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Inventory Optimization Practices for Fueling Growth

Pat Dippel
August 12, 2021
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So you want to grow your business, but you aren’t sure you can because of cash flow constraints. This problem plagues many companies, so you aren’t alone. This is an issue that US manufacturing as a whole needs to solve to maintain competitiveness.

According to the St. Louis Federal Reserve’s FRED tools, US manufacturers had $219 million of work in process inventory out of a total inventory of $740 million in June. That’s about 30% of the total value of inventory in the US tied up in work in process. There’s an additional $262 in finished goods inventory. That brings the total inventory that’s been worked to some extent to about $481 million, or about 65% of total inventory.

That’s a staggering amount of inventory being held by US manufacturers, and represents room for improvement in our processes to improve the competitiveness of US manufacturing. Luckily, you can do your part to turn this around by making a few key operational improvements with big returns.

At Veryable, we help businesses improve the efficiency of their operations through the use of on-demand labor and a flexible labor pool. These improvements often include optimizing inventory, and along the way we’ve learned some tips that will help you reach your goals like these companies have.

In this article, you’ll learn how to fix your immediate inventory issues with on-demand labor and how to leverage these improvements to reduce lead times and grow.


Stage One: Addressing immediate inventory issues

The first stage of your journey is to optimize your inventory. This means reducing excess work in process inventory and reducing excess finished goods inventory.

Identify excess work in process inventory by implementing standard work

You should implement a new standard for work in progress to ensure inventory is optimized between workstations. This means you’ll need to consider your takt time and the sequence of operations on your line to determine what your WIP should actually be. Chances are there will be room to improve and you will identify some excess inventory tied up in WIP.

As an example, imagine that you need your line to produce 10 widgets per hour to meet customer demand. And each widget takes half an hour to produce. Using Little’s Law, you would multiply your takt time of 10 widgets per hour by your cycle time of 0.5 hour, resulting in a target WIP inventory of five widgets.

Assuming you have five workstations set up, with each doing six minutes of work on the widget, then you would place one unit of WIP before each step of the process for a total of five WIP inventory units. If you have any more inventory than that, there is room to improve. You should be driving performance toward the reasonable takt time, rather than piling up inventory and incurring holding costs.

To reduce this excess WIP, you should increase your throughput by optimizing the sequence of operations and driving toward target takt time on your line.

When you increase the throughput of each station along your line and reach target takt time, you can flush out the WIP by converting it into finished goods. This will make sure inventory doesn't creep back in, tying up your cash and hurting service levels.

On-demand labor can support your full-time employees in this process by working alongside them while your FTEs stay focused on what they specialize in. You could also invite on-demand labor to handle setup and cleanup, or bring them in to help increase the working hours on your line.

Reducing your work in process inventory will move goods faster and create a better flow of value through your operation.


Reduce finished goods inventory

With lower WIP, you can replenish stock faster, which means you can hold less inventory. Calculate how much finished goods inventory you should hold now that your lead time is shorter. You should reduce your finished goods inventory by getting it all shipped as soon as possible. If you’ve freed up enough lead time, you’ll be able to capture revenue sooner because some of your customers will gladly take their orders early.

This might mean you need to get creative with how you assign your workers so that you can prioritize flushing finished goods inventory to get back to lower inventory levels. Alternatively, you could bring in additional labor on demand, or add an extra shift dedicated to flushing the finished goods. This way you can convert that inventory into cash while keeping the rest of your operation working on orders beyond what the finished goods can cover.


Reduce promised lead times

Now that you have less work in progress and less finished goods inventory, you can confidently reduce your published lead times to delight your customers and win new business.

With your streamlined operation, your growth story continues as you easily take on more orders while maintaining best in class lead times and crushing your competition.


Stage Two: Entering growth mode and taking new orders

When you’ve handled the immediately pressing issues with inventory, you’ll have freed up some cash and streamlined the flow of value through your operation. Now, it’s time to leverage these improvements to crush the competition and take on more business.


Utilize your time and assets

With lower published lead times, orders will be coming your way. To get the most out of your equipment before you invest in anything new, make sure that you have fully optimized your current process based on the new standard work target. This means driving takt time consistency, monitoring WIP to stay on target, and sequencing operations to facilitate your targets.

Once you’ve exhausted your opportunities for improving processes, you can focus on more fully utilizing the assets you have by filling your off-shifts and weekends. In other words, make the most of what you already have so that you can see what you’re capable of now that you’ve cleaned up your inventory issues.

For this step, you’ll want to aim for having as much uptime as you can. Think of this as a stress test, and take notes as you observe what’s actually happening on the shop floor.


Start planning for what’s next

As you stress test your operation, identify your bottlenecks and understand the load and utilization at each of your workcenters. A good rule of thumb is that once a workcenter consistently reaches 75% utilization, it’s time to consider adding new capacity through additional equipment. This leaves you some surge capacity with your equipment and won't hold back your growth plans while you order new equipment.

Make sure you understand the lead time for that equipment, because if it is extremely long, you might want to buy while you’re at a slightly lower utilization.

When taking on incremental growth and fully utilizing the assets you have it’s important to control the bottleneck. Having a flexible labor pool keeps the bottleneck at the equipment ensuring that it isn’t labor holding you back. This gives you the most revenue capture. Lowers your labor cost, and helps you add equipment as needed allowing you a mechanism to prioritize where you invest your money in equipment capacity. 


Spend your extra cash

Put those inventory dollars you freed from WIP and finished goods inventory to self-fund the new assets you’ve identified a need for. This will increase your throughput and set you up for growth.

For example, maybe you noticed that with another machine, you could now easily spin up a new line. With on-demand labor, you could put one of your employees on the new machine and use flexible labor when you need extra help on that line.


Continue to monitor inventory levels and utilization

It’s important to keep an eye on the inventory levels and utilization of assets across your workcenters. This is not a one-and-done improvement, but a constant process of monitoring operations to identify necessary adjustments.


How to get started with on-demand labor today

While getting more cash by optimizing your existing inventory and growing by purchasing additional equipment if needed, you’ll still need to ensure you don’t get constrained by your labor as you grow. You’ll be able to more quickly and easily reduce your lead times with flexible capacity.

You can flush excess WIP and finished goods by building and leveraging a labor pool as needed to directly match your labor to incoming customer demand. A labor pool is like a flexible extension of your workforce that you build over time by adding the on-demand workers that you like to a favorites list you can pull from any time.

Instead of having extra workers standing around with nothing to do, you could have a lower baseline of full-time employees and flex your labor capacity as needed by inviting on-demand workers from your labor pool.

This way, you would only have workers working when there’s work needed to fill orders. This would virtually eliminate WIP and finished goods inventory, because if you’re only making what’s needed, then you should immediately have somewhere to ship each order of finished goods.

To get started addressing your inventory issues with on-demand labor, sign up for a free business profile with Veryable. You can post your first work opportunity to help flush out inventory and start building your labor pool today.

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Pat Dippel

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