Tips for Reducing Raw Material Inventory

This post is the 5th installment in a series on estimating and quantifying benefits related to a Lean process improvement initiative. So far we’ve covered the benefit categories of Direct Labor Productivity, Floor Space, Work in Process Inventory and Finished Goods Inventory. We are continuing our analysis of inventory in this post by looking at Raw Material inventory.

The amount of Raw Material inventory you have at any given point in time is a function of how fast it is arriving from outside suppliers, and how fast it is being issued to WIP or being shipped as finished product. Unless the rate of arrival can be controlled, reducing the amount of inventory on the factory floor simply means that more inventory is now in the warehouse. The golden key to improving Raw Material inventory turns (or reducing quantities) is simple: suppliers need to deliver more frequently in smaller quantities.

This is easier said than done for several reasons:

1. More frequent deliveries will most likely have a negative impact on freight costs.
2. More frequent deliveries means more handling, more receipts, potentially more paperwork.
3. External suppliers are not under your control.
4. You have many different external suppliers, who need to be managed independently.
5. Many of your suppliers may be located in other countries, a long physical distance from your facility.

What I am driving at is that unless you have a plan to change these factors, you may not have as much control over Raw Material levels as you think. Don’t project Raw Material inventory improvements unless you plan to be working on this issue.

Apply the Pareto Principle to raw material reduction. What you’ll find is that inventory classification codes A and B typically represent 80% or more of your total inventory investment dollars, but only 20% of the part numbers. C items (hardware, fasteners, lower-cost items) include a lot of different items but not a lot of money compared to the A and B classes. Focus on the A and B items, and set the C items aside to deal with later if at all.

The actual calculation of benefits is the same process that we discussed in previous posts. The inventory reduction itself is a Balance Sheet item, while the Cost to Carry Inventory factor can be applied to this value to estimate the potential impact on the bottom line.

So how do you actually have suppliers deliver in smaller quantities more often, practically speaking? Here are a few strategies, none of which can be implemented overnight:

1. Try to cultivate geographically local suppliers. Having a supplier nearby makes it a lot easier to schedule more frequent deliveries.
2. Build a network of domestic suppliers within a 1-day radius by truck. This will allow you to set up an external delivery route system that can pick up full containers and return empty ones. This is what is being done by companies like Toyota Material Handling.
3. Implement a mixed-container strategy for overseas material. Instead of receiving a month's worth of a single item in one shipment, mix this item with other parts on a more frequent basis. This will allow you to maintain lower shipping costs while driving down inventory at the same time.

Of course your ability to take advantage of these methods is entirely dependent on your circumstances. But one thing is for sure: it takes years to build up a robust supply-chain system that is able to control inventory quantities while not driving up transportation costs!

Check out the Lean Benefits Calculator (free) that you can use to play with the numbers, at www.leanbenefitscalculator.com. See you in the next post, on the subject of Reducing Overtime Expense.