This is the final article in our series outlining smart inventory control strategies.
To date we’ve described four seemingly simple – but proven – strategies for smarter inventory control.
For companies that carry inventory (manufacturers, distributors, retailers and service providers) and want to better manage their inventory availability while reducing ordering and carrying costs, these strategies will be perfect for you.
Last month we discussed the importance of improving your processes and procedures.
This time we focus on reducing lead times and lot sizes by reducing the “fixed” ordering costs.
Strategy 4: Reduce lead times and lot sizes
Shorter lead times equals less wastage.
If lead time was zero, you wouldn’t need inventory. The longer the lead time, the more inventory you’ll need, and the more safety stock because variability is a time-sensitive phenomenon. There is more risk of variation over the course of a week than there is over one day. Forecasts are also more accurate in the near term than they are further out.
Replenishment planning is focused on replenishment lead time. With shorter lead time, replenishment quantities can be smaller, meaning that less inventory is brought in at a time and used up more quickly—so overall inventory level is reduced.
The economics of ordering
Replenishment lot size is usually determined through the general concept of economic order quantity or EOQ.
EOQ balances ordering costs (fixed costs associated with purchasing or making an item regardless of quantity) and carrying cost (larger order quantity means higher inventory and therefore higher carrying cost). EOQ finds the lowest cost replenishment order quantity.
While many companies do not use the actual EOQ formula to determine lot size, the concept still holds in informal logic and intuitive methods–a successful business minimises overall cost by avoiding unnecessary inventory and minimizing the number of orders at the same time.
The key to reducing the “economic” replenishment order size (thereby reducing inventory) is to reduce the fixed ordering cost (there isn’t a lot you can do to reduce carrying cost, unit cost or usage—the other major factors). For purchased items, ordering cost includes the operating cost and efficiency of the purchasing department, receiving and inspection, and material handling (put-away).
Integrated purchasing applications with supplier portals for collaboration, links to planning systems for automated or semi-automated ordering, blanket orders (based on good forecast-based plans), electronic communications (through EDI or direct), and other technologies can help ease the ordering process. Pre-qualified suppliers and certified quality simplify and expedite receiving and handling.
For manufactured items, the focus is on set-up and changeover times. Companies often invest in automation–flexible machines that can easily switch from one product or variant to another with little or no human intervention—to reduce changeover and thus reduce economic production quantity. Other less costly changes include fixturing and mistake-proofing (also known as “poka-yoke”), scheduling to minimize the changes between one job and the next, and process redesign to simplify changeover.
Inventory can be considered a “necessary evil”, but you don’t have to simply accept the level of inventory you have. By understanding the reasons why you have inventory and addressing the underlying causes, you can reduce inventory without raising the risk of shortages—a true win-win for operations managers, the company, and your customers.
This information is tailored to bigger businesses with more complex needs. If you’re interested in finding out what solutions MYOB has for bigger business, see our resources and events. Find case studies, download our resources, and register for a demo to see our products in action.