At my first meeting with many companies, they’re often stressed by trying to deliver 3% to 5% per year cost reductions to their customers. They frequently have inventory turns of four or less, which consumes cash and erodes profitability.
Companies really can achieve dramatic improvement with profit numbers in the 20% of sales range and inventory turns over 12. Rick’s Materials Management Manifesto will challenge your thinking and put you on a path to world-class performance.
Rick’s Materials Management Manifesto
- You Can Sell Out of an Empty Wagon
Sales people and company executives often believe you need to have inventory on hand (and lots of it) in order to respond to customer demand. The key to customer service is having the right product in the right place at the right time at the lowest possible cost. That might mean having none in your warehouse.
- Don’t Waste Your Buyer on Buying
Buyers often spend much of their time issuing purchase orders and trying to get parts more cheaply. What they should be doing is working with suppliers to improve their performance, planning, and flow, and reduce costs through better materials selection and management. The buying should be done by the system.
- RFQs Increase Costs
Many companies issue Requests For Quotes (RFQs) any time they need more materials or new items. However, the best suppliers often don’t respond to RFQs because, since they’re so good, they can better spend their time serving the customers they have and getting new ones through referrals.
- Annual Cost Reductions of 3 to 5% Are Peanuts
With the advent of Lean processes, many companies require their suppliers to reduce costs 3 to 5% annually. If these same companies implemented supplier partnerships, Total Cost of Ownership and World Class Manufacturing concepts (including JIT and concurrent engineering), they could reduce costs by 10 to 20%.
- Unplug your MRP – It’s Likely an Ineffective Buying Tool
Many companies use a materials requirement planning (MRP) system to trigger purchases and manage inventory. The problem is that MRP requires accurate bills of materials, accurate inventory data, and reliable supplier lead times in order to work properly. Failing that, buyers will always pad inventory so they don’t run out, which can lead to quality problems, excess and obsolete inventory, and inventory adjustments. Unplug your MRP and use auto replenishment systems such as Vendor Managed Inventory, supplier kitting, Kanban, and blanket purchase orders to really get your turns up and dramatically reduce costs.
- Too Many Suppliers Spoil the Soup
Common practice says that spreading your buys across a number of suppliers reduces risk and provides competitive pressure on prices. By rationalizing your supplier base, opportunities are created to develop supplier relationships that can lead to high volume cost reduction, focus on high performing suppliers to reduce lead times, reduce costs, increase inventory turns, and provide outsourcing opportunities.
- Manage Products Throughout Their Life Cycle
One of the key elements in reducing inventory levels and preventing obsolete inventory is what I call ramp-up/ramp-down: managing the number of new products while reducing the number of old ones. Many companies focus only on new product introduction, causing a proliferation of old products that consume cash, take up shelf space, become obsolete, increase warehouse costs, and often end up in the dumpster.
- Consigned Inventory Can Destroy Supplier Relationships
In consigned systems, the inventory comes into your warehouse, but ownership transfer doesn’t occur until the inventory is used. Too many purchasing departments use this to reduce inventory and delay paying their suppliers.
There are several potential problems with consigned inventory. First, because the user doesn’t own the discipline, there’s little impetus to track and manage it. Second, deciding who is responsible and who “owns” any missing inventory causes bad feelings. Things get worse when you start to look at whose insurance covers the inventory. It’s in your warehouse, but the supplier still owns it. In the event of fire, flood, theft or other shrink, whose insurance covers the parts?
Supplier partnerships, process discipline and striving to improve flow though Just-In-Time inventory management can provide exponential improvements in profit and cash flow. Use Rick’s Materials Management Manifesto to guide your thinking and achieve world-class performance.
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