Inventory waste is one of those age old problems that appears simple at first, but becomes vexingly complex upon closer analysis.
Maintenance and inventory managers generally agree that inventory waste should be eliminated to the greatest extent possible. Beyond that, there is broad disagreement, beginning with the definition of ‘waste’ itself.
For some companies, any inventory that sits on the shelf for more than a year or two represents an unacceptable expense. In a recent IMPO feature, consultants from Grainger, an industrial supply company, suggested that, on average, as much as half of the inventory that companies keep in stock is never used.
Other companies may struggle with the opposite problem: parts are coming off the shelves so quickly they can’t keep up the pace. As a result, they’re frequently left short-handed when equipment breaks down, which causes prolonged downtime, excess costs, and damage to customer relationships. In these cases, the waste comes in the form of higher prices paid for emergency part orders, lost business, and operational inefficiency.
Which scenario best characterizes your company? What is your inventory really costing you? If you’re not totally sure, you’re not alone. Many of our clients come to us looking to do a better job of tracking their inventory data for the purpose of answering questions like these.
Here are some steps you can take to find the answers you need and finally start to make inroads into the inventory waste problem.
+ Get a CMMS system to track your inventory. Before you do anything else, you’ll need a system that can track complete data on your inventory. Best in class CMMS solutions like ManagerPlus are enabled for use with barcode systems and mobile devices, making it easy to get detailed, real time information about inventory flows.
With this data in hand, you’ll be able to narrow down sources of waste, and automate aspects of the acquisition process to ensure that you’re never left short-handed.
+ Determine inventory turn ratio. In order to determine whether your inventory levels are maintained efficiently, you need to calculate how often different items are being used. This is where the inventory turn ratio comes in handy.
To calculate your inventory turn ratio, divide the dollar value of the inventory you’ve used over the past 12 months by the dollar value of the inventory you have on hand today. In ManagerPlus, you can run an Inventory Cost Valuation report and filter it to show the value of all inventory on hand as of today’s date. Next, you can run the Work Order Parts Usage report for the past 12 months to get the total value of the parts that have been used in that span.
After you’ve divided the value of inventory used over the past 12 months by the value of the inventory you currently have on hand, you should come up with a number that can range anywhere between a small decimal and a number like 2 or 3 (note that this number is not a percentage). Generally speaking, a low number indicates a slow rate of inventory turn, which is a sign that a lot of parts are sitting on the shelf unused and overstocking may be a problem.
If the number is high—say 2 or 3—it’s a sign that you generally turn inventory over very quickly, which could mean that shortages are a concern. According to Grainger, up to 75% of the cost of inventory is hidden in the administrative work necessary to acquire parts, so it’s important to understand how regularly you are going through the work to replenish your supply.
For manufacturing plants, reliabilityweb.com suggests that an inventory turn ratio of 1 is the number you should be shooting for. But this is a general conclusion—the important thing is to understand what your ratio is so that you can start to dig deeper and identify different sources of costs.
A company with a high inventory ratio might look at automating more of the purchasing process using their CMMS in order to reduce the overhead associated with re-ordering. Companies that have a high turn ratio, on the other hand, need to perform criticality analysis on their inventory.
+ Determine criticality. Let’s say that your inventory turn ratio comes out to be 0.5 or lower. This means you should start downsizing your inventory immediately, right?
Not so fast. To ascertain the true cost of holding a given part in your inventory, you should first take a look at your maintenance history.
Some parts are difficult to source, ship, and install, which in cases of emergencies spells longer downtime. In other words, a part may be costly to hold in stock, and it may stay there for a long period of time, but having it on hand may dramatically reduce overall downtime in the event of a sudden breakdown.
This tradeoff is the core of critical analysis. Though it may take some time, it will be worth your while to determine which parts are associated with mission-critical assets and make inventory decisions accordingly.
+ Visibility is key. Ultimately, these are just basic, preliminary approaches to inventory analysis. But getting started is half the battle. Installing a robust inventory tracking system like ManagerPlus is the best way to tackle the tough challenge of inventory waste.