In our last blog, we began a discussion about how applying three basic principles to the management of your MRO inventory can directly affect your bottom line – Today and Tomorrow. The three principles are;
Rule #1 – Increase Your Income
Rule #2 – Spend Less
Rule #3 – Control More
Today, we will explore Rule #2 – Spend Less.
Rule #2 Applied – How can you spend less on your MRO inventory and directly affect your company’s bottom line?
MRO costs can come from several different sources in your facility. Getting a handle on the excesses in one area will affect the others.
Controlling Inventory Costs – Excess inventory costs often come from poorly defined or poorly enforced processes or from not having proper measurements in place to manage the inventory. For example;
Obsolete inventory happens when there is no purging process (or no purging process exercised on a regular basis). Get rid of excess and obsolete inventory (see previous blog for recommendations).
Special projects create excess inventory when there is no process to restock items not used on the project (so they get dumped somewhere and are no longer accounted for in the inventory). Almost every facility has that “scary warehouse” or storage area that no one really wants to go into to search for things. Legends are told about people who go in but don’t come out… Implement a policy of checking items out of stock and also checking unused items back into stock rather than just dumping them in a corner somewhere.
Overstocking of inventory occurs when no one is measuring usage. No one really knows how much of a product is needed, so they order on a “gut feel.” Another cause derives from no one checking inventory before they order more product. Instill a policy of checking stock before EVERY purchase. (In order to check stock, you must have an accurate and rich inventory database. We will discuss that further in the next blog – Rule #3 – Control More). Keep track of what is used and how much is used. Base ordering on usage figures rather than “gut feel”.
“Buying around the inventory” is the most common result of not knowing or not being able to find what you have in stock. In other words – it’s easier to just buy it than to find it. Establish controls around the processes contributing to these “buy around” habits and make it easier to do the right thing than it is to do the wrong thing.
Process Costs – In addition to gaining control of the purging and restocking processes mentioned above, you should also consider reviewing the following processes as sources of increased costs and also potential savings.
Item search time – Search time costs money in both labor (time for the search) and in downtime (time not producing while you are searching). Minimizing this time through clean up and organization of your storeroom saves big money.
PO processing time – Processing multiple PO’s to the same vendor saps cost from your company. Consolidating vendors and purchases reduces the amount of time spent generating, processing, and receiving orders.
Travel time – With inventory located all over the plant, your technicians spend more time than you know traveling from location to location collecting the parts they need to complete a job. In addition to the time spent traveling, it is also a convenient way to get “lost” and have an extra break along the way. Quantify this time into labor hours (and dollars) and you will be stunned. Reduce this time by consolidating and organizing your inventory.
Downtime – Downtime is often the biggest source of money escaping from any facility, but it is rarely measured completely or accurately. Whether you choose to measure it or not, you know that this cost must be contained and eliminated whenever and wherever possible.
Purchase Costs – When I mention purchase costs, most people think I am going to talk about how well they negotiate their pricing with their vendors, but that isn’t my focus here. I’m looking at the bigger picture.
Fragmented Supplier Base – This is where I like to apply the 80/20 rule. If you are buying less than 80% of your product from your top 10 vendors, you probably have an opportunity to gain significant savings through supplier consolidation.
“Just In Case” Buying” – As you have had to cut back people, you probably built some safety net redundancy into your buying. You aren’t sure what you are going to need and the person who does know isn’t here anymore, so lets get 3 of that item, just in case it’s hard to get if you ever need them later. Restricting yourself to buying only what you need, based on usage rather than “gut feel” can reduce costs significantly and move you toward the control of inventory and dollars that you need.
“Buying Around the Inventory” – Buying around the inventory (going around any of the buying processes) , as in some of the examples mentioned above, is a result of it being easier to buy new product than it is to find the product you already own. If you don’t know what you have or if you can’t find what you have, you will probably have people buying around the inventory. It will result in buying more product than you need, paying more than the negotiated price (spot buys almost always cost more than planned purchases), and paying a higher procurement cost in both PO process cost and in travel/shipping costs. These cost creep up on your bottom line pretty quickly, so it is best to address this ASAP.
As the above steps are implemented, you will find your bottom line improving. The more quickly you are able to implement the changes, the more quickly you will be able to reap the rewards. The longer it takes to implement, the more money is lost and can not be recovered.
As always, if you have questions or need help with implementing these (or other) improvements to your inventory management processes, Professional Materials Management (PM2) stands ready to assist. We are fast, easy, and affordable. More importantly, we bring decades of inventory expertise to address your needs. Give us a call at (813) 249-0834. Or visit our website: www.PM2online.com