How to measure inventory and set the target?

One of the questions most of the business head used to ask is, " How do I know my inventory level is high or low? How can I measure Inventory and I track? What is the benchmark for the inventory level?


My answer would be as follows.

Comparing or benchmarking may not give the right approach. As we discussed in the Holistic approach to managing Inventory in small, emerging organizations, Inventory is a function of many factors like your business, trade type, supply chain factors, product mix, lead time, volume vs. variety.
The benchmarking may not give you clarity about all the elements in the benchmarking industry or organization.

Instead, understand your inventory metrics as on today, set a target to reduce it every year from now on.

How should I measure my Inventory?

There are different measures to measure Inventory.

For example, you can measure your inventory value as a % of sales. Every month, you can measure and track your inventory value regarding your sales value.

Another proven method of measuring Inventory is Inventory Turn, which implies your organizational capability of turning Inventory frequently to achieve the sales.

Inventory Turn = Cost of Goods sold / Avg Inventory.

Cost of goods sold = This is the cost to make the goods like raw material cost + manufacturing expenses + any other indirect expenses.

Average Inventory = In a given period, say in a month's time frame, you can take the average Inventory you are maintaining. For example, you can add up all the day's Inventory in a month and divide by the working days. That will give the average Inventory.

Some organization has a practice of taking closing stock or opening stock, but that will be skewed to an extraordinarily high or low value.

For example,

To make an annual sales turnover of 100 lakhs, if you have avg inventory 100 L, Your inventory turn would be 100/ 100 =1
alternatively, for the same sales turnover of 100 lakhs, if you have avg inventory 50 L, Your inventory turn would be 100 / 50 =2
In case, if your avg inventory is 10 L, your inventory turn would be =100/10 = 10

The higher the inventory turn, the more active you are.

If there is a higher inventory turn, that means, with minimal Inventory, you are turning many times to achieve the sales turnover, result in lesser working capital or better cash flow.

Hence, one of the practical measures of Inventory would be " Inventory Turn."

Increasing Inventory Turn is possible only when you look into the root causes of the symptoms and initiating strategic and tactic initiatives.

That is a continuous activity, and you need to benchmark yourself and continuously work on optimizing the Inventory without affecting the delivery performance.

Now the action for your organization is 

1. What is your organizational Inventory Turn?
2. What is the target you are setting for the next year to increase your Inventory Turn?

Changeover time loss reduction is compelling need for organization- why?

When the manufacturing facility produces a different component of same of the different family, it needs time between one component to another component change in the equipment or facility. The time required between two components production is called change over time or setting time.

To be specific on the definition of changeover or setup time is the time elapsed between last good piece of component  A to the first good piece of component B.It comprises Preparation Time before setting + Actual setting in the equipment + Quality proving the new component as per specification.

Why is there a compelling need for changeover time loss reduction initiatives?

In external socio-environment, there had been a shift in customer's preference, lifestyle, affordability, and expectation of spot delivery or short lead time and so on. This change in external leads to the following challenges to the business internally.

1. Frequent new product launches and reduced shelf life  of the product

2. Increase in variety with moderate/high volume

3. Meeting delivery commitment  

How the external scenario affects the organization capability on changeover time loss reduction?

Unlike it is justifiable to have dedicated equipment/facilities, the organization has to produce all varieties of the same family group in the same equipment/ facilities. If the changeover time is high, it will affect the organization in the following ways

1.Utilization loss to the equipment/facilities

2.Loss of capacity

3.Increase in manufacturing cost as all the losses would be accounted as manufacturing overheads only

4.o counter high changeover, if the organization goes for higher lot sizes, it will affect regarding higher WIP / FG inventories, possible rejections/ rework/planning cumbersome and other communication issues.

on the contrary, if the organization is continuously working on reducing changeover or setup time loss, it will  help

1. Faster delivery leads to customer 's acceptance and possible sales volume growth

2. Better manufacturing cost, in turn, product price

3. Quality improvements due to coordinated and standardized work during setting 

4. Improves the morale of the working people as they are mostly affected due to unorganized changeover process.

5 Short changeover time brings flexibility to the organization to produce variety and at the same time, not losing the utilization and people efficiency loss.

Going forward, those organization who are specialized in variety handling with minimal production cost would be fittest to survival.

One of the competitive advantage for the organization is that developing the capability to reduce the changeover continuously and increase the flexibility in meeting the customer's requirement

Why sustenance is important in workplace?

In most of the organizations, we can hear one common phrase “we have already implemented this initiative, but not continued or this will not work here”

Why do people come to conclusion as “no initiative will work in their workplace?". The reason is lack of consistency in implementation. 

In today’s internet world, there is not much ignorance of knowledge and know-how; it is only lack of consistency in implementation.

How this inconsistency will affect individual & Team?

When you implement some initiatives, not consistently follow it and eventually drop it, you are giving a subconscious message to yourself and team that you are not sensitive to results or incapable of execution. This inconsistency will impact the confidence of the leader at an individual level and encourage mediocre performance at the team level. The next time when you think of new initiative, old memory reinforces you about failure or low confidence pulls you down from taking action.The root cause for all consequence is inconsistency in implementation.

 So, in personal and organizational level, if you take any initiative, be sure that you are consistent in your implementation even though you are relatively slow in taking a decision. Ultimately your consistent actions push up your confidence and your consistent actions inspire others to follow. This is one of the traits of leadership, i.e. consistency in thinking; talking and doing.You are meant to be a leader for others!!!!

Understanding Operations Excellence

Operations Excellence is a journey towards creating a continuous improvement culture inside the organization to meet the customer's requirements consistently.

For any business, the customer is the central focus point. The customer's expectation from the organization is to provide the product or service on time, with quality and reasonable price point. To meet this customer's needs, internally the organization must have dynamic, capable team to deliver. 

Hence, Organisation's initiative must focus internally organizational capability to deliver the customer's requirement consistently. That is operational excellence which is the continous effort by nature.