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INVENTORY REDUCTION Article
How Inventory Reduction can Help Design Half-Cost Products
By Dr. David M. Anderson, P.E., fASME, CMC
Copyright © 2020 by David M. Anderson
The Results of Eliminating Inventory:
• Save a lot of Money. For every $4 million of inventory eliminated, companies
will save $1 million dollars a year!
• Avoid Inventory Problems. Avoid inventory obsolescence, inventory
deterioration, warehousing expenses, expediting, and lost sales from the
• Quick Response. Instead of forecasting sales, spending money to build those
products, paying inventory carrying costs until they are sold, and hoping you
built the right ones in inventory, you could build all products on-demand
without any inventory.
HOW TO REDUCE AND THEN ELIMINATE INVENTORY
The following sections will show how to reduce and even
eliminate Raw Materials inventory, Parts inventory, Work-in-Process inventory,
and Finished-Goods inventory.
Reducing Raw Materials and Parts Inventory
The Problems with Raw Materials Inventory
If the rare case when delivery time doesn’t matter, raw materials and parts
could be purchased after the manufacturer receives an order and then production
would begin after they all arrive. But the vast majority of manufacturers must
be much faster than that, so they may try to stock all raw materials and parts
in inventory. However, it would cost way too much money to stock all of those
needed for all products that might sell. So the manufacture will try to use
sales forecasts to predict which product variations are most likely to sell and
then tell Procurement which to order and stock. Of course, this scenario would
only work if the forecasts were perfect and all the parts and materials were
available, in the right quantity, to start production. If any of this is off,
then expensive expediting will have to try to quickly procure whatever is
The Solutions to Raw Material Inventory Problems
1. Standardize all raw materials, even if most applications will get a
“better” material. The money saved in overhead costs would be far greater than
the going for the minimum spec for each of a proliferation of materials. If
standardized enough, these materials can be ordered in a
steady flow with a
slight leveling buffer stock with confidence they will be used one way or
Results. All that redundant inventory can be eliminated. Out-of-stock
delays will be eliminating since fully stocking a plethora of raw material
part number is impossible, but expensive to try.
2. Standardize on the longest version and cut-to-length
as needed. This applies very well to coiled linear material, such as tubing,
hose, rope, chain, wire, strips, and so forth. Even straight material can be
cut-to-length, for instance, hinges, thick tubing, pipe angles, channels, and
I-beams. Both of these categories were cut-to-length at one of the author’s
clients, Pentair’s Hoffman enclosures. The following link is a summary of a
journal article they wrote:
Another client ordered heat-exchanger tubing in long straight
lengths shipped in 50 foot boxes that easily fit on a truck trailer or shipping
Any waste (which could be recycled) would be more then paid
for by reductions in supply chain management and inventory costs.
The means to do this can range from manual cut-off, to manual cut-off up against
a programmable stop, to uni-dimensional programmable cut-off machines.
3. Very long raw materials, like sheetmetal and fabric, can be ordered in
coils or reels directly from the mill. Material “blanks” can be cut
on-demand for all users in the factory.
Results of Dispensing Sheetmetal from Coils:
• The extra cost and delays of intermediaries can be avoided. Keep in mind
that all sheets of metal are cut from coils and all bolts of cloth are cut
from reels by these intermediaries, who are usually less efficient than the
methodologies recommended herein because they have to do additional
non-value-added steps to repackage materials into cut pieces.
• Nesting waste will be minimized because nesting is much better when the
length is essentially infinite. And waste will be greatly reduced when large
pieces must be cut from pre-cut sheets or bolts.
• Remnant management will be eliminated to store, identify, and retrieve
remnants, which can be significant when large pieces are cut from
not-much-larger sheets. These large remnants are hard to find uses for and
they usually get damaged during storage and retrieval. Further, color-coded
markings may have been cut off, thus opening possibilities for mistakes.
• Cut blank inventory will be eliminated when all blanks are cut in-demand.
And inventory carrying costs are higher for heavy materials that must be
stored on pallets, which need fork-lift aisles to access the pallets.
Reducing Inventory for Parts (raw materials)
In order to reduce parts inventory and avoid the problems
mentioned for raw materials, parts must either be available on-demand or
build to-order by the following methodologies:
Solutions to Reducing Parts Inventory
1. Standardizing parts can greatly reduce part inventory to only the
standard parts, which can then be “ordered” as a steady flow, with the
confidence that they will be used on way or another. With enough
standardization, the standard parts can even have a small stock on hand to
even out product demand
Results. Standard parts would be available for on-demand assembly
with little inventory.
2. Kanban parts. Done right, the kanban system (see
kanban article) can actually be build parts in batches and still always be
available for on-demand assembly. When the assembler finishes a bin’s worth
of parts, that is the pull signal to send the empty bin to its “source” to
be refilled and returned before the second bin is depleted (as shown in the
illustration in the kanban article).
Results. Kanban parts can be made in batches and,
yet, always be available at all points of use for on-demand assembly
without any overhead for MRP-based purchase orders.
3. Parts build on-demand. There are two ways to
a. Parts may need to be
designed for build-t-order .
b. The manufacturer builds parts on-demand from spontaneously available
materials and parts, as described above and at the
article on spontaneous
vendor/partner builds parts on-demand and delivers them quickly to
your “pull signal.” Note that batching parts for shipping across oceans is
not “quickly.” Trying to “pull” parts from a supplier’s inventory is not
really build-to-order because it suffers from all the shortcomings of
inventory, mentioned above and in the Mass Production article. One exception
may apply if the manufacturer is big and powerful, like Dell Computer, and
the manufacturer insist that suppliers build warehouses next to the assembly
plant, stock them with their parts based on the manufacturer’s forecasts,
and pay the inventory carrying charges
until the manufacturer “pulls” a part
into assembly. Such manufacturers have been know to have negative workings
capital because the collect money from customers right away and pay the
suppliers net 30 days. This arrangement is hard to pull off and can only
build products from this inventory about 3/4 of the time. See Dr.
Anderson's article in Fabricating & Metalworking magazine, titled:
Tearing Down the Walls; Design for Manufacturability and Concurrent
Engineering require vendor/partnerships to reap the lowest total cost and
the fastest time-to-market at
Reducing Work-in-Process Inventory
In any manufacturing process Work-in-Process (WIP) inventory carrying costs
will be accruing while every assembly processing step is being done.
1. Slow Processing Steps Accrue Inventory Carrying Costs
Slow processing steps will incur more WIP
inventory carrying cost. Slow process usually occur because
products are not
designed for manufacturability, are not built on concurrently engineered tooling and
equipment, and need too much manual processing that require too much
skill and judgement and then needs inspections and rework to correct the
manual work. Further, inaccurate, incomplete, or ambiguous documentation
can slow down part fabrication and product assembly, especially when
outsourcing any of that production.
All of these delays will incur a significantly more work-in-processing
inventory carrying costs proportional to the value of the WIP inventory
at that point in the process, which increases at every step.
Consider the common practice when the last step is wiring an expensive
machine, which usually involves a lot of manual wire routing (sometimes
left to the judgement of the assemblers!) and hundreds of individual
connections, when machines are “wired like a house.” All of this is
labor-intensive and prone to errors, which take even more time to
troubleshoot and repair.
The WIP inventory carrying cost is the highest at this point because all
of the expensive parts and all the previous value-added processing is
chalking up inventory carrying costs during these lengthy steps. So the
WIP cost would be the inventory carrying cost multiplied times almost
the entire value of the product!
Solutions to Slow Steps
manufacturability and minimal skill & judgement, concurrently
2. Batches between Steps Accrue Even More Inventory Carrying Costs
Work-in-Process inventory carrying cost can be several
times more if there are batches of parts or product waiting between each
Solutions to WIP Carrying Costs of Batches Between Steps
The solution to the very expensive problem is flow manufacturing,
sometimes called one-piece flow which has no inventory between steps.
3. Adding Expensive Parts First Greatly Raises WIP
It may seem logical to start assembly with the most
convention “foundation” part and then add the rest of the parts on
top of that foundation. For instance, large trucks and other
commercial vehicles usually start with a frame, which is not very
expensive. But then all the expensive parts are added next, such as
the engine, transmission, and axles, which bolt on quickly. The rest
of the assembly adds low-cost parts that are very labor-intensive
steps like doing all the wiring and plumbing
The problem with this “logical” approach is most of the procurement
budget is spent up-front and, for the rest of the assembly process,
the high cost parts keep chalking up large WIP
And if steps are slow (problem # 1 above) and there is inventory
between steps (problem # 2 above), then enormous WIP inventory
carrying cost will be incurred. At one truck manufacturer, the WIP
inventory carrying cost exceeded profits! So eliminating them would
Solutions to High Accumulations of WIP Inventory Costs
Optimize the order of assembly so the lowest cost parts go in first
and the and the slowest, most labor-intensive steps happen first.
Then bolt on the most expensive parts as late as possible, ideally
just before shipping. If that is hard to do with the current design,
then the next-generation architecture would need to be
designed for lean production and build-to-order to enable that. For the truck example, the engine,
transmission, and axles could “prepped” off-line and then quickly
bolted on right before shipping. This may require “dummy” fixtures
for the engine/transmission and some reusable wheeled dollies to
fill in for the axles.
One excellent example : The most expensive part in a wind turbine is
the generator. One company minimized WIP
inventory carrying costs by
bolting it on the day before shipping!
Finished Goods Inventory (FGI) Elimination
The most expensive inventory is Finished Goods Inventory (FGI), which must
be paid when Manufacturing builds products “to-forecast,” places then in FGI
inventory, and waits for them to be sold, hoping that the forecast-built
product variations in inventory are what is most likely to sell. And FGI
inventory carrying costs will be ultimately paid by the custom no matter
where the inventory is: at the company, at distributers, or at dealers.
Consider a car dealer with 200 cars in inventory with an average value of
$20,000 each, which would represent a total finished goods inventory value
of $4,000,000. The FGI inventory carrying cost would be 25% of that per year
and that would actually cost the dealer $1,000,000 per year! So the dealer
would pay a million dollars a year, just for the chance to make that impulse
sale to a customer who could make that impulse buy and drive it home that
day. However, the options may not be what the customer really wanted, but
that would always be the case for BTO.
The numbers are much more shocking for the manufacturer. The book,
“Build-to-Order; The Road to the 5-Day Car” said “A leading manufacturer
estimated its current inventory located at distribution points in Europe to
be worth €10 billion, reflecting the picture in the US.” That amount of
inventory will cost €2.5 billion per year!
The Solution to Eliminate Finished Goods Inventory Costs
Using all the principles above and on this site to build-to-order products
which would not only save all those inventory carrying cost but also give
the customer exactly what the customer wants.
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Dr. David M. Anderson, P.E., fASME, CMC
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