The 8 Wastes of Lean: Part 2 – Inventory

|  3 minute read

One of the challenges faced when stocking a product range, packaging supplies, group of components or collateral, lies in the storage and transport of the goods. Stored goods and parts provide no value to the customer until they’re delivered, thus creating waste.

Learn more about the second type of waste as Signet’s Lean tips continue, with a guide to the second of the 8 Wastes: Inventory.

Understand your customers’ needs:

Lean tips always come back to one key point: customer value. In order to minimise inventory, a complete understanding of customer needs is required. Keeping less than customers require of a product will cause shortages and unhappy customers, but keeping more than is needed means stock is remaining in the warehouse– and going to waste. To determine optimal stock levels, not only do past order patterns need to be recognised, but accurate forecasts need to be made. To forecast successfully, you need to know your customer.

Why carry inventory?

Inventory has many functions, including:

  • Localised products
  • Products may be required at a certain location- for example, Signet needs to keep stock related to the Agriculture industry in North Queensland.
  • Keeping the supply chain flowing
  • Have enough stock on hand to stop your supply chain backing up at the slower points (this is known as decoupling).
  • Safety Stock
  • Some inventory is required in case forecasts are wrong or delays occur.

Other reasons to carry inventory might be to balance customer demand, display products, and get better deals with bulk prices, good exchange rates, good interest rates, tax rates, etc., and to plan for negative events like spills and environmental issues.

What are the costs associated with carrying inventory?

  • Storage costs
  • Warehouse space, office storage space, and associated packaging and handling costs are ongoing– every item in storage that’s not being used is costing money with no added value to the customer.
  • Financial capital
  • Money spent on inventory can’t be used elsewhere- consider the opportunity cost of this. The amount spent on items in storage could be earning interest on a different investment.
  • Taxes and insurance
  • Taxes can apply to inventory, depending on the location. Insurance on the items is another consideration- again, if the goods aren’t being used, these are just extra costs.
  • Obsolescence
  • Keep the items in stock too long and they’ll lose value. Remember the value is to the customer- they don’t want to buy something if its shelf life has lapsed in your warehouse.

Manage your supply chain

There are many ways the supply chain can be optimised to reduce inventory. A centralised warehousing system reduces the amount of safety stock needed, for example, but may affect lead times. Again, it’s vital to know where the value is for your customers, internal and external, to make the best decisions.

Don’t forget the rest of your workplace

Inventory not only includes the products stocked in a warehouse- the rest of the workplace often contains this type of waste as well. Some common culprits are paperwork (picture the accounts department, or marketing materials), the stationery cupboard (are spare envelopes and packaging supplies taking up too much space?), the tea room (if you’ve ever thrown out off milk, this is a sign), and, maybe most of all, the email inbox.

How to reduce Inventory waste:

  • Introduce policies throughout your supply chain that reduce how much inventory is held. Cross-docking is one example of how to prevent items being unnecessarily stored.
  • Know your customers’ needs and values. This goes for internal and external customers. If these are known, stock levels can be managed.
  • Take a look at order frequency, and bulk purchase discounts. Money saved in bulk purchasing may not make up for the cost of the waste created.

Our Lean tips continue next month with our guide to Motion, so check back in to learn more about how to reduce waste in your business.

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