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Inventory Analysis- Manufacturing Example

Machining & Assembly of Specialized Pumps 

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inventory turnover history

20 FPCl Long-Term Historical Analysis

inventory turnover history

20 Typical Long-Term Historical Analysis

inventory by production stage

Figure 21 Inventory Stage Profile

inventory by production stage

Figure 21 Inventory Stage Profile

inventory history 

Fig 22 Inventory History-Stage

inventory history

18 Typical Long-Term Historical Analysis

Fluid Products Corporation

The client in this project was an old firm with a long history. They built large, highly specialized pumps and certain critical fittings and controls to match those pumps. The objective of the project was a new plant layout that emphasized Cellular Manufacturing. Of necessity, material storage played a large role in this layout project.material storage played a large role in this layout project.</p>

Historical Analysis

A long-term historical analysis, figure 20, brought forth two major conclusions:

Note::

This example comes from a Strategos consulting project. We have changed names and specifics to disguise the client's identity. The essentials, however, come directly from the project.

• There was a downward trend in turnover that had persisted for at least eleven years and probably much longer.

• At the beginning of this period, turnover was near the lower bounds of industry averages but by the time of the study had fallen significantly below those averages.

 

From figure 20 it was evident that inventory was increasing faster than sales.

Where Was This Inventory?

The next reasonable question was “where is this inventory going?” Figure 21 and figure 22 provide the answer. Figure 21 shows that 82% of the current inventory is in WIP. Figure 22 shows that the growth of inventory has been almost entirely in WIP.

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Inventory turnover industry averages

Fig 23 Industry Average Comparison

Inventory turnover industry averages

Fig 23 Industry Average Comparison

Inventory by product

Fig 24 Inventory by Product

Inventory by product

Fig 23 Industry Average Comparison

 Figure 23 shows how the relative proportions of FPC’s production stage inventory compares with industry averages. Since there were few industry groups that fitted FPC’s products exactly, the proportions shown in figure 23 are approximate. This approximation makes little difference, as it is clear that FPC’s WIP is significantly out of line.

Three distinct product lines existed. Figure 24 shows the inventory associated with each product line. The Valve product and Pumps represented the majority of the inventory. However, valves were a highly seasonal product and much of that inventory was in Finished Goods. We might have displayed the data differently, for example, calculating turnover by product line.

It seemed clear to everyone at this point that pump WIP was the primary culprit and that the amount of this inventory was extremely high.

The Root Causes

When the proportion of WIP is too large, it indicates problems on the shop floor or the scheduling and support systems for the shop. Material flow diagrams and process charts verified the casual, visual observation that confusion reigned on the shop floor and material movement was excessive, confused and erratic. This, in turn, necessitated complex scheduling and other elements that amplified the negative effects.

How did this situation develop? The root causes of this problem were in the firm’s Manufacturing Strategy or rather their lack of Manufacturing Strategy. Decades prior to this project, the company operated with functional machining departments. Equipment was simple and small-scale but required highly skilled machinists.

As the firm grew, each functional department became more specialized, more inward-looking and more disconnected from the others. Then, Numerical Control machining was introduced. These machines were expensive and required high utilization to show profitability. Schedules were arranged to load the new NC machines, scheduling became more complex and queues grew to ensure that the NC machines always ran. WIP increased accordingly.

The solution was a Manufacturing Strategy that emphasized Cellular Manufacturing. Most workcells were designed around one of the new NC machines which became the "key machine" for that cell. Many other aspects of Lean such as teams and Kanban were also used.

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