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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

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