The COVID-19 pandemic, along with a supporting cast of other troublesome events, has resulted in a prolonged period of disrupted supply and erratic demand. Many manufacturers feel under pressure to build up ample safety stocks, but that can be a dangerous tactic. In this environment, effective inventory management can be invaluable.
A quick introduction
Good inventory management simply means having the right quantity of the right thing, in the right place, at the right time. It’s a subtle art – failing to hold enough inventory may leave you unable to meet customer demand, but hold too much and you risk a cashflow crisis and a host of other operational issues (more on that below).
In times of uncertainty, inventory management is a particularly valuable skill. It’s natural to want to hold as much stock of everything as possible, but this only seems like a good idea because the full costs of doing so are difficult to see on a balance sheet.
A common example with many SME manufacturers is to purchase an item in bulk, even though you only need a small amount, because economies of scale make it seem like better value. But if that excess stock ends up sitting in the warehouse for weeks, months or even years, the unaccounted-for costs of holding it in the factory will quickly stack up and it will end up costing you more in the long run.
Space, the finite frontier
In lean-speak, inventory is one of the most well-known – but perhaps least well-managed – of the 8 Wastes. Inventory not only ties up cash in the business, but also creates knock-on inefficiencies in the workplace. Unless you have endless storage room and a perfect stock management system, excess inventory wastes valuable space, which itself causes further waste in terms of time and labour.
It’s not uncommon to find SMEs with storage racking so full that goods end up dumped in other places, there’s no space for work in progress, and items are difficult to find because nothing is marked, they’re in the wrong place or they’re blocked by something else (sometimes causing a health and safety risk). Before you know it, somebody needs to spend an hour looking for a single widget whilst holding up the entire production line. Or worse, you end up buying in more while the original gathers dust at the back of the factory. Sound familiar? We’ve even come across companies who couldn’t find products they knew they’d made, and in the end had to make them again!
Finding the balance between Just in Time vs. Just in Case
In an ideal scenario, you want goods to arrive at the exact time that they are needed, not before and not after. However, this only works under the assumption that supply chains are intact and working as they should (suppliers aren’t locked down because of a deadly virus, ships aren’t stuck in the Suez Canal, there are enough lorry drivers on the road, etc.).
When materials are difficult to get hold of anywhere, it can pay to have a little more flexibility in your stock levels. But before you jump into building up ‘Just in Case’ safety stocks, you should first make sure you maximise efficiency by ensuring your inventory management is up to standard.
Here are some top tips:
1. Prioritise critical items
Every manufacturer has essential supplies which, if unavailable, will stop production altogether. Think particularly about items that are needed for higher value-added, fast-selling goods (‘runners’) or for top customers that you absolutely cannot let down. If you’re going to hold more stock of anything in times of uncertainty, these should always be prioritised above items for lower volume, lower value or slow-selling products (‘strangers’) that may end up sitting in the factory for long periods of time.
One way to do this is to use ABC analysis to identify a priority list of items (‘A’ are most critical, followed by ‘B’ and ‘C’), recording how frequently they are used and how long their lead times are. Use this to create ‘stock rules’ to prioritise purchasing and clear space for important stock.
2. Use facts, not guesswork
A reliable and up-to-date Enterprise Resource Planning (ERP) or Material Requirements Planning (MRP) system is invaluable in times of supply disruption. Ideally, you should be able to use your stock management system to understand exactly where items are through each stage of production, whether that’s awaiting delivery, in stock as raw material, part of work in progress, or in finished goods.
This may sound like an expensive proposition, but if you’re regularly spending several man hours trying to find items, consider how much money is being wasted in lost time and labour. It may help the business case to physically measure this ‘hidden’ cost on a monthly basis – you might be surprised at the figure you come to.
3. Keep it tidy, keep it visible
It sounds obvious, but keeping storage areas clean and orderly is one of the most important parts of inventory management. Follow 5S principles to maximise visibility of stock, using proper racking and numbered storage location areas so everything is easy to find. Even the simplest measures can make a big difference – for example by creating a sorting system for components to make it easier to find the right one for each job and ensure it is always in stock.
Be ruthless with old, obsolete or unnecessary inventory – write it off or sell it to create as much space as possible for your critical items. It may even be worth creating an area specifically for overflow to give you clear visibility of stock you are holding too much of. That way, you can quickly identify items that are being ordered excessively, too early or by mistake, and undertake a root cause analysis to understand why that happened. The goal is to keep that overflow area empty.
4. Reduce manual tasks
Try to minimise manual stock handling as much as possible through automated systems such as barcode scanners for every item in and out. The more manual your process, the more likely things are to end up in the wrong place and the less accurate your stock numbers will be.
Automation will also provide you with hard data that can be used to re-order items at the best possible time. It also frees up employees for more important tasks. Get in touch with Made Smarter to learn more about opportunities for automation in your business.
5. Track risk of run out
If you have a fairly consistent order pattern, create a ‘risk of run out’ spreadsheet for important items that tracks stock levels, items on order and sales forecasts to calculate how many days’ stock you have left until you run out. This will help you to order at the right time to minimise inventory on-site.
6. Re-think forecasting
When forecasting customer demand, the conventional method is to compare sales to the same period the previous year, or the same season. However, when demand is erratic and supply chains are in crisis, standard forecasting techniques aren’t going to work.
In this situation, qualitative information becomes more valuable. That means communication and transparency with your customers and suppliers. With customers, explain your circumstances and ask them about their intentions for the following weeks and months to get a better idea of potential demand. With suppliers, try to ascertain how lead times might change and find out what you could do to help them, such as giving advance notice of your requirements or aligning orders with their production or shipping cycle.
7. Kit out orders in advance
If you have enough advance notice from your customers, kit out orders ahead of time to make sure you have all the items you need. This is particularly useful if you know your stock management system isn’t accurate. Kitted out orders can be stored separately or allocated to a certain area of the warehouse (another reason to keep things tidy!). If possible, allocate these items to the order on your ERP system so you know they are work in progress.
Another way to reduce the risk of an unwelcome surprise when you start working on an order is to inspect critical goods, or a sample of goods, when they arrive or when kitting (either way, in advance of production and leaving enough time to replace if necessary).
8. Measure your improvements
Good inventory management should lead to increased efficiencies across the board. As you make improvements or try out new ideas, track the impact on different metrics, such as on-time delivery, machine downtime, unplanned stoppages and cost of inventory. Only by analysing the data can you truly appreciate the benefit of effective inventory management.
If any of the above has struck a chord, see what support is available to your business and arrange a call from one of our specialist Manufacturing Advisors.