Many people don’t understand the link between high inventory and late shipments. However, there is high correlation between these two situations. Inventory control methods can be adopted to mitigate this however.
Why does high inventory impact on-time shipment?
Let’s list the main reasons:
- Purchasing larger batches from sub-suppliers means those large batches take longer to be delivered;
- Processing larger batches internally means it takes longer to finish them (based on the very serious “Little’s Law”);
- When materials are “sticky” and move slowly through processes, very widespread quality issues are found more often and are more difficult to troubleshoot – often leading to mass sorting & reworking.
Add to this the cost of inventory, which easily amounts to 25% a year. It is important to avoid swimming in a sea of inventory.
What are inventory control best practices?
The best companies have implemented a series of inventory control methods to reduce the amount of inventory they hold. Here are the most important best practices to consider.
- A weekly aged inventory report and/or meeting. You need to set a target (which might differ from one SKU to another). For example, in a computer factory, Intel chips have to be monitored every 3 days because they might become obsolete extremely fast.
- Watch carefully the ‘slow moving’ and the ‘aged’ inventory. Again, different standards apply in different industries. “Slow moving might be 1 to 3 months. ‘Aged’ often has to be scrapped…
- Develop a mathematical model for the safety stock. If, for example, your supplier for a given component has 5 days of lead time, but they require 10 days for some shipments, you need to keep an inventory roughly equal to 10 days’ worth of production consumption. When you get below that amount, you need to re-order immediately.
- Have a good warehouse system. Every piece of material should be in a specific address (it might be matched with a barcode system which now costs less than 10,000 USD for a medium-size warehouse).
- Link all to your MRP. A strong Materials Requirement Planning system can give you a real-time status and breakdown on your inventory, and can help you make the right ordering decisions based on what is in stock right now and on forecast demand. It will support all your other inventory control best practices.