In these challenging times, even those with well-developed business continuity plans have been caught out, with too many of some products and too few of others – undermining production plans, distribution performance, service levels and cash flow management.
How do you now plan a recovery?
We recommend a review of each of the 7 basic components behind all inventory management.
Have the changes been recognised, analysed, calibrated and adequately addressed – or not?
Manufacturing and Distribution professionals, from both the Finance and Operating parts of the business, regularly express concern about the cash tied up in inventory… they want to set targets by item, category, supplier etc., in order to release some of that cash.
But inventory levels are not targets, they are outcomes of implemented policies and practices. An understanding of how these policies and practices will play out is therefore critical.
So, let’s go back to basics.
We have developed the enclosed 1-page checklist to facilitate a discussion between company leadership and planning personnel to support a self-evaluation of current status and gaps, and to set you on a path to manage inventory in the best way possible.
The outcome should be to set new and transparent inventory objectives, with frequent reviews to align on desired service levels, cash invested and short-term tactics.
We are presenting this as a discussion guide, but it can easily be viewed as a checklist to be followed as a recurring process, driving continuous improvement as you progress.
Get the PDF version here.
|Components||Elements||Issues, obstacles, constraints, or failures in your business|
|1. Establish near/mid-term strategy for holding stock|
At the business / aggregate level.
Stock holding versus Just in Time.
Why do you need to carry stock?
How much contingency buffer can you justify or support.
|Business situation/cash flow balance |
Variability of demand
Variability of supply
Security of supply
Purchasing leadtime, responsiveness
Economies of scale in order quantities
Hedging of product / commodity pricing & currency exchange rates
|2. Determine optimal inventory levels|
At the category and / or item level, what are the costs involved to carry stock as compared to ordering /maintaining pipeline?
|Cost of money|
Cost of warehousing
Cost of shrinkage
Cost of damage
Loss due to stock deterioration
* several of above elements at item level
|3. Rationalise & maintain the Inventory Master|
Proliferation of items kept in stock is a major risk and cost.
First effort should be to rationalise items (products, WIP, RM) and then maintain control.
|Establish process and approvals to add items|
Controls & responsibilities for changes & deletes
|4. Manage replenishment of stock|
The core of inventory management via the established processes and tools for Planning & Control. Establish process and ensure compliance.
Periodic review points
Actual order Qty vs Economic order Qty
|5. Manage excess, aged & obsolete stock|
In most businesses, there are several unjustifiable layers of inventory. Removing slow moving & obsolete items frees up cash and enhances compliance to governance.
|Frequency of formal reviews |
Analysis of stock holding
Definition of obsolete stock
By ABC categorization establish target periods of cover
Assigning responsibility for and finding means of disposition can be challenging
|6. Inventory control & record accuracy|
At this point in the sequence, the first pass at inventory optimisation will have been achieved even without assurance of data integrity. For the long term, establishing physical & system control is of paramount importance.
|Policy points for control of physical stock Policy points for control of record keeping Stock takes & reconciliation.|
Cycle Counting IS the best way to assure Inventory Record Accuracy (IRA) and to drive Root cause analysis & corrective action.
|7. Performance measures|
What gets measured gets done.
|A small suite of measures to monitor|
Frequency of review
Drive Root Cause Analysis Corrective Actions (RCCA)
For further information please contact us at www.lca.asia/contact