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.
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.
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.