MRO Today - Slowing the aging process

Slowing the aging process

by R.T. "Chris" Christensen

I continually get questions on inventory aging and how this applies to the theory of lean manufacturing.

If you ask your financial people, the general answer is to eliminate all inventory in a lean environment. But, let’s dig a little deeper.

We have two costs that we are working on. The first is the investment, the finance charges on money borrowed to pay for that inventory. The second is the cost of carrying that inventory in your system.

From a financial point of view, we need to minimize both the amount of money invested in inventory and the carrying costs of that inventory. The easy way to do this is to have all of your inventory on consignment and located in a facility on your site that is owned or, best yet, paid for by your suppliers. If you don’t own it and pay to carry it in inventory, then you have met the goals of the financial unit inside your operation.

That works, but if we can’t get someone else to own the inventory on our shelves (or close by and readily accessible), then we need to manage it.

A few weeks ago, a reader asked if a policy of disposing inventory based on time of ownership, or aging of inventory, was the best way to do it. This person said his company’s policy was to scrap anything that was on the shelf for five years. It applied the philosophy to production work-in-progress inventory, finished goods inventory, service parts inventory for both current and obsolete products, and maintenance inventory.

Anything on the shelf for more than five years was scrapped. But if you think about it, the only place the aging philosophy works is where inventory is time-dated. That can be applied to some finished goods inventory to help identify what isn’t selling. Beyond that, aging really doesn’t apply to other categories of inventory you have.

In the real world, we need a blend of philosophies. You need to apply different tactics to inventories. You need to classify each segment based on why it’s needed.

With cheap, commodity-type items, it’s to your advantage to keep these in reasonable supply and not worry too much about them. You use plenty of these items. The supply will generally stay fresh and turn in six months. To improve upon that, contract out that material and establish a vendor-managed inventory relationship. Inventory is owned by someone else, the carrying cost is gone and you have reduced inventory.

Aging inventory has a use, if you can’t work the system on consignment. By aging, we purge excess inventory based on age, or how long we have had ownership. This helps insure that we don’t carry inventory for years and years without using it. It becomes a corporate philosophy to say how long you should carry inventory after the last-use requirement. One year? Two years? Two weeks? This is an arbitrary way of purging inventory. What you really need to do is classify inventory based on why you have it and then apply a philosophy to manage this inventory.

Four alternatives to aging
Here are some tools you can use to evaluate your inventory when aging is not a viable tool.

1) If the item in inventory is a critical or major maintenance part for a machine and has a long lead time, you must carry it, regardless of the cost. Evaluate the part for condition and upgrade, if necessary.

2) Evaluate long-lead-time parts based on worst-case scenario. To do this, determine the amount of that item you could possibly use if the worst possible events occurred for a time period necessary to resupply. Take your highest use rate multiplied by the lead time to get a new supply. That determines the inventory of that item. At that point, get rid of any excess inventory beyond your worst-case scenario.

3) Purchase short-lead-time items as needed. That is, if the time to get the item is less than the time to need. Let’s say that at the time you realize you need an item, it takes three days to get an item. But you don’t actually need it for four days. If you can get it quicker than you need it, there’s no need for inventory.

4) On expensive low-use parts, it just might be cheaper to pay the overnight air freight bill than to keep it in inventory.

Aging is a good inventory tool, and it does have an application in a lean environment. However, there is a limited use. Take a look at the four other tools here, and apply them to your inventory management system.

See what works for you, and then let me know the results.

R.T. "Chris" Christensen is the director of the University of Wisconsin School of Business' operations management program. If you have an inventory management question, contact Coach Christensen by phone at 608-441-7326 or e-mail cchristensen@execed.bus.wisc.edu.