Inventory Management: Money Well Spent

A couple of weeks ago, I went into the kitchen at our office when I arrived in the morning. There was nothing unusual about my trip for a daily cup of coffee, but when I got there, I was shocked to find that I couldn’t fix my cup. We were totally out of creamer!

I know. I could have just drunk the cup black, and I might have if another thought hadn’t occurred to me: “What if I had been trying to fix an asset instead of a cup of coffee?” What if it were a missing spark plug or a specialized component? I can go without a cup of coffee today and wait a week for a new box of creamer cups.  But without the right inventory, it becomes impossible to use an asset.

Not only do you need to order the part, but you’ll likely also be paying extra to expedite the shipping to get it in as soon as possible. It can make an already bad situation even more expensive, and further delay the work from being completed.

So, how do we prevent future stockouts? At first, it seems simple: make sure you are always so overstocked that you never run out. But this brings its own challenges. I want creamer when I get my coffee, but I don’t want my entire kitchen filled with stacked boxes of creamer either.

The Costs of Overstocking

Having the right amount of inventory is a balancing act. Too little inventory and you risk having a stockout, but overstocking is not a good solution. Some inventory, like screws or other small parts, can easily be stored in mass quantities. For these smaller parts, there is little cost associated with storage, and their low individual cost makes overstocking relatively inexpensive.

However, for larger components, this is not the case. Your inventory space is not unlimited, and you must pay for each part or component before you need to use it. If you are looking at a part like a cutting tool for a drill, an automotive battery, or an electric motor, then costs can add up quickly.

The high out-of-pocket expense for carrying so much stock is too much for many businesses to swallow. Additionally, if an inventory item becomes outdated, then you are left with the choice of either running on outdated parts for the foreseeable future, or else throwing out your existing inventory and replacing it all.

What’s the solution? Like a lot of things in life, Inventory Management is about using the right tools to help you achieve the right balance.

Balancing Inventory Levels

Balance is about finding that “Goldilocks” zone where you don’t have too many parts in stock, but you always have what you need. So, what is the magic number? Let’s take a look at how you can figure it out. It should go without saying that this will need to be done differently for different inventory items.

First, let’s define your inventory lead time. Lead time is the amount of time that passes from the time you place a purchase order to the time it arrives and is entered into your asset management platform. This lead time is important, because ideally you should be ordering so that your next shipment arrives before you need it.

The next thing you need to define for the asset is your average use rate. This is done using the following equation:

This rate will repeat over time while you get new shipments, giving you a sawtooth graph like this one:

The upticks on the graph are new shipments of parts that arrive. The question is now, what are the maximum and minimum points on the graph?

For some people argue that for maximum efficiency, the shipment of parts should arrive “Just in Time” for the repairs that require them. While this is inarguably the best way to manage your inventory in a perfect world, real world shipping and circumstances makes this a risky strategy.

Calculating your maximum is a little easier. First, consider how much inventory you can store. Your maximum should not exceed this number. Note that this is not your normal inventory level, which should reflect your normal part usage rate.

Integrating Inventory Management with Asset Management

What does it mean to integrate Inventory with Asset Management?

Well, if you’re using ManagerPlus, this is where things get really exciting. When you use the ManagerPlus asset management platform, you can setup your inventory and then relax. When you assign a work order, it will automatically account for the parts to be used within your inventory. The platform will inform you that you need to order more of a part (via the notify tool) when your unassigned parts drops below your minimum level. This will inform you how many parts you will need to order to get back up to your assigned normal level of inventory.

Your inventory tool also records where your parts are located so you can easily find them when you need them. New shipments can be integrated using bar code scanning. You can also tell ManagerPlus your lead time with your preferred vendor, and Notify will take it into account when telling you when to order your next shipment.

Benefits of Automated Inventory Management

When you use ManagerPlus’ Inventory tool, you can see some amazing benefits, including:

  • Easily locate inventory in storage
  • Save money from expedited shipping costs
  • Integration with work orders
  • Barcode tracking through mobile device cameras
  • Lower storage costs from excess inventory

If you struggle with your inventory levels, or would like to improve your inventory management practices, let ManagerPlus help you take control and reduce your inventory costs. We love to hear your success stories, and can’t wait to see the improvements in your own organization.

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