- February 24, 2021
- Posted by: David Marshall
- Category: Management, Manufacturing
The story of just-in-time inventory is one used to frighten young manufacturing operations managers: automotive manufacturers are so tight on their just-in-time manufacturing require their vendors to deliver their shipments at a specific minute or else they’ll be fined thousands of dollars for every minute of delay.
Operations managers hear this and begin considering all the benefits of bulk ordering and having everything on hand so you never run out.
While just-in-time manufacturing is great if you can execute it — and necessary if space is a premium in your operation — bulk ordering is not a great way to keep your raw materials on hand to avoid any problems.
For one thing, you tie up your operating capital into material that you may not use for days, weeks, or months. For another, those materials are at a greater risk of being damaged. And third, you’re paying to store things that you don’t actually need to store in the first place. Think of how much money you could save on storage costs if you could reduce your inventory by 50%.
Conduct a Pareto Analysis Of Your Inventory Levels
The Pareto principle basically says that 80% of your results come from 20% of your efforts. (Actually, Wikipedia says “roughly 80% of consequences come from 20% of the causes.”
In the case of a manufacturer, it means 80% of their revenue (sales) comes from 20% of their catalog. Similarly, 80% of their revenue comes from their 20% of their customers.
In truth, the number 80-20 is really just an arbitrary point, but it’s one we use a lot. One of the businesses I ran in the past, less than 10% of our catalog created 94% of our sales volume. In other words, if we only kept 10% of our units in stock at all times, we could capture 90% of our sales volume.
Conversely, it meant 10% of our sales came from the remaining 90% of our items. For some companies, you could actually become more profitable just by cutting out those 90% of your products from your inventory.
Knowing this enabled us to do a number of things:
- We cut back on warehouse space.
- We freed up our capital for other uses.
- We reduced damaged inventory, which meant reduced waste.
- We outsourced the rarely-ordered parts, which helped with the above items.
If you can determine which are your top 10% – 20% of products, you can look at the situation and say “I don’t have to make those every day.” You can make it once and store it, with the risk of having to write it off as an obsolete item. This might be advisable if you only have to make a few of these items each year, and the setup and creation isn’t too painful. (If it’s too painful, buy them from someone else and store them.)
You would also continually make and inventory your top sellers. You would measure the churn rate of those products, and make enough to ship everything within a 30-day period. In that case, it won’t cost you anything, because it’s going out and you’re getting paid.
Or if you had a customer you really trusted — and they weren’t a just-in-time facility — you could ship it to their factory and have them store it until they needed it. Then, as they pulled out the inventory, they would let you know and you would just invoice them as needed.
We’ve never done that final arrangement in any of my companies because my philosophy has been not to force my customers to store my inventory. My philosophy was to drive my service levels so the customers could rely on the fact that I would ship whatever they ordered within 24 hours.
I’ve been a manufacturing executive, as well as a sales and marketing professional, for a few decades. Now I help companies turn around their own business, including pivoting within their industry. If you would like more information, please visit my website and connect with me on Twitter, Facebook, or LinkedIn.
Photo credit: Foundry (Pixabay, Creative Commons 0)