Inventory is one of a company's most expensive assets, making up around half of the total invested capital.
When we talk about inventory, we’re referring to the raw materials, work in progress (WIP) and finished goods held by your company at any time. The problem is, manufacturers often hold far more inventory than is required to produce goods in time for customers.
These inefficiencies and inaccuracies with inventory can cause major problems, risks and costs. Because the fact is, every piece of inventory has a cost associated with it. This could be as a physical asset as well as costs associated with storage space, transportation, risk of loss or damage, insurance, and even interest. The more money that’s tied up in inventory, the less is available to use elsewhere in the business.
By optimising inventory control and removing inventory waste, you can improve your bottom line, while making your manufacturing processes and whole business more efficient in the long term.
But to remove inventory waste, you need to first identify where this waste comes from.
Producing too many goods, or producing them before they are needed by customers, is one of the top causes of inventory waste and one of the seven wastes of lean manufacturing. By making too much in advance, you have to manage the costs of holding inventory, finished stock that you may not be able to sell, and work in progress.
All of this requires space for storage, as well people and equipment to move the stock around – yet more costs for your business. Excessive transportation and handling also increases the risk of damage or loss of inventory, as well as transport waste.
Actionable Tips to Avoid Overproduction:
- Use Just-in-Time Lean Manufacturing principles to only make things as quickly as the customer wants, so you can hold the minimum stock required and reduce manufacturing waste.
- Only order the supplies you need for your immediate customer needs, eliminating excess inventory.
- Use an Enterprise Resource Planning (ERP) solution for simpler and more accurate Materials Requirements Planning (MRP) and forecasting to optimise production planning.
- Connect planning, labour and resource management in one ERP solution to provide visibility and reduce waste.
The ‘waste of waiting’ tends to occur through processing bottlenecks or delayed delivery of raw materials and supplies. It can quickly increase production costs, as employees and equipment can be underutilised while they wait.
Actionable Tips to Avoid Delays:
- Automate the inventory management process using smart software solutions for timely deliveries.
- Analyse your approach to supplier management in order to ensure supplies aren’t delayed.
- Identify bottleneck areas in your production line where work in progress is building up.
- Defective inventory
Lots of things can lead to inventory defects – many of which are completely avoidable. Defects can come from equipment faults, supplier issues, lack of operator training and more.
The costs associated with inventory defects can be high, especially when you consider the costs of rework, rescheduling, extended lead times, and unsatisfied customers.
Actionable Tips to Avoid Defective Inventory:
- Invest in preventative maintenance to ensure your equipment is always running at its optimum.
- Regularly train operators on machinery.
- Review your suppliers to ensure they are providing high quality goods.
True, having a large amount of inventory on hand saves you from running out. Sometimes you can make large savings by buying materials in bulk or with a special offer. But these savings can be quickly offset by the major problems of overstocking.
Surplus inventory, whether raw material, work in progress or finished product, takes up valuable warehouse space resulting in higher risks, maintenance and handling costs. Depending on the goods, you may be left with stock that deteriorates, suffers wear and tear, or perishes after a period of time – resulting in waste you need to dispose of. Of course, you can speed up production to use up the stock before it deteriorates, but you may then be left with finished products you cannot sell.
Actionable Tips to Avoid Overstocking:
- Only stock adequate quantities to meet forecast demand.
- Use an ERP platform to simplify Materials Requirements Planning (MRP) and forecasting, which optimises production planning and stock ordering.
Bring it all together
Inventory waste brings substantial costs, risks, and inefficiencies to a business. Even the smallest inventory waste can have a snowball effect on how you manage staff, equipment, storage and other costs – which can hurt productivity and, ultimately, profitability. The solution lies not only in managing inventory, but effectively predicting demand, analysing material and resource requirements, and accurately planning production. For this, you need visibility into real-time data, such as stock levels, prices and orders, along with automated planning and forecasting capabilities.
This can be achieved with razor-sharp precision using an Enterprise Resource Planning solution. Growing manufacturers like Koshi Sushi and SEA Electric use MYOB solutions to bring accuracy, real-time immediacy and integration to the production process, removing the problem of inventory waste.
Our partnerships with the word’s leading vendors means we’ve got a finger on a few pulses; we’re always happy to engage with you to see how and where we can work together for the benefit of your operations. Feel free to get in touch any time.