Minimize Inventory to Minimize Waste
Inventory offers peace of mind. You’ve got product when your customer wants it. You’ve got raw materials when you need them. That peace of mind comes at a price. To reduce the cost of inventory, make sure people in your company know its associated costs and the causes of excess inventory in your facility.
Cost of Inventory
To start, people should understand the carrying cost of inventory-the value of parts or raw material in storage. Inventory is like money kept in a coffee can instead of the bank, no value is gained as it’s stored. The money stored in inventory can’t be used for other purchases or improvements at the company.
Product and supplies in storage are also a liability. Look at the regulatory requirements and paperwork necessary for storing hazardous products or waste and you’ll know that the materials are viewed as a risk. They are also at risk for becoming damaged, spoiled or obsolete, resulting in waste.
Inventory shows up as cost for storage like rent and taxes, costs of heating and lighting the space, cost of employees to move items in storage (receiving, relocating and retrieving), record keeping costs, and the cost of handling-equipment like forklifts and conveyors. The carrying cost of inventory is estimated to range from 10 to 40 percent of its value. Twin City warehouse space averages $3.73 per square foot.
Product and raw materials build up in warehouses for a number of reasons. Consider how the following affect your operation.
When sales and purchasing aren’t linked to production schedules, inventories of both raw materials and finished goods increase. Prevent forecasting errors by sharing forecasts with customers and suppliers to decrease the costs of inventory.
As part of its demand-pull purchasing system, Artic Cat in Thief River Falls gives their suppliers access to an updated 52-week forecast every night. This has allowed the company to decrease inventory carrying costs by $6.4 million and decrease warehouse space by 65,000 square feet.
Some warehousing transferred to its suppliers. BTD Manufacturing in Detroit Lakes now bulk produces parts that are contracted for a 360-day supply. This reduces their setup times and saves them more than cost of warehousing the parts. BTD has found that Artic Cat’s forecast sharing system has helped it decrease its own supply of raw materials. The company can more accurately predict their needs based on the forecast.
Engineering design changes
The recreational vehicle market is very competitive and new product designs must be released every year. Artic Cat’s design engineers used to make design changes and parts in inventory would become obsolete-a waste. With the new purchasing system, engineers are aware of the cost of inventory and far fewer obsolete parts must be scrapped. Production, engineering and purchasing should all use one bill of materials.
Work with suppliers to minimize industry overages-quantities in excess of number ordered-and lot sizes mismatched between transportation and production. Stock products for easy access and rotate your supply so it doesn’t become obsolete on the shelf.
Sources: Chilton’s Distribution, “Cut Inventory with a Scalpel, Not a Cleaver,” 1991, and Manufacturers Alliance program Creating Speed & Simplicity in the Supply Chain; 7/13/00.
Excess product inventory can hide problems and result in waste. Be prepared-moving closer to just-in-time delivery with your customers and suppliers may uncover:
- Lengthy setups
- Poor quality
- Machine breakdowns
- Bad designs
- Unreliable suppliers
- Inefficient layout