Inventory-to-sales ratios are at historic lows, stockouts are at historic highs, and workforce issues are widespread. Gaining visibility into your supply chain, including your own operations, is imperative for dealing with disruptions.
Yes, you should be communicating more frequently with your suppliers and customers as lead times continue to fluctuate, even for domestic suppliers. Yes, you should be making adjustments as demands increase for traceability. But as things change, how do you adjust to gain the most possible control of your inventory amid these disruptions? It’s imperative to have a plan, but what exactly is that plan?
You can literally have a plan for every part, not just on raw material, but also on finished goods.
Consider how the Production Team is usually stuck in the middle trying to keep the component and finished goods inventory to a financial minimum while also attaining high on-time delivery. It is easier to attain high customer on-time delivery if you have a lot of inventory on hand, especially finished goods, but that can drive up inventory costs. The plan for every part will help attain both low inventory dollars and high customer on-time delivery.
Gather Data on Every Part You Purchase
You can’t improve what you don’t know. You may be surprised by what you learn once you dig into the specifics of your inventory and operation. Ideally, here is what you should know about all of your parts or material supplies:
- What is the supplier’s lead time from order to arrival? Are they consistently on time?
- What is the normal and expedited transportation time?
- What are freight costs? How much does that vary with order quantity?
- What is the quality of the parts? If you reject some parts, what percentage?
- How does the supplier react to changes in the schedule? How agile are they? Do they demand agility from you?
The data will be invaluable in developing the rest of your plan.
Classify Your Inventory By the ABC System
The ABC system is simply identifying your parts with the greatest impact as “A” parts, and those with the least impact as “C” parts. The greatest impact parts in your operation need the greatest effort and attention in terms of lead time, adequate inventory, pricing and other business considerations. “A” items tend to flow through the operation the fastest and have the most value. You will prioritize your planning for those parts.
The next step is doing regular cycle counts to make sure your inventory is accurate. You may be OK with a 1% difference in inventory. You might find some surprises. For example, you might learn that the bill of materials (BOM) for a product calls for the operation to use an “X” screw, but the second shift has been using “Y” screws. Your cycle counts may expose inventory issues, but they also could expose issues in failing to follow standard work, which could be leading to other issues.
You also don’t have to do cycle counts at the same frequency for all your parts. A suggested starting point is to count “A” parts every month, “B” parts once a quarter and “C” parts every six months. As you get the results of these counts over a period of time, the count frequency can be adjusted up or down.
Take actions to solve any issues you discover. Investigate errors. You might learn that different areas of the operation treat transactions and touch points differently throughout the production run. The more transactions you have, the more potential for human error in your recordkeeping.
Develop an Approach for Creating Buffer Stock for Inventory
Having gathered data on your parts and classified their importance, you are in position to prioritize what buffers you should create for your stock. You will base those buffers on:
- Importance of the part: “A” parts call for a different approach than “C” parts.
- Reliability of supplier: If a supplier is not reliable you will need a larger buffer.
- Demand fluctuations: How agile do you need to be for your customers?
There are other factors to consider for your plan, such as the trade off for transportation costs vs. carrying more inventory. You also will need to know your economic order quantity (EOQ), which is the optimal order quantity for minimizing total costs related to ordering, receiving, and holding inventory. This will guide you on how much to purchase for any part and when to purchase it. EOQ also should take into account freight costs.
Establish Minimum Inventory Quantities for Each Part
Again, using your “A” parts as a priority, establish a highly visual Kanban type system to help identify issues with inventory levels. Make it clear what is the minimum level of inventory for each part.
Your ERP or computer system should be identifying inventory issues in real time, but it is not unusual for manufacturing operations to have operator errors in their systems. A visual alert system serves as a backup system and empowers people in operations to notify others of developing issues. Think of this as foolproofing your systems.
Another proactive step to help control your inventory is to create a “supermarket” of small or key parts adjacent to the operation. Again, not all parts are created equal. Some are more easily managed closer to the operation. Smaller parts may not need to go to the warehouse. Be sure to post the minimum number of these parts as well, so operators can quickly see when supply is low.
Track the Quality of the Parts and Supplier Reliability
Another component of the plan to better control your inventory is to develop a system for scoring your suppliers. Track delivery and quality. Share data with them about defective parts. Show them examples of what you are rejecting.
Changing suppliers often is a big commitment of resources. It’s disruptive. Work with your current suppliers for improvement and retention. Maybe you can visit their operation to help them find the source of any issues. The more you can improve their performance, the smoother your operation will be.
Your Local MEP Center Can Help You Control Your Inventory Levels
Understand the carrying costs of your inventory, which can involve storage, labor, transportation, handling, insurance, taxes, depreciation and more. It can be up to 50 percent of your company's assets. This is why it is so important to resolve inventory conflicts. By creating a Plan For Every Part (PFEP) on both raw material and finished goods, you can work toward meeting short-term demands and controlling inventory.
Experts at your local MEP Center can help you develop a plan for dealing with disruptions in your inventory and supply chain.
