“Lean” is a popular word in commerce today. There are a lot of books, articles and seminars that will tell you how to get the “fat” out of your business. Last week I read an article that advised every distributor and manufacturer to practice “just in time” (JIT) inventory management. That is, you should strive to receive products just before they were needed in production or delivered to a customer. I also received a call from a client who said that his accountant had advised him to get rid of any item that didn’t generate at least three turns a year. That is, an item whose sales didn’t exceed three times the quantity he had to buy from his supplier.
Lean inventory management is a great concept, but it should only be applied in circumstances where:
• Demand for the product is known before a time period equal to the anticipated lead time
• The supplier of the product is very reliable
• You can economically order the quantity of the product that will be consumed in a short period of time
Sure, sometimes these three conditions occur and inventory can “pass through” your warehouse on its way from your supplier to the customer or job site. But, most organizations far more often have to also deal with:
• “Independent demand” with varying customer requests that are not known until just before the product(s) are needed
• Inconsistent delivery of replenishment shipments
• Case quantities and other requirements that force you to order more of an item that will be sold or consumed in one transaction
Dealing with these challenges can cause a company to overstock products in their attempt to achieve the first part of the goal of effective inventory management: to “meet or exceed customers’ expectations of product availability.” However, they also have to address the second part of the goal, “with the quantity of each item that will maximize net profits or minimize the total inventory investment.”
In the next several months we will address the balance between the “lean” theory of inventory (i.e., minimizing stock) and ensuring that you have what your customers expect to be available for immediate delivery.
First, we begin by identifying how much you currently have in inventory. Instead of just looking at the on-hand quantity or value, we want to determine how long your current inventory will satisfy customer demand. This is referred to as the “day’s supply of inventory” or DSI. DSI is calculated with the formula:
Current Available Inventory ÷ Forecast Demand per Day
• “Current available inventory” is the current on-hand quantity minus the quantity committed on current outgoing orders.
• “Forecast demand per day” can be calculated by dividing a monthly forecast by 30 days or a weekly forecast by 7 days. For example, if the available quantity of a product was 120 pieces and the forecast demand per day was 4 pieces the 120 pieces would represent a 30 day supply (120 ÷ 4 = 30 day supply).
Next month we will start to use the DSI measurement in our quest to “right size” your inventory. In the meantime:
• prepare for next month by calculating the DSI for each of your inventory items.
• examine those products with a high day’s supply and ask your buyers, “Do we really need this much of this item in stock”?