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Inventory Management
Inventory is a necessary part of the Supply Chain. Manufacturing Inventory is made up of three categories: 1) raw materials, 2) work in process, and 3) finished goods. Costs of inventory have to do with holding costs, moving costs and ordering costs. Carrying inventory currently costs between 30-35% of the total market value. Due to the high cost of carrying inventory, many theories and systems have been created to reduce inventory yet still match actual demand. This video overviews the approaches taken to inventory management by two companies NaviStar and Caterpillar.
NaviStar is a truck manufacturer who before 1979 held 20-30 days worth of inventory to assure customer demand was met. This large inventory involved lots of paperwork and man power. This type of Inventory Management was cost intensive. In the present, NaviStar has changed over to the use of electronic tools to help manage their inventory. They currently utilize three methods for inventory control.
The first method is the “Ship to Line sequence.” Parts are ordered per MRP but are delivered by “Point Of Use,” a Just-In-Time methodology.. This method is used for their large and expensive parts. This method is able to reduce inventory and cycle time, which in turn has reduced their overall cost of carrying inventory.
The second method is “Ship to Line Set” sequence, this appears to be a variation of a reorder point system which can be used to control parts that are used on a wide variety of final assemblies. The term “panstock” is used to describe such items because these items are inexpensive and kept in pans (examples include bolts, washers, screws, and nuts).
The third method involves the use of “Blanket Purchase Orders”. A “Blanket Purchase Order applies to items that are ordered using an annual contract and specific release dates are given for weekly, biweekly, or monthly shipment quantities. By committing to purchase, for example, 5200 items for the year but request weekly deliveries a firm can reduce the cost per item (they guarantee to purchase 5200) while reducing total annual holding costs. For example, NaviStar is able to carry only 3 ½ days worth of inventory with this method and still have reduced inventory costs.
Caterpillar is a heavy equipment manufacturer who over the last 50 years have produced a wide variety of products. The manage about 99,000 parts in the production of current equipment using an MRP/JIT system. However, at the same time, they maintain 460,000 service parts (service parts are parts that are used to maintain equipment that is already in the field. They have developed an inventory management system to keep track of all 460,000 part and maintain a 99% fill rate. That is, Caterpillar has 460,000 parts in inventory sitting on their shelves at their distribution centers while selling 130,000 parts over the counter every day in response to Customer’s Demand.
To reduce the inventory while maintaining a high percent fill rate, Caterpillar developed an Inventory Management system using 15 world-wide distribution centers that give system-wide visibility on part availability, a visibility that includes the inventory maintained by their customers who have extra parts. With this system-wide inventory, at the end of each day 99% of orders are shipped and only 1% are on back order. This inventory system allows Caterpillar to guarantee that parts will be delivered within 48 hours or the part is free. Since customer demand for service parts is completely random, a JIT system doesn’t work here.
Doing business in a global economy requires companies to manage their inventories more accurately and cost effectively to be competitive. Controlling fixed costs, holding costs, set-up (order) costs, and achieving competitive percent fill rates is critical to long run financial success.
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