Chasing the proper inventory levels in further processing operations is the like chasing the Holy Grail. Unless you have the proverbial crystal ball, it seems like you always have too much of the slow sellers and never enough of the fast movers.
Traditional accounting methods assign financial value to inventory making it an asset on the company’s financial statement. The more inventory the more your company is worth; so you should have a lot of inventory, right? But, what about the cost to carry the inventory, whether it is in commercial freezer charges, the risk of obsolescence or the possibility of damage to the cases on the pallets causing piles of rework?
What is the right inventory level?
So what is the right inventory level? In an ideal manufacturing environment, the right inventory to have on hand is the amount you have to sell that day, not one box too few or too many. You believe that is a dream and the dream can never come true. Really?
What if your poultry operations only produced what was sold the previous day by your customers and all you were doing is replenish their stock of your product? What has to happen to make that a reality?
The truth about Economic Order Quantities
First, you have to throw out Economic Order Quantities (EOQs). “Heresy!” you say. “Our cost per pound would skyrocket!” says your cost accountant. Really? Would this increase your costs?
Think about it. Will you have to hire anyone? Not if you use the SMED techniques for changeovers that we have talked about in previous articles. This allows you to do fast changeovers multiple times a day. Admittedly, there are still allergen issues that need to be addressed, but these can usually be worked through to allow you to run many more product codes on a given line in a given time period.
Is it more important to produce more pounds, or is it more important to produce the right pounds of product that is already sold? Still, you would be producing fewer pounds through the plant making the cost per pound appear to increase. But, if you look at the operation as a whole, there is effectively no increase in costs. No new hires. No additional utility cost. No additional capital cost. The cost stays the same.
The difference? Fewer pounds in the freezer. Far fewer pounds. Usually a 50% to 70% decrease in inventory. How much are you currently spending on freezer storage? Make sure you factor in transportation to and from, obsolescence, and damaged product, not just per pallet cost and transaction cost.
Of course, once this hurdle is crossed, and it is a hurdle most organizations will never even attempt to cross; you have to know what your customer sold yesterday. This requires you to have more than the typical seller/buyer relationship. This requires a partnership built on trust. Trust that you can come through for them, because if you don’t, they may have idle production lines. Trust that the data being shared will not be shared with others. Unfortunately, it is perceived as being too technical a task to share the data because it involves two IT departments communicating with one another. Ironically, the technical issues of data sharing piece of this puzzle is actually the easiest part to implement.
It all sounds a little too simple, right? Well, it is true every organization is different and each customer has their own set of concerns.
Managing the customer’s inventory
What if your sales department could approach their customer and tell them, “If you share your sales data with us, and let us make the inventory level corrections necessary (i.e., we manage your inventory), we promise you’ll never run out of this product and if we do, we’ll pay you ‘X’ dollars per day we are out of stock.” Who knows, you may even be able to offer them a price break if the costs of cold storage are factored in.
In cases where the cold storage is paid by the customer, it would have a direct impact on their bottom line too. Which of your customers’ purchasing managers wouldn’t like to go their manager and show them how much they saved their company by decreasing their inventory?
Is one day of inventory realistic? Probably not, especially when there are 48-hour holds for testing etc. However, if you take that hold time and double it, what would your inventory levels be? Chances are, they would still be considerably less than what you currently have on hand, and you have just provided yourself with a 100% inventory buffer. Again, each organization is different and inside each organization there might be different parameters for different classes of inventory.
Don’t depend on the status quo
Let’s face it – the one constant in the world is change. With the possibility of USDA allowing fully-cooked product from South America or Asia to be imported, there will be some big changes ahead. Is your organization prepared for these changes? Or are you still running with decades old business practices that GM and Chrysler used so successfully in their search of the Holy Grail?