Focus on improvement
The objective of any inventory control and planning strategy is to avoid shortages while minimizing the amount of inventory. Having more inventory is the easiest way to reduce or avoid shortages. While the risk of shortages is likely to increase with reducing inventory, this relationship can be changed with a third factor and that is variability. As mentioned in the previous article, safety stock is the customary way to compensate for variation including swings in demand and other unexpected changes in demand or supply.
It is impossible to cover all possible variations because the future is unknown. We are left to cover the majority of the expected problems and live with a level of availability (fill rate) less than 100%. A higher fill rate is possible with more safety stock. However, it is possible to increase the fill rate without increasing inventory with reduced variability. On the other hand reducing variability would allow you to reduce safety stock without reducing the fill rate. Simply put, to reduce inventory while maintaining or improving fill rate, reduce variation.
The most obvious ways to reduce variation are:
- Improve inventory accuracy.
- Improve forecast accuracy
- Reduce lead time
- Become more reliable
- Implementing integrated systems like ERP, warehouse management systems, automated data collection, and other technologies to improve accuracy.
Reduce lead times and lot sizes
You wouldn’t need inventory if the lead time is zero. However, you will need more inventory and safety stock if lead time increases because of variability which is a time-sensitive phenomenon.
The risk of variation increases with time because forecasts are more accurate in the near term than they are further out. Replenishment planning is focused on replenishment lead time.
Replenishment quantities can be smaller with shorter lead time, which means that less inventory is brought in at a time and used up more quickly—so overall inventory level is reduced. Usually, the general concept EOQ or economic order quantity is used to determine the replenishment of lot size. In spite of the fact that many companies do not use the actual EOQ formula to determine lot size, the concept still holds in informal logic and intuitive methods– In a successful business, avoiding unnecessary inventory and minimizing the number of orders at the same time, to reduce the cost.
If you are interested in reducing “economic” replenishment order size than reduce fixed ordering cost. For purchased items, ordering cost includes the operating cost and efficiency of the purchasing department, receiving and inspection, and material handling. Purchasing applications that are integrated with a supplier portal for collaboration, links to the planning system for automated or semi-automated ordering, electronic communication, and other technologies can help ease the ordering process.
Certified quality and Pre-qualified suppliers simplify and accelerate handling and receiving. The focus is on set-up and changeover times for manufactured items. Changeover and thus economic production quantity is usually reduced by companies by investing in automation.
Other less costly changes include “poka-yoke” meaning fixturing and mistake-proofing, scheduling to minimize the changes between one job and the next, and process redesign to simplify changeover.