13.3 Inventory Management

Key Concepts

1. Inventory Control

Inventory control involves managing the flow of goods into and out of an organization to ensure that stock levels are maintained at optimal levels. This includes tracking stock levels, managing orders, and ensuring timely replenishment.

Example: In a machine shop, inventory control ensures that essential raw materials like steel and aluminum are always available when needed for production. This prevents delays and ensures a steady workflow.

2. Stock Levels

Stock levels refer to the quantity of goods a company has in its inventory at any given time. Maintaining optimal stock levels is crucial to avoid overstocking, which ties up capital, and understocking, which can lead to production delays.

Example: A machinist might maintain a stock level of 50 units of a specific type of cutting tool. This ensures that there are enough tools for daily operations without overloading storage space.

3. Reorder Point

The reorder point is the inventory level at which a new order should be placed to replenish stock. It is determined by factors such as lead time, demand rate, and safety stock.

Example: If a machinist uses 10 units of a particular screw per week and the supplier takes 2 weeks to deliver, the reorder point might be set at 20 units to ensure no stockouts occur.

4. Safety Stock

Safety stock is the extra inventory held to mitigate risks of stockouts due to uncertainties in demand, supply chain delays, or other factors. It acts as a buffer to ensure continuous production.

Example: A machine shop might keep an extra 10% of a critical component as safety stock to cover unexpected increases in demand or delays in supplier deliveries.

5. Just-In-Time (JIT) Inventory

Just-In-Time (JIT) inventory management aims to reduce waste by receiving goods only as they are needed in the production process. This minimizes inventory holding costs and reduces the risk of overstocking.

Example: A JIT system in a machine shop might order raw materials only when a production order is received, ensuring that materials are used immediately and reducing storage costs.

6. Economic Order Quantity (EOQ)

Economic Order Quantity (EOQ) is a formula used to determine the optimal order quantity that minimizes the total cost of ordering and holding inventory. It balances the costs of ordering and holding inventory.

Example: A machinist might use the EOQ formula to determine that the optimal order quantity for a specific type of bearing is 50 units, balancing the cost of ordering and storing them.

7. ABC Analysis

ABC analysis is a method of categorizing inventory items based on their importance to the business. Items are classified as A (high value), B (medium value), or C (low value) to prioritize management efforts.

Example: In a machine shop, critical components like precision bearings might be classified as A items, while less critical items like standard screws might be classified as C items.

8. Inventory Turnover

Inventory turnover measures how many times a company's inventory is sold and replaced over a period. A high turnover rate indicates efficient inventory management, while a low rate suggests overstocking or poor sales.

Example: A machine shop with an inventory turnover rate of 10 means that its inventory is sold and replaced 10 times a year, indicating efficient use of inventory.

9. Lead Time

Lead time is the time between placing an order and receiving the goods. It includes production, delivery, and any other delays in the supply chain.

Example: If a machinist orders a custom part from a supplier, the lead time might be 4 weeks, including production and delivery times.

10. Cycle Counting

Cycle counting is a method of inventory auditing where a small subset of inventory items is counted on a regular basis, rather than conducting a full inventory count at one time.

Example: A machine shop might perform cycle counting on its A-class items every week, ensuring that high-value items are always accurately tracked.

By understanding these key concepts, machinists can effectively manage their inventory, ensuring optimal stock levels, minimizing costs, and maintaining a smooth production flow.