Inventory Debate

Throughout recent years there’s been an on-going debate around the topic of inventory.  How much is too much? When does going “lean” prevent you from being ready to fill customer orders promptly? What about implementing the Six Sigma method?  The questions regarding best practices for inventory management are endless.  Here are some factors to consider when determining whether your inventory levels are appropriate or could use some adjusting.

First, how is inventory being defined?  In this case, inventory is defined as any good, regardless of the stage of production it’s in.  This would include raw materials all the way up to products ready to send to a customer.  This is the main reason that inventory tracking and management is so difficult within manufacturing compared with other industries. Tracking this many items can be an extremely daunting task.  In general though this would include three categories: raw materials, work in process, and finished goods.

Working with this definition of inventory there are four areas to examine in determining whether your levels are in balance:

Forecasting Accuracy – the ability of your company’s team to accurately forecast upcoming orders as well as sales for new products is directly related to your inventory levels.  If you’re consistently overstocked or under prepared on inventory take a hard look at your forecasting.  Of course this can be more of an art than a science to predict future orders but generally with monitoring, trends will appear.  Many companies find that certain times of the year or a specific quarter is always busier or slower and can adjust inventory levels to accommodate.

Lead Time – many manufacturing companies find that certain components have extremely long lead times which forces them to stock more than they would like in order to be prepared.  One option can be to discuss with suppliers reducing the lead time by increasing the lot size.  Many suppliers will be willing to provide larger volumes of parts in shorter lead times because of the increased immediate revenue.

Product Quality – some suppliers find that they have to keep a higher than normal inventory to be able to provide replacement parts fast enough in warranty situations or other product returns.  If this is the case an investment in the quality department, either personnel or measurement tools, could be worth the initial cost.  Certainly the fewer failed parts coming back the less inventory required.

Product Changes – an area that can really hurt with inventory is products becoming obsolete.  If new designs or technological changes are coming out too frequently it will require either that old products be kept to maintain those already in operation or will result in lots of unusable inventory with products that can no longer be sold.  Either scenario is costly.

Many experts agree that regardless of what inventory system you use reviewing the items above can be extremely helpful in being prepared without being at financial risk with too much inventory.

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