Meet demand and maintain low inventory levels

Inventory Management - levels, system, model, type, business, system, What is inventory?

meet demand and maintain low inventory levels

Maintaining low inventory levels is a common logistics and inventory they have just enough inventory to meet current and near-term demand, but not so much. One way to keep inventory levels and costs lower is to negotiate faster goals of ordering enough to meet ongoing customer demand while not. Inventory exists to meet customer demand. In the past, companies maintained a steady level of inventory because competition was low. Inventory levels are reduced to save on costs, decrease on lost profit, and free up.

Companies typically try to achieve a balance whereby they have just enough inventory to meet current and near-term demand, but not so much that they have excess.

The Advantages of Low Inventory Levels |

Reduced Holding Costs Holding inventory has costs. Typical costs include utilities for the space used and labor costs involved in managing the inventory.

A grocer, for instance, may have significantly lower utilities costs by using less freezer or cooler space to store refrigerated and frozen inventory. A distributor or retailer would need less labor to manage a smaller level of inventory holdings than it would to manage higher inventory levels.

Easier Organization Smaller inventory levels are also easier to manage. It takes less time to organize and retrieve inventory when there is less of it to put away and get out. Running out of only one item can prevent a manufacturer from completing the production of its finished goods. Inventory between successive dependent operations also serves to decouple the dependency of the operations.

Reduce inventories and improve business performance

A machine or workcenter is often dependent upon the previous operation to provide it with parts to work on. If work ceases at a workcenter, then all subsequent centers will shut down for lack of work. If a supply of work-in-process inventory is kept between each workcenter, then each machine can maintain its operations for a limited time, hopefully until operations resume the original center.

Lead time is the time that elapses between the placing of an order either a purchase order or a production order issued to the shop or the factory floor and actually receiving the goods ordered. If a supplier an external firm or an internal department or plant cannot supply the required goods on demand, then the client firm must keep an inventory of the needed goods.

The longer the lead time, the larger the quantity of goods the firm must carry in inventory. A just-in-time JIT manufacturing firm, such as Nissan in Smyrna, Tennessee, can maintain extremely low levels of inventory. Nissan takes delivery on truck seats as many as 18 times per day.

However, steel mills may have a lead time of up to three months. That means that a firm that uses steel produced at the mill must place orders at least three months in advance of their need. In order to keep their operations running in the meantime, an on-hand inventory of three months' steel requirements would be necessary.

Inventory can also be used as a hedge against price increases and inflation. Salesmen routinely call purchasing agents shortly before a price increase goes into effect. This gives the buyer a chance to purchase material, in excess of current need, at a price that is lower than it would be if the buyer waited until after the price increase occurs. Often firms are given a price discount when purchasing large quantities of a good. This also frequently results in inventory in excess of what is currently needed to meet demand.

However, if the discount is sufficient to offset the extra holding cost incurred as a result of the excess inventory, the decision to buy the large quantity is justified.

meet demand and maintain low inventory levels

Sometimes inventory is used to smooth demand requirements in a market where demand is somewhat erratic. Consider the demand forecast and production schedule outlined in Table 1. Notice how the use of inventory has allowed the firm to maintain a steady rate of output thus avoiding the cost of hiring and training new personnelwhile building up inventory in anticipation of an increase in demand. In fact, this is often called anticipation inventory.

How to Keep Inventory Levels Low

In essence, the use of inventory has allowed the firm to move demand requirements to earlier periods, thus smoothing the demand. In order to facilitate this, many firm's use an ABC approach. From an inventory perspective it can restated thusly: Therefore, a firm can control 80 percent of its inventory costs by monitoring and controlling 20 percent of its inventory. But, it has to be the correct 20 percent. The top 20 percent of the firm's most costly items are termed "A" items this should approximately represent 80 percent of total inventory costs.

Items that are extremely inexpensive or have low demand are termed "C" items, with "B" items falling in between A and C items.

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The percentages may vary with each firm, but B items usually represent about 30 percent of the total inventory items and 15 percent of the costs. C items generally constitute 50 percent of all inventory items but only around 5 percent of the costs. By classifying each inventory item as an A, B or C the firm can determine the resources time, effort and money to dedicate to each item.

Usually this means that the firm monitors A items very closely but can check on B and C items on a periodic basis for example, monthly for B items and quarterly for C items. Another control method related to the ABC concept is cycle counting. Cycle counting is used instead of the traditional "once-a-year" inventory count where firms shut down for a short period of time and physically count all inventory assets in an attempt to reconcile any possible discrepancies in their inventory records.

When cycle counting is used the firm is continually taking a physical count but not of total inventory.

meet demand and maintain low inventory levels

A firm may physically count a certain section of the plant or warehouse, moving on to other sections upon completion, until the entire facility is counted.

Then the process starts all over again. The firm may also choose to count all the A items, then the B items, and finally the C items. And these problems can compound themselves. Long lead times lead to a requirement to forecast, and long-range forecasts are by nature inaccurate.

When actual customer demand is not what was forecasted, unsold inventory quickly accumulates in expensive piles, while expensive expediting is used to produce the needed products that are in short supply. Salable throughput decreases while customer service goes down. Generally, the cycle just keeps repeating itself, further compounding cash flow, profit and service problems.

How to reduce inventory Most executives agree that top-heavy inventories are a giant cash vacuum and need to be reduced in order to free up cash for investment in revenue-growth activities. How can this be accomplished?

meet demand and maintain low inventory levels

One of the major impediments to inventory reduction is the mistaken notion that just improved inventory management is all that is required to get the job done. The real culprits are the inefficient business processes that cause excessive inventories to exist in the first place. Here are eight suggestions: Certainly, lack of control contributes to excessive inventory, but often behavior in inventory-controlling functions is driven by management's highly negative reaction to material shortages compared to rare and less severe response to high inventory levels.

meet demand and maintain low inventory levels

Send the correct signals to those functions that control inventory so that they are properly motivated towards reduction. For the most part, it is inadequacies in cross-functional business processes that cause the need for inventory buffers to exist; address the cause of the problem, not the result.

Identify the underlying causes, get control so that inventory buffers are not needed, then reduce the inventory accordingly. Otherwise, the inventory reduction will only exacerbate the underlying problem.

Major reductions 20 to 50 percent or more in all forms of inventory, without harming customer service, usually require the re-engineering of the order-to-delivery cycle to find ways to do it faster, better, cheaper.