|
|
|
|
The Importance of Day One Decisions |
|
Free Feature Article |
|
For many companies their inventory really is the forgotten investment and this is especially the case with engineering inventory. These companies may expense their inventory or many not have in place any system to manage their inventory. In this case the issue is not ‘optimization’, these companies are faced with the challenge of setting up an inventory management system. (By the way, what is optimization anyway except a way to recognize and correct problems from past decisions that are now evident.)
A number of years ago I was faced with exactly this situation. The company that I joined expensed their maintenance spares and didn’t use their ERP system to record stock movement, stock holdings etc. Essentially their spares area was a ‘dumping ground’ for anything that people thought might be useful in the future. I joined this company as the Plant Engineer and my task was to turn around an ailing manufacturer. For this business a key issue was reducing downtime and spares management was a cornerstone of our plan to reduce downtime. (We did much more that manage the spares but having the right part available for PMs and breakdowns was crucial to minimizing downtime.)
The challenge that everyone faces in this situation is setting up their spares management without over investing in the spares they hold. It is very easy to get carried away and hold everything ‘just in case’ but good management requires that we invest our working capital dollars wisely. That is, we invest only when necessary and only in the minimum required quantities.
So how is this achieved? The starting point is mindset. If we start with a mindset that says ‘availability = reliability’ then we will over invest in spares because we will justify everything on a false premise.
The mindset to adopt is what I call a ‘Zero Inventory Mindset’. This does not mean that we hold zero inventory (although that would be nice), it means that we start with a mindset that ‘inventory=cash’ and we seek to minimize our cash investment without jeopardizing our minimum requirements for availability.
Adopting this approach is really important because any decision you make on ‘Day 1’ is unlikely to be reviewed for some years. So that decision is committing your company to an investment that may not be corrected for years to come. If that investment was for capital equipment rather than working capital then I am certain that the decision process would be very different. However, adopting a sound approach to these early inventory decisions may prevent the need for future ‘optimization’!
The following are two extracts from my book Smart Inventory Solutions. The first discusses the ‘Zero Inventory Mindset’ and the second shows how the questions relating to a ‘Zero Inventory Mindset’ can be used to develop a simple checklist to provide some rigor in our thinking.
Step 1: Adopt a Zero Inventory Mindset (Extract from Chapter 5 of Smart Inventory Solutions)
In an ideal world there would be instant replenishment and zero inventory. This means that whenever an item is needed it would be instantly available. We would hold no stock because we could get delivery in the required quantity, in an acceptable time frame, all the time.
But we don’t live in an ideal world and we can’t get instant replenishment. What we can do, however, is take an approach to inventory that questions the need for the inventory investment. At this stage this is more of a mind set than an action plan. The key is to ask three questions before making any commitment to continuing to hold or adding to inventory.
1. Question whether the stock is really needed.
What are the alternatives to actually holding the stock? Could it be supplied on sufficiently short notice or substituted with another item? Would the user be prepared to wait for delivery without the wait impacting your competitive position? For engineering spares, is there an alternative processing path that could be used while the spare is delivered? Do not forget that all inventory costs money. By questioning the real necessity of adding an item to inventory you are questioning whether an investment should be made in that inventory.
This is the point at which most inventory thinking stops – do we need it? Yes. Then get one in. But good inventory management goes beyond this and asks further questions before deciding to invest.
2. Question who should make the investment.
Once it is determined that access to an item is required on almost no notice, it almost invariably follows that people assume that their company should be the one to make the investment. A far better alternative would be to have someone else make the investment. Many suppliers are willing to do this as it guarantees that they maintain continuing business with your company. Before committing to an inventory investment explore the possibilities of consignment stock.
3. Determine how planning and process redesign can minimize the investment.
If it is determined that an item is needed and that the supplier is not prepared to support their ongoing relationship with your business then you need to determine what actions you can take to minimize your investment in the inventory.
There are many actions that can be taken to minimize the investment and these are detailed in the chapter on the ‘7 Actions for Inventory Reduction’.
When setting up a new inventory management system, you must ask yourself the questions about applying the ‘7 Actions for Inventory Reduction’. This is the only way that you can minimize your investment without impacting your ongoing risk. To help you do this we have developed the Stock Decision Checklist.
Stock Decision Checklist (Extract from Chapter 7 of Smart Inventory Solutions)
(Apologies for the repetition but it helps explain the checklist in Figure 1)
When deciding what items to put into inventory many companies limit their thinking and this results in their being overstocked.
They often ask themselves only one question, ‘Does this item need to be available at short notice?’ If the answer to this question is ‘yes’, they put the item into inventory and the company is committed to not only the initial expenditure but also an ongoing investment. The thinking stops here and administration processes take over.
But there are two further questions that should be asked before any item is taken up as inventory. Do we have to make the investment? and, if so, how can we minimize the investment?
In asking both of these questions you are seeking to be smart about how you spend and invest your cash.
Asking ‘Do we have to make the investment?’ seeks to avoid making any investment by either finding a substitute or getting someone else to make the investment on a consignment basis. This is the preferred option if the outcome is that demand can be satisfied at an acceptable service level.
If no-one else is prepared to invest or there are no substitutes, then you must ask ‘How can we minimize the investment?’ In other words, how can you spend as little of your cash as possible and still have the items available? The focus is now on setting up the dynamics of supply to minimize the cash you need to invest. Options include, matching delivery with usage, minimising the reorder quantity, reducing the replenishment time or simply buying the lowest total cost item. These options cover the main actions required for inventory reduction.
The decision making process for new items is shown in Figure 1 The Stock Decision Check List.
Figure 1: The Stocking Decision Checklist
(For a copy of this checklist click here)
At the end of the day, if it were my money being invested I would seek to minimize the overall investment and seek to ensure that those ‘Day 1’ decisions did not set me up for years of over investment.
When establishing a new inventory management system you must consider the long-term cash impact of your decisions
About The Author
Phillip Slater is the author of the book Smart Inventory Solutions. For more information visit his website at http://www.InitiateAction.com.
Note: You are welcome to reprint this article online on the condition that it remains complete and unaltered (including the ‘About the author’ info at the end) and you send a reprint to enquiries@InitiateAction.com |
|
Initiate Action Pty Ltd 49 Vida Street, Aberfeldie Vic 3040 Australia phone: +61 3 9331 3181 fax: +61 3 9331 3180 USA and Canada Free Call 800-581-7678
|
