Five keys to effective inventory management

Maintaining an efficient inventory management strategy can help industrial plant mangers improve and ensure the success of their operations. When addressing inventory management, there are several major factors to consider. Perhaps the most important is recognizing that inventory costs extend well beyond the initial purchase price of materials.

06/01/2005


Maintaining an efficient inventory management strategy can help industrial plant mangers improve and ensure the success of their operations.

When addressing inventory management, there are several major factors to consider. Perhaps the most important is recognizing that inventory costs extend well beyond the initial purchase price of materials. Other factors to consider

are additional costs for handling and storage, different types of stock, accurately estimating the replenishment quantity and predicting the appropriate timing to reorder.

Furthermore, the effort and sophistication needed for a successful inventory strategy should be balanced with the size, complexity and, most importantly, the cost of the inventory to be handled. Here are five of the most important factors that need to be considered.

Carrying costs

Let's say a company typically has 100 containers of oil in inventory at $500 per container. One would think that the inventory cost would be $50,000. But it's not. Additional carrying costs will actually drive the total cost of purchasing and maintaining the oil, or any other product, closer to $60,000 or $70,000.

Carrying costs are associated with holding or "carrying" inventories over time. In other words, the company has to pay more money on top of the purchase price of the oil for things such as storage, insurance, extra equipment and personnel.

Also included are costs for such items as forms, clerical support, processing, borrowing and taxes. While the carrying costs will vary with specific situations, they are often estimated at 18 to 25 percent above the value of the inventory.

Understanding your stock

Another factor impacting the efficiency of one's inventory management strategy is the role of the inventory. Inventory is composed of two separate stocks — working stock and safety stock.

Working stock supports day-to-day operations and will continuously cycle up and down as the material is consumed and replenished.

Safety stock is basically an insurance policy against uncertainty. Material shortages caused by unexpected events such as delayed replenishment or an unusually high consumption rate can be covered with the safety stock. Under ideal operating conditions, safety stock is not used. However, since operating conditions for any business are not always ideal, one should regard safety stock like the insurance policy on one's car — you hope you'll never have to use it, but it would be very risky to be without it.

Replenishment quantity

How much should you buy when replenishing inventory?

The most economic replenishment quantity, commonly called the EOQ (Economic Order Quantity), represents the lowest total sum cost of total inventory and inventory acquisition costs (order placement costs, invoice processing costs, payables costs, freight, etc.). Large replenishment quantities translate into fewer replenishment orders but larger inventories. Small replenishment quantities will reduce inventories but will increase the number of replenishment orders needed.

The EOQ is a function of the consumption rate, carrying cost, inventory value and inventory acquisition costs.

Reorder point

The appropriate time to reorder inventory can be determined by how quickly the inventory is being consumed and the order lead time designated by the supplier.

For example, if a business consumes 10 gallons of oil per day and it takes five days to receive material from the supplier, reordering should take place when the working stock gets down to 50 gallons. If one's inventory management system is working to maximum efficiency, one's working stock will get to zero gallons as the replenishment arrives.

Inventory cost reduction opportunities

Reducing inventory and related total inventory costs do not always go hand-in-hand. So, how can one further trim inventory costs, beyond the tips provided above, without running the risk of running out of necessary materials? First, and perhaps the most basic element in reducing costs, is to work with suppliers to shorten cycle order fulfillment times to minimize the need for excess safety stock.

Another area in which one can achieve cost savings is through product consolidations. Multiple individual safety stocks can be combined into one typically smaller safety stock. Consumption rates for consolidated products are higher, making smaller order quantities more economical. The higher consumption rates are also typically more ratable, which can translate into further safety stock reductions with no increased risk of runouts.

In every operation, it is important

to develop an efficient inventory management strategy so as to achieve a competitive edge in the marketplace. By paying close attention to the key factors mentioned above, plant managers can build and sustain an efficient inventory management system that saves time and money.


Author Information
Dave Janiga is an industrial lubrication specialist with ExxonMobil Lubricants & Specialties




Top Plant
The Top Plant program honors outstanding manufacturing facilities in North America.
Product of the Year
The Product of the Year program recognizes products newly released in the manufacturing industries.
System Integrator of the Year
Each year, a panel of Control Engineering and Plant Engineering editors and industry expert judges select the System Integrator of the Year Award winners in three categories.
May 2018
Electrical standards, robots and Lean manufacturing, and how an aluminum packaging plant is helping community growth.
April 2018
2017 Product of the Year winners, retrofitting a press, IMTS and Hannover Messe preview, natural refrigerants, testing steam traps
March 2018
SCCR, 2018 Maintenance study, and VFDs in a washdown environment.
June 2018
Machine learning, produced water benefits, programming cavity pumps
April 2018
ROVs, rigs, and the real time; wellsite valve manifolds; AI on a chip; analytics use for pipelines
February 2018
Focus on power systems, process safety, electrical and power systems, edge computing in the oil & gas industry
Spring 2018
Burners for heat-treating furnaces, CHP, dryers, gas humidification, and more
April 2018
Implementing a DCS, stepper motors, intelligent motion control, remote monitoring of irrigation systems
February 2018
Setting internal automation standards

Annual Salary Survey

After two years of economic concerns, manufacturing leaders once again have homed in on the single biggest issue facing their operations:

It's the workers—or more specifically, the lack of workers.

The 2017 Plant Engineering Salary Survey looks at not just what plant managers make, but what they think. As they look across their plants today, plant managers say they don’t have the operational depth to take on the new technologies and new challenges of global manufacturing.

Read more: 2017 Salary Survey

The Maintenance and Reliability Coach's blog
Maintenance and reliability tips and best practices from the maintenance and reliability coaches at Allied Reliability Group.
One Voice for Manufacturing
The One Voice for Manufacturing blog reports on federal public policy issues impacting the manufacturing sector. One Voice is a joint effort by the National Tooling and Machining...
The Maintenance and Reliability Professionals Blog
The Society for Maintenance and Reliability Professionals an organization devoted...
Machine Safety
Join this ongoing discussion of machine guarding topics, including solutions assessments, regulatory compliance, gap analysis...
Research Analyst Blog
IMS Research, recently acquired by IHS Inc., is a leading independent supplier of market research and consultancy to the global electronics industry.
Marshall on Maintenance
Maintenance is not optional in manufacturing. It’s a profit center, driving productivity and uptime while reducing overall repair costs.
Lachance on CMMS
The Lachance on CMMS blog is about current maintenance topics. Blogger Paul Lachance is president and chief technology officer for Smartware Group.
Maintenance & Safety
The maintenance journey has been a long, slow trek for most manufacturers and has gone from preventive maintenance to predictive maintenance.
Industrial Analytics
This digital report explains how plant engineers and subject matter experts (SME) need support for time series data and its many challenges.
IIoT: Operations & IT
This digital report will explore several aspects of how IIoT will transform manufacturing in the coming years.
Randy Steele
Maintenance Manager; California Oils Corp.
Matthew J. Woo, PE, RCDD, LEED AP BD+C
Associate, Electrical Engineering; Wood Harbinger
Randy Oliver
Control Systems Engineer; Robert Bosch Corp.
Data Centers: Impacts of Climate and Cooling Technology
This course focuses on climate analysis, appropriateness of cooling system selection, and combining cooling systems.
Safety First: Arc Flash 101
This course will help identify and reveal electrical hazards and identify the solutions to implementing and maintaining a safe work environment.
Critical Power: Hospital Electrical Systems
This course explains how maintaining power and communication systems through emergency power-generation systems is critical.
click me