Consumption-based inventory: lessons for SMEs

During interaction with an engineering SME recently, high inventory was identified as a pain area. Analysis led to few points which I thought were generic in nature and would be of interest to many SMEs. Here is the summary.

Obviously it hurts to have high inventory and it disturbs even more when you find that we do not have stock of something that we want. This also means we hurt the customers, possibly lose them and downward spiral for business begins.

This is classical case of how mismanagement of inventory leads to larger issues in the companies, particularly SMEs. Here are some tips to sense the problem in time and address the possible underlying issues quickly.

First, let us look at some symptoms.

·       Order too much in advance and are unable to change course when we realize the error

·       Order in excess of demand when you are not sure of who will be able to supply

·       Accept material that is not balanced but produced to suit supplier’s convenience

·       Ordering pattern is not changed for more than 6 months

·       Supplier whose items contribute highest to inventory also has highest contribution in shortages

·       Customer with payment problems also has high pending orders

·       Cheapest source has more shortages for that item

All these are clear signs that inventory is not being managed well.

How do we correct the situation? Here are some simple tools:

1.    We all know that inventory or shortages are result of demand - supply mismatch. We must also remember that demand is an independent variable of the two. So, all our orders and communication with our suppliers must build this “flexibility” to match supplies with demand. Another way to define this is to know “how much change is possible in given time frame (say with 15 days notice)?”. This is very important for “made to stock” business situations

2.    Identify and focus on supply lead time so that maximum number of items have supply lead time less than lead time for our finished product. Best way to minimize inventory will be carry minimum stock of all items where lead time is less than what is committed to our customer and order them when you have confirmed orders. This is very relevant to “made to order” situations.

3.    Remember, safety stocks are linked neither to consumption nor lead time. They are linked to variability either in demand or supply. If we are sure of demand (say like news paper…one copy every day) we will never plan for more than one…Same way if we are sure the shipments come every morning (like say milk), we will never stock the same for few days requirement. So key is to build reliability in supplies and demand projections. Obviously this is easier said than done but we can measure and reduce variability over time with good analysis

4.    One of the biggest drivers in “inventory reduction” is standardization. You will be amazed to see variety being used for fasteners, packing boxes, connectors etc. Managing each size is costing a lot of space and time. This is equally true for some high value spares.

5.    Lastly, suppliers holding back one item and supplying all the rest is not uncommon. It adds to his billing and our inventory. Both create problem by blocking money and space. Key is to have kits driven by its usage in particular assembly. It removes imbalance, ensures less time spent in picking in stores and off course reduces materials management efforts

Hope this helps my SME friends to save all important resources of time, money and space…and move towards “consumption based inventory management”