One of the key issues facing chemical companies has always been controlling inventory. Inventory is the focus of two conflicting corporate objectives: maintaining inventories large enough to provide good customer service and smooth plant operations, and small enough to limit the financial investment and risk.
Operating departments face increasing pressure from management to reduce inventories. It is often the case that inventories can be trimmed, realizing significant cost benefits. However, we also know that excessive inventory reductions actually cost the company more money than is saved. Moreover, deciding which locations should sustain inventory reductions is critical to customer service.
While the enterprise resource planning (ERP) system can tell you how much inventory you have, it can't easily tell you why you have it. It is also difficult to tie cost increases in manufacturing and lost sales directly to an inventory level that is too low. In this article, we will show you how to identify the contributions to overall inventory, discuss which components lend themselves to control, and highlight how inventory reductions can be directly related to manufacturing costs and customer service.
Components of Inventory
When establishing effective measures to control inventory, it is of paramount importance to understand how much of the inventory is in each of the following inventory components: in-process, test, in-transit, cycle stock, safety stock and inventory builds. (See figure.) By understanding the structure and flow of inventory as product demand cascades through the supply chain, it is possible to precisely determine how inventories can effectively be reduced to minimize inventory investment, without sacrificing profitability and customer service. Product inventories occur in the following areas:
- Reactor/Production - This inventory includes in-process inventory as a product is being manufactured, test inventory as it is held for quality analysis, cycle-stock inventory as it awaits shipment to other plants for further processing or other locations for direct sale, and safety stock.
- Between Plants - This inventory is the material that is in transit between plant locations, whether in trucks, railcars or other containers. It consists of intermediate material that is in need of further processing before being shipped to a customer.
- Compounding and Blending - Like reactor inventory, this is the inventory that is either in process, in test, or in the cycle-stock or safety-stock inventories that are held to support shipments from this location.
- Packaging and Repackaging - Inventory that is in process for packaging or repackaging.
- From Plant to Warehouse -This inventory is the material that is in transit between plant locations and warehouses.
- At the Warehouse - This inventory consists of the cycle stock and safety stock that supports direct sales to customers. Depending on sales forecasts, one might also be intentionally building inventory to meet future demand.
In each of these locations, we identified one or more types of inventory that is typically held. Some of the types are more strongly affected by business policies, while others are more closely tied to manufacturing and distribution processes.
It may be possible to reduce in-test inventories by increasing throughput in the quality-assurance lab. However, that may require a significant investment in new equipment, training and personnel. Usually, it is easier to impact policy-dependent inventories than it is to change process-dependent inventories. On the other hand, a decision to reduce the customer-service goal from 99% on-time shipment to 98% directly impacts the safety-stock requirements, but at what costs? The key question is, "How should one compare alternative policy decisions that impact delivery?"
PICASO supply-chain planning software.
Whether the type of inventory is process dependent or policy dependent, the target objectives that we set will be based on average values since this will enable us to view inventories in a way that is not distorted by production cycles. Process inventories, including in-process, test and in-transit, depend largely on the achievable rates of production, material handling and testing at the production facility, and transportation times for the selected transportation modes. Improving these rates is desirable, but difficult to achieve in the short term. One has relatively greater opportunity to influence cycle stock, safety stock and inventory builds.
Let us examine how to set objectives for each of these in turn.Cycle Stock: If one were to shorten the cycle from 30 days to 15 days, the cycle-stock inventory would drop by 50%. Unfortunately, this reduction of cycle stock is not free. The cost is that during the same 30-day cycle, the production facility will now have twice as many transitions or changeovers. Each transition or changeover generally involves non-productive time, such as clean-out and set-up, and reduced production time where rates are being adjusted and the actual product may not yet meet specifications. This reduces the overall plant capacity available for making prime product.
The PICASO Cycle Optimizer, from WAM Systems' advanced supply-chain planning suite, can be used to determine the best cycle to use, considering all of these costs. It balances inventory costs, which decrease as the cycle is shortened, against transition costs, which increase as the cycle is shortened, to find the cycle length that will give the lowest overall cost. Whether or not an optimized cycle length is known, the cycle-length policy can be combined with product forecasts to compute cycle-stock inventory levels.Safety Stock: Appropriate safety-stock levels are determined by three factors: the desired level of customer service, the accuracy with which one can predict future demand and the volume of demand for the product. PICASO uses a sophisticated method for determining safety stock and provides the means for calculating the recommended safety stock automatically. PICASO also provides for manual entry of a safety-stock level, if desired. Inventory Builds: From time to time, it may be necessary to build inventories to meet future increases in demand or to deal with future capacity constraints. While inventory builds are generally dictated by a capacity-planning process, one must be aware of which stock-keeping units will be involved in order to set appropriate inventory targets. Inventory builds can be modeled in PICASO by increasing the safety stock above the level automatically recommended.
Planning and Predicting PICASO Inventory Targeting calculates all components of inventory at each point in the supply chain. The planner has ready access to the underlying policies and detailed analyses from which these results derive. Graphical results show historical, current and predicted inventory levels together with minimum, maximum and average target values. These tools clearly highlight how well operations are adhering to strategic targets.
Measurement and Control Once policies and plans are in place, the next step is measurement and control. This involves comparing actual aggregate inventory targets to planned inventory targets to identify areas that require attention. It also involves monitoring and reporting on both direct demand that is shipped to a customer, and dependent demand that is transferred to another supply point before being processed and/or shipped to a customer. Finally, it involves adjusting inventory target components on an exception basis.
Reporting Capabilities To support this monitoring and control requires the ability to rapidly access appropriate data to support inventory-control decisions. PICASO Inventory Targeting produces an extensive dataset that supports built-in reports. This report compares the calculated inventory targets with the projected inventory and the three-month forecast.
The PICASO Inventory Targeting module provides all the functionality needed to accomplish supply-chain management tasks, from understanding inventory components, to navigating the supply chain, to monitoring inventory-control policies by exception reporting. Fully integrated with the entire suite of PICASO software, the Inventory Targeting module is designed to enable chemical-industry supply-chain teams to successfully realize their corporate inventory-management objectives.
Additional information on PICASO supply-chain planning software is available from WAM Systems, Inc., 2250 Hickory Road, Suite 410, Plymouth Meeting, PA 19462; phone 484-530-4380 or 800-358-8305; fax 484-530-4854; visit the Web site www.wamsystems.com; or e-mail firstname.lastname@example.org. Or Circle No. 72.