When I worked in automotive, our inventory costs were phenomenal, so I was tasked with reducing the inventory. We were continually running out of stuff, so before I could look at reducing stock… we had to implement some controls.
So I introduced monthly stock checks, so that we could see where we were losing stock.
The warehouse was rearranged, with set areas for each raw material, so stock shortages could be identified quickly and then daily spot checks were implemented to confirm our stock levels against the system.
We checked bins, so that we could see where production was hiding their quality issues.
We introduced key performance indicators (KPIs) against the production line and the supply chain, so that we could identify where we were having problems.
Once we had done all that and the inventory controls were starting to stabilise our usage, it was time to look at introducing systems.
Using the 80/20 rule, ABC analysis and risk management modelling, we identified those raw materials that were difficult to get hold quickly, that transportation costs outweighed the value of the product or that couldn’t be retrofitted and therefore would stop production.
So, for instance, we had a small screw that came from Japan, and normally they would be shipped, with a 6 week lead time. If we needed some urgently, they would have to be airfreighted and the cost of holding the stock was negligible when compared to the cost of flying them in urgently.
Another material was the plastic that produced the car doors. It came from Germany and without it, we couldn’t produce anything, Plus the plastics manufacturer would batch produce different colours, starting with white and getting darker with each change over, so depending where they were with in the production flow as to how quickly they could deliver what we needed. And if we desperately needed it, then the costs to interrupt a run would be astronomical, so it was important that we kept tight control of the materials and made sure that we had buffer stocks to allow for the long lead times.
We also had quality issues with a couple of suppliers, who never delivered on time, or didn’t deliver the correct quantities, and so we had to hold buffer stocks of these, while working with the supplier to help them implement improvement controls
However, some of the door handles were produced a couple of hours up the road and could be retrofitted to the door just before shipping, so although it wasn’t ideal if we did run out, they weren’t as high risk an item. This meant that we could hold lower levels of stock, with more regular deliveries.
After going through each item and agreeing a minimum and maximum stock level, it was time to create a system that would monitor these stock levels against production needs, bill of materials, economic order quantities and lead times, to make sure that we were ordering the right stuff so that the customer would get their deliveries on time and in full.
Of course, the system was only as good as the people using it. Sometimes, production would decide that they would build out of sequence and so run out of parts, we would order the incorrect parts or the customer would change their requirements at short notice, so we didn’t always get it right!
Having weekly meetings with production, and building good relationships with our customers and suppliers all contributed to the success of the system and within quite a short timeframe we had managed to reduce our stock levels by around 50%.
Not only did this have a direct impact on the profit and loss account, but it also reduced costs in a number of other ways. Quality issues improved, there was less stock, so less likelihood of it getting damaged in the warehouse. External warehousing costs were reduced, because we could now manage it all in-house, and inventory shrinkages decreased, because there were better controls.
There were also more intangible benefits such as better relationships with the production line. We got a better understanding of their needs and why they did certain things, which meant that we could then plan deliveries against this. We also improved relationships with suppliers, we weren’t going to them continually changing requirements and asking for special deliveries. And of course we increased our ability to meet customer needs on-time and in full, which then helped win new business.
So, in short, we introduced controls, monitored KPIs to identify improvement areas, used modelling techniques to set stock levels and then introduced systems for reordering and tracking usage against bill of materials.
Hope that helps, but if you need help with your supply chain systems, please get in touch and we can discuss how best I can help you