Cost Reduction Using Ten Inventory Management Techniques Monday, May 1, 2000 4:15 -- 5:50 p.m. Mark S.

Miller, C.P.M.,CIRM Thomas M. Graddy, C.P.M., CIRM

NAPMs 85th Annual International Conference New Orleans, LA

Purchasing and Inventory

Inventory is $ Purchasing can play a major role The impact to the bottom line 10 ways to reduce inventory costs Master forecaster from the midwest

Impact to the Bottom Line

Base Sales Cost of goods sold Materials Purchases Labor Overhead Change inventory Total COGS Gross Profit from sales Expenses Net Income 300 100 50 40 0 190 110 50 $60 $10 less inventory 300 100 50 40 (10) 180 120 50 $70

Impact to the Bottom Line

Balance sheet
Raw material Work in process Finished goods

Cash flow

1) Improve Communications in the Supply Chain

The Supply Chain

Supplier

Plant

Warehouse

Dealer

Customer

Improve Communications
Safety/ Buffer inventory at each level Communicate electronically In house supplier personnel
Manage schedules Expedite Sales trends at retail level

2) Reduce supplier lead Times

Lead times affect safety stock 95% of lead time is idle time Track and measure supplier lead times Negotiate lower lead times Look at lead times in entire supply chain
Transportation Receiving Inspection

3) Standardize
Benefits of standard products Lower prices Lower process costs Fewer quality costs Lower inventory costs

Standardize
Steps to standardize Use industry standards Classify parts Form a Standardization committee Get the supplier involved

4) Reduce Surplus/ Obsolete Inventory

Identify surplus/ obsolete Use it elsewhere within your firm Return it to the supplier Sell it to other companies Promote and sell at a discount to your customers Donate it to charity Scrap it

5) Improve Supplier Quality Poor quality leads to more inventory Supplier selection Supplier quality audits Corrective actions

6) Challenge MOQs and Price Quantity Breaks

Minimum order quantities and price quantity breaks increase inventory Costs of setting up a job Commitment agreement

7) Schedule More frequent deliveries

quantity

time

time

Schedule More Frequent Deliveries

Class Frequency A B C Monthly 3 months 6 months Average Inv 2 weeks 6 weeks 24 weeks 3.7 weeks New Freq New ave Inv Weekly Monthly 6 months .5 Weeks 2 weeks 24 weeks 1.9 weeks

Average Inventory

8) Improve On Time Delivery

Poor delivery = inventory Measure supplier performance Communicate how it is measured Set goals with suppliers Recognize superior supplier performance

9) Let Suppliers Manage Inventory

Vendor managed inventory (VMI) Point of sale (POS) Consignment stocking Supplier stocking

10) Recognize the Value of Inventory Reduction

Get everyone involved
Communicate the impact to the bottom line Get everyone involved - suppliers, finance, engineering and marketing

Credit inventory reduction as a cost reduction

Reinforces the importance to the organization

11) Improve forecasting

Premier forecaster Markac the cheesehead

Summary
1) Improve communications in the supply chain 2) Negotiate lower supplier lead times 3) Standardize to reduce inventory 4) Reduce surplus/ obsolete inventory 5) Improve supplier quality 6) Challenge supplier MOQs and price quantity breaks 7) Have parts delivered more often 8) Improve supplier on time delivery 9) Have supplier manage inventory 10) Give credit for inventory reduction.