Cabinet Makers and Small Business Inventory Planning
We mentioned in our first article, our roots are deep in a few industries, and woodworking, specifically cabinet making, is one of them. We then looked in the second article that cash flow is key, and one of the most direct elements of cash flow is Inventory. We discussed some basic elements of Inventory, and how powerful it is to get a picture of how much capital you really have located outside your bank account.
We want to expand on this and look at how much more power you can have when you grasp the idea of Inventory Planning. These fundamentals don't apply just to Cabinet Makers obviously, we are just using them as a great example.
So let us assume you have worked through a process to get your current Inventory amounts accessible. You can find out with fairly good accuracy how much you have on hand of a given material right now. You know how much value it has, and how many. You soon find out that while you have some great information about where you are at now, you don't know much more than that.
Just knowing you have x amount of a product doesn't tell what you need to do ABOUT it. Do you have enough? Do you need more? Do you have too much?
The main problem here is you don't know how TO PLAN your Inventory.
Inventory Planning Basics
Inventory Planning thinks about Inventory OVER TIME. Not just what you have now, but how much will you need..And we need to keep in mind the 2 Rules of Inventory
The #1 rule of Inventory Management
Never run out of inventory
The #2 rule of Inventory Management
Never have more inventory than you absolutely need
Get your Demand Together
Demand is the amount of product you need to consume. Here is an example of a Raw Material (Red Birch plywood) We see here a basic summary of an MRP (Materials Resource Planning) report in our Software Toolkit. We will break down each piece as we go.
Inventory: You have 18 of this part currently in stock. If you have no demand, you have product you don't need.
The next section is the DEMAND, or the amount you need. In this case we have details about which job (called a PhaseMat) they come from. The Left column, represented by a negative number is how much of this part the Job needs. For the moment, let's disregard the dates that normally occur on the left. We will get to those later.
What we see is that we need 29 units of the part. The second column shows a running total of the first line (Current Inventory) and then includes each demand from the jobs. So the starting amount (18) will only allow you to get through 3 jobs at best if you use the inventory for Job 151890, 151720, 152700 but you do not have enough to make job 152550
- If you were to look at any one job demand without knowing the current inventory, you would now now how much to order. You would run out of Inventory.
- If you look at the sum of all demands, without knowing the current Inventory, you would buy too much because you already have Inventory on hand.
The next piece of the puzzle is Safety Stock. How much of this product do you need on hand even when there isn't a demand? Do you need some extra in case someone scraps some material? How about if the product has a long lead time and you need some buffer? What if it is used often and you want to accommodate last minute orders?
In this case we have 18 on hand, but only want 10 in safety stock. Somewhere in history, we have bought more than we need, and it resulted in us carrying more on the shelf than we had to have, tying up captial.
We need to make sure we have an extra 10 left over AFTER we fulfill the demands. From above, we know we have 18, we need 29, so we are 11 short. In addition, we need to have 10 remaining on hand, so we actually need 21 units to fix Inventory.
Think about how often this situation occurs with all the materials you use.
Knowing the current inventory is good. Knowing how much you will need for upcoming jobs is even better. Knowing how much you need to have on hand is good.
Knowing all these factors at the same time is GREAT
Looking at the By When
Now that we see total quantity is important, along with the other factors, we need to look at one more factor. Timing.... Lets look at the whole picture WITH DATES
Now we see an even more profound picture. We obviously have to use historical dates so just look at the sequence, and assume it is 7/1/14 and you run this report.
- Current Inventory is what you have NOW.
- By 7/21/2014 you have completed 2 jobs, and have 1 unit of stock remaining.
- You do not need any more product (outside of the Safety Stock you want to have on hand all the time) until 8/4/2014
- By 8/4/2014 you will need 10 units for Job 152550
- By 1/19/2016 you need 1 more for Job 152700. This date essentially means it is not scheduled seriously or confidently.
- From a basic planning standpoint, we have more than we need right now, and run down to 1 unit and hold it for 2-3 weeks. Then we run out, and have nothing on order to let us complete the jobs we have scheduled.
If we then respond and go place a Purchase Order int he system to plan perfectly, it will then look like this.
While this isn't 100% perfect, perfect isn't a real goal. The main thing is we aren't running out of Inventory (the #1 Rule) and we are minimizing the amount we have on hand going further (the #2 Rule).
How does this affect Cash Flow?
The simplest way to think about this is Inventory is cash not in the bank. The ability to reduce the inventory on hand results directly in cash in your bank (unless you spend it somewhere else!). By minimizing Inventory, we keep the cash where it can be used best.... IN THE BANK!
Looking at Inventory totals is good, but not great. Unless you have very, very simple dynamics you typically need to know WHEN you need materials, and if the date is valid. You also need to know about what you want left over in case you have to use this material in other situations.
The elements to track this kind of information is all in our Software Toolkit: Current Inventory, Demands on Inventory (from sales and/or manufacturing), Future incoming (Purchase Orders), and Safety Stock.