Careful, Comprehensive Inventory Management (Part 4)

As a memory aid, I use A⁵6σ to represent such a careful, comprehensive, and corporate approach to inventory management.  Each component of A⁵6σ is essential for achieving sustainable, continuous improvement in inventory efficiency.  There are five concepts which I will alliterate with the letter “A” combined with the tools of six sigma.  Below, are the final points.  Please see my previous posts for earlier points.

Access – information and use it instead of inventory

Data is now more available than ever.  However, there are two key challenges in making use of it.  The first is the acquisition of data.  For everything, from where a particular serial number of an item is currently located in a supply network to syndicated data of leading indicators of demand, methods, technologies and markets exist for the acquisition of data.  Once you have the data, you must then organize, summarize, and analyze the data into information in such a way that better decisions can be made in less time.  As an example, knowing more about your customer’s demand sooner may help you operate your operations more effectively and efficiently to meet that customer’s demand when it actually comes to fruition.  Knowing the exact location of inventory as it transits and is transformed through your value network can, in some cases, help you respond more quickly to the changes in the market without adding more inventory.

Accelerate – continuously reduce lead-times and lot sizes

Whether you consider yourself a “lean” operation or a “six-sigma” shop or both (“lean six-sigma”), the reality remains that all manufacturers are obliged to constantly search for ways to reduce lead times and run times (batch or lot sizes) during which variation can occur.  This sometimes requires analysis of fixed versus variable cost such as the fixed cost to modify equipment so that change overs can be completed more quickly against the variable cost of carrying inventory for a longer time, or perhaps indefinitely.

6 σ – leverage techniques of process control reduce variation

In conjunction with continuously reducing lead-times and lot sizes, a careful and comprehensive approach to inventory management requires that you make use of what we have known for decades about statistics to identify variation (the reason for safety stock) and its sources, so that you can work continuously to reduce it.  As with the “Anticipate” process, you will reach diminishing returns, but your progress may not be linear or only incremental, and it will be difficult to anticipate when a step-function improvement will occur, so this is an ongoing responsibility.

So, there you have it, the A⁵6σ approach to inventory management.  In summary,

1. Anticipate market requirements
2. Account for your actions
3. Accurately calculate safety stock
4. Access information and use it instead of inventory
5. Accelerate by continuously reducing lead times and lot sizes
6. Leverage the 6σ techniques of process control to reduce variation

You need to do all of these in order to manage your inventory carefully and comprehensively.  I suspect you are careful and comprehensive in your approach to cash management.  Since you spend so much of your cash on inventory, it’s time to take an equally intelligent approach to managing inventory.