Do You Measure The Real Cost Of Sales

Posted by on 10:29 am in Inventory Optimisation | 1 comment

Do You Measure The Real Cost Of Sales

Or Take The Figure The Accountants Work Out?

Cost Of Sales

Simple right? How much does your organisation spend on stock. It’s more or less the cost of your stock related to the bill of material for the item in question. Isn’t it?
Specifically stock for direct resale or component stock that’s part of your manufacturing process. The question is, do you really know much do you spend on it?

I’m going to make a prediction here. Almost two thirds of those reading this who are responsible for their organizations inventory will not know the real answer to this. At best they will have an accountants version of this figure.
First, let’s sort out one definition. We are actually talking about the cost of inventory, specifically component or raw material inventory for sell-through or to be part of the manufacturing process.
We aren’t talking about the cost of business sundries such as stationery supplies, catering, janitorial equipment and any of the other myriad items required to make most businesses run smoothly, we are just talking about manufacturing cost of raw materials.

An accountant may look at a company that runs a typical perpetually calculated FIFO system (first in first out) and ask that inventory is calculated like so.

At point of sale (when the invoice is raised) a dual transaction is carried out. Crediting the company with the value of the sale and debiting the stock that was used to create the product

For accounting purposes this works it’s the standard way of measuring the cost of sales. For measuring stock levels it can have some flaws.
It relies on a very well maintained B.O.M (bill of materials) being kept for each item. It requires that sundry items directly used in manufacture are drawn down also, perhaps on a pro-rata basis.

The problem isn’t that accountants do this. The problem is that this figure, often simplified and sanitized, and if this is the one fed back directly into your companies inventory control system, in my experience it is often not  good enough.

Examples of innacuracy could include items such as disposable templates used during assembly, one-off use testing equipment certain cleaning materials (most would come under business sundries, but  there are examples of exotic, specific, manufacturing process critical substances used here). Even paint or powder coat seems often missed from the cost of sales and, for ease of accounting purposes, pushed into a sundry or draw-down category of raw material, relying on periodic and manual counting of stock levels rather than being integrated properly into a process.

Surely these never amount to much? Isn’t a ready reckon system good enough for these items?

I can see why the thought of having these slightly harder to quantify items out of your digital system is appealing. The task of measuring how much powder coat for example is needed to cover every item that needs it is thought to be time consuming. There is an assumption that measuring it is an imprecise task.

Both of these assumptions are, for the most part, incorrect.

Accurate measurement of liquid consumable items in a large scale manufacturing process

Effective measurements of sundries and consumable items

As an aside, usage of cleaning items, powder coating and other fluids and sundries have been shown to be as predictable, once measured, as almost any other item in the average inventory system.

I have walked into companys who use periodic manual “ready reckon” methods for all sorts of manufacturing critical items, companies that have expensive and otherwise well run ERP and inventory control systems, and the management team use just these justifications.

So here’s a few facts – with citation, that might make you change your mind.

General Motors prior to 1999 reported that over 50% of all their line stoppages and slow downs were as a result of issues with coating, cleaning and sundry items.
In 2000 GM changed their inventory control methods to accurately calculate manufacture, loss and “failed in operation” (FOI) use of these items and reduced line downtime by almost 60% as a direct result. Here’s some of the detail of that.

Working with direct to line suppliers (whose profit levels, not to mention trust, relied on accounting for the usage of sundry items, nuts, bolts, wire etc.) Bosch in Worcester, over time, managed to measure a far more accurate level of loss during the manufacturing process and then implement both a best practice initiative on the shop floor to reduce loss, and a more accurate bill of materials which reflected the true level of component use per SKU manufactured. In turn this reduced manufacturing down-time by almost 20% as well as reducing costs as best practice was rolled out.

Here’s a question you might be asking yourself right now.

Why should I, as an inventory professional do this when my accounts department seems to already have it covered?
Her’s an answer for you.

When was the last time you saw the company accountant brought to book for a line side shortage or for a large manufacturing overstock?

If your experience is anything like mine, the answer would be “never”.
The lesson?
Don’t always use accounting principles to control manufacturing methods.
Those book-keeping guys have little interest and no responsibility for your stock availability levels, just the overall stock value and cost of sales.

As an inventory professionals stock availability is your job. Take ownership.


Supplier Controlled Line-Side Stock Replenishment

Posted by on 10:23 am in Inventory Optimisation, Supply Chain | 0 comments

Supplier Controlled Line-Side Stock Replenishment

Overcoming The Delivery Issues

Just In time ordering, processing and delivery seems to pull constantly on small businesses. You feel you should implement JIT (Just in time), of course you want to, but is it something you can implement with your current control system? Pushing this question a little further, how about foregoing componenet storage for many of your smaller or “C” class lineside items altogether and implementing supplier lead replenishment directly to the point of manufacture?

If you’ve seen as many implementations of inventory control as I have over the years, it soon becomes apparent that, of the number of manufacturing facilities that would benefit from line side deliveries, very few actually implement it. If pressed, many of the prime candidates for this who have not grasped the opportunity will reply with the same concern. One word.

Stock Replenishment Out Of Your Hands Requires Trust

This reticence comes itself in various forms but can be summed up pretty neatly with;

Confidence that the supply chain will not be interrupted.

This is the most common trust issue. Manufacturers, while understanding the cost of holding excess inventory on one hand, are also often privately happy, or at least like the feeling of security that holding  a few hours, days or weeks of “C” class stock and sundry items in the warehouse for “just in case” gives them.
Just in case the supplier has a hitch with delivery, just in case they need to change manufacturing focus at short notice and the new B.O.M calls for a different part – in which case – nice to have some in stock.

All well and good, but the win here is that line-side stock replenishment (component delivery) doesn’t rule out contingency, it just needs to be formalised. Opportunities to enter partnership lead contracts that allow for contingency to be handled in a more cost effective manner.

Slick efficient systems revolving around supplier created invoices which automatically trigger works orders at the suppliers plant. Actioned after being checked by a production planner and reconciled against a shared and updated production plan.
This again relies on trust as it works best with the relevant bill of material tied to the production plan being embedded in the suppliers manufacture control system.
So we have the opportunity for live demand updates always available to the supplier live on their own inventory control or MRP system.

As a slight aside, the biggest potential win I’ve seen in this becomes apparent very early on in the process where, almost without fail a good supplier will offer alternatives and create opportunities by being an embedded part of the process. How often have I heard;
“So why do you have two different lengths of” (for example) “M6 bolts that only vary by 4mm”
A reconciliation between production, design and quality departments then shows that only one size is needed, often saving a SKU and almost invariably providing a stock cost saving in the process.

The technicalities of design aside (an opaque process if you ask designers directly, a much simpler one if you refer purely to form and function) there are often opportunities to standardize many components, often at a cost saving.

The Big Picture

The bigger picture though is the need for line side supply contracts to be set up with contingency in mind and for the administrative system that oversees the contracts to be configured to make the control and visibility of this as simple as possible.
Here’s a fact. Where I’ve seen a concerted effort to implement supplier partnerships of this kind I’ve always seen a gradual standardization sub-assembly and component parts and this rationalization reflected in time throughout the stock management and MRP systems.

Give your supplier credit for, in most cases, understanding the items they manufacture better than you do. Then allow yourself to benefit from that.

Also, I should add that when implemented with a full commitment, these arrangements have, in my experience, always worked, and always with a quantifiable, and often sizable cost saving. Added to the initial aim of a reduction in inventory and administration. The positive effect rolls down from design through inventory right onto the shop floor and is reflected in the balance sheet in due course.

Business trust in the supplier. Enabling supply partnerships of this kind in stock replenishment can raise a few hairs when it comes to fiscal trust.

“How de we know we are not being over charged?” and
“What do we do if we get a failed batch delivered?”

While these are real concerns, and in my experience will always be raised by someone in the decision chain, effective and easily manageable solutions are easily found.
Simple 2 bin replenishment methods offer a transparent solution to the actual delivery while trained line side operatives who perform a sample check with the help of your QA staff overcome all but the most disguised of quality issues (which would occur whether direct to line-side deliveries were implemented or not in most cases) and a reconciliation of supplier invoices againt a total of BOM usage  and measured scrap at the end of an agreeed period clears up the under/over delivery questions. It sometimes reveals some waste issues line-side which, while hard news at first, offer yet more opportunities for savings if acted upon. Kaizan anyone?

Yes, there is a little more to it than that. The devil is sometimes in the detail. Then so is the advantage of putting a little effort in. It works. Trust me.

Have a read of these papers on the issue;

It might be worth considering as a first step to reduce inventory with the added bonus of building better partnerships with your supply chain and enabling your own employees in the process.

Done right, everyone is a winner.

Obsolete Stock As A Simple Gauge Of Storage Efficiency

Posted by on 12:56 pm in Inventory Optimisation | 0 comments

Obsolete Stock As A Simple Gauge Of Storage Efficiency

I’ve heard it said at meetings with business owners “If I expanded I’d need more warehouse space” or perhaps “The cost of holding extra inventory almost makes expansion a none starter” or words to that effect.
It never pays to contradict a potential client’s point of view straight off the bat, so the thing to do here is to nod in agreement. Maybe some kind, sage words regarding the value of well managed inventory and the overall cost of storage. That’s the sort of approach I’d advise, but what I think is something completely different.

My first objective is to see if I can take a look at the warehouse itself, ask about what inventory control systems they use, maybe even get some insight into the inventory system itself. In an ideal scenario, at some point I’d really like to speak to the busiest warehouse operative I can see, the one with the most experience. In most cases this might be the team leader, and ask one simple question.

“Where do you keep your obsolete and slow moving stock?”

Importantly this isn’t couched as a leading question, but in my experience it is always answered. Quite often, safety considerations permitting, you will actually be shown to the area and the policy for dealing with old, obsolete or unidentified stock is. This is the win.
Here is where a simple mental expansion of the control of this area and systems the company use to control it will tell you in a rough-cut form all you need to know about the potential space savings that might be had.

In other words it is a remarkably effective litmus test for the efficiency of use for the warehouse and inventory system as a whole.

A great example was at a company I visited in Leicester who made spare parts for the motor industry. The logistics director had told me that they were considering renting off-site storage to deal with the ever increasing stock levels and the likelihood of imminent overflow.

Balanced against this was my experience later that day when walking the storage facility with the warehouse manager. I was shown a  “shrine to classic cars” slap in the middle of the large but largely un-optimized warehouse space. This was not a metaphorical shrine, it was a  literal one. A table with a  grease proof cloth in a warehouse bay at ground level. On the cloth a beautifully polished and chromed exhaust pipe from a 1970’s British motor classic. My memory prevents me from naming the actual make of the car. The model escapes me. I think it was a Triumph Stag. But I might be wrong.

Around this, the 5 adjoining bays, 2 either side and the 3 above these. Had various old car parts in different states of display.

A smallish concession perhaps in a warehouse with over 2,000 such bays, but maybe indicative.
A walk further down the narrow isle layout we stopped

“The obso stock is here to the end on both sides, then in the boxes at the bottom, stuff that’s supposed to have been scrapped is outside”
“Supposed to have been scrapped”? was my obvious follow up.
“Yes, we had a deal to get it taken away once a month, but some of it needs a permit to dump and that costs more so we’ve never got around to getting one”
“How long has it been there then?” I asked mentally totting up a rough-cut space and cost savings potential if what I was seeing turned out to be an accurate reflection of the truth.
“Best part of two years most of it” was the reply.

Ok this is an extreme example, but the underlying trend shows one common factor which rings true again and again. That is the disconnect between those that work in the warehouse for a living, and the decision makers who read the cockpit reports on inventory space availability.

In this case, of the approximately 2000 bays in the warehouse, a simple clear out opened up almost 8% with over 150 bays freed up. A deal with a scrap merchant got the yard cleared at effectively no cost.
I should add that this was before the metal price boom of 2008-2012, where the same endeavor might have actually yielded a profit.

Once I had an understanding of the level of inefficiency in the warehouse space it was easy to predict the likely savings an effective stock control and inventory management system tied in to actual customer demand cycles might yield. Added to a little renegotiation of  the delivery schedules from some of the larger bulk item suppliers, alu dipped steel being the main one in this case, the company realised that they had enough space to accommodate their expected growth.

Once the “doorway” question of obsolete stock” was asked, the rest fell into place. Once again it proved its worth as a litmus test of overall inventory efficiency.
Sometimes it’s not what you ask, it’s who you ask.

Bar Codes – A Stock Control Revolution

Posted by on 1:23 pm in Inventory Optimisation | 0 comments

Bar Codes – A Stock Control Revolution

The industrial revolution brought with it a number of first world issues. Once goods were created and shipped in large numbers the issue of accounting for them soon became apparent.

The problem of quickly identifying large numbers of items with variable units of measure seemed one that could only be solved through some level of automation.

Shining A Light On The Bar Code Problem

The food industry was the first to move towards a solution. The perishability of their products being the driving force here. In 1932 Wallace Flint came up with a system that used ultraviolet light and reflective ink to mark goods and developed a rudimentary scanner that used technologies borrowed from the movie industry and applied that to Morse code.

The rail industry was the next to move towards automated stock recognition. This brought new issues into play. Different companies would share the same trucks and freight containers, the system needed to be adopted more widely to be of any use. It took the railway owners and early adopters to cajole others into buying in. Cost was of course an issue and it was estimated that, on the USD and UK railways alone the cost of implementing this early stock recognition would run to hundreds of thousands of pounds per annum. No small amount in the 1930’s

Business To Customer

While this early solution worked in established trade networks and for business to business use, it was not feasible to roll out to smaller suppliers and implement on a B2C basis. Also, the amount of data that could be held in a readable format by these early technologies was very low. The most common for5mat used a 4 or 6 digit code to identify a unique item, then a simple box quantity appended. There was no room for full description of the product or any other useful data such as supplier name, destination, UOM or expiry dates. Even the description needed to be looked up. It might also take up to 4 seconds to read a box. A great start but not ideal.

In the 70’s a study suggested that it would cost UK industry around £80 million to implement bar codes universally. However this cost would be recuperated within the first two years

Supply Chain Top Down Implementation

In the end, as with many innovations in supply chain control, it was a top down implementation that was required. Large manufacturers, where the issue of large inventory control was most acute, made is a contract requirement that their suppliers implement the technology. This in turn filtered through to customer sales soon after when the benefits of real time inventory management became apparent.

QR And Beyond

Today the best QR codes are capable of holding several kilobytes of information. Enough for full product descriptions safety and perishability details and even branding , Running a large warehouse environment without digital reader technology is almost unheard of.

Cash Flow Vs Inventory Levels

Posted by on 11:51 am in Inventory Optimisation | 6 comments

Cash Flow Vs Inventory Levels

For many businesses, balancing inventory levels and cash flow can be a real challenge. With a huge amount of uncertainty in both supply and demand, businesses rely on their inventory to absorb challenges in the market place. However, simply keeping large inventories of every item is simply not an option. Considering the financial restraints on cash flow, Businesses have to take a strategic approach to their inventory management.

Meeting demand

Ultimately businesses hold stock in order to satisfy customer needs. Without sufficient levels of stock, customers would simply turn to the nearest competitor. As a result, keeping items in stock is key for competitiveness.

Take for instance the retail industry; this year, merchandise from the film Frozen and Lego products are expected to be the in huge demand. While many purchases at this time of year are likely to be gifts for others, customers are still not likely to be willing to wait for popular items to come back in stock. In the run up to Christmas, many stores will start investing heavily in stocks of these products in order to capitalize on this year’s festive demand.

Financial constraints on cash flow

Although it could be argued that holding large inventories maximises opportunities to make sales, holding large inventories can also come at a huge cost. Firstly, there is the additional cost associated with holding excessive inventories such as the extra transportation fees and warehouse space required. Furthermore, by holding larger inventories, working capital becomes tied up in stock. Given that all inventory is subject to obsolescence, damage or in some cases perishability, there is no guarantee this investment will ever come to fruition.

While products with high demand like Disney’s Frozen branded toys or the latest Lego figurines are unlikely to suffer from this issue, for slower moving products this can be a real strain on cash flow.

Balancing inventory and cash flow

As a result, businesses must review their stock holding in order to find the balance between inventory levels and working capital.  Through aligning inventory levels with customer demand, businesses can satisfy demand and still maintain a healthier cash flow.

photo credit: kenteegardin via photopin cc

Supply chain management: the sad reality of modern day slavery

Posted by on 1:34 pm in Inventory Optimisation, Supply Chain | 0 comments

Supply chain management: the sad reality of modern day slavery

Despite being abolished over 150 years ago, it seems slavery not only still exists but is thriving. In the last year alone, a number of businesses have received fierce criticism over claims of wide spread exploitation including accusations of forced and child labour. Given that recent reports suggest that enslavement is rife across modern supply chains, the true extent of the issue is yet to fully emerge.

Modern slavery in today’s supply chain

With an estimated 21 million people forced in to some type of labour, the scale of this issue is difficult to imagine. While the thought of slavery seems archaic in our world of automated processes, intelligent machines and advanced production processes, new research suggests that around 11% of businesses believe that some form of modern slavery exists within their supply chain. Furthermore, given that the supply chains of everyday items including sugar, coffee and chocolate were all listed as having the highest levels of human exploitation, slavery is something that should matter to all of us.

Steps towards a more ethical supply chain

In response to such injustice, organizations across the world have started to take steps to tackle the issue of exploitation in supply chain. For example, the NSPCC and the British Home office have recently joined forces to deliver a hard hitting campaign against slavery. Focusing on all types of enslavement, their collective aim is to educate the British public about the reality of slavery on British shores while directly supporting those affected. In addition, the Chartered Institute of Purchasing & Supply has teamed up with the anti-slavery charity, Walk Free, with a specific objective of eliminating slavery from supply chains.

Although there is no questioning the importance of such organizations in eradicating slavery, some are questioning on whether governments should also be doing more to tackle the issue at hand. For instance, British Prime Minister, David Cameron, recently came under fire after failing to pass through a draft anti-slavery bill which would have legally required all big businesses to declare their suppliers. By making this a legal requirement, big businesses would be more accountable for any exploitation taking place within their supply chain.

Improving supply chain transparency

While some argued this may be seen as a burden on businesses, several organizations have proved the benefit of making their supplier information public. For example, in 2013 H&M became the first retailer to publish a comprehensive list of the factories which produce the products sold in their high street stores. While only a limited number of retailers have followed suit, by taking this bold move H&M have taken a big step forward in preventing exploitation across the supply chain.

Given the extent of the issue, it is impossible to ignore the role slavery plays in modern supply chains. While a number of organizations are helping to resolve the issue by either making the public more aware of the issue at or taking steps to make businesses more accountable, the sad reality is that slavery is all too common. With this in mind, what do you think should be done to help reduce slavery from supply chains?

Photo credit wildrosetn39 via photopin cc

Supply Chain: is it time automotive businesses fine tune their operations?

Posted by on 1:23 pm in Inventory Optimisation, Supply Chain | 2 comments

Supply Chain: is it time automotive businesses fine tune their operations?

Over the last few years, the automotive industry has endured a bumpy ride as the double dip recession hit businesses at every level of the automotive supply chain. Although the rest of Europe continues to struggle with slow demand, car production in the UK is booming. As the sector now enters the 29th month of consecutive growth, are automotive supply chains prepared for the challenges that lie ahead?

Demand drives british automotive industry

When the economy in the UK first crashed back in 2008, automotive manufacturers faced unprecedented market conditions as consumer lost confidence and demand slumped. However after surviving a second crash in 2010, it looks as though British manufactures and suppliers are once again back on the right track. With strong demand and increased investment from government and customers alike, British manufactures are right to feel optimistic about the future.

After all, in July alone, a staggering 172,907 new cars were registered onto British roads. Underpinned by cheap finance deals, increased employment levels and increased customer confidence, industry bodies are now forecasting that by the end of the year consumers will have bought around 2.5 million new cars; 8.1% more than in 2013. In addition to growing demand from British consumers, it seems UK manufacturers are also benefiting as a result of demand from overseas: according to Society of Motor Manufactures and Traders (SMMT), exports of new cars increased 3.4% as nearly a million cars were exported between January and August this year.

Supply chain complexities threaten growth

While this growth comes as a welcome relief from the recessionary environment in which manufactures have become accustomed to, increased demand for new cars has also presented UK businesses with a number of new challenges. For example, as highlighted by the emergence of new cars such as Vauxhall’s Adam, MG’s 3 and the latest MINI which allow customers to effectively build a completely personalised car, consumers are demanding greater choice. As a consequence, this surge in product variety places a huge amount of pressure on businesses at every level of the supply chain. Even businesses offering aftermarket spares will be hit by the growing product ranges as owners have to replace parts further down the line.

The complexities do not end there however; as demand extends beyond the current supply chain capacities, businesses now must decide how best to meet the needs of their customers. On one hand, some businesses have been forced to extend delivery times for their cars and as a consequence some customers now have to wait up to 6 months for their new car to arrive. However, given that impatient customers may be unwilling to wait, other companies, such as MINI and their new production plant in Holland, have decided to expand their facilities in order to increase output levels.

While there is no questioning that increasing output capacity will better position MINI to satisfy demand as well as the increased product variety, given the financial cost, this is an extremely risky means of coping with the changing environment. For instance, despite SMMT’s positive forecasts, some economists have questioned how sustainable the current rate of growth is. With nearly three quarters of cars now bought on finance, some are concerned that the recent growth has been the result record low interest rates and that an increase in interest could take the shine of credit deals on new cars and thus could massively reduce demand for new cars.

Given the complexity caused by the growing product diversity and the rapidly growing but somewhat uncertain demand, automotive businesses simply cannot afford to do nothing. While extending delivery times to catch up with demand could leave customers frustrated, developing production facilities instead could leave businesses with underutilized facilities should demand slow. Instead businesses should review their current supply chain practises in order drive up efficiency levels and get more out of their existing infrastructure.

Demand profiling for a more responsive supply chain

In order to capitalize on the recent growth without disappointing customers or making risky investments into production facilities, it is essential that businesses develop a more comprehensive understanding of demand. Once demand has been effectively profiled, businesses can start to plan the supply chain accordingly. By aligning operational requirements with the capabilities of their suppliers, automotive businesses can ensure that all required components needed are available when and as they are required which in turn should prevent bottle necks, supply shortages and ultimately increase overall productivity.

While the UK automotive industry’s recent strong performance has exceeded expectations, given the uncertain environment, businesses across the automotive industry should continue to strive to improve their competitiveness through focusing on getting more from their existing supply chain. Considering some the potential issues which may impact the industry in the near future, what steps has your business taken to meet the current demand?



E-commerce: Is the battle between bricks and clicks finally over?

Posted by on 2:44 pm in Inventory Optimisation | 5 comments

E-commerce: Is the battle between bricks and clicks finally over?

Retailers suffered a huge drop in sales as we turned away from traditional stores in favour of online outlets. With high streets up and down the country looking increasingly bare, there is no questioning that e-commerce has changed the way we shop. However, will a new trend in consumer purchasing behaviour unite the traditional bricks ‘n’ clicks retail model with a more modern e-commerce alternative?

A new approach to e-commerce

we have witnessed a boom in the number of click and collect operations. This innovative delivery method combines the best aspects of online shopping and retail stores. By allowing customers to make orders online and then pick up their products from retail outlets at their own convenience, retailers have been able to capitalize on consumer’s increased focus on convenience.

According to Retail-week, businesses are completely rethinking their existing business models in order to provide an effective e-commerce service. ASDA, for example, have recently invested heavily in specially designed temperature controlled pods which they hope enable customers to pick up their all their grocery purchases whenever they want. Given that the retailer has already enjoyed a 20% increase in demand for their online grocery division as a result of such developments, there is no denying the potential of this new approach to e-commerce.

This is re-enforced by the fact that even well-established online retailers realize the advantage of having a physical location customers can pick their purchases up from. For instance, while Amazon has traditionally offered customers a range of postal delivery options, the online giant is now trialing a number click and collect pick up points which are expected to be strategically located in tube stations, shopping centres and in Co-operative stores around the country. Given that click and collect points in London’s tube station are already taking over 10,000 orders a month, the rise of these new e-commerce services marks a huge shift in the way retailers do business.

Holistic demand planning

With the rise of such e-commerce services however, retailers have placed huge amount of pressure on their internal supply chain operations. Whereas before click ‘n’ collect, retail stores had to manage just two major distribution channels: physical stores and distribution centres which supported the online operations, the emergence of pick up points has blurred the line between the two.

Instead of developing a separate plan to meet demand from online and store customers, retailers now need to take a more holistic approach to demand planning. After all, when you consider that a customer could potentially have a product delivered directly to their door, sent to a dedicated pick up point or simply straight from the shelf in a retail outlet, supply chain managers undoubtedly have a lot more to think about.

With many of the biggest names in retail investing into click and collect services, it will be interesting to see what impact this has on the industry. Considering the recent interest in this new approach to e-commerce, what potential challenges do you envisage for retailers?

KayVee.INC via photopin cc

JIT “Just In Time” Measuring The Impact

Posted by on 11:33 am in Inventory Optimisation | 0 comments

JIT “Just In Time” Measuring The Impact

A smooth flow of stock and semi assembled items just as many as you need, just when you need them. No waste, no hidden inventory costs and reduced issues with obsolescence. JIT (just in time) implemented into a companies supply chain seems to provide a lot of benefits, and in most cases it does.

The internal logistics and accounting departments of many companies have come unstuck with the hidden costs of implementing JIT however, and here is just one example of where the appearance of a low stock level can be mis-leading, and have a high impact on stock cost.

A small company fabricating steel parts through cutting, pressing and CNC machines was looking to expand it’s production base with limited room. It was identified, and probably quite rightly, that stock space could be greatly reduced within the small facility to make way for more plan and machinery. To facilitate this reduction safely, the process of re-arranging delivery terms with raw material suppliers was begun. JIT delivery was required.

The process took a little longer than expected, and it turned out JIT seemed to cost a little more – but that was offset easily, so it seemed, by the potential revenue created by the increased manufacturing space and lower stock levels.
While the new contracts had quite a few new elements, in this case I’ll draw your attention to just one. JIT required that the production for each day be known beforehand, at least 72 hours before. Also, once a delivery slot for raw material was arranged, there would be an increasingly cost of re-arranging. It went up sharply and could be pretty steep if a re-arrangement was required within four hours of the 15 minute delivery slot.

Turning the stock away or re-arranging the delivery could, for instance, accrue costs that amounted to over 20% of the cost of the steel sheet involved.

The assumption was that this would rarely, if ever, happen.

Roll forward 12 months is JIT working?

Theses costs have been re-negotiated more than once since JIT was introduced. The overall cost of JIT is substantially more than the revenue created by the increased production. This small steel fabrication company is, in effect, paying for offsite warehousing by proxy. The proxy often being an 18 wheel lorry parked in a layby a few miles from the delivery point accruing costs for every 30 minutes that pass.

The moral of this (true story? Internal manufacturing control and stock handling systems need to match, and in all likelihood, be better than, the external supply based logistics controls.

A companies internal stock handling needs to be in tip top before highly nuanced supply chain logistics can be bolted on.

Hidden Stock Issues

Posted by on 11:09 am in Inventory Optimisation | 1 comment

Hidden Stock Issues

The question of stock control often, and necessarily begins with the preceding question of, “How much stock do we have at the moment”.

Issues of return on investment, “stock turns” and safety margins for critical items of production or supply should be understood by any company that holds stock.

The one time this is rationalised for many might be the annual and legally required stock take for accounting purposes. The once a year opportunity to get things just right – or is it.

Having arranged many stock takes across several companies ranging from SME’s with less than 10 employees up to international giants, this accepted process of correcting the levels once a year seems well established – and in almost all cases – for stock control purposes, often ineffective.

Stock Issues, what is the problem then?

In short – it is the exception that distorts the rule. These exceptions come in many forms. In some cases sub-assemblies of items are given a blanket value and separate identity code that does not drill down into the component parts. Maybe just about fine if you have a smooth manufacturing process and little work in progress (WIP).

Not so good if you have several thousand square feet of shop floor area permanently covered with what amounts to 30% of your overall inbound stock value tied in to WIP.

While valuing each sub assembly or part finished item does fulfill the legal need for accounting purposes. Not having those items correctly drilled down through the bill of material (BOM) they contain for stock control purposes can lead to some pretty large errors of magnitude.

There are also discrete areas within many businesses where blanket values are put on part finished or finished items for expediency. Returns, obsolete stock (with salvageable high value components), goods in transit, stock in test areas.
A test would be to consider if there are areas within your company where hidden stock mounts up. While I know contingency is often made to value these items for strict legal accounting purposes, is it possible that the stock control itself is an Achilles heel? If so what is the solution?