventory, or teams are manually ordering off planning spreadsheets, it doesn’t mean inventory is any more actuate. Buffer stock is an important lever and prevalent input that once refined can generate cost reductions.

   Critical variables that need to be reviewed and considered for ideal buffer stock are supplier ratings; suppliers with quality or delivery issues should have higher buffer stock. Suppliers with long lead times should also have higher buffer stock to mitigate stockouts due to the potential impact of missed shipments. It is common for companies to add additional buffer stock due to onetime issues with suppliers, then never to return the buffer stock level to its ideal state, the result is higher inventory then needed. Audit and adjust current state buffer stock to reflect Automated Plan for Every Part numbers.

4. Check pull signals

   It is critical to audit the number of pull signals to ensure the number of signals reflects the target calculated in Automated Plan for Every Part. A typical issue for Kanban manual card inventory control systems is too many cards, increasing the buffer stock and thus inventory in the system.

   Electric systems are error proof in this regard; however it doesn’t mean that the number of pull signals in your inventory control system is accurate. Regardless of system, the process is key for pulls signals, specifically the site at which the signal is triggered.

   The closest location to which the part package is opened for use is preferred for triggering a reorder to mitigate access buffer stock inventory. Adjusting pull signal numbers can adjust inventory costs in days depending on how quickly turns happen, however, dialing down pull signals to the ideal target over a series of weeks while monitoring impact can help with team member buy in.

5. Attaining the right ongoing inventory cost

   Tame your inventory costs today by embracing Automated Plan for Every Part software and leveraging the above four action items to reduce inventory costs. As with many organizations, auditing your current state inventory levels verse planned could be an eye opening and concerning report to review.

   Inventory costs are a universal struggle among manufacturers, the difference is the solutions companies deploy; temporary fixes or institutional changes that are sustainable. The above actions are some of the more critical variables, that once properly adjusted, will position your organization to actualize and maintain lower inventory costs.