For many years, if you were a job shop or contract manufacturing owner you didn’t have to worry about inventory. You bought raw material directly to the job about when you needed it and whatever inventory you did have was usually comprised of raw material drop or remnants or a few finished parts from a previous job overrun.
However, customer demands upon job shops are changing. Likely, many of you are feeling your customers pressuring you to produce smaller lot sizes and shortening their delivery demands as they wish to outsource their planning and ultimately the cost of carrying inventory to their suppliers. In addition, material availability from suppliers can at times be sporadic and constant price fluctuations (usually in the form of increases) are cutting into your margins.
With these ever changing demands, even today many manufacturing shops still manage their material requirements by intuition or gut feel. As a result, these shops tend to manage more inventory than required because they are using outdated systems or NO system at all to manage true supply and demand of that material. As shops have to manage MORE inventory, it becomes critically important to understand the true cost of inventory.
The cost of inventory is based on a number of variables; however, in general the additional cost of carrying inventory can be broken down into four broad categories. The first of these cost categories is the cost of the inventory itself often referred to as “capital costs.” This cost is the price that you originally paid for the material or the cost of manufacturing the item. The second cost category of inventory are the “inventory service costs”. Inventory service costs include the cost you incur in handling the material, insurance you pay to insure against loss or damage, and the taxes you pay on the declared value of the inventory. The third cost category of inventory are the “storage space costs.” These costs would include the actual cost for maintaining the physical storage of the material, any staging areas, and the packaging or bins to within the storage facilities. The final cost category of inventory are the “inventory risk costs.” These costs are the costs associated with inventory obsolescence, revision changes, damage, shrinkage, or relocation costs. Most industry experts generally agree that these costs will add a minimum of 20-25% to the cost of inventory and depending upon the type of inventory and requirements for storage as high as 75%. These additional costs will have significant impact to your margins the more inventory that you have to carry.
So the challenge today is for shop owners and inventory managers to be “smart” in deciding what inventory to carry and use systems and technology whenever possible to help them manage their supply and demand for both raw material and finished goods. How does a shop fully utilize a shop floor scheduling system to assist in managing a more lean inventory?
A manufacturer needs to first understand the capacity of their shop and to what level they want to be able to plan and schedule. For some shops, scheduling to a department might be sufficient, or to a group of similar machines, or in some cases you might have to get down to the machine level. A question to ask yourself at this stage is: Does my current production planning solution or process allow me the flexibility to do the type of scheduling required by the type of orders that I run?
For job shops, the variability of capacity caused by the availability of people resources, machine resources, and the kind of parts you are running can make this a daunting task without an automated shop floor scheduling solution. And even when you have begun using the scheduling capabilities of your shop management solution, you need to consistently evaluate your shop capacity regularly and make those “tweaks” and adjustments in the shop floor scheduling solution. Regularly updating information related to scheduleable hours and capacity hours, employee and machine constraints, and understanding where your bottlenecks are is critical.
Another critical component is understanding that the production planning process really starts with the quoting or estimating function. In evaluating where your company is in terms of this, take a sample of your quotes, how detailed do you lay out the routing of parts that you are quoting, can you re-quote repeat work on a part based on how the part actually ran the last time, do you account for employee efficiency and machine efficiency.
Finally, accurate and up-to-the-second collection of production data for active orders is critical. Can you be satisfied with data that is eight hours old if you are inputting data manually? Do you regularly audit the accuracy of production quantity data? For prototype shops, do you have a mechanism for indicating percentage of completion versus just recording actual time run? Do you have the ability to view exception information to isolate and deal with accuracy issues?
Before launching your initiative to reduce inventories and reduce the overall cost of carrying excess inventory, you must set a goal to fully maximize your production planning system. Then, you must constantly monitor the data and take action when there are exceptions. Visibility to key scheduling and planning metrics and their effect on inventory will allow key management personnel to quickly and effectively determine alternatives, react to the situation, and implement the necessary scheduling options to ensure that commitments made to customers are met. The best planning systems allow you to see the effect that scheduling have on inventory in real time. In the end, these planning solutions will help you reduce the need for safety inventory and increase your profit margins. In the end, your shop will become more lean and mean and better service your customers’ changing demands.