ArtsAutosBooksBusinessEducationEntertainmentFamilyFashionFoodGamesGenderHealthHolidaysHomeHubPagesPersonal FinancePetsPoliticsReligionSportsTechnologyTravel

Benefits of Lean Inventory Management

Updated on December 8, 2016
Large warehouse
Large warehouse | Source

What is Inventory Management?

Inventory management is a technique of reducing inventory without causing any stock-outs to the system. There are a few key factors that enable an organization to achieve this inventory reduction and at the same time enhance stability in a system.

1.Space

Up to 70% of floor space in a factory or any other business premises is occupied by inventory. There are three categories of inventory:

  • Raw Materials - these are the inputs required for processing into finished products for sale
  • Work in Process- these are inputs which are at various stages of production within the process
  • Finished Goods- these are the market ready products awaiting an order or shipment to the final customer

Space can be reduced by determining the appropriate stock levels based on the actual market demand, together with other supply chain considerations such as supplier lead times.

inventory of packaged goods
inventory of packaged goods | Source

Why keep inventory?

Companies keep various inventory categories for the purposes of ensuring a smooth flow of their operations. However, a closer look will reveal that more than 70% of all inventory-be it raw material, in-process or finished goods- is unnecessary. Why then is there so much unwanted inventory in many business operations? The fundamental reason is because the operational efficiency and effectiveness is low necessitating many inventory buffers across the value stream.

2. Management

Warehouses and stores require personnel to constantly monitor, issue and report on stock levels. Inventory must first be ordered, purchased, received, stored and then re-issued to the next process. When this happens, the raw material accumulates costs along the way. Ordering is done by purchasing staff after being informed of stock levels and special needs by the stocking department. As an order is tracked from placement to delivery, there is a lot of communication back and forth between the purchasing department and supplier. Once delivery is made, a receiving process that usually involves quality and quantity checks by receiving staff is carried out. The stocks are stored and constantly monitored for reorder levels after issuing to the next process. As the raw materials are converted from one form to another, the internal processes go through the same routine of order, store and issue until the finished goods shipment and shipping.

What percentage of floor space is taken up by inventory

See results

Typical space requirements for inventory

(click column header to sort results)
Inventory Type  
Space Occupied  
No. of Days in stock  
Raw Materials
25%
60
Work in Process
20%
3
Finished Goods
25%
60
Analysis of space occupied by inventory

3. Pilferage

When inventory is lying in storage, the chances that it might be stolen by staff is very high. There is also the possibility of misuse due to poor monitoring. When inventory is too high, it becomes difficult to know how exactly it is been used (or misused) and variances are only highlighted after stock taking has been done -usually monthly and in some cases quarterly. The cause of the variance is not easily identified as stock taking takes place long after a pilferage incident has occurred.

4. Obsolescence

Inventory must be stored in such a way that it remains fresh to the next consumer in the value chain all the to the final customer. Perishable goods have to be consumed before they expire or no longer useful due change in customer specifications. Technological products have a very short life cycle in the market and a producers have to make sure they manufacture only the right quantities for a particular model. Goods that are seasonal or subject to fashion trends like clothing also need to be produced in the right amounts so as to avoid being stuck with large stocks of unsellable inventory.

Why Inventory is not an asset

  • Takes up a lot of space
  • Requires daily management attention
  • Can easily be stolen
  • Becomes obsolete in time
  • Holds up capital
  • It is not an asset!


5.Held up cash

All that inventory is money that cannot be used immediately and may affect operations because of poor cash flow. The finished goods inventory lying in a warehouse waiting for a customer order accumulates costs because it still has to be managed and monitored. The goods also used up resources during the manufacturing process: raw materials had to be procured, stored and processed into the final product. It can be said that the finished goods inventory is the most expensive category of inventory because it has accumulated costs during the course of its manufacture.

Conclusion

Due to the important role inventory plays in the preservation of a healthy cash flow, several measures can be taken to control the waste associated with its poor management. These include:

  • Establishing actual customer demand and producing accordingly
  • Enhancing communication between processes so as maintain visibility across the value chain
  • Rationalisation of inventory buffers used to shield the business from various shocks
  • Collaboration with suppliers with a view to decreasing supply lead times
  • Operational process improvements which can improve the flow of inventory through the system

© 2013 David Gitachu

Comments

    0 of 8192 characters used
    Post Comment

    No comments yet.

    working

    This website uses cookies

    As a user in the EEA, your approval is needed on a few things. To provide a better website experience, hubpages.com uses cookies (and other similar technologies) and may collect, process, and share personal data. Please choose which areas of our service you consent to our doing so.

    For more information on managing or withdrawing consents and how we handle data, visit our Privacy Policy at: https://hubpages.com/privacy-policy#gdpr

    Show Details
    Necessary
    HubPages Device IDThis is used to identify particular browsers or devices when the access the service, and is used for security reasons.
    LoginThis is necessary to sign in to the HubPages Service.
    Google RecaptchaThis is used to prevent bots and spam. (Privacy Policy)
    AkismetThis is used to detect comment spam. (Privacy Policy)
    HubPages Google AnalyticsThis is used to provide data on traffic to our website, all personally identifyable data is anonymized. (Privacy Policy)
    HubPages Traffic PixelThis is used to collect data on traffic to articles and other pages on our site. Unless you are signed in to a HubPages account, all personally identifiable information is anonymized.
    Amazon Web ServicesThis is a cloud services platform that we used to host our service. (Privacy Policy)
    CloudflareThis is a cloud CDN service that we use to efficiently deliver files required for our service to operate such as javascript, cascading style sheets, images, and videos. (Privacy Policy)
    Google Hosted LibrariesJavascript software libraries such as jQuery are loaded at endpoints on the googleapis.com or gstatic.com domains, for performance and efficiency reasons. (Privacy Policy)
    Features
    Google Custom SearchThis is feature allows you to search the site. (Privacy Policy)
    Google MapsSome articles have Google Maps embedded in them. (Privacy Policy)
    Google ChartsThis is used to display charts and graphs on articles and the author center. (Privacy Policy)
    Google AdSense Host APIThis service allows you to sign up for or associate a Google AdSense account with HubPages, so that you can earn money from ads on your articles. No data is shared unless you engage with this feature. (Privacy Policy)
    Google YouTubeSome articles have YouTube videos embedded in them. (Privacy Policy)
    VimeoSome articles have Vimeo videos embedded in them. (Privacy Policy)
    PaypalThis is used for a registered author who enrolls in the HubPages Earnings program and requests to be paid via PayPal. No data is shared with Paypal unless you engage with this feature. (Privacy Policy)
    Facebook LoginYou can use this to streamline signing up for, or signing in to your Hubpages account. No data is shared with Facebook unless you engage with this feature. (Privacy Policy)
    MavenThis supports the Maven widget and search functionality. (Privacy Policy)
    Marketing
    Google AdSenseThis is an ad network. (Privacy Policy)
    Google DoubleClickGoogle provides ad serving technology and runs an ad network. (Privacy Policy)
    Index ExchangeThis is an ad network. (Privacy Policy)
    SovrnThis is an ad network. (Privacy Policy)
    Facebook AdsThis is an ad network. (Privacy Policy)
    Amazon Unified Ad MarketplaceThis is an ad network. (Privacy Policy)
    AppNexusThis is an ad network. (Privacy Policy)
    OpenxThis is an ad network. (Privacy Policy)
    Rubicon ProjectThis is an ad network. (Privacy Policy)
    TripleLiftThis is an ad network. (Privacy Policy)
    Say MediaWe partner with Say Media to deliver ad campaigns on our sites. (Privacy Policy)
    Remarketing PixelsWe may use remarketing pixels from advertising networks such as Google AdWords, Bing Ads, and Facebook in order to advertise the HubPages Service to people that have visited our sites.
    Conversion Tracking PixelsWe may use conversion tracking pixels from advertising networks such as Google AdWords, Bing Ads, and Facebook in order to identify when an advertisement has successfully resulted in the desired action, such as signing up for the HubPages Service or publishing an article on the HubPages Service.
    Statistics
    Author Google AnalyticsThis is used to provide traffic data and reports to the authors of articles on the HubPages Service. (Privacy Policy)
    ComscoreComScore is a media measurement and analytics company providing marketing data and analytics to enterprises, media and advertising agencies, and publishers. Non-consent will result in ComScore only processing obfuscated personal data. (Privacy Policy)
    Amazon Tracking PixelSome articles display amazon products as part of the Amazon Affiliate program, this pixel provides traffic statistics for those products (Privacy Policy)