Managing inventory costs can often feel like trying to tame a wild animal: risky, complicated, and time consuming. As a result, leading companies work to master lean tools like Plan for Every Part (PFEP) to map the 31 variables impacting inventory, and are rewarded by realizing and maintaining lower inventory costs.
Organizations that have yet to begin their lean journeys could generate up to a 50% reduction in inventory costs (on average) when implementing PFEP. Even existing lean companies or ones who have not audited their inventory systems and processes recently could see similar cost reductions. Furthermore, an organization whose entire supply chain undergoes a lean transformation, including its supply base, will develop into a lean extended enterprise and possess great potential for enhanced inventory cost reductions.
Companies face abundant challenges to reduce inventory costs, that, when combined, are often the root cause for not achieving or sustaining cost reductions. One major element of common frustration is the timely visibility of accurate inventory planning data. Teams need to have reliable data available in one place from which to calculate ideal future-state inventory levels.
Supplier delivery fluctuations add volatility to inventory models, negatively impacting efforts to reduce inventory, which could result in stockouts. This makes predictable supplier delivery times crucial to reducing inventory costs.
With an ideal plan, there are specific inventory targets, maximum inventory levels, storage locations, and packages; then, there is actual reality. Everyday business challenges need to be understood and accounted for to bring about results. A deep understanding of the many variables, inter-dependencies, and real-world risks will allow your team to succeed in obtaining sustainable inventory cost reduction.
4 Actions to Reduce Inventory Costs
1. Define Goals
The frequent statement “we need to reduce inventory costs” is rather broad, so defining your organizational goals regarding lowering costs will lead to better and quicker results. Invest the time up front to train your team on the fundamentals of the variables that impact inventory costs. This will ensure that when inventory levels are reduced, they are preserved.
Break down 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 and implementing a phased approach to build team momentum is usually best. A PFEP software application is the perfect tool to use for defining quantitative inventory targets and calculating 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 earn support from leadership. 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. Then, utilize PFEP to calculate the maximum target inventory levels and compare these numbers to the current maximum inventory levels.
This analysis will highlight the deltas where significant inventory cost reduction opportunities lie. Next, perform a thorough plant walkthrough to record the actual inventory levels, which will highlight additional areas of inventory cost improvement. Lastly, adjust your ERP system to reflect the ideal maximum inventory level, by part, calculated in the PFEP.
3. Review Buffer Stock Levels
As with maximum inventory levels, if your ERP system is automatically reordering inventory, or your team is manually ordering from planning spreadsheets, it does not mean inventory is any more accurate.
Buffer stock is an important level and prevalent input that, when refined, could generate cost reductions. One significant variable for ideal buffer stock is supplier ratings; suppliers with quality or delivery issues should have a higher buffer stock. Suppliers with long lead times should also have a higher buffer stock to mitigate stockouts due to the potential impact of missed shipments.
It is common practice for companies to add additional buffer stock after just one mishap with a supplier, then never return the buffer stock level to its ideal state, which results in having higher inventory then needed. To counter this, audit and adjust current state buffer stock to reflect your calculated PFEP numbers.
4. Check Pull Signals
It is critical to analyze the number of pull signals to ensure the number of signals reflects the target calculated in PFEP. A classic issue for Kanban card inventory control systems is using too many cards, which increases the buffer stock, leading to surplus inventory in the system. Digital systems are far less prone to error in this regard, however, it does not mean the number of pull signals in your inventory control system is accurate.
Regardless of the system your organization has in place, the underlying process for pull signals is key, especially for the site where the signal is triggered. The preferred location for triggering a reorder should be as close to the part package as possible to mitigate excess buffer stock inventory.
Adjusting pull signal numbers could change your inventory costs within days, depending on how quickly turns happen, but tuning ideal pull signals over a series of weeks and monitoring their impact will provide a more accurate data set and encourage team member buy-in.
Inventory costs are a universal struggle for many businesses, but the cost reduction results achieved, and their long-term sustainability, depend on whether the solutions applied are temporary fixes or institutional changes. Lean is a journey, so embracing a PFEP application for analyzing and adjusting your maximum inventory levels, buffer stock levels, and pull signals to reduce inventory costs will support your company on its way to becoming a lean extended enterprise.
Tracking and modifying those three inventory cost variables are momentous, but should be combined with the remaining 28 to reach full lean potential. Investing the time and resources to understand and properly adjust these current-state inventory variables will position your organization to generate and maintain remarkable cost reduction results.