In Part 1 of this two-part series on inventory reduction in manufacturing, we looked some of the over-arching issues associated with the subjects—the causes and the effects. While many of the variables associated with inventory management change from operation to operation, it is still an unwavering notion that each manufacturer does have something akin to an optimum inventory level. How soon you realize this and do something about achieving it is often the path to improved profitability.
Why do we have inventory in the first place? Demand, of course, drives inventory. Demand is a function of the sales pipeline, and sales themselves are a function of what level of quality you sustain as a producer. The better your quality and meeting of promised delivery dates, the more sales you get and the more lead-time demands you have on inventory.
How big are your orders and lot sizes, and what supply buffer do you maintain? Do you have a tendency to hedge against unreliability of vendors by ordering and maintaining extra material/parts? In a related sense, do you maintain extra inventory as you believe in increased demand via forecasting? In short, you must ascertain the factors affecting your inventory level decisions, and understand if hedging inventory for speculative purposes is part of your practice. Certainly, there is nothing wrong with hedging when the prices of certain material are subject to increases; however, speculative purchasing should not be the norm and may, in fact, come back to haunt you during pricing downturns.
In general, material cost increases raise inventory. Lowest unit cost does not necessarily mean lowest cost of doing business, or even lowest cost of material, for that matter. You must see this as a deceptive notion, because as material costs go up, turns do not decrease, because they are being measured on a new and higher base.
When examining your own inventory purchasing and maintenance habits, you can then begin employing methods to get it in line with best inventory reduction practices. In other words, build an objective point of view for assessing your state of inventory management first, and then engage a logical sequencing to putting an end to the worst of your practices.
First, practice Inventory 101: Don’t order what you don’t need. For existing commitments, cancel or reschedule where practical. Second, ship it out! Eliminating constraints to getting product shipped. Shipping is perhaps the key to getting inventory out of your system. Also, sell your excess inventory at full price/cost, if possible. Third, see if you can rework or substitute inventory in place of parts that have been specified. You can then turn to perhaps salvaging inventory (particularly obsolete inventory) for cash at a reduced rate.
Forth, finally, if none of these are working for you, simply get rid of useless inventory by hook-or-crook. Dump it, delete it, or otherwise destroy it. Often, the tax write-off and lower holding costs alone (and added shelf space!) will make elimination worthwhile.