Operations professionals have been preaching the Toyota Production System (TPS) with its the elimination of waste in all formats. A famous (infamous?) element of TPS is the concept of Just-In-Time (JIT) inventory with factories and project managers praising the reduction in inventory seen through its practice. As a result, Just in Time inventory has earned an inaccurate connotation as minimal inventory when in fact, that’s the opposite of its meaning. When executed properly, JIT inventory factors in multiple variables associated with your supply chain: Production lead time, transportation time, demand, variations in demand and transportation. JIT inventory actually means Just As Much Inventory

There are several ways to calculate the proper amount of inventory. Depending upon your sales cycle, you may want to calculate the amount of inventory based on an amount of time or units available. A previous SPOTLIGHT highlights (The A, B, C, (and D’s) of Inventory) how you might go about segregating your inventory. This SPOTLIGHT focuses on how to calculate the amount to hold.

Utilizing a metric that focuses on a timeline will help an organization better understand their inventory position relative to demand and modulate accordingly, especially in highly seasonal environments. The calculation is to divide your weekly demand for the SKU into the inventory position for that product.

Example A:

  • Product a has a weekly demand of 10
  • Current inventory sits at 100 units with nothing in transit from the supplier
  • Lead time from supplier is 14 weeks
  • Current inventory position is only 10 weeks on hand,. With a lead time longer than that, the organization is at risk to run out, given current run rates

Example B:

  • Product B has a weekly demand of 10
  • Current inventory sits at 1,000 units with nothing in transit from the supplier, but a recent order for 100 was placed
  • Lead time from supplier is 10 weeks
  • Current inventory position is 100 weeks, which is too much inventory even in a volatile situation.
  • Open Order at vendor should be reviewed for cancelation.

Example C:

  • Product C has a weekly demand of 10
  • Current inventory sits at 100 units with nothing in transit from the supplier
  • Lead time from supplier is 9 weeks
  • Current inventory position is 10 weeks on hand (WOH), which is reasonable. No change but inventory should be monitored.

Future demand, especially in a highly seasonal environment like beach products or Christmas decorations,, should be reviewed as inventory should be further dropped pending increases/decreases in seasonal weekly demand

The calculations above can be modified, depending upon your business cycle, although Weeks On Hand works universally. In an environment with high activity, like a Direct to Consumer environment, Days on Hand may be relevant, however.

For more information on setting inventory levels appropriately, and how it might benefits your organization, reach out to a member of the Forsyth Advisor’s team.

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