Inventory Control: Treat the cause, not the symptom
As with almost everything else in purchasing, inventory management requires thinking out of the box and working closely with suppliers. The result: improved working capital.
By Paul E. Teague -- Purchasing, 1/18/2007 2:00:00 AM EST
Of all the things purchasing professionals can do to help manage their company's inventory, the biggest thing is this: Analyze what causes inventory, not the inventory itself.
So says Roger Ellis, a Lean-manufacturing consultant, who spent 30 years in manufacturing at General Motors, much of that time dealing with materials-management issues. Like a headache, he says, inventory is a symptom of something else. “You have to figure out what's driving it, and it starts with design and leadtimes.”
Managers get too focused on controlling inventory by edict, Ellis says. His advice: Think about how the overall business operates. And think beyond just cost reduction.
For example, he has one client, a furniture manufacturer, which sourced foam parts from China because they were cheap. “But, it took five months to get the shipments, which meant the company needed five months' worth of inventory in the pipeline,” he recalls. “Meanwhile, there was a supplier practically across the street for the same parts.”
Often the fundamentals get lost in efforts to cut costs and to develop unique designs. Ellis recalls a case from his GM days where part and design standardization solved an inventory issue. “GM had 60 different caps for windshield washer fluid containers,” he says. Standardizing to one simplified design and inventory.
Beyond trying to influence design, inventory offers opportunities for procurement to contribute and add value, says Bob Rudzki, president of the Pittsburgh-based consulting firm Greybeard Advisors. “For sizeable companies,” he says, “supplier inventory terms and consignment programs can often free up tens of millions of dollars in working capital.” He recommends including inventory in requests for proposals and letting suppliers provide ideas on how they can help.
Indeed, supplier management and partnerships are an integral part of inventory management. A copyrighted study by the nonprofit APQC (American Product Quality Center) says inventory optimization must entail a “significant change in replenishment speed and efficiency achieved through deliberate partnerships with internal and external suppliers.” Best practices companies, the report says, incorporate their inventory optimization into both their business strategy and culture.
Stryker Instruments, one of the companies highlighted in the APQC report, created a supplier advisory board to help the company think through its inventory-control issues and opportunities. The board meets quarterly, APQC says, to share information and work through supply chain issues.
Collaboration. “We try to manage the right balance of inventories through collaboration across the value chain internal to Simmons,” says Seth Kaufman, vice president of poultry management accounting and corporate information services at Simmons Foods, a large poultry processor based in Siloam Springs, Ark. “We have been moving towards closer collaboration with suppliers, but we have a long way to go to reach best-in-class status,” he says. But the company does use Oracle software to make internal departments aware of inventories with no sales activity. “We have a weekly alert that goes to the chief operating officer on the number of days an item has had no sales activity,” Kaufman says. Because of the company's tracking, “the COO hasn't seen an e-mail in months.”
Supplier collaboration is important to the inventory-control efforts at the Glazer Family of Companies, distributors of fine wines, malts and spirits. The company operates in 12 states. Facilities in each state are responsible for forecasts, and a centralized purchasing team is responsible for replenishment across multiple states.
The company uses Bridgeport, a Web-based software tool from Management Dynamics (MDI) Inc., for automating global shipment visibility. “MDI has helped us create a method for pulling purchase order information together in one view,” says Gregg Mitchell, vice president of supply chain. “While we're not good at managing it yet, we have enlisted help from our major vendors and carriers to provide the necessary electronic status updates to make the tool as effective as it can be in tracking true purchase order leadtimes.”
Working with vendors on forecasting has paid off by connecting supply chain teams and driving forecasting and reliability, Mitchell says. The result has been a 48% reduction in out-of-stock items for one key vendor.
At the Cleveland Clinic, Dennis Mullen, director of materials management, relies on vendors to manage the inventory for radiology equipment. The vendors use hand-held PCs provided by the Cleveland Clinic to regularly count units to see what they need to re-stock and when. The hospital programs the hand-held units for the vendors. “Vendor management helps us in many ways, including making it possible for us to operate with less staffing,” he says.
For bandages, splints and other supplies, his in-house ERP system automatically re-orders supplies when they get down to a predetermined level. That system is from Lawson Software, which the organization installed in 1999, when the Cleveland Clinic absorbed several other health-care facilities and became a healthcare facility system, with nine facilities in Ohio and one in Florida.
Mullen, who began his career as a paramedic, then moved into purchasing when he got his MBA, says inventory management is not quite a life or death challenge. Consultant Ellis agrees, but can't resist the medical analogy: Don't focus on the pill (inventory itself), analyze operations for the cure, he says.
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