Inventory Best Practices

STEVEN M. BRAGG, CPA, has been the chief financial officer or controller of four companies, as well as a consulting manager at Ernst & Young and auditor at Deloitte. He is the author of over thirty books primarily targeted toward controllers, treasurers, CFOs, and their needs. Bragg received a master's degree in finance from Bentley College, an MBA from Babson College, and a bachelor's degree in economics from the University of Maine.

• Preface xvChapter 1 Success or Failure with Best Practices 1Types of Best Practices 1Most Fertile Ground for Best Practices 2Planning for Best Practices 3Timing of Best Practices 5Implementing Best Practices 6How to Use Best Practices: Best Practice Duplication 9Why Best Practices Fail 10Summary 14Chapter 2 Inventory Purchasing 152.1 Include Suppliers in the New Product Design Process 172.2 Use Supplier-Concurrent Engineering 182.3 Avoid Designing Risky-Procurement Items into Products 182.4 Match Product and Part Life Cycles 192.5 Reduce Safety Stocks by Shrinking Supplier Lead Times 202.6 Purchase Supplier Capacity 202.7 Reduce Safety Stocks by Accelerating the Flow of Internal Information 212.8 Buy from Suppliers Located Close to the Company 222.9 Relocate Suppliers On-Site 232.10 Use Local Suppliers for Rapid Replenishment 242.11 Consider Foreign Sourcing 242.12 Use Auctions for Selective Purchases 252.13 Compare Suppliers Based on Total Landed Cost 262.14 Eliminate Approvals of Routine Purchases 272.15 Purchase Based on Material Requirements Planning 272.16 Compare Open Purchase Orders to Current Requirements 282.17 Freeze the Short-Term Production Schedule 292.18 Share Production Plan with Suppliers 302.19 Obtain Direct Links into Customer Inventory Planning Systems 302.20 Require Frequent Deliveries of Small Quantities 312.21 Arrange for Inbound Split Deliveries 332.22 Arrange for Phased Deliveries 332.23 Adopt Rolling Schedules 342.24 Adopt Just-in-Time Purchasing 352.25 Implement Stockless Purchasing 362.26 Centralize Purchasing 372.27 Designate Major Suppliers as Lead Suppliers 372.28 Single-Source Products 382.29 Install a Supplier Rating System 402.30 Use Long-Term Supplier Relationships for Strategic Purchases 412.31 Shift Raw Materials Ownership to Suppliers 422.32 Flag Changes Impacting Advance Material Requests 44Chapter 3 Inventory Receiving and Shipping 453.1 Reject Unplanned Receipts 453.2 Obtain Advance Shipping Notices for Inbound Deliveries 473.3 Directly Enter Receipts into Computer 483.4 Automatically Collect Inbound and Outbound Cube and Weight Information 493.5 Repackage Incoming Items into Increments Ordered by Customers 503.6 Put Away Items Immediately after Receipt 513.7 Stage Received Goods for Zone Putaways 523.8 Eliminate the Receiving Function 533.9 Combine the Shipping and Receiving Functions in One Area 543.10 Assign Docks Based on Minimum Warehouse Travel Time 553.11 Require Supplier Deliveries with Open-Sided Trucks Directly to Production 553.12 Ship Using Returnable Wheeled Containers 563.13 Use Dunnage Bags to Cushion Outbound Shipments 573.14 Use Shippers with the Most Consistent Delivery Performance 583.15 Have Delivery Person Deliver the Invoice 593.16 Pay Suppliers Based Only on Receiving Approval 603.17 Provide Pending Shipment Information to the Collections Staff 63Chapter 4 Inventory Storage 654.1 Drop Ship Inventory 674.2 Cross-Dock Inventory 674.3 Move Inventory to Floor Stock 684.4 Use Temporary Storage for Peak Inventory Requirements 704.5 Assign Unique Location Codes to All Inventory Storage Locations 714.6 Reduce the Number of Inventory Bin Locations Assigned to the Same Product 724.7 Assign Fixed Inventory Locations to High-Volume Items 724.8 Segregate Customer-Owned Inventory 734.9 Allocate Warehouse Areas to Specific Customers 744.10 Segregate Inventory by ABC Classification 754.11 Store High-Pick Items in Order Fulfillment Zones 764.12 Adjust Case Height to Match Cubic Storage Capabilities 764.13 Adjust Case Stacking or Width to Avoid Pallet Overhang 774.14 Combine Out-and-Back Inventory Moves 784.15 Use Different Storage Systems Based on Cubic Transactional Volume 784.16 Use Modular Storage Cabinets for Low-Storage-Volume Items 794.17 Use Carousels to Increase Picking Efficiency 804.18 Use Movable Racking Systems 814.19 Use Multistory Manual Picking Systems 814.20 Use Gravity-Flow Racking for FIFO Picking 824.21 Use Pallet-Flow Racks for Pallet FIFO Picking 834.22 Create Double-Deep Racking or Stacking Lanes for Large SKU Pallet Volumes 834.23 Use Push-Back Racks for Multiple Pallet Storage 854.24 Eliminate Cross Bracing in Low-Weight Storage Configurations 85Chapter 5 Inventory Picking 875.1 Group Single-Line Orders and Pick in Order by Location 885.2 Use Single-Order Picks for Emergency Orders 895.3 For Manual Systems, Pick from the Source Document 905.4 Implement Forward Picking 905.5 Use Wave Picking by Grouping to Consolidate Transactions 915.6 Use Zone Picking to Consolidate Total Transactions 925.7 Use Zone Picking with Order Forwarding 935.8 Use Voice Picking to Record Low-Volume Picking Transactions 945.9 Use Pick-to-Light to Record High-Volume Picking Transactions 955.10 Use Portable Scales to Pick Small Items 975.11 Pick into Multibin Carts 975.12 Store Kitted Inventory in an Accumulation Bin 985.13 Use Standard Containers to Move, Store, and Count Inventory 995.14 Issue Parts in Full-Bin Increments 1005.15 Have Suppliers Sequence Their Parts Deliveries 1015.16 Avoid Restocking during a Picking Shift 1015.17 Optimize Inventory Storage through Periodic Location Changes 102Chapter 6 Production Issues Impacting Inventory 1036.1 Eliminate Incentive Pay Systems Causing Excessive Production 1056.2 Standardize the Number of Shifts Worked throughout a Factory 1066.3 Allow Production Workers to Call Suppliers about Faulty Materials 1076.4 Invest in Smaller, Low-Capacity Machines Rather than High-Capacity Ones 1076.5 Purchase Machines from a Single Supplier 1086.6 Produce the Same Parts on the Same Machine Every Time 1096.7 Perform Inspections at the Next Downstream Workstation 1106.8 Improve Periodic Equipment Maintenance 1106.9 Shift Some Equipment Maintenance to the Production Staff 1116.10 Preplan Major Equipment Maintenance 1126.11 Replace Aisles with Conveyors 1136.12 Schedule Smaller Production Batches 1146.13 Produce to Order Rather than to Stock 1156.14 Reduce Container Sizes 1156.15 Reduce Setup Times 1166.16 Shorten Cycle Times 1176.17 Replace Straight Assembly Lines with Serpentine Lines 1186.18 Reduce the Length of the Assembly Line 1186.19 Divide the Assembly Line into Segments 1196.20 Use Cellular Manufacturing 1206.21 Group Machine Cells Near Common Inventory Storage Areas 1216.22 Position Local Cell Storage between Workstations and Aisles 122Chapter 7 Inventory Transactions 1237.1 Reduce the Number of Stored Data Elements 1257.2 Record Inventory Transactions with Barcodes 1267.3 Record Inventory Transactions with Radio Frequency Communications 1277.4 Track Inventory with Radio Frequency Identification (RFID) 1287.5 Eliminate All Paper from Inventory Transactions 1307.6 Use the Kanban System to Pull Transactions through the Facility 1317.7 Eliminate All Transaction Backlogs 1327.8 Verify That Receipts Are Entered in the Computer System at Once 1337.9 Have Customers Order by Part Number 1347.10 Audit All Inventory Transactions 1357.11 Compare Recorded Inventory Activity to On-Hand Inventories 1367.12 Immediately Review All Negative Inventory Balances 1377.13 Replace the Physical Count Process with Cycle Counts 1387.14 Use Control Groups to Locate Transaction Errors 1417.15 Prioritize Cycle Counts on Next-Usage Items 1427.16 Streamline the Physical Count Process 1427.17 Install a Warehouse Management System 145Chapter 8 Inventory Planning and Management 1478.1 Include Materials Managers in the New Product Design Process 1508.2 Reduce the Number of Product Options 1518.3 Increase Prices for Nonstandard Options 1528.4 Increase Prices for Small-Unit Orders 1528.5 Convert Information Products to Electronic Versions 1538.6 Reduce the Number of Products 1538.7 Reduce the Number of Customers 1548.8 Avoid Promotions 1558.9 Design Products with Lower Tolerances 1558.10 Require Formal Review and Approval of Engineering Change Orders 1568.11 Assign Inventory Items to Classifications 1578.12 Forecast Demand by Product Families 1588.13 Segment Forecasted Demand into Stable and Unstable Products 1598.14 Centralize Responsibility for Inventory Planning 1608.15 Delay the Order Penetration Point as Long as Possible 1608.16 Use a Material Requirements Planning System to Model Alternative Lot Sizes, Safety Stocks, and Lead Times 1618.17 Reduce Job Releases to Production 1628.18 Prioritize Production Based on Delivery Region 1638.19 Use Variable Safety Stocks for Fluctuating Demand 1638.20 Convert Safety Stock to Just-in-Case Stock 1648.21 Eliminate Expediting 1658.22 Develop a Product Substitution System 1668.23 Question the Level of Customer Service Provided 1668.24 Focus Inventory Reduction Efforts on High-Usage Items 1678.25 Create a Visual Review System for Noninventoried Parts 1688.26 Eliminate Departmental Stocks 1698.27 Install a Distribution Requirements Planning System 1708.28 Distribute Slow-Moving Items from Regional Warehouses 1708.29 Install a Hold and Flow System 1718.30 Use Overnight Delivery from a Single Location for Selected Items 1728.31 Use Fair Shares Analysis to Allocate Inventory to Warehouses 1738.32 Periodically Rationalize the Warehouse Network 1738.33 Plan for Product Shutdowns 1758.34 Create a Materials Review Board 1758.35 Identify Obsolete Inventory via Physical Inventory Tags 1768.36 Plan for Service Parts Inventory Levels 1778.37 Inspect Returned Merchandise for Usability 1788.38 Reserve Otherwise Obsolete Inventory with “Service/Repair” Designation 1788.39 Avoid Product Obsolescence with Shelf-Life Control 1798.40 Create an Obsolete Inventory Budget for Disposals 1808.41 Batch Excess Inventory for Sale to Salvage Contractors 1818.42 Sell Excess Items through the Service Department 1818.43 Set Up a Reverse Logistics System 1828.44 Outsource Selected Warehousing Functions 183Chapter 9 Warehouse Layout 1859.1 Include Other Issues than Cost in a Warehouse Acquisition Decision 1869.2 Generally Organize the Warehouse in a U-Shaped Process Flow 1879.3 Organize the Warehouse by Storage Zones 1889.4 Maximize Vertical Storage Space 1899.5 Tailor Vertical Storage Space to Manual Picking Needs 1909.6 Enclose Building Supports in Racks 1909.7 Use Narrow Aisles in Manual Putaway and Picking Zones 1919.8 Avoid Aisles Adjacent to Outside Walls 1929.9 Use Automated Storage and Retrieval Systems 1929.10 Use Automated Guided Vehicle Systems 1939.11 Use Conveyors to Reduce Employee Travel 1949.12 Avoid an Excessive Level of Warehouse Automation 1959.13 Eliminate the Quality Review Area 1979.14 Enlarge the Receiving Area 1979.15 Design Just-in-Time Docks for the Largest Anticipated Trucks 1989.16 Lock Down the Warehouse Area 1999.17 Plan for Maximized Warehouse Space Utilization 2009.18 Eliminate the Warehouse 200Chapter 10 Cost Accounting 20310.1 Eliminate Purchase Price Variance Tracking 20310.2 Eliminate Tracking of Work-in-Process Inventory 20510.3 Eliminate Scrap Reporting in the Production Area 20610.4 Charge the Entire Inventory to Expense 20610.5 Use Specific Identification Costing with RFID Tags 20710.6 Have the Cost System Separate Value-Added and Nonvalue-Added Activities 20810.7 Assign Overhead Based on Square Footage Used 20910.8 Do Not Credit Internal Departments with Sales When Production Is Completed 21010.9 Report on Landed Cost Instead of Supplier Price 21110.10 Report on the Total Cost of Product Ownership 21110.11 Implement Activity-Based Costing 21210.12 Assign Overhead Personnel to Specific Subplants 21410.13 Implement Target Costing 21410.14 Limit Access to Unit-of-Measure Changes 21510.15 Review Cost Trends 21610.16 Review Material Scrap Levels 21810.17 Revise Traditional Cost Accounting Reports 22010.18 Audit Labor Routings 22210.19 Follow a Schedule of Inventory Obsolescence Reviews 223Chapter 11 Bills of Materials 22711.1 Audit Bills of Materials 22711.2 Conduct a Configuration Audit 22911.3 Modify the Bills of Materials Based on Actual Scrap Levels 23011.4 Modify the Bills of Materials for Temporary Substitutions 23111.5 Eliminate Redundant Part Numbers 23211.6 Standardize Parts 23311.7 Review Inventory Returned to the Warehouse 23411.8 Use Bills of Materials to Find Inventory Made Obsolete by Product Withdrawals 23511.9 Identify Inactive Inventory in the Product Master File 236Chapter 12 Impact of Constraints on Inventory 237Overview of the Theory of Constraints 237Overview of the Constraint Buffer 239Alternatives to the Constraint Buffer 240Expedite Zone 241Buffer Manager 242Buffer Hole 242Buffers for Labor Operations 243Assembly Area Buffer 243Inventory Releases 244Batch Sizes 244Summary 246Chapter 13 Inventory Policies and Procedures 24713.1 Create a Policies and Procedures Manual 24813.2 Train the Warehouse and Accounting Staffs in Inventory Procedures 25013.3 Cross-Train for Mission-Critical Activities 25113.4 Train Using Training Teams 252Chapter 14 Inventory Measurements 27114.1 Percentage of New Parts Used in New Products 27114.2 Percentage of Existing Parts Reused in New Products 27314.3 Raw Material Content 27414.4 Bill of Materials Accuracy 27514.5 Item Master File Accuracy 27614.6 Economic Order Quantity 27614.7 Distribution Turnover 27714.8 On-Time Parts Delivery Percentage 27814.9 Incoming Components Correct Quantity Percentage 27914.10 Purchased Component Defect Rate 28014.11 Percentage of Receipts Authorized by Purchase Orders 28114.12 Percentage of Purchase Orders Released with Full Lead Time 28214.13 Putaway Accuracy 28214.14 Putaway Cycle Time 28314.15 Scrap Percentage 28414.16 Average Picking Time 28514.17 Picking Accuracy for Assembled Products 28614.18 Average Picking Cost 28714.19 Order Lines Shipped per Labor Hour 28814.20 Shipping Accuracy 28914.21 Percentage of Products Damaged in Transit 29014.22 Warehouse Order Cycle Time 29014.23 Inventory Availability 29114.24 Delivery Promise Slippage 29214.25 Average Back-Order Length 29314.26 Dock Door Utilization 29414.27 Inventory Accuracy 29414.28 Inventory Turnover 29514.29 Percentage of Warehouse Stock Locations Utilized 29714.30 Square Footage of Warehouse Storage Space 29814.31 Storage Density Percentage 29914.32 Inventory per Square Foot of Storage Space 29914.33 Storage Cost per Item 30014.34 Average Pallet Inventory per SKU 30114.35 Rate of Change in Inactive, Obsolete, and Surplus Inventory 30214.36 Obsolete Inventory Percentage 30314.37 Percentage of Inventory > X Days Old 30414.38 Percentage of Returnable Inventory 305Appendix Summary of Inventory Best Practices 307Glossary 319About the Author 331Index 333