The Fundamentals of Inventory Management

Taming The Inventory Monster!

If you’re like a lot of businesses today, somewhere on the grounds or inside the facility is a room jam packed with maintenance and repair parts. You probably don’t have any idea what’s in the room since you have no process in place to manage the inventory. Meanwhile, the inventory seems to be growing, and if you had to guess, you would say you have much more inventory than you need. You can’t set reasonable stocking levels because you don’t know how many of each part that you use. If this sounds familiar, read on.

So how do you gain control of this situation before the audit department gets hold of you, or you have to move to a different office for lack of space?

Here are some basic steps you can take to tame the monster.

Before you start, visualize the end.
How will employees find and check out parts from this area in the future? In other words, will they “shop the aisles” for parts or will there be a service window with a tool room attendant on duty to issue parts? Will everything be neatly labeled? Will you need floor ladders to reach the upper storage areas? Will the aisles be wide enough to roll ladders or utility carts through them? How you visualize the end state dictates how you approach taming the monster.

Select a management process to manage the inventory.
These processes range from manual KANBAN processes to high-end software solutions, and everything in between. First, find out what systems your company is running today that might be able to manage the inventory. Many software solutions offer you the option to purchase their “Inventory Management Module.” There can be many benefits to staying within the same software package that your company uses for other areas of the operation. If that is not an option for you, there are numerous inventory management systems available ranging in price from under $1000 for a single user to fully networked systems with much higher price tags. If you’re not sure, it is always wise to call an expert. Professional Materials Management, Inc. (PM2) specializes in inventory management set-ups, and the phone call is free.

Get rid of obsolete and dead inventory.
Be aggressive with this. Return or sell whatever you can and trash the rest. Use the “dust bunny” test, which states, “If you can wipe off enough dust with one pass of your finger to roll it into a dust bunny, that part has been there forever. Get rid of it.” Remember that whatever parts you eliminate now will reduce the number of items to manage and will buy you shelf space in the storeroom.

Organize the remaining items on the shelves.
You may want to group the items by type (plumbing, electrical, etc.) or by machine or department (#3 rolling machine, housekeeping, etc.). Put yourself in the shoes of the employees that have to come into this area and find parts. Let your end users’ needs be your guide. Ideally, small parts should be stored in bin boxes. Do not stack different items on top of one another.

If you still need more shelving space after you’ve dumped the trash and organized the rest, install industrial shelving units to suit your needs. It’s always a good idea to allow for 10% growth of the inventory, just in case you have to add parts for another manufacturing line or that new wing of the building.

A word on modular drawer cabinets: While drawer cabinets hold a tremendous quantity of parts, consider their impact on your item look-up and retrieval process before you install a bunch of these. In other words, if end users will be “shopping the aisles” to locate parts, open bins are much more convenient because they can see the parts in the bins. If end users will be looking up parts by part number on a system, the system will pinpoint exactly where they will find the part. If you use drawers and have a “shopping” environment, take care to label the drawers accurately to include all product types within each drawer.

Develop a location scheme and label all shelving units.
These should be barcode labels. Even if you don’t have immediate plans to use barcode scanners, you may change your mind later and the labels will already be there. We recommend labeling locations to the shelf level only. Location-labeling each bin on a shelf can make a nightmare out of moving items within your system.

Build a high quality inventory database.
This is the most tedious step in the process and it is generally best left to third party service providers that specialize in this kind of work. (My company is one example.) Your database, at minimum, should contain the following features:

1. Description should be standardized. The most common way to manage standardized item descriptions is by using a “Noun – Modifier – Attribute” approach. For example, all of your descriptions for electric motors would look like this: Motor, Electric, 1HP, 56Frame, 240V, etc. The benefit: When sorted by noun and modifier, standardized descriptions make scanning down a screen of parts or a printed sheet much easier because all like items are grouped together.
   
2. Always capture the manufacturer’s name and number whenever it is available on the part. The benefit: Having the manufacturer name and number makes sourcing products much easier, and it helps your suppliers to provide you with the right products.


3. Capture item location.


4. Item counts – While some businesses choose to count the items as they collect them, it is typically recommended to count everything all at once at the end of the project, in order to provide an accurate starting point for your inventory.


5. Item price – Your item cost will typically come from the Purchasing Department; however if you are starting with nothing, it may make sense to estimate the value of each part until you can use an actual cost the next time you buy it. Without at least a cost estimate, you won’t know how much inventory you own, which is often much more than you think.
   
6. Other fields to consider collecting are your company part number, machine specific information, supplier name, supplier number, and cost center.
   
   

Barcode label all items in inventory.
Again, you may not have scanners today, but why not be prepared?

Count the inventory.
This is preferably done in one fell swoop, maybe over one weekend.

Track item usage religiously.
Once you’ve loaded the inventory onto your system, you can begin tracking usage. Typically, you will find out that you are holding inventory levels that well exceed the needs of your operation.

The Benefit.
Here is the big payoff. Experience shows that businesses taking these steps avoid significant spending in the first year, equaling 20% - 30% of their original inventory on hand. This more than offsets the cost of taming the monster in the first year, and you’ll come out looking like a hero.

Dan Floen is President of Professional Materials Management, Inc. (PM2). PM2 helps companies better manage their spare parts inventory environment by building inventory databases, setting up efficient stockrooms, and providing expert materials management advice. To learn more, visit http://www.pm2online.com/.

Building A Solid Spare Parts Inventory Management Foundation

“Building A Solid Spare Parts Inventory Management Foundation” - Frequently Asked Questions
Dan Floen, President - Professional Materials Management (PM2) www.pm2online.com

During a recent webinar, I presented some fundamental steps that you can take to put your spare parts inventory management system on a rock solid foundation. This area is often overlooked, but the return on investment of doing this correctly is huge. Done right, companies often see their purchasing spend for spare parts reduced in the first year by 25% or more.

Here are my responses to the most frequently asked questions on this topic:

1. Why build a spare parts inventory in the first place?
Taking an example from the military, if the supply of provisions, equipment and fuel to a battalion is interrupted for any reason, the battalion stops in its tracks and may even have to return to base, losing or delaying the opportunity to advance toward its objective. In the same way, the effective management of your spare parts inventory will ensure that your employees have the parts they need to keep the business moving forward productively and efficiently.

2. Should I build a spare parts inventory in-house or contract it out?
The two deciding factors here are resources and expertise. Do you have enough resources in-house to staff this effort adequately to complete it in a reasonable timeframe? Companies that choose to “build a spare parts inventory as time allows” rarely complete it. This process takes focus and sustained resources. The sooner that you complete this, the sooner that you will realize the associated return on investment and productivity benefits.

Also, consider the inventory expertise of the in-house resources that are available to do this work. For example, are the employees well-versed in inventory layout and design? Do they have the tools and training they need to build a high quality standardized parts inventory database? Do they possess the inventory project management skills necessary to develop an effective and realistic plan, and then manage it to completion?

If you don’t have adequate resources or expertise to build a spare parts inventory well the first time, consider outsourcing the work to an expert.

3. What is the average return on investment?
Going in, we typically see spare part on-hand inventories ranging from $750K to $1.25M. These spare parts inventories are typically turning less than once per year and companies are buying “around” their inventory, for the lack of visibility to it. Employees spend an inordinate amount of time searching for parts, and when they can’t find them, they simply buy more.

Here is a typical ROI example:
Current on-hand inventory is $1M and inventory turns are 1. Also, 50% of this parts inventory is dead or obsolete. This leaves $500K of active inventory, which is turning twice per year. By managing to 4 turns on the active inventory (a 3-month supply), you will “burn-off” $250K of inventory, avoiding $250K in purchasing spend in the first year or so. (This example doesn’t include process cost savings because most CFO’s see these as “soft costs” that don’t directly affect the bottom line. However, few would argue that productivity can be significantly impacted when employees have more time to do their primary job.)

If you would like to watch the presentation, “Building A Solid Inventory Management Foundation,” click here
http://www.pm2online.com/video/PM2_Webinar_Presentation.wmv


I wish you well as you embark upon your inventory management initiative. If you need any assistance along the way, just give us a call at (813) 249-0834.