Cost Reduction through Inventory Management

Chances are like most of the companies we work with every day, you too have identified cost reduction as one of your top goals for 2019. In fact, it’s likely that this is a constant target for your business, perhaps even formalized within a continuous improvement program.

Your packaging inventory is one area of your business that can consume a lot of financial resources. A variety of different inventory management models can be applied to help you manage this critical area of your business. Many were developed for complex manufacturing environments like automotive, or strictly regulated industries like medical devices. However, the sound principles embodied in these concepts can apply to any sized business.

JIT Just In Time       

The Just In Time concept is an integral part of the Toyota Production System (TPS). Often, it is now generically referred to as the lean manufacturing system.

This system became widely known outside of Toyota during the 1973 global oil crisis. At the time, much of Japanese industry became aware that Toyota was maintaining their profit levels, while they and other manufacturers globally were losing significant ground. In the late 1970’s Taiichi Ohno, then retired Vice President of Toyota and considered the architect of the JIT system published his own book about TPS.  He outlined the principles behind this thoroughly integrated system that was developed over many decades. TPS is designed to maximize cost reductions and improve profits by achieving consistent quality, improved production efficiencies and eliminating waste of time, labor and materials.

Cost reductions through JIT 

The JIT philosophy aims at producing goods to meet customer demands as close as possible to when they want it, exactly what they want and in exact quantity. It is a comprehensive approach to the entire process of manufacturing. However, in its simplest application to managing your inventories, it can significantly reduce your costs and ensure the right materials are on hand when needed. 

You’ll free up valuable real estate by inventorying a minimum quantity to meet production for the next day or two. Additional cost reductions will come from improved cash flow and reduction of obsolete inventories.Your supplier can now purchase in larger quantities than what you could have bought and stored at one time. Those savings will be passed on to you for additional cost savings.

JIT programs require a close supplier relationship to ensure the inventory levels are appropriate within your entire pipeline. After all, line shutdowns due to lack of packaging are very costly, but with good planning, they can be avoided.

KANBAN

Another familiar term and an integral part of the complete JIT process is this visual card system. This concept had its beginnings in Toyota machine parts factories as early as the late 1940s. This too has evolved and expanded to what is now an electronic system of notifications used not only by Toyota, but by most of their partners in their supply chain.

Even small businesses can adopt a simplified version for their inventory management. For example, cards attached to each pallet of corrugated are pulled off as that stock is moved to the production floor. This card is then communicated to the vendor who will replenish the item on the next delivery, thereby ensuring a consistent, reliable inventory of the materials that are critical to your operations.

What’s right for your business?

Working closely with your packaging supplier, you should develop the system that’s right for you. Many customers benefit from a combination of concepts tailored to meet their needs. A JIT program on those supplies critical to your operation, where a pipeline of just the right amount of inventory is always at hand on your floor. The supplier will have a suitable backup as well. Other items perhaps due to their density (films for example) will be carried at higher levels. Or, stocking off the shelf items that are easily replaced or substituted may be managed on a drop-ship basis.

Consignment is another option that may be appropriate where production schedules are simply too unpredictable. Last minute changes require flexibility and ample inventories on hand. Although you’re tying up the physical space, at least you will not be paying for the inventory until it is used in production, or until it ages to the agreed upon date (usually 30 to 45 days from receipt)

Managing your inventories well can deliver significant cost savings to your entire organization. The key to choosing the right program is to honestly evaluate your entire operation and determine which concept(s) will make the most sense for you. Partnering with the right packaging supplier that can offer the capital and logistical support to your operations will deliver benefits far beyond the competitive price of the box.

Contact Heritage Paper today to see how we can tailor a program for you that ensures maximum cash preservation, offers flexibility and provides for a reliable and consistent supply chain.