Smart Inventory Solutions. Phillip Slater
maintenance into operations and then executive management.
A desire to ‘do his own thing’ led Phillip to leave it all behind in 2001 to start his own company, Initiate Action. Over the years Phillip has helped many companies improve profits, increase reliability, and reduce working capital in many different industries and at least a dozen different countries.
Now Phillip utilizes the expertise and experience built up over nearly 25 years to assist select clients in operations improvement and inventory optimization.
Through his company, Initiate Action, Phillip also licenses his intellectual property and processes to other companies for software development and service delivery.
You can find further details on Phillip’s services at www.PhillipSlater.com.
Foreword to the Second Edition
Albert Einstein is reported to have said ‘The important thing is to not stop questioning.’ The most obvious question to ask when considering a second edition of a book is: Didn’t you cover this topic in the first book? The answer to this question is both yes and no.
Yes, because the first book covered the Inventory Cash Release® Process and has subsequently helped thousands of people better understand that process.
No, because, through application, processes evolve and the needs of the readers evolve with them. It seems that publication of the first edition of Smart Inventory Solutions raised as many questions as it answered!
Question like:
•How does this relate to how my store room functions?
•Where does classic inventory management theory come in?
•What steps do I take next?
•How do I recognize a good consignment deal?
And so on.
It is now more than four years since I wrote the first edition of Smart Inventory Solutions and during that time I have continually answered the follow-up questions that have been asked by readers, workshop attendees, and clients. This has resulted in a whole body of work that was not widely published. As this body of work related directly to the issues raised and processes discussed in the first edition, it seemed an obvious move to publish an updated second edition.
This second edition, therefore, is not just a minor review but a complete rewrite with many new sections, tables, and diagrams — in fact, the content has nearly doubled.
Like the peeling of an onion, I fully expect that this edition will produce still further questions; I welcome any feedback from readers on issues and queries that this book provokes for them.
Keep on improving,
Phillip Slater
Chapter 1
Introduction to Smart Inventory Solutions
Achieving True Inventory Optimization
The optimization of materials and spare parts holdings has, for many years, been a goal of inventory managers, operations managers, and financial managers. This is particularly so in industries with significant investments in these types of inventory and is often driven by both a need for operational support and a need to free up working capital. The benefits that come from achieving materials and spares inventory optimization are such that the business case for action is irrefutable.
The problem is that, until now, the techniques that have been applied to achieve the optimization of this inventory do not result in a truly optimal outcome. At best they provide short-term changes; at worst they lull people into a sense of operational excellence when nothing could be further from the truth. When subject to critical analysis, the reasons for this become quite obvious. Let me explain.
Traditionally, one of two approaches has been applied: either undergo data analyses using a statistically-based software algorithm, or select a single criterion (such as obsolescence) and look for inventory that meets that criterion. Both of these approaches overlook one simple fact.
High levels of materials and spares inventory are a symptom of the broader issues with the way the inventory is controlled, supplied, accessed, purchased, and managed. Inventory levels are determined by a combination of supply chain management, internal policies and processes, and people’s behavior and training. These issues involve a wide range of personnel who come from engineering, maintenance, stores, inventory management, procurement, and even finance. Achieving true inventory optimization and lasting results requires an understanding of all the behaviors, context, and process factors that influence the inventory. Addressing high levels of materials and spares inventory through traditional inventory review and ‘optimization’ techniques does not address these issues as it rarely involves the range of personnel that influence the outcomes and does not improve the company systems and knowledge to address these issues in the future.
Neither software algorithms nor single criterion solutions address the full range of possibilities and so they cannot possibly provide true optimization. The short-lived gains they do achieve will, most likely, be reversed when the focus is taken off the immediate project and the operational processes and behaviors once again influence the inventory levels.
Achieving true inventory optimization requires a new, innovative approach that combines knowledge of parts usage, procurement, and supply chain issues with a review of behaviors and the management processes that drive them. This approach is known as the Inventory Process Optimization™ Method.
This second edition of Smart Inventory Solutions expands on the key material of the first edition to encompass and explain the Inventory Process Optimization™ Method. In doing so it also explores the supply chain, policy, process, people, and behavior issues that must be addressed for the achievement of true inventory optimization.
Inventory: The Forgotten Investment
Materials and inventory management is one of the most important disciplines in almost every company. Inventory can provide the capability to fulfill a customer need, repair a broken machine, assemble products for sale, or just keep production going. Yet, inventory management is widely perceived to be one of the most boring management topics there is. Mention inventory management to most people and almost immediately their eyes begin to glaze over. In fact, someone once suggested to me that the title of this book should be: Inventory: More Exciting Than It Sounds!
However, consider this: for manufacturing organizations, inventory can account for up to 50% (or more) of the current assets of the business (see Appendix A for a glossary of terms used in this book). This means that for most manufacturers, up to 50% of their assets that could convert to cash in the next 12 months are tied up in inventory. For retail and wholesale businesses, the figure is even higher. While materials and spares holdings typically do not reach these values in terms of percentage of assets, a large number of organizations have millions and even tens of millions of dollars tied up in this type of inventory. Some larger organizations with which I have worked even have hundreds of millions of dollars tied up in spares.
The problem is that, unlike cash, the money tied up in this type of inventory is not available for any other use. It cannot be used to fund the business or for further investment in other productive assets. With engineering spares, this problem is even more exaggerated as the inventory is not purchased with resale in mind. The funds spent on this type of inventory are essentially gone; there is little probability of a genuine return on investment. Unlike receivables, this inventory does not represent a defined future stream of income.