How to Respond to Inventory Management Challenges Part 1 of a 3-part article on inventory management
Storerooms in institutional and commercial facilities that I visit around the world have several things in common. In general, they are overstocked with inventory, understocked with critical items, plagued by undocumented use, disorganized, and short on space to efficiently store essential spare parts and equipment.
Several years ago, I worked with the facility maintenance group at a major university in North Carolina. The group had the greatest storeroom operation that no one used. Instead, technicians would jump in a truck, drive to the local hardware store, and buy the materials they needed. Why? They had lost faith that the storeroom would have them.
Over the years, I have conducted assessments of dozens of storeroom operations. My findings from these assessments reveal interesting data and startling findings:
- 58 percent of typical storeroom inventory has not been touched in more than three years.
- Of the remaining 42 percent of active inventory, 60 percent is overstocked.
- 15-20 percent of storerooms have a budget for dispensing of obsolete materials.
- 7-12 percent of SKUs are duplicates.
- Just 12 percent of stocked items account for 78 percent of storeroom activity.
What is the actual financial impact of these numbers? Consider a storeroom with an average inventory value of $1 million supporting a facility maintenance staff of 20 technicians. Based on the above findings, the operation has:
- $580,000 of potentially obsolete material. Part this inventory will be deemed obsolete, and some will be reclassified as critical, or insurance spares. I consider critical spares like a life insurance policy. I do not want to use the policy, but the risk and financial implications of not having it are too great for me to not have it.
- $288,000 in overstocked items. What do these materials tied up in inventory do to maintenance budgets or cash flow?
- $70,000–120,000 of potential duplicate parts are stored with different part numbers or OEM part numbers.
- $120,000 worth of inventory that could be distributed via open stock issue, vendor managed inventory (VMI), or consignment. Better yet, they could be housed in strategically placed vending machines throughout the site in order to relieve the storeroom staff of redundant, non-value-added activities.
How would any organization’s finance people take the news that the organization owns more than $500,000 of scrap and more than $250,000 in excess inventory?
By industry veteran, Andy Gager is the CEO of AMG International Consulting in Charleston, SC.