Lean Inventory Management: How to implement Lean Inventory with ERP?
Lean is a way of thinking. A systematic method to identify and eliminate waste from processes to provide maximum value to customers.
What is Lean Inventory Management?
Lean Inventory Management is a systematic method that focuses on eliminating any form of waste in Inventory and providing the right quantities of inventory, just-in-time, to ensure smooth flow of production and ultimately add value to the customer. Thus, Lean inventory management focuses on maintaining the bare minimum required inventory.
What is the importance of Lean Inventory Management for Manufacturing SMEs?
Inventory Management is a critical function for all manufacturing SMEs to ensure smooth & continuous production without having to face situations of stock-outs or overstocking.
While overstocking will result in working capital being locked in and hurt the bottom lines of SMEs, stock-outs will result in significant delays in production & delivery to customers.
Lean Inventory Management ensures continuous improvement in inventory management by making consistent and relentless effort to remove any form of waste in Inventory.
Lean Inventory Management makes it possible to increase production efficiency, achieve cost reduction & improve profitability.
How to plan for Lean Inventory Management?
For Lean Inventory Management to be implemented successfully, each member of the organization needs to be aware of the Principles of Lean which aim to eradicate all forms of wastes; to provide maximum value to the customer such as optimal price, perfect time, right place, etc.
Manufacturing SMEs should develop a culture to define & follow standard workflows from acquiring raw materials to delivering the product to the customer by preventing any delay, blockage, or breakdown.
It may be necessary to educate everyone concerned on how to identify delays, bottlenecks, waste, and what steps to take to eliminate and improve processes. When the employees are conscious of their responsibilities & and how they can add value it will be easier to implement Lean Inventory Management.
How to Implement Lean Inventory Management System with ERP?
1. Process Standardization
To implement Lean Inventory Management practices, it important to have standardized processes. With ERP software you can implement standard inventory management practices and processes across the company. You can implement business rules and business discipline for well-defined workflows.
You will be able to set up alerts & notifications for approvals & authorizations, wherever required or even to raise an alert if the situation demands. For ensuring lean inventory you must define inventory rules as per your requirement. Few examples are as follows:
- Define Lead Times: How long does it take for materials to arrive from the moment you order? How much time does it take to manufacture the end product? How much time for quality check & dispatch? When you can clearly define these lead times, you will be able to place orders well in time to avoid any delays in production.
- Define Reorder Points: Clearly define Inventory Reorder points & create notifications, alerts whenever inventory falls below certain levels. Thus companies can ensure optimum inventory for efficient production
- Define Safety Stock: Every Manufacturing SMEs should define and maintain Safety Stock as a buffer to cover for any unforeseen circumstances that may hinder the production process such as late delivery from the supplier, inventory errors, rejections, etc
2. Accurate Inventory Information
To implement Lean Inventory Management, it is critical to have a good Inventory tracking system in place. ERP software is extremely useful to ensure real-time and accurate visibility of the inventory across various processes and multiple locations.
You will be able to track inventory in the production line, raw materials & finished goods present in warehouses at different locations, inventory in transit, and so on.
When you have accurate insights into inventory, you can plan for further requirements more accurately and procure just enough quantity as well as just in time. This will help achieve a significant reduction in procurement & inventory carrying costs.
3. Demand Planning & Demand Forecast
ERP production planning module enables companies to accurately forecast demand based on orders or historical data and plan production accordingly. This helps achieve just in time production, based on demands.
How will this will ensure better inventory management? You are less likely to order inventory beyond demand. You will also be able to order staggered deliveries of inventory to be made available just in time for production. You can also plan for more than normal stock in case of higher seasonal demand. Thus you will be able to order just enough so you will not have excess inventory waste.
4. Waste Reduction
The primary objective of the Lean Inventory is waste reduction. However, this should not be at the cost of affecting the quality of the end product. All employees must focus on removing various possible wastes in Inventory such as :
- Wastage of raw materials as scrap or inability to re-use scrap for by-products
- Waste of materials due to defects, rejection, rework, pilferage
- Inventory lying idle on the shop floor due to delays in production, transportation, etc.
- Excess inventory resulting from overproduction due to error in demand planning
5. Build Good Supplier Relationships
Suppliers play a critical role in implementing Lean Inventory Management. Suppliers practically become Partners for particular items/commodities. They are actively involved in maintaining inventory levels all the time. They may also provide value-added services such as share ideas for alternate cost-effective materials suitable for your processes.
Aggregate demands across your organization. Requests for smaller deliveries spread over some time. This will shorten the lead times and you can order just enough and just in time. Adopt best practices such as transparency, timely payments, buyer-supplier meets and more to build a good reputation and goodwill with the suppler.
Establishing strong buyer-supplier relationships will eventually enable you to maintain a lean inventory.
6. Monitor Inventory KPIs
The purpose of using Inventory KPIs is to keep an eye on the effectiveness of inventory management methods and define strategies and improving them based on informed, data-based decisions. This will help keep a check on excess inventory buildup.
Some important Inventory KPIs to measure are:
- Inventory Turnover ratio: Inventory turnover measures how many times the Manufactured inventory is sold and replaced. It is calculated as sales/average inventory. A low inventory turnover ratio implies lower sales & higher inventory.
- Inventory Carrying Costs: Inventory Carrying cost or Holding Costs consists of costs such as warehouse rent, electricity, equipment, salaries, losses due to pilferage, etc. Higher Inventory carrying costs are an indicator of working capital is tied up in inventory
- Waste: It is important to measure, material/goods wasted during production or in other processes. Keeping a close eye on this KPI will help reduce the overall waste and improve the bottom-line.
What are the Risks in Lean Inventory Management?
While Lean Inventory Management is a great strategy to lower inventory carrying costs and release tied up working capital, there is an element of risk involved in it.
Sometimes, errors in inventory prediction or inventory tracking or delay in receiving inventory in time will result in situations of productions being delayed or coming to a halt.
Tracking & Monitoring your inventory closely at all times, whether it is in transit, or lying in warehouses is critical to ensure that you receive inventory in time to ensure smooth production. Similarly, it is important to have a Safety Stock or Buffer Stock as explained earlier.
What are the Benefits of Lean Inventory Management?
Companies that have implemented Lean Inventory Management have seen significant improvements in areas such as:
- Fewer Delays in Processes
- Shorter Lead Times
- Improved Product Quality
- Lower Inventory Holding Costs
- Reduction in Manufacturing Costs
- Improved Profitability
What are you waiting for? Go ahead and adopt Lean Inventory Management. The strategic means to achieve considerable improvement in productivity, efficiency & profitability of Manufacturing SMEs.