Inventory is the cost of imperfect information! If we knew exactly when we needed a specific item, we could arrange delivery for the day before we need it. However, in the world of MRO and indirect material, we rarely know when we will need something. Since we don’t know when we need inventory, we are required to put cash down to buy what we think we need on hand. Most experts calculate carrying costs from 18% to 30% of the total inventory value per year. As inventory managers we can do little to affect the total carrying costs, but we can do something about the inventory levels. If we have to pay 18%-30% for carrying cost – we would want that to be the smallest number possible without causing work stoppages. Vending solutions can’t do much to affect what it costs you to carry a dollar of inventory, but they can affect how much inventory is required.
Decrease Inventory and Increase Availability
Trying to reduce the inventory you carry to the absolute minimum without creating stock-outs is a balancing act. Finding that balance is tricky and shutting down production is expensive. Most managers overstock indirect inventory avoid a work stoppage. If these managers experience a stock-out, they jam even more inventory into the system to insure it does not happen again. AutoCrib solutions utilize advanced inventory algorithms to balance inventory against required service levels based on how you consume products (demand-side data) as opposed to how you bought the inventory (supply-side data). This system can also help you eliminate slow and dead inventory, while simultaneously reducing stock-outs. This can result in carrying the minimum amount of inventory without affecting the user base. A demand-based ordering system utilizes a “days of supply” approach instead of a traditional min/max system. This means inventory levels are constantly being adjusted based on how your user base consumes the inventory instead of a static preset reorder point. Since the system is constantly sizing the inventory, you won’t need a stock-out to occur before you decide to make a change; the system will simply make the correct changes for you based on demand. This typically results in meeting the demand needs of an organization with 20% to 30% less inventory.
Decrease Time Spent Managing Inventory
Many companies check settings on their basic min/max systems once a year. If you have over 1,000 items and it takes on average 5 minutes to go over each item, you will have 85 hours dedicated to checking your min/max levels. By using demand-based ordering systems, you reduce time and effort spent correcting basic min/max levels that are likely incorrect shortly after you adjust them. AutoCrib systems are adjusting reorder points constantly by looking at a wide variety of factors, such as: increasing or decreasing demand, lead times, days of supply, order processing time, spikes or trends in demand, etc. It weighs these factors and then crunches the data every night. This allows your inventory managers to spend more time on value-added tasks and less time managing re-order points.
The cost savings are significant, but so is the cost of delay, which can cost you thousands each month an inventory management system isn’t in use. Typically, companies using industrial vending systems see an average 20% reduction in inventory. This can add up to hundreds of thousands of dollars in a very short amount of time. You won’t need to experience a stock-out or waste time fiddling with your min/max levels to find the magic number to have on hand when you implement a sophisticated “point-of-use” vending solution.
Remember, this is part four of a seven-part blog series on solutions that increase savings, efficiency, and productivity with industrial vending systems. Click here to go back to the first blog of this series about reducing consumption. Stay tuned for our next post about eliminating stock-outs.