Inventory Management with COVID-19, Part 8
Component and Raw Materials Needs
Many organizations assemble or manufacture finished good products. Historically, it has been common practice to record the quantity of the component parts and raw materials used in creating the finished goods products in usage history as they are consumed. This historical usage is utilized in forecast formulas to predict the quantities of raw materials and component parts that will be needed in the future. Remember the common phrase, “what we consumed in the past is a good indication of what we will use in the future.”
However, over the past few months we have seen significantly different demand for some products due to the effects of the COVID-19 virus. Sales of some products has skyrocketed while customers’ needs of other items has drastically declined. If you acquired raw materials and component parts based on past consumption, you probably will have excess inventory of some material and shortages of other needed items.
To avoid this situation, base your future needs of components and raw materials on the forecasts of their associated finished goods. Please refer back to the first several articles in this COVID-19 series for procedures for forecasting demand of the finished good products during these uncertain times. To properly determine the quantities of components and raw materials needed to produce the forecasted finished goods:
1) Ensure that your bills of materials (BOMs) are accurate. A BOM is the list of components (and the quantity of each component) needed to produce one complete finished product. For example, finished good #A100 is assembled from three component parts:
Component Needed Qty Lead Time (Days)
C100 2 7
C200 3 14
C300 1 90
2) Forecast future demand of each finished good product for each of the upcoming several months. The number of months should be based on the longest lead time for one of the component parts or raw materials in the BOM. In our example we need to forecast demand for products for three months (i.e., 90 days)
3) Determine the quantity of each component part that will be needed in each of the upcoming three months. If the next month’s forecast for product #A100 is 40 pieces, we will need 80 pieces of component C100, 120 pieces of component C200 and 40 pieces of component C300.
4) Accumulate total needs in each of the future three months for each of the component parts. After all components C100, C200 and C300 may be used in multiple finished good products.
5) Plan when the quantities of each component part should be reserved, or additional stock of these items ordered from a supplier, by subtracting the longest component lead time (in this case 90 days) from the date finished good #A100 will be needed to fulfill customer demand. This will help prevent stock shortages in the production process.
In order to effectively operate in these challenging times, we have to examine and improve our business processes. Not only will this practice allow us to optimize our current working environment, but establish a framework for success when our situation returns to “normal”. Stay safe!