What is Holding Your Company Back From Lowering Inventory Levels?

By: David Sherman

Firms today are beginning to understand more and more that high levels of inventory aren’t just detrimental to costs but also for hiding other potential issues. Inventory management starts with lean buying and planning tactics as well as streamlined inventory management standard processes for material handling and planning.

It Begins with Suppliers

The beginning stage of inventory management doesn’t begin at the dock door; rather, it begins with the supplier. The supplier must fully understand their customer’s intentions (and especially demand) in regards to material planning and purchasing for the firm. Firms need to advise their suppliers of their consumption (customer demand) so that they can match buying and manufacturing processes for both parties. This collaboration allows for a more level volume flow within this particular sector of the supply chain network. As both firms begin to understand their customers’ demands the firms are more able to align their processes in this regard. As smaller shipments at more frequent intervals becomes the norm, the inventory isn’t necessarily being held by an individual firm (holding costs), rather it is being spread throughout the supply chain for more level consumption and cost sharing. This can help reduce total costs for all parties involved (potentially transportation costs may go up but this amount is rather minuscule compared to materials/logistics spend). Once this relationship begins to become more stable, real levels of inventory can be realized, i.e. supplier processes are strong enough to support individual quantities rather than batch shipments.

 What Happens Next?Inventory

Once the collaboration has begun with supplier(s), internal processes can be geared toward lean receiving and warehousing functions. These functions must support the ultimate end goal (as should all processes in the firm): customer demand. As customer demand is realized, buying habits then reflect this menagerie of relationships that can directly affect warehousing/production needs (to support those customer demands). Receiving processes must also be geared to effective storage and usage of inventory for production purposes. As production has a specific lead time and takt time (for each process) it is important for receiving/warehousing to understand those items and to effectively match their processes and resources to eliminate waste in order to provide a more stable volume flow. As inventory is maintained at low(er) levels, these stable processes can help become more agile to the overall production process (customer demand).

Cost Benefit

Internal processes, when maintained and continuously improved upon can help leverage and maintain low(er) inventory levels. But these inventory management processes will take some time to implement and will require parity at all levels within an organizations, and eventually with supplier(s)/customer(s). As each function is causal and has a direct effect on every other function within a firm, it is paramount that each relationship is clearly understood. Lowering inventory levels too quickly could run the risk of line stoppages (unstable processes) and mis-communication (visibility gaps) which could be detrimental to a manufacturing operation. For this reason, firms must understand the cost and the benefit of maintaining lower levels of inventory, as they continue upon their lean journey. Inventory management can help reduce one of the most strenuous (and potentially non-necessary) costs for a firm. As long as the processes and the visibility between each function supports all of the other functions, low(er) levels of inventory can be maintained. Collaborating with other members of the supply chain and leveraging these process techniques can have huge benefits for a firm in regards to inventory management. This brings up a serious but very real question: what is holding your firm back from lowering inventory levels and costs?

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