Inventory levels

    Cash.. according to Warren Buffett in one of his public appearances said "Cash is not king if you have no plans to use it", hoarding cash can give you a peace of mind in moments like 2008 or 2020. Something very similar to what Henry Hoang said "Having cash or cash equivalents in your portfolio gives you peace of mind and the opportunity to capitalize when everyone else is losing their minds during a market correction".

But let's talk about operational cash in a manufacturing business; and more specific on the stagnate position of cash, Inventory. One of the most popular activities while transforming or fixing a business is to find the correct amount of inventory. The typical first step is to slice the total inventory by locations and by financial A, B and C categories, where A's are the most expensive items and C's are the least expensive. Unless you have just a few products and you are in the high volume - low mix this approach will work. Completely different approach is needed when the you have a large number of products in the catalog. 

My proposition is to look at the inventory from the inventory turns point of view, this way, we can focus our efforts in closing the door to those with the least inventory turns; with the precaution that those can also be part of a policy to support legacy systems or products.

By identifying raw material or components with low inventory turns, you can avoid using precious cash in items that will hit the door and then the shelf.

How and why do you have so much inventory on those items?  What I have found over the years is caused by the distraction of the hot list of parts needed to run the next day of production, and the full trust given to the computer system, in this case to the parameter call "safety stock". Some other reasons for this outcome are the policies around inventory and customer services expectations. People in the business facing the customer are in need of inventory to cover almost any customer demand. Policies applied just to change something in most cases creates other issues, like reducing or setting life span for service when you have years worth of parts sitting on the shelf. New products from competitors clouding the forecast and slowing down the speed of consumption of certain product. We can go on an on, but the point is; once we're facing a situation like this, the best way is to shutdown those items from the purchasing list. it's much easier to remove the item from the list than give the task to sales to promote those items to customers. We need to realize the fact that deep down there is a powerful reason why the items remain in inventory for years.

As we progress in the automation of the planning task, we need to realize that engineering bill of materials are for engineering drawings, never I my career the engineering bill of material was useful (structure-wise) to order material and control the material correctly. Almost all of the ERP/MRP's in the market corroborate the effectiveness of the system to manage this condition, the reality is that you need an army of people to manage it.

If you are in a high volume - low mix environment, the cost of the item is minimize and well priced, this is not the case for a low volume - high mix configuration, some items are priced correctly but the caveat is the amount of periods of inventory you will need to purchase as minimum quantity. When the market is consuming those items, your cash is locked on items you are selling, the condition and the cash requirement changes when the market changes and the volume goes down.

Total cost of goods is sometimes divided in two areas, the piece price is a metric for purchasing, but freight cost is under manufacturing.  The cost of the unit is great, the cost of freight is good, but when you need to expedite (and it's a matter of time), most of the savings can go with it in one instance. Current situation in today's world.

Let's go back to the inventory level, how to size your inventory correctly, In my experience you need to really look at the lead times, remove the safety stock from the MRP system (yes not at typo) and manage your forecast process every month beyond your frozen period; just the way the business manage the month financial closing. 

Lead time, why is this important and what is point A and what is point B for the cycle, Point A is when you send a purchase order to the supplier, Point B is right before the next purchase order is sent. This is the real cycle of the item. It is important because it measures the true cycle from ordering to ship, receive, inspect, store, use and replenish. If your process is different and, for example your lead time is from ordering to receive, you are missing a big piece of the process. This is not different than measuring the cycle time of a machine producing parts. From loading to loading again, or from push start to push start.

Safety stock, I will only use safety stock in combination with Min and Max parameters and only on the distribution centers or finish goods to the customer. For the academics on MRP's the safety stock will overwrite any other planning parameter until your safety stock is in inventory (system inventory) otherwise every time MRP runs, the signals or messages to the planner are a the top of the list, numbing the rest of the parts. Big disruption and bad behaviors are created as work around; two words for that "excel files" every day.

Forecast, In order to be able to produce on time, the organization must respecte the lead times to suppliers, the Plan or Forecast needs to exist. If your business is reacting to real customer orders, and the effort is to fulfill those orders without a forecast, your are on a spiral... Safety stock will not save you from it, expedite will continue forever or at least until the customer orders keep pilling up. It's a must to have a plan/forecast establish in the organization. If your lead time is 2 months, and you're in April, the Sales/Forecast changes or adjustments are for the month of July; not May, not June. Those months are gone and out of reach from changes. The parts/items are in the process of manufacturing or in transit to you. Changing numbers inside lead times are a few of the reason for the stock outs and not having material available. 

The question is, what happens if you are a restaurant? the answer is simple, the catalog (menu) requires a certain amount of product in the freezer or fridge (inventory), but you still need to know your average volume. what if your product is custom made, same logic!