In today’s business environment, actions tend to be driven based on the results of Key Performance Indicators (KPI’s), and this is especially true in the manufacturing space. The typical organization develops KPI’s to enable them to holistically measure Quality, Delivery, and Total Cost of products they are supplying to their customers. These indicators are closely monitored so that companies can ensure that they are adding as much value to the end consumer as possible while producing products at an optimal cost resulting in enhanced profit margins. Though all of these indicators need to be managed simultaneously, most organizations tend to gravitate towards methods to free up cash flow while maintaining acceptable Quality and Delivery standards because it has a direct measurable impact on the company’s financial performance.
Financial Impact of Inventory
The cost of carrying inventory is often the most significant variable cost and is the most difficult to control for a manufacturing facility. It requires equipment and labor to manufacture, it has to be stored which requires space, it needs to be packaged, and it has to be transported to and from different points in the manufacturing and distribution process. Inventory is considered one of the seven wastes of lean manufacturing and is particularly dangerous because it hides many other wastes in a company’s production system. Inventory is the raw materials, work in progress (WIP), and finished goods stock that is held for future consumption. Companies often hold far more “safety stock” inventory than is required to produce the right products at the right time for a variety of reasons including potential risk of “stock-out”, optimizing labor productivity, etc. Even if your firm has outsourced manufacturing to a contract manufacturer inventory is still vitally important as you company is paying for holding inventory whether is shows up on an invoice or not.
Lean Production Control
Data shows that organizations with an effective production control method in place are far more productive and have a healthier bottom line. The following are some of the key benefits of reducing inventory through lean production control methods:
- Improved company cash flow due to less funds being tied up in inventory
- Increased sales as a result of having the right products available at the right time
- Less obsolescence costs from lower inventory levels and higher inventory turnover
A number of methods can be applied to a company’s production control and inventory management strategy that can improve overall performance and total cost. It is every organizations responsibility to understand their own manufacturing structure or the structure of their contract manufacturer. Specifically one must understand all of the abilities and constraints that exist so that a customized but standard process can be established and executed.
Inventory Reduction Methods
- Kanban: Kanban is a method used to regulate the flow of goods both within the manufacturing facility and with outside suppliers and customers. This flow is based on automatic replenishment through signal cards that indicate when additional goods are needed. The benefits to this method are that it eliminates waste from inventory and overproduction, and it can eliminate the need for physical inventories by relying on signal cards to indicate when more goods need to be ordered.
- Heijunka: Heijunka is a form of production scheduling that purposely manufactures in smaller batches by sequencing (mixing) product variants within the same process. The goal of this method is to identify opportunities to smooth production levels to effectively support a volatile demand signal. There are many benefits to this strategy including reduced lead times (since each product or variant is manufactured more frequently) and inventory (since production batches are smaller in quantity).
- Just-In-Time (JIT): Just-In-Time is a method that tends to be the most successful and cost effective if a company’s manufacturing process has the capacity and flexibility to support it. Just-In-Time pulls parts through production based on customer demand instead of pushing parts through production based on projected demand. This method relies on many lean tools, such as Continuous Flow, Heijunka, Kanban, Standardized Work and Takt Time. This highly effective method of reducing inventory levels also has the potential to improve cash flow and reduce space requirements through inventory reduction.
When a team develops a successful strategy to manage inventory levels in all areas of the supply chain, the opportunities to improve processes and eliminate waste are endless, and the financial benefits far outweigh the resources and effort required to execute these plans. We hope you find these inventory reduction methods are useful in your journey at your plant and/or in partnership with your contract manufacturer to become a lean organization. Reducing your inventory will free up cash that your company can utilize in a multitude of ways. It is our hope this new found cash could allow you to enhance your new product development and bring to market new innovative products.