Inventory Process Optimization™ challenges the constraints to improvements in inventory to ensure that the result is an improvement to ‘what could be,’ not just a recalculation of ‘what is.’ So, while, Inventory Management must eventually lead to an over-investment of cash in inventory as people seek to eliminate stockouts, Inventory Process Optimization™ results in a sustainable and lasting minimization of the investment of cash while maintaining the availability promise. Although this difference may seem subtle, the impact is significant. Chapter 9 of this book takes you, in detail, through the Inventory Process Optimization™ Method.
Modifying your systems to improve your materials and spares inventory management performance is of little value if the results don’t last. In fact, the use of resources in a program that doesn’t deliver lasting results could be viewed as a waste of company resources. Similarly, an inventory reduction in one year is of only minor value if the cash is then put back into inventory in the next year — this is sometimes referred to as a ‘yo-yo’ effect. That is, great initial results and then, without other changes in the management of inventory, the initial results are reversed as the inventory is restocked. The yo-yo effect is typically the outcome of attempts at inventory reduction that don’t focus on achieving lasting results through identifying and changing the real drivers of high inventory levels.
Ensuring that the gains achieved are lasting and sustainable requires the training of your team, consistent application of the process, a review of policies, procedures, metrics and measures, and changes in the reporting used for inventory management. It is only by following this path that a company-wide, lasting result can be achieved.
To assist you in achieving lasting results, Chapter 10 works through the execution of a program of inventory review and Chapter 11 works through some case studies showing short- and long-term results as well as some of the hurdles to implementation. Achieving lasting results requires more than just an understanding of Inventory Process Optimization™ techniques and processes. It also requires an understanding of the management systems that drive your inventory outcome and the implementation and tracking of the actions that you will develop from reading this book.
Henry Ford once said, ‘If you think you can do something and if you think you can’t, in either case you are probably right.’ If you genuinely believe that no change is possible, then you are unlikely to drive a successful result. Remember, though, that to believe that no change is possible is to believe that your system is perfect and unchangeable. How likely is it that this is true?
If you recognize that past assumptions may no longer be valid, that the world changes, and that your own efforts in supply chain or operational improvement have changed the dynamics of supply and demand, then the Inventory Process Optimization™ Method is for you.
This book has been designed and written to provide you with the insight, understanding, process, and tools to improve your materials and spares inventory management performance, free up significant cash, and achieve lasting results.
Chapter 2
The Mechanics of Inventory Management
The purpose of this section is not to provide an in-depth understanding of all the mechanics of materials and inventory management (there are hundreds of other books that can do that) but rather to revisit or recap the mechanics in a way that puts the rest of this book in context.
Certainly this section addresses some basic elements of materials and inventory management but, as in many situations, the real value comes from looking beyond the basic element and understanding the implications of that formula or process that the element represents. Anyone can look up a formula on the Internet; however, it is an understanding of the nuances that provides value. For example, one of the major reasons that organizations have so much difficulty with materials and inventory management is that they confuse simplistic with simple. Although the concepts and formula are simple — in that they are readily understood — they should not be thought of or applied in a manner that is simplistic, that is, free of any complicating factors.
Too often people take the basic concepts and formula and do not think through the complicating factors when implementing the concept or formula. This does not mean that we need to make things overly complex; it just means that we need to understand the implications of our choices. This section aims to provide some insight to assist in that understanding.
One of the most common confusions of terms is that between materials and inventory. Many engineers, in particular, concern themselves with materials management but show little interest, and sometimes don’t want to be involved in, inventory management. However, when subject to some scrutiny this does not make any sense.
Materials are the physical parts and components and materials management is concerned with the logistics associated with the procurement and supply of those materials in a timely manner. Inventory is the gathering of those materials in order to provide a ready supply when they are needed. Inventory can also be defined as those parts purchased for future use without knowing exactly where and/or when the part may be used.
Inventory management, therefore, is a subset of materials management as it is primarily concerned with managing the procurement and supply of those materials held as inventory. Anyone who is involved in materials management must therefore have an interest in inventory management if their materials are being held for future use. Inventory management is much more than just managing the storeroom.
Relevant Terms and Expressions
Before working through the rest of this book and to ensure a common understanding of some relevant terms and expressions, review Table 2-1, which shows the most immediately relevant terms and expressions, and Appendix A, which contains a comprehensive glossary of materials and inventory management terms and expressions.
| Term | Definition |
| Cash flow | The net gain or loss of cash in a business through its business cycle. |
| Inventory | Materials and spare parts that are held for future use without knowing exactly where and/or when the item will be used. |
| Lead Time | Measured from when the ROP is reached to the actual physical restock. |
| Materials | All items that are purchased for use in, or for supporting, manufacturing and engineering activities. |
| Max | In some systems, this is used to determine the reorder quantity when the minimum is reached. |
| Min | In some systems, this is both the safety stock level and the reorder point. |
| Reorder Point | The trigger point for reordering stock (ROP). |
| Reorder Quantity | The quantity to be reordered when the ROP is reached (ROQ). |
| Safety Stock | An allowance for both demand and supply variations during the lead time to restock. |
| Stock Keeping Unit | Refers to any individual inventory item; also known as an SKU. |
| Stock turn | The
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