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Lean Methodology

Business Process Management

When Buying Bulk for a Discount Hurts You: A Lean Methodology Perspective

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Is bulk ordering worth the discount?

Anyone who has gone to Sam’s Club or similar places understands what it means to buy in bulk. In some cases, it makes a lot of sense. Large families, or business who go through a lot of a certain supply can really save time and money by buying larger quantities at a lower price. Some businesses can even earn a discount for doing this. But, before you jump into buying bulk, let’s take a look at it from a lean methodology perspective.

The Basics

Business ‘A’ maintains a warehouse of supplies and has found that they use 12,000 widgets a year to produce their gadgets. Every month, they purchase 1,000 widgets and pay a dollar per unit. To protect themselves from supply chain interruptions, they keep a month’s supply in stock. This means they have $1,000 dollars of inventory on the shelf. This inventory takes up 10 square feet.

The Score

Karen, the bookkeeper has been paying the $1,000 a month bill every month for a year, but today, she gets a notice from the supplier that says, “Business A, do we have a deal for you! If you buy 15,000 widgets in bulk, we will offer you a 10% discount.” Karen, believing she is making a rockstar move to help the budget, cuts the check for $13,500.

The order comes in and instead of delight, the production manager is upset. Where in the world is he going to find 150 square feet of space to store the widget order? They decide to spend a few man hours clearing a space. This creates $15,000 of inventory on the shelf.

The Problem from a Lean Methodology Perspective

While some business owners would look at this $15,000 of inventory as an asset, the majority of it is considered “cold” stock, which means that it has to be sold to have any value. It takes up space that could be used for production. There are also conditions in which the supply will outlast the demand, leaving the business with useless inventory. This could include:

  • Gadget 2.0 requires a different style of widget
  • Gadgets become obsolete and something new needs to be created
  • Demand drops due to new competitor
  • The suppliers for any other component of the gadget change
  • Manufacturing requirements/codes change

Once stock is sitting on a shelf in the business, it depreciates in value. By the third year, cold inventory is costing the business money!

To make matters worse, the production manager was in the process of buying a new piece of equipment at a cost of $10,000 that was going to save $600 per month in operating cost and increase the production capacity.  Buying the equipment is no longer possible as the money is now tied up in over a year’s worth of inventory

In lean methodology, we look at the entire process of managing inventory, including how much stock to carry, when to order, how to move the oldest inventory first, and how to protect ourselves from interruptions in the supply chain. We look at when taking discounts helps, and when it hurts.

Do you have inventory on your shelves that is three or more years old? Do you know how much (minimum) stock to have on hand and when to order? Do you have a process for managing ordering, discounts and interruptions? If not, I can help.

Contact us today to learn more about lean inventory management or lean methodology to use in your business to make it more effective, efficient, and profitable.

Business Process Management

Is Storing Cold Inventory Costing You More Than Replacing It Would? 

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5S Organization

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As a Lean Consultant, one of the tools I use is the 5S Organization System which is particularly helpful when it comes to reclaiming space. In fact, storage issues are a big reason I am called into organizations. They need more floor space… they are moving into a new space… they realize they have dead inventory and don’t know what to do about it.  Often when I go into businesses, I discover they have become “blind” to the things they are storing that they don’t need. In some of these cases, this storage costs more than replacing the actual supplies being stored. 

This can happen when the parts become obsolete, or there is no process in place to handle these supplies, either in inventory, scraps, returns, or defect management. This happens a lot in Research and Development, in Engineering, and with business founders. In fact, business owner have a tendency to store personal items on property, creating a problem with space, but that’s a topic for another article. Today, we will address the 5S Organization System. 

5S Organization 

The 5S Organization System is part of Lean Methodology and consists of the components: 1. Sort, 2. Set in Order, 3. Shine, 4. Standardize, and 5. Sustain. Some companies choose to add a 6th S: Safety. Overall, this process helps organizations increase floor space, reduce costs, create a safer working environment, and increase productivity. 

Sort. This is the first step and its where we go through all the equipment, supplies, and tools in an area and sort based on who needs it, for what purpose, and frequency of use. We take into consideration the value of the items and the best location for them – which may include the dumpster, storage, donations, or even re-purposed in another area. 

Set in Order. After sorting and moving items out of a space, we then process the remaining assets. Logical arrangements are made to allow access to the right equipment, supplies and tools by the right people at the right times. Organizational systems such as bins, hooks, shelves or files may be used to reduce chaos. 

Overall processes may be examined to determine the best flow and to discover holes that would cause this problem to resurface. Care is taken to not create additional waste, which includes wasting time and resources. 

Shine. Shine refers to cleaning up the area. Often when items are stored for long periods of time, dust and debris can build up. But Shine isn’t just a one-time project. Shine puts systems in place for continuous organization and cleanliness of the area to prevent future equipment failure, inventory overstock or neglect. 

Standardize. Where Shine may feel janitorial or maintenance focused, Standardize addresses the root cause of the disorganization so it can be addressed proactively as much as possible. It creates processes, schedules, diagrams, task lists and more to create a culture and system of organization. 

Sustain. Sustain brings the organization into the future, keeping the changes in place. It keeps the fix from being a temporary solution. Anytime a new system or process is implemented, it will take time to get used to. After time, it can start to morph, so “checking in” with the process is a part of Sustain to make course corrections, or adapt the shifts for increasing efficiency. 

A Real World Example 

I was called into a company who was moving into a new space because they had too much “stuff” and needed help sorting so they knew where to move everything into the new space. We used the 5S Organization System for this project, as it was the best solution. While sorting, we came across three boxes that had the original tape from when they were shipped, 4 years prior. When I asked what they were, no one knew. So, we opened them. We looked into the boxes and I asked, “Do we need these?” 

The response I received was, “Well, I’m sure we do.” 

We asked around and discovered the boxes were holding supplies for a project that had been abandoned 3 years earlier. We kept going through boxes, determining what could be sold, donated, re-purposed or trashed. We ended up filling two dumpsters. Had they done the process prior to making the decision to move, they may not have needed to. 

 

PBEX, LLC provides a complete review and analysis of the business processes that create efficiency and profitability, and the barriers to them. Contact us today to learn more about lean business management and the multiple tools, including 5S Organization, and to schedule your review with a process improvement and automation expert.