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Poor Inventory Control / Inventory out of Control

"We can’t ship for another week, we don’t have the parts!" "What is that over there?" "The computer said we had 50... thumbnail 1 summary
"We can’t ship for another week, we don’t have the parts!"
"What is that over there?"
"The computer said we had 50 and there aren’t any here."
"We don’t use that part anymore, why did we buy it?"

These comments ring throughout many manufacturing companies during the year. The core problem usually points to one underlying factor—poor inventory control. Inventory control is one area that differentiates successful and unsuccessful companies.

Inventory control is not just a materials management or warehouse department issue. The purchasing, receiving, engineering, manufacturing, and accounting departments all contribute to the accuracy of the inventory methods and records.

Inaccurate inventory data will contribute to shipment delays, production stoppages, purchasing of the wrong parts, and stocking too much inventory.

Regardless of the type of manufacturer (discrete, process, engineer to order, etc.), deficient areas all seem to remain the same. Take a look at this checklist and consider the depth of your company’s inventory controls:

Area 1—Bills of Material (BOM)

The accuracy of your bills of material is an important factor to consider when analyzing your inventory levels. How often are your BOMs reviewed and updated?
  • Are your BOMs accurate? Do they contain an engineer’s concept of the product from several years ago, or do they reflect the actual parts and subassemblies that are used on the shop floor?
  • Do your BOMs reflect the actual manufacturing flow? Do the engineers think the product uses one set of routings while the shop floor produces the product in a completely different manner?
  • Is scrap or shrinkage factored into the yields? Bills created using 100 percent yields are almost always incorrect.
Result: Inventory shortage due to inaccurate usage of parts.

Area 2—Receiving Policies

The receiving policy must be documented and actively managed to ensure receiving is timely and discrepancies (short shipments, over shipments, rejects, etc.) are consistently processed.
  • Does your dock look like an Oklahoma land rush once a vendor delivery is made? Or do you make sure delivery is what you’ve ordered by using the correct receiving documentation and purchase order information?
  • Do you perform quality checks on critical material before releasing into inventory stock or the production floor?
Area 3—Do You Know Each Part’s ATP (Available to Promise)?

ATP is exactly what it sounds like. It’s the amount of inventory not already committed to a customer order or to be used as a subassembly in another unit. When ATP is not known, many manufacturers either bulk up inventory to a level that assures them they can’t possibly run out or they run very light inventory levels. Both sides are bad. Inventory that doesn’t turn adequately wastes company assets, and dangerously low levels increase the risks of stock-outs that may halt production. The best way to check the use and accuracy of ATP is to watch order entry personnel. If they put customers on hold, run to the warehouse, and physically check stock status, then you’ve got a problem.

Area 4—Engineering Changes

Are changes in finished good components reviewed and effectivity dates communicated to all departments in a timely manner? Consider these questions:
  • Does your company use an engineering change committee to analyze the criticality of proposed changes? Don’t allow one engineer to make a part obsolete without a balanced look at what the change might do to other areas of your business (e.g., creating obsolete inventory).
  • Do your engineering change notices include effectivity dates that are actively managed? If not, buyers might continue to order parts based on their historical records and previous drawings.
Result: The wrong parts are ordered, automatically creating obsolete inventory, and the new parts are missing, thereby creating shortages.

Area 5—Scrap Reporting

If parts are damaged during the assembly process, you’ll need to review how replacement parts are issued. Many companies allow production personnel open access to inventory and don’t require any recording of the additional parts used for a particular run or job.

There are several reasons why all parts used in the production process should be charged against the particular work order. First, usage of additional parts will affect the profitability of each job, so tracking the parts actually used is critical. Second, recording actual usage of parts will enable you to decrement the replacement parts from inventory, thereby reflecting more accurate on-hand balances.

Area 6—Lead Times

Review and update the accuracy of vendor lead times. Buyers are in the best position to establish product lead times for each vendor, and they usually complete them when the MRP system is implemented. But how often do you review the lead times?

Generally, lead times continue to decrease across most industries. If your vendor’s lead-time was 30 days a few years ago, chances are the lead-time is much less today. If you need $100,000 of inventory for a particular work order, and your lead times are actually 15 days instead of the old 30 days, your company has reduced its profitability by about $350 (assuming an 8 percent carrying cost).
Lead times should be re-evaluated periodically and changed to reflect the vendor’s actual performance.
The flip side of inaccurate lead times will create missed shipments due to stockouts and shortages.

Area 7—Reorder Triggers

Reorder points and minimum stocking levels are established to alert buyers when it is time to order. How accurate are your triggers?
  • How do you evaluate individuals within your purchasing function? If their annual performance evaluation is based only on the avoidance of shortages, chances are your inventory turns are lower than normal. Make them responsible for a minimum level of turns as well.
Every CEO should become aware of their company’s overnight carrier bills (FedEx, UPS). To eliminate stockouts and delays, many companies have become addicted to overnight shipments as a temporary Band-Aid to deeper problems. The root problems are most often located in systemic problems.

Area 8—Warehouse Locator System

As basic as this sounds, most companies do a poor job of establishing and maintaining warehouse part locations. As inventory items are received or moved, it is difficult, if not impossible, to know where the inventory is physically located. Warehouse productivity drops substantially when each part retrieval becomes a search. 

Maintaining accurate inventory data and a well-run physical warehouse is critical for a manufacturing company’s success. Policies and procedures should be developed, implemented and maintained after the physical aspects are under control. These policies are best supported with a fully integrated computer system that provides immediate access to all inventory transactions as they occur. Immediate access to information allows personnel to review and challenge events as they happen versus reviewing it long after the event has occurred. However, keep in mind that integrated computer systems are not the solution. It’s only a tool to be used to point out deeper problems and issues. 

With management’s commitment to maintaining accurate inventory levels, and new policies and procedures being supported with fully integrated computer systems, it becomes much easier to know when enough is enough!