ARE YOUR INVENTORY LEVELS SET TO MAXIMIZE PROFIT, OR SOMETHING MUCH MORE ARBITRARY?

Have you ever noticed that when you add new shelving or storage in your garage it always fills up? Even if you add more than you need, within a year it is full. Do we really have exactly what we need on those shelves, or is our personal inventory set by the available space? Finished goods, raw materials, and WIP seem to behave in much the same way and that could be because we tend to calculate the cost of machines and FTEs, but not inventory.

We spend a lot of time in carton plants all over North America, and we see inventory levels vary greatly from one location to another. While it is not a hard and fast rule, the level of inventory is normally in relation to the cost of real estate. Areas, where space is at a premium, tend to have very little inventory, while our clients that have large campuses in lower-cost areas tend to have much more inventory.

Is your inventory level set by space rather than profit? One way to tell is to go for a walk. Is your building full? Should it be full? Is that the exact amount of inventory you should have?

Simply reducing inventory is not the best approach because some inventory is more efficient than not enough. For example, most shops are not balanced perfectly. You probably have more capacity in printing than cutting, or maybe the other way around. To make up for that you may need to run more hours in a department, and that requires WIP to keep the department running. It may also make sense to cut in on one order to print another because cutting is going to be most efficient by die number, and printing by imprints, and so on.

In raw material areas, your purchasing department will probably not get into big trouble if they fill up that space but would be in trouble if an order was late because you ran out of stock. Then in today’s market, with long lead times for board, you may not have the luxury of “just in time” for paper.

Without turning it into a large and cumbersome project, you may want to put a pencil to the problem, and see what your cost of inventory is. Some of the things to consider are material handling cost, shrinkage from damage, shrinkage from things like ruleset, the cost of money, and rent if you have an outside warehouse. Your ERP system should provide those numbers for you. If not, you should add the necessary waste categories and GL accounts to track these things.

Years back I did this homework for a couple of companies. The cost for holding finished goods was higher than we thought it would be. Without that understanding, they would be more likely to run longer runs to offset the cost of setup on some older machines.

Your team knows these things, but do they take time to consider them?