Article
September 2023
Cutting down Inventory carrying cost
Managing Inventory is a sophisticated process for manufacturing companies. If enough attention is not paid to this,
it will have negative effect on both profit and cashflow.
Here we have put together how OurSys helps you to follow the scientific best practices in inventory management. Each point below has potential to save your inventory costs in a big big way.
Please spend time to ponder over these points.
Setting reorder levels correctly
For items that are regularly consumed, reorder levels must be set in the OurSys item master. Reorder level is NOT one month stock
or two month stock. It has to be calculated by multiplying [average consumption per day] with [average lead time] plus the [safety / minimum stock].
The safety stock / minimum stock must be [maximum consumption per day x maximum lead time] – [average consumption per day x average lead time]
Setting the inventory levels right will itself cut down inventory costs and will improve in time delivery rate as well.
Using Pareto Reports
OurSys Pareto reports indicates the top 20% items that give 80% business. It means that if these 20% items are in stock, 80% of the business is assured.
Therefore, planners must set reorder levels of these 20% items based on the consumption pattern. These items should never go out of stock.
Setting the Receiving Tolerance in the Item master
In OurSys, 'Receiving Tolerance' can be set in the item master for items such as raw material where the recieved quantity may be slightly in excess of the purchase order quantity.
But this feature should not be misused. Therefore management must set a periodic check to ensure that the tolerance limits set are logical and not in excess.
Using the MRP for planning
Material Requirement Planning feature, under PPC module of OurSys, not only saves time but accurately calculates the exact shortfall of material required to execute an order after considering
the total demand as per sales orders and Bill of material, unallocated available stock, pipeline stock, reorder levels and the economic order quantity.
This is the most optimum way of deciding what and how much to buy or make.
Using OffCuts & leftovers
OurSys allows you to inward raw material offcuts or left overs by adding attributes such as grade and dimensions. Whenever a new BOM is being designed the designers can check the availability of material in offcuts and allocate them for the order.
Even planning can allocate these offcuts to Job Orders. Companies with non standard products can make a big saving by consuming offcuts.
Make Approved Purchase mandatory for Purchase
This will bring in accountability for buying material. Only authorised individuals should be allowed to approve Purchase Requisitions.
OurSys provides information such as current unallocated stock, reorder levels, EOQ, last GRN date & GRN quantity and purpose of buying for the approver to make decision of buying.
There is a setting in OurSys to make Purchase Requisitions mandatory. This is essential where the top management is not involved in every purchase.
Set Sales Order wise Purchase Budgets
There is a provision in OurSys to set purchase budget for every sales order. This is useful for companies who buy Sales Order wise.
This budget will ensure that excess material is not bought unnecessarily.
Set and use Economic Order Quantity for buying material
The EOQ is the optimal number of product units to order considering inventory carrying costs, consumption rate and cost of purchasing. EOQ works best in the constant demand scenario.
Strategic Sourcing
If Minimum Order Quantity (MOQ) restriction of supplier is greater than company's calculated Economic Order Quantity (EOQ), sourcing team must either convince the supplier to supply as per EOQ or should look for alternate suppliers. You will find both EOQ and MOQ in Item master.
Reduce purchase leadtime
Reducing purchasing leadtime will reduce reorder levels and thus overall inventory carrying costs. The Just-In-Time concept has been adopted by all larger corporates in an attempt to reduce leadtime to zero.
Thus either educate and train suppliers to deliver in minimum leadtime or look for suppliers who would do so.
OurSys provides comparison of leadtimes of different suppliers in the Quotation Comparison Chart.
Import Substitute
Items which are regularly being imported are the potential items for developing suppliers within the country. You can filter purchase order report to find list of such items.
Import substituition will not only save cost of the product but will also reduce the leadtime.
Upgrading Suppliers with Direct to line
Suppliers must be educated and trained to setup systems that produce zero defect items. Such qualified suppliers can then be given Inspection Waivers in OurSys.
This eliminates inspection delay thus reducing overall leadtime. If this is coupled with Just-In-Time, it can have major impact on inventory carrying cost and cashflow.
Job Order Releases must be controlled
In case of Assemblies, if material of entire kit is not available, the job orders must not be released. This way the material can be moved to another assembly which can be completed.
Also, manually generated Job Orders for stock must be controlled and questioned. There has to be a management approved policy for releasing 'For Stock' Job Orders.
Use OurSys's Job Order release function to control all such Job Orders.
Identify bottlenecks to reduce Inventory
Company's throughput is limited by the throughput of it's bottleneck machine / resource. You can identify bottleneck machines using OurSys and then plan the rest of the jobs considering the maximum capacity of the bottleneck machine.
This will avoid inventory pileups on the shopfloor.
Deliver what is ready
OurSys helps users to quickly identify items on order which are in ready to despatch condition. These items can be quickly despatched and invoiced reducing inventory and improving cashflow.
Using Stock Ageing Report for investigation
OurSys identifies idle stock and presents it age wise and value wise. You can further investigate who had ordered this and for what purpose and why is it still lying in the stock.
Management must carry out such checks periodically so as to keep tab on excess productions and purchases.
Mark Items as Obsolete and Inactive
Items which have been upgraded or discontinued should not be bought or made accidentally. To avoid this scenario, such items must be marked as 'Obsolete' in the Item master.
OurSys will then restrict creation of Purchase Orders and Job Orders for such items. However it will allow users to consume these items.
Once the inventory of such items is zero, they must be marked as 'Inactive' to remove them from appearing in any transactions in future.
Identify slow moving Job Orders
OurSys helps to identify non-moving and slow moving Job orders using a dashboard. Such Job Orders must either be pushed to completion or return their material back and close them. This will help to utilise the inventory in other jobs.
Monitor Stock Reconciliations
Management must monitor stock reconciliations periodically. Every reconciliation indicates that there is a shortcoming in data entry or in the masters. These cases must be investigated and corrected.
This will ensure accurate inventory which further ensures correct MRP run.
Keep tab on tools, toolings and cutting tools consumption
In OurSys, tools, toolings and cutting tools when issued do not automatically get consumed. When the broken or spent up tool / tooling is returned, it is to be marked as consumed.
Until this point of consumption, the responsibility remains with the person it was issued to. This process brings in
accountability and thus ensures legitimate consumption of tools, toolings and cutting tools.
We have tried to put major inventory savings here but we are sure some of our users could be innovatively using OurSys to save inventory costs. Do share such case studies with us.
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