Warehousing & Distribution
Problem Inventories
By Jan Young, CFPIM
Every business has problem inventories whether they are recognized or not.
Surplus, obsolete materials, "just-in-case" safety stocks, material
stored in the wrong warehouse, material that isn't quite good enough to
use but is too good to throw away, items approaching their shelf-life limitations,
etc., all contribute to the problem.
These inventories represent waste. They tie up company money, require material
handling, consume valuable space and, possibly most important, they make
the warehousing operation larger, more complex and therefore more costly
than necessary.
Here's a step-by-step process you can use to get a handle on the size of
the problem and to limit its impact on your business.
1. Define the problem.
Start with the idea that all inventory is a problem unless there is financial
justification for it. Then list the categories of inventory that you think
may represent the biggest losses: obsolete material, overstocks, defective
material and incorrectly located material. Your list may be longer than
this one.
For each category, determine a measurement. For example, overstocks might
be measured based on the number of weeks or months of supply on hand. Now
apply pencil to paper and attempt to determine what value of this measurement
represents the borderline between justifiable and problem inventories.
Don't attempt to define the problem by yourself. Help and cooperation from
your financial organization will be needed. Be sure you have identified
and reasonably estimated all of the costs involved.
2. Develop auditing and reporting procedures to track the problem.
Set up a process or a procedure that will automatically and regularly measure
the amount of problem inventory on hand. Be sure that the measurements provide
breakdowns by such things as location, product line, age of the stock, the
reason for the problem, etc. Also provide a tool that will allow you to
get access to the details underlying the measurement.
3. Establish problem inventory levels as a permanent performance measurement.
On a worldwide basis, American business is notorious for its short attention
span. We have a great tendency to develop short-term solutions and then
walk away, with the result that the problem is soon back to haunt us. You
can avoid this phenomenon by agreeing with your management that problem
inventory levels are as important as productivity and short-term sales and
that they should be a formal part of the measurement of your operation.
4. Create a short-term cure.
The short-term cure is usually simple to define and difficult to execute:
Get rid of the problem stock. The hard part usually comes about because
the business will have to accept the short-term, one-time cost of disposing
of the problems. Although this may be difficult, it has to be done.
Creativity is essential in the development of ways to dispose of problem
stock. Ideas include sale to customers, brokers or inventory clearance houses,
rework, substitution, disassembly, intracompany transfers, new product designs,
use in training and, as a last resort, scrap. It will often be necessary
to plan and schedule the disposition of this material to moderate the impact
on the business and allow costs to be absorbed at appropriate times.
5. Determine the causes of the problem.
The most interesting and most productive part of the problem inventory project
is the long-term part. Ask yourself how the business got into the problem
in the first place. Prompt monitoring and disposal of problem inventories
helps limit the cost, but the real objective should be to prevent problem
inventories from being created in the first place.
Here are some places to look for problems: over-optimistic sales forecasts,
unplanned quick-fix engineering changes, market and technology changes,
poor production planning and/or unrealistic scheduling, vendor and production
failures to meet schedules, incorrect lot sizing and/or ordering policies,
excess safety stocks, inaccurate inventory data, and poor communications
among warehousing, purchasing, scheduling and production people.
6. Develop a long-term cure.
Problem inventories will continue to exist and the magnitude of the problems
will not be reduced until long-term cures are adopted. These cures will
most likely make themselves evident as the causes are defined. Implementation
of the cures may involve substantial change to existing business processes
in some instances, but in other instances, it may be relatively easy.
The basic principle is economic efficiency. If inventory is the cheapest
way to meet a challenge or solve a problem, then the inventory is justified.
But if there are other alternatives that cost less to implement, then the
inventory is a problem and it should not be kept. A long-term outlook and
a willingness to dig into the details and analyze the situation will result
in a more efficient and a more successful business.
Jan B. Young, CFPIM, is director of warehouse technology for Catalyst
USA, Inc., a supplier of off-the-shelf warehousing and distribution systems.
He is the author of Modern Inventory Operations, published by Van Nostrand
Reinhold in 1990.
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