Last Updated on November 9, 2020 by Dan
Inventory is needed in all types of manufacturing. It comes in many forms – raw materials, work in process and finished goods are the most common. Many customers are asking their vendors to hold finished goods and deliver on-demand to lower the number of raw materials at their facility. These inventory practices place pressure on vendors to find ways to serve their customers while holding the minimum of inventory possible. Inventory has an impact on cash flow. Aged and obsolete inventory are a drain on company resources. The companies that manage their inventories well have an advantage over their competition.
Optima Associates has developed a series of tools used to evaluate, analyze, and control inventory. These tools are an essential part of our company assessment toolbox. Optima has worked with all types of companies and has assisted with strategies for sizing and uses of inventory. Optima has helped reduce finished goods inventories by large percentages resulting in positive impacts to cash flow. We have assisted companies with developing internal “supermarkets” that reduce overall lead time to their customers while controlling the amount of inventory required.
All of Optima Associates’ inventory analysis and control tools can be deployed by virtual/remote methods, although it is always better if Optima can come on-site to examine the situation. We always begin with an interview to gain an understanding of the relevant issues. We also work with the customer to understand what the goal for improvement is. Below, we will examine each of the tools as they may be used by a typical customer.
To start any analysis, data is required. To understand inventory, we must first understand customer demand. We request a year of demand, daily if possible but weekly at a minimum. The data included should be a minimum of date of transaction, item number, item description, quantity, customer, and dollars. Additional helpful information includes group codes/product family designations and customer ratings. In addition to customer demand, we need to understand raw material demand. We will need the BOMs (Bills of Materials) for all the items listed in the customer demand data.
ABCXYZ analysis will be applied to the customer demand data. This type of analysis is used to understand the driving forces behind the business. The analysis consists of examining the ABC (normally a quantity of some type) for each item along with the XYZ or amount of variation seen for that item. In most cases, it is quantity-per-week by item and the weekly variation seen for the same period. It can also be dollars by item vs variation or item by customer vs dollars all depending on the situation and what we are searching for. Here is a typical output from an ABCXYZ analysis (also know as an ABC inventory analysis or XYZ inventory analysis).
The above example is ABC of dollars by customer and XYZ of weekly quantity variation by customer. AX customers are the most desired. AX customers generate high dollars with a low variation – they are purchasing regular quantities weekly. Starting on the left, of the 841 available customers, 17 or 2% are considered AX customers. From an A standpoint, there are 26 customers or 3% of customer quantity. In the center, AX customers account for 56.6% of all products sold – A – customers represent 70% of all products sold. On the right, AX customers account for 55% of the dollars – A – customers represent 69% of total dollars sold.
This inventory analysis shows that the CZ customers need a review as there are 689 of them that are driving 12.8% of the volume. On average, CZ customers are generating $23,774 annually, and are also creating the most weekly variation or disturbance to the schedule. Perhaps there are some products in the CZ that are not generating enough profit for the effort that is needed.
The BOM data can be linked to each finished goods product and the same analysis can be generated for purchased and manufactured materials. This analysis alone can provide direction for sales, purchasing, and manufacturing teams alike. Optima will assist with strategies of make-to-order or make-to-stock based on the above analysis. It should be noted that the tools being deployed here are only a part of our assessment process and need to be viewed in the overall context of the manufacturing processes. Tools such as a Value Stream Map and Capacity Analysis may be needed to correctly leverage the full impact of the analysis.
There are always many questions related to inventory control. How much should be kept on hand? What should the trigger quantity be? What should the make/buy quantity be? How much safety stock should be applied? How much space will the inventory need? Optima has some proprietary tools that can answer the above questions. The goal for the inventory control tools is to provide the best possible customer service with the lowest levels of inventory necessary. These tools can also be applied and monitored virtually/remotely.
The tool Optima uses for inventory sizing is dependent on knowing the demand for each item over time. The historical data that was provided can be used or the historical data along with a growth factor or a future forecast or a combination of these can be used with the tool.
Replenishment lead time for each item is the next piece of data that is needed. If this is an internal manufacturing supermarket, the lead time will be the amount of internal time needed to make the required quantity once a trigger is reached. For a purchased parts supermarket, we will need to know the vendor’s lead time once a trigger has been hit and an order placed.
The next piece of data needed is the frequency that the product will be ordered in. Let’s say for example that you are purchasing products from overseas and there is a lead time of 14 weeks. Having to hold fourteen weeks of inventory will eat up cash and space. There needs to be a better way. The lead time will be kept at 14 weeks, but the frequency for orders can be dropped to perhaps 2 weeks so the amount of cash and space required is limited. Doing this will create a pipeline of product in the supply chain from overseas to your facility. There are costs of shipping to be contended with also, but this is all a balancing act to provide the best service to your customer at the lowest cost of inventory. The tool will allow you to model such scenarios.
The final factor to add to the tool is the amount of safety stock required. We calculate this by each SKU. We have found over time that using a “peanut butter” type of safety stock allowance places some inventory positions at risk while others are too fat. Our tool allows the user to “tune” each SKU and determine the outages that would have or could happen. The tool will predict how many outages there would be and when they would have occurred. The user can also see how much inventory it would take to have zero outages. Customers sometimes determine that they will manage the risk of a single outage to reduce the overall cost of the inventory on hand.
The tool shows the trigger point for each item and the reorder quantity once the trigger point is reached once the user is done “tuning” the item. The trigger points and reorder quantities can be set to a skid or container quantity as needed.
This inventory control tool will also show how much space will be required by the inventory. Optima customizes each tool to a customer’s requirements for the amount on each skid, stack height, etc. The tool also shows average and maximum inventory levels and the cost of the inventory.
This type of tool should only be used 2 to 4 times per year. This is not a day to day tool; it is used to determine the inventory levels to be used over the next period with three months being the lowest. Below are some examples of a fully deployed tool.
“Supermarkets” or “Kanbans” of inventory can be extremely helpful when applied correctly. The beauty of a supermarket or Kanban is that lead time to the customer starts at the supermarket. Deployed correctly, weeks of lead time to customers can be eliminated while controlling internal inventory levels. The difficult part of creating a supermarket or Kanban is the creation of itself. Many times, manufacturers are struggling to meet customer demand. The utilization of a supermarket would be very helpful. The problem is if they are already struggling to meet demand, when are they going to have the time to fill the supermarket? They will have to meet demand and create additional product to build the supermarket at the same time. Optima will take the time to analyze manufacturing capacity to ensure the capability to build the supermarket if needed. We have the tools that can be deployed to assist with the needed analysis.
Inventory analysis and control described above can be deployed in a virtual/remote method. I can think of no better time to be assessing and controlling inventory levels than now. There may be business saving dollars to be discovered through the application of improved inventory control methods. It can also open doors with your customers by assisting them with improvements in control of their inventories. Contact Optima Associates with any interest in the above tools. We will be happy to discuss your needs.