Imagine your manufacturing facility has faced several shortages of a critical component within the last few months. Those shortages occurred because a supplier’s delivery was late. To avoid further disruptions, your company decides to create a buffer and keep more of that material on hand.
The stockouts stop, and the warehouse is full. But that creates another problem.
Since you now have an excess of that component on hand, cash is tied up in materials that can sit idle for months. Depending on the nature of the component, there is a chance it can become obsolete or unusable while it waits for usage. Then there is the physical cost of storing the excess material.
In the meantime, employees are spending time moving, counting, and managing the inventory. Work-in-process begins to pile up between production steps, causing more delays.
Solving one problem only created another.
When it comes to inventory, manufacturers find themselves in a constant balancing act between having too much and having too little. That is the challenge of inventory reduction in manufacturing.
How do you reduce inventory without creating stockouts, production delays, or missing customer orders?
The goal isn’t necessarily to have the least inventory possible. It’s to have the right inventory in the right place at the right time.
Why Excess Inventory Is a Problem for Manufacturers
When a manufacturer has too much inventory on hand, whether it’s finished goods, raw materials, or work-in-process (WIP), it does more than just take up space in a warehouse.
Sitting inventory ties up capital that could be used for other purposes. Manufacturers have to spend money storing, handling, tracking, and moving that inventory. The longer inventory sits, the greater the chance raw materials can spoil, become damaged, or obsolete. Storing more inventory of components to compensate for an unreliable supplier only covers up the fact that the supplier is unreliable. Large batches of finished goods that sit and wait for distribution can mean inaccurate demand forecasts or inefficient production scheduling.
Simply slashing inventory can create a different set of problems. Stockouts can occur when manufacturers don’t have enough raw materials on hand. Downstream processes can sit idle when WIP is too low in one area. When finished goods aren’t available when the customer needs them, deliveries can be missed.
Solving these challenges isn’t simply about setting lower inventory targets. Manufacturers must understand what causes excess inventory to accumulate in the first place.
Lean manufacturing provides a framework for doing exactly that. Through lean inventory management, manufacturers can utilize data to establish appropriate inventory levels, improve production flow, reduce variability, control WIP, and improve inventory turnover without creating unforeseen new problems.
How Manufacturers Can Reduce Inventory Without Causing Stockouts
Before asking how much inventory can be eliminated, manufacturers should consider how much inventory is actually needed for a process to meet demand reliably.
This concept is called safety stock.
Safety stock is a quantity of raw material, components, or finished goods that a manufacturer keeps on hand as a buffer against unexpected changes in demand or supply. Keeping the right amount of safety stock on hand can help manufacturers outlast minor supplier delays so that their entire production process isn’t forced to shut down.
However, safety stock is quite different from excess inventory.
Inventory consists of a mix of raw materials, work-in-progress, finished goods, and MRO. Excess inventory is inventory beyond that which is reasonably necessary to support production and customer demand.
In order to ensure there is enough inventory on hand without creating stockouts, manufacturers need to identify the appropriate level of safety stock along with the right reorder point.
The reorder point tells a manufacturer when new material should be ordered, while the safety stock provides a buffer against changes in supply and demand.
For example, if a supplier usually takes five days to deliver a component, a manufacturer should maintain enough inventory to cover production for those five days, plus an additional buffer for possible delays. Keeping inventory beyond that needed to cover expected demand plus safety-stock is what can become excess inventory.
Manufacturers can calculate the appropriate safety stock and reorder points using actual demand and lead time data. This will help you determine the right amount of buffer your process needs to maintain operations.
7 Inventory Reduction Strategies for Manufacturers
There are several things manufacturers can start doing to reduce inventory.
1. Identify and Eliminate Excess Inventory
Not all inventory is equally valuable. Start by assessing what inventory you currently have and what purpose it serves. You may have obsolete materials, duplicate stock, excess finished goods, and “just-in-case” materials all taking up valuable space. The goal is to separate the inventory that serves a purpose from inventory that has simply accumulated over time.
2. Reduce WIP By Addressing Bottlenecks
If material piles up before a certain machine or process, find out what is causing the issue. It can be a result of uneven workloads, quality problems, long changeovers, scheduling issues, or batch sizes that are too large. Lean techniques like improving production flow, using pull systems, and reducing batch sizes can help reduce WIP and address bottlenecks.
3. Reduce Batch Sizes and Setup Times
Large batch sizes naturally produce significant inventory. However, some manufacturers are incentivized to produce larger batches than necessary simply because changeover from Product A to Product B takes significant time. Manufacturers should explore ways to reduce setup, or changeover times can make smaller production batches more practical.
4. Improve Supplier Lead Times and Reliability
Unreliable suppliers can lead manufacturers to stockpile critical components. Reviewing supplier lead times, delivery consistency, and minimum order quantities can reveal opportunities to improve reorder points. In some cases, it may be possible to work with suppliers to improve performance or even change the source of the component or material.
5. Improve Accuracy With Scan-In/Scan-Out
Inaccurate inventory records can cause manufacturers to order or produce more of an item, even when they already have enough on hand. Scan-in/scan-out processes can improve inventory accuracy by tracking the movement of materials using barcodes or QR codes as they are received, moved, consumed, or shipped. This gives manufacturers better visibility into where inventory is located and how much is actually available.
6. Back Reorder Points With Data
Manufacturers need to set accurate reorder points. Instead of relying on a “just-in-case” approach, using historical demand data, lead times, and service requirements can help establish appropriate safety-stock levels.
Tools such as Economic Order Quantity (EOQ) help manufacturers determine how much inventory to order at a time. EOQ uses factors like ordering costs, holding costs, along with item demand to determine the most cost-effective inventory levels.
Using these techniques helps manufacturers make more informed decisions about when to replenish inventory, how much to order, and how much safety stock to maintain.
7. Continuously Review Obsolete and Slow-Moving Inventory
For manufacturers, inventory reduction requires more than a one-time cleanup of their warehouse. Organizations should periodically review their inventory to identify aging inventory, obsolete materials, slow-moving items, excess finished goods, and unused components. This can help identify issues where forecasting, purchasing, and production decisions have created excess inventory.
A Practical Way to Approach Lean Inventory Management
Lean inventory management can help manufacturers reduce inventory while ensuring there is sufficient safety stock on-hand to withstand short-term inventory disruptions. Manufacturers can employ a simple, repeatable process to identify where the biggest opportunities exist to reduce inventory without stockouts.
- Measure: Start by establishing current baseline inventory levels, inventory turnover, WIP, stockouts, and aging inventory.
- Identify causes: Instead of simply setting lower inventory targets, examine why excess inventory is accumulating.
- Improve flow: Act on your findings to address identified bottlenecks, long changeovers, large batches, and other causes of WIP accumulation.
- Improve visibility: Use scan-in/scan-out techniques to increase the accuracy of inventory from production through shipment.
- Reset inventory levels: Use real demand and lead-time data to reevaluate your reorder points, safety stock, purchasing quantities, and production schedules.
- Monitor results: Track inventory turnover, stockouts, WIP levels, and service levels after changes have been made, comparing the results against your baselines from step 1.
Manex: Helping Manufacturers Reduce Inventory Without Sacrificing Production
Reducing inventory takes a more nuanced approach than simply ordering less or reducing output. Excess inventory is often the result of deeper problems within production flow, supplier reliability, forecasting, scheduling, or inventory control.
Lean inventory management gives manufacturers an opportunity to address these underlying issues and reduce inventory while minimizing the risk of stockouts.
For over 30 years, Manex has served California manufacturers with inventory management and lean manufacturing consulting services designed to identify operational inefficiencies, improve production flow, reduce waste, and build more resilient manufacturing systems.
When excess inventory, increasing WIP, and inconsistent inventory turnover are tying up capital in your manufacturing operation, Manex can help you reevaluate your performance and improve efficiency with lean manufacturing techniques.
