Organizational Performance Part 43: Managing Inventory | Operational Excellence Quick Hits

Quick Hits share weekly tips and techniques on topics related to Operational Excellence. This week’s theme relates to managing inventory. We hope you enjoy the information presented!

Speaker 1: (02:56)

Speaker 1: (02:57)
Now, the replenishment time is that lead time plus the production lead time, plus the transportation lead time. So, our total replenishment time is 23 days in this case. If we look at the replenishment time for that scenario, we have 12 days of the order lead time, 10 days for the supply and production lead time, one day for the transportation lead time, for a total of 23 days.

Speaker 1: (03:21)
Now, what happens if we change it up and go to a make to availability concept where we’re going to reduce the order quantity significantly from 800 units down to a hundred units. What is the impact of that by doing smaller batches? Let’s calculate it. Now we have day zero, stuff shows up at the point of consumption. In two days we get to the trigger point and we reorder. The order lead time goes from 12 days to two days. Of course, our supply and production lead time remains the same, and our transportation lead time is the same. Our order lead time is two days, replenishment time now goes to 13 days. So, if we look at this scenario in the replenishment time. Again, our order lead time is now two days, production supply lead time 10 days, transportation lead time one day. The new replenishment time becomes 13 days, so we’re reducing from 23 days to 13 days.

Speaker 1: (04:23)
What impact does that have on our inventory? When we look at setting inventory targets, our target calculation is the maximum consumption within the average replenishment time factored by unreliability of the replenishment time. In this case, we’re reducing the replenishment time from 23 days to 13 days. Of course, the maximum consumption within that period of 13 days is going to be much less than 23 days. Not quite half, but significantly less.

Speaker 1: (04:57)
What does that mean? Now the target inventory is what’s on hand plus what’s on the way, what’s on order. So, of course we’re going to have more orders on the way and so we can get away with much less finished goods inventory because orders are going to be coming into finished goods at a much higher frequency. In that case, by reducing replenishment time, the organization can respond to quicker to consumption, and therefore hold less inventory coupled with actually better delivery performance.

Speaker 1: (05:31)
The mindset needs to be we can hold less inventory by reducing the replenishment time. And the goal should always be to try to reduce replenishment time, reduce replenishment, time, reduce replenishment time. We reduce that replenishment time, we can hold much less inventory and give the same performance of delivery.

Speaker 1: (05:52)
That’s our session today for the mindset around inventory. Next week’s session’s going to focus on how do we establish price, looking at our cost plus concept, and calculating margin to determine what price we should set for our product or service.