In our last blog, we considered the fact that maintenance, repair, and operating (MRO) inventory is often overlooked as a source of cost cutting and increased savings that could have a positive influence on your company’s bottom line. So, how can your inventory help you survive in these economic times?
Your inventory costs money and if you begin to look at your inventory as if it were cash lying on your shelf, you will begin to view it is a tool to manipulate that can increase cash flow and free up dollars that can be used to pay for other priority items within the company. For example; would you rather have your money tied up in six electric motors that you have used one of in the last year and that cost $150 each (6 x $150 = $ 900) or would you rather have $900 to repair that air conditioner you’ve been limping along for the past year?
Excess inventory usually occurs over time through a variety of insidious processes, which we discussed in our last blog. The two questions today are;
- How do you determine what is excess inventory and what isn’t?
- How do you quantify the excess inventory that you have?
There are four pieces of information that will help you determine what excess inventory you have. They are:
Do you track usage? Issuance of parts? If you are tracking your usage, you are well on your way to determining what is excess and what is not. If you have issued a part only one time in the past year (and you trust that your information is accurate), chances are, you do not need to stock it. I will caution you to make sure that the same part is not listed in the inventory database under several different descriptions or numbers. I would also advise you to make sure that your workers are not pulling from “private stock” inventories or “hidey holes” of product that are not represented in your inventory system at all.
Annual Inventory Turns is a measurement of how many times in a year you use a particular item. For example, an inventory turn of “2” means that you use that item two times a year. In this example, if you have 6 of this item on the shelf, you have too much inventory of that item. It is not unusual for a company to have over half of their inventory with turns of less than 2 per year. Wouldn’t it be nice to have the money represented by these items available to use on other priorities?
Criticality of a part has to do with whether the part is critical to your plant/facility to keep it running. For example, if the motor that runs your production line fails and you do not have a spare on hand immediately, how much does it cost you per hour that the plant is not running? The answer to this question will determine if the part is critical or not? Part 2 of this question is this; How fast can your supplier get it to you, and can you get them to agree to keep the part on hand all of the time so you don’t have to? If a part is critical, but you can get the part to your facility immediately via will-call pick up or courier, you don’t need to stock it.
If you are like many companies out there, you aren’t measuring your inventory turns and you can’t really rely on the accuracy of your database, but all is not lost. When all else fails, use the “dust factor” to help you make a decision. First, look at how much dust there is on the box? Second, go to your Plant Engineer and ask if the part is critical to keeping the company running. If not, it is excess inventory.
There are three pieces of information you must have in order to quantify your inventory value. They are:
- Accurate inventory– Do you have an inventory master list? Is everything on it? Are you sure? How many times is a part listed (in other words, are there duplicates)?
- Dollar value of each item – Do you know how much each item is worth?
- Quantity of each item – Do you know how much of each item that you have? Are you sure? Again, check the “hidey holes and locked closets. These items may not be represented in your inventory system.
Once you have determined the value of you inventory and how much of it is excess, it is time to determine how to convert this excess inventory into hard cash that directly hits your bottom line. Excess product can be repaired, salvaged for parts, sold, or returned to the vendor that sold it to you.
Your excess inventory brings with it benefits in the form of “burn off” opportunities for usable product, repaired items, and equipment that has been cannibalized for parts. These all present the chance to avoid spending and bring in company savings. Cash opportunities come from excess product sold to salvage companies and product that is returned to vendors. All of these opportunities drive increased cash flow and go directly to the bottom line where they can get to work for your company. That is how your excess inventory becomes the hero that can help you survive in today’s tough economic environment.
As always, PM2 stands ready to help you with these, or any of your inventory problems. Please feel free to give us a call at (813) 249-0834 or e-mail your questions to firstname.lastname@example.org. Or visit us at www.pm2online.com