Are you tired of excess inventory tying up your working capital and taking up valuable space? Do you want to improve your bottom line while also providing better customer service? If so, read on to discover effective ways to reduce inventory waste and optimize your inventory management.
Inventory waste can impact anyone producing a product, distributing goods, providing a service, or providing professional services. This includes employees, managers, and customers.
Inventory is part of Six Sigma because it can be a significant source of waste in many processes. Excess inventory can tie up working capital, take up space, increase handling costs, and lead to waste and obsolescence. On the other hand, insufficient inventory can lead to stockouts, lost sales, and dissatisfied customers. Therefore, managing inventory levels is critical to maintaining an efficient and effective process.
Measurement of Inventory Waste
The Measurement of Inventory Waste is different from company to company. The obvious is Dollars and Units of Measurement by each item or part.
Follow a recipe or formula. Why? To receive the same result each time. Consistence is the key.
Example: Your favorite Chocolate Chip Cookie has 12 chocolate chips. Not 5, not 20, but 12. This is why you purchase them. You like them, and they have the fulfilling taste you desire. What if you ate one with only 5 chocolate chips in it? You would not receive the flavor you seek—one bad, no problem. But if you noticed more 5 chippers than 20 chippers, you would probably find another chocolate chip cookie. People seek consistency in products and services.
You are in Seattle, New York, San Diego, or Miami, the chain restaurants provide the same experience in environment, atmosphere, menu, and food. It is consistency within the chain. Why? Because business owners realize the “brand” is defining what is to happen, “the Brand Experience.” This is why people will go to a particular restaurant because they enjoy the experience of that brand.
Tortilla Chips Case Study
Follow a recipe or formula. In manufacturing, you can compare the actual usage of an ingredient to the standard. Call this your Item Performance.
Another way would be to compute the Yield or Usage of an Item Used compared to the total pounds of product produced. What? Let me explain. On the first shift (8 hours), your company averaged 30 bags per minute of 12oz Plain (Salt Added) Tortilla Chips, 12 units per case. The Raw Materials used were:
- Corn 10,285 pounds
- Oil 2,484 pounds
- Salt 324 pounds
- Packaging 15,000 bags (impressions)
- Corrugated 1,205 boxes
With an average of 30 bags per minute, production was 1,800 per hour. In an 8 hour shift, production for the 8 hour shift was 14,400 bags. Cases produced was 1,200. With 12 ounces per bag, total pounds produced was 10,800 pounds in an 8 hour shift.
- The Corn Yield was 105.0%. Total Pounds Produced (10,800) divided by Pounds of Corn Used (10,285). Let’s assume the Standard Corn Yield is 110%. Total Pounds Produced (10,800) divided by 1.1 (110%, the Standard Corn Yield) equals 9,818 pounds. The Standard Corn Usage (9,818) minus the Actual Corn Usage (10,285) equals a Corn Usage Variance of 982 pounds.
- The Oil Usage was 23.0%. Pounds of Oil Used (2,484) divided into Total Pounds Produced (10,800). Let’s assume the Standard Oil Usage is 25%. Total Pounds Produced (10,800) multiplied by 0.25 (25%) equals 2,700 pounds. The Standard Oil Usage (2,700) minus the Actual Oil Usage (2,484) equals Oil Usage Variance of 216 pounds.
- The Salt Usage was 3.0%. Pounds of Salt Used (324) divided into Total Pounds Produced (10,800). The Standard Usage is 3.0%. No variance.
- The Packaging Waste is 600 bags, 4% Waste. Packaging Standard Usage of (14,400) minus Units of Packaging Used (15,000). This difference divided into Packaging Standard Usage (14,400).
- The Corrugated Waste is 5 boxes, 0.4% Waste. Corrugated Standard Usage (1,200) minus Corrugated Used (1,205). The difference divided into Corrugated Standard Usage (1,200).
We have defined the Unit of Measurement. Let’s place values with these rawe materials to compute a usage value.
- Corn cost value at $3.30 per pound x 982 pounds = $(3,240.60).
- Oil cost value at $0.52 per pound x 216 pounds = $ 112.32.
- Salt cost value at $0.25 per pound
- Packaging cost value at 7¢ per bag x 600 bags = $( 42.00).
- Corrugated cost value at 75¢ per box x 5 boxes = $( 3.75).
- The Total Usage Variance at Cost equals $3,174.03.
This case study is an example only. The key factor is to provide information on how a usage variance in units and dollars takes shape.
Service Businesses
In a service business, such as carpet cleaning, you may compare the actual usage of chemicals to the standard usage based on the area cleaned. If you use too much chemicals, this can be harmful to the carpet, may take more clean water to clean up, and more time. If you don’t use enough chemicals, it will take longer to clean and
In a professional service business, compare the actual man (people) hours worked to the standard, quoted, or billed hours.
In many cases, the founder or the owner has developed a formula or a recipe to follow. It is important to stay along these lines that has been set forth.
Why Inventory Waste Occurs
There are several reasons “Why Inventory Waste Occurs.” Common reasons include the following:
- Overproduction: Producing more goods than ordered can lead to excess inventory.
- Inaccurate forecasting: Too much or too little inventory is due to demand not accurately forecasted.
- Changes in demand: Changes in customer demand can lead to excess inventory being held, as the company may be slow to react.
- Poor inventory management skills can lead to excess inventory, which can be wasted through spoilage if the product is perishable.
- Someone is misplacing products. It is vital to know where all items, raw materials, and finished goods are located. This information is essential every minute, every second of the day. Someone moving a product without recording the new location is frustrating. This is “Waiting or Time Waste.” Another Six Sigma Waste.
- Not following a recipe or formula. (manufacturing, service, or professional service business)
- OSD (Overage, Shortages, and Damages) during transportation.
- The actual recipe or formula does not match your computerized system. The recipe or formula on your computerized system needs to match the actual recipe or formula.
How to resolve Inventory Waste? “How to” can be difficult. But, “If it were easy, everyone would do it.” Everyone is not doing it; you are. Uncover the root (source) of the inventory waste; solve this issue, and it will correct many issues downstream.
Solutions to Inventory Waste
Here are a few suggestions to resolve inventory waste:
1. Implementing Just-In-Time (JIT) inventory management: JIT is a lean manufacturing approach that produces and receives inventory only when needed. This can help reduce excess inventory and associated carrying costs while improving process efficiency and flexibility.
2. Improving forecasting and planning: By improving demand forecasting and production planning, businesses can more accurately predict the amount of inventory they need, reducing excess inventory and stockouts.
3. Implementing vendor-managed inventory (VMI): VMI involves the supplier managing the inventory levels and replenishing the customer’s inventory. This can help reduce inventory levels while improving supply chain efficiency and reliability.
4. Technology. The right technology can assist everyone in the business. It can provide more accurate results quicker if utilized properly. WARNING: Technology does not correct broken processes or people.
5. Reducing lead times: By reducing lead times, businesses can minimize the amount of inventory needed to avoid stockouts, reducing excess inventory and associated costs.
6. Implementing Six Sigma methodologies: To identify the root causes of inventory waste and develop solutions to address them, use Six Sigma Principles. Businesses can optimize their inventory levels and reduce waste by following the DMAIC process and using statistical tools and techniques.
7. Cycle Counting daily can help determine what is going right and wrong. You will not count everything daily but cycle through everything once a quarter. Counting everything once a quarter, four (4) times a year. Count Key Ingredients more frequently.
8. Key Performance Indicators. A daily KPI report can define what is happening with your business. Use a NSM, North Star Metric. One key metric defining the direction of your business. Do this for any business, regardless of size or type.
9. The actual Recipe or Formula needs to be verified with your computerized system. When the actual usage does not match the recipe, ask “Why?”. Has the formula changed? Has the computerized system always been wrong? Before changing the computerized system formula, investigate.
10. Kanban is a visual management system that can assist in controlling inventory levels. Kanban systems use visual clues to tell you when to order more inventory.
Inventory waste can be a significant source of inefficiency and cost in many processes. By measuring and addressing this waste, businesses can reduce inventory levels, improve process efficiency and flexibility, and increase customer satisfaction. Businesses can effectively manage their inventory and reduce waste by implementing JIT, improving forecasting and planning, implementing VMI, reducing lead times, and using Six Sigma methodologies.
Cost of Inventory Waste
The cost of inventory waste can be high. When calculating Inventory Waste, you may want to include the following:
- Space: Storing inventory in a rented space can increase inventory costs.
- Materials: The cost of the materials that make up the inventory can also be high.
- Labor: The cost of labor to handle and maintain the inventory can also be high.
- Insurance: The cost of insurance to protect the inventory from damage or theft can also be high.
We record inventory at its purchasing cost and include inbound delivery charges, which encompass freight costs, exporting fees, and tariffs.
Estimated overhead costs account for 15% – 18% of inventory costs, excluding direct and indirect costs. Depending on your business, this can be more or less.
Where Inventory Waste Occurs
Inventory waste can occur anywhere in the supply chain, from the raw materials supplier to the customer. However, it is most commonly found in the following areas:
- Warehouses: Warehouses are often used to store excess inventory.
- Distribution centers: Distribution centers are used to ship inventory to customers.
- Retail stores: Retail stores often have large amounts of inventory.
- Business processes: During the business process, you may have an inferior raw material or a machine not appropriately calibrated.
- Shipping point and route. Inadequate packaging can be the cause of waste during shipping.
- Usage Process. This would be during the manufacturing, service, or professional service process. In manufacturing, it could be product spilled on the floor and then thrown away. In professional services, it could be wasting time and taking personal time during a job or project.
How to Reduce Inventory Waste
You have several options to reduce inventory waste. Some of the most effective methods include:
- Accurate forecasting: Accurately forecasting demand is essential for reducing inventory waste.
- Efficient inventory management: Efficient inventory management can help to ensure that the right amount of inventory is on hand. Implement a Cycle Count process.
- Daily Cycle Counts based on the Pareto Principle, 80/20 Rule. When inventory levels are correct, actual usage is correct. In turn, you have a higher success rate in forecasting.
- Just-in-time manufacturing: Just-in-time manufacturing is a production method that minimizes inventory by producing goods or services only when they are needed.
- Kanban: Kanban is a visual management system that helps to control inventory levels. This helps ensure you never run out of inventory but don’t have too much inventory.
- Use a Pull System instead of a Push System. With a Pull System, you only produce goods or services when needed. This helps to reduce the amount of inventory that is on hand.
- Use a vendor-managed inventory (VMI) system. With a VMI system, your suppliers manage your inventory levels. This can help you free up time and resources to focus on other business areas.
- Regular (daily) operation reports. Also known as KPIs. Defining Yields and Usage on Key Components such as Ingredients, Packaging, and Corrugated could assist managers in defining what is happening.
Organizations can save money and improve their bottom line by reducing inventory waste. They can also improve customer service by providing products or services when needed. Following these tips can reduce inventory waste and improve your bottom line.
I would like to know your opinion. Please enter your thoughts and comments below.
