May 5, 2016 / best practices, continuous improvement, Cost Management, customer delivery, industry news, LIT, material costs, strategic planning
For any metal service center, inventory management is an ongoing challenge. Ensuring that the right amount of inventory is in-house while simultaneously working to reduce overall operating costs is not an easy task. Service centers have had an especially tough time striking this balance over the last few years.
As reported in our Metal Service Center Outlook for 2016, service centers spent most of 2015 working to wipe out their leftover inventory from the year before. Due to declining prices, service centers held their purchase orders in hopes prices would improve. According to data from the Metal Service Center Institute (MSCI), U.S. service center steel shipments declined in February by 4.6% from the prior-year, while shipments of aluminum decreased by 2%. As metal service centers focused on offloading high-priced materials, steel and aluminum inventories decreased by 20.6% and 21.6%, respectively from the prior-year.
Despite hopes the market would improve, prices only declined further, pushing service centers to continue offloading inventory and holding orders for better prices. The latest figures from MSCI report U.S. service center steel shipments in March decreased 9.2% from March 2015, and shipments of aluminum products decreased by 11.3% compared to the same time last year. Inventories in March also decreased 1.4% and 1.9%, respectively, from February alone.
A New Approach
Like any other operational area, managers need to approach inventory management with a commitment to continuous improvement. As stated in the eBook, Five Performance-Boosting Best Practices for Your Industrial Metal-Cutting Company, this is critical to thriving in today’s market. While there is likely no one “silver bullet” answer to the industry’s current inventory challenge, one strategy may help service centers find that critical balance.
As reported by Supply Chain 24/7, a new tactic called the Science of Theoretical Minimums (STM) is said to reduce cost and increase customer service. Unlike other inventory strategies, such as Just-In-Time and forecasting that only push the costs of inventory back to the supplier, STM reveals how much profit is currently untapped throughout the entire supply chain. This provides service centers with a clear picture of where to focus their efforts so they can monetize those supply chain gaps.
The basic premise of STM links actions to results by tracking two metrics—physical lead time and informational lead time. Physical lead times (PLT) are related to how long it takes to procure parts and transportation times. Informational lead times (ILT) track the time it takes for information to move between supply chain participants. After assessing both lead times, areas that can be improved are made evident, pointing out where operations can focus on optimizing the process to reduce costs.
According to the article, managing STM involves three key steps:
- Define a supply chain with zero ILT
- Define the PLT and its corresponding variability
- Define the cost difference between ILT and PLT
Together, the three steps inform managers where they can make beneficial changes with the most impact on cost. “The theoretical goal of supply chain management is quantified as the theoretical minimum, which is defined as that point where informational lead time is zero,” the article explains. “STM provides a theoretically grounded foundation for this goal, and does so in a way that is actionable for supply executives.” (To read more about the specifics about STM, you can read the full article here.)
Strategy into Action
Of course, the real test is when a theory is put into practice. According to the article, several big names have achieved quantifiable success after applying STM principles:
- Walmart, for example, is using STM in its Supplier Portal Allowing Retail Coverage. The portal relies on real-time supply chain information to “stay in stock” with low inventory levels and ultimately reduces ILT and PLT. As a result, the retail giant has reported improved gross margin return on inventory investment.
- After adopting STM, food producer Del Monte Foods reduced inventory by 27%, increased in-store service levels to 99%, and improved forecast accuracy by 20%.
- Hewlett Packard reduced lead times and doubled its on-time deliveries with STM by identifying informational lead time delays and implementing a three-stage process that included communicating to their supplier their delivery dates, production time and end product deliver times. As a result, inventory expenses decreased by $9 million.
While today’s metal service centers need to operate lean and reduce operating costs in the wake of declining prices and shipments, they also need to complete orders in a timely manner and meet increasing customer demands. Finding the right inventory level will likely always be a challenge for service centers, but industry leaders focused on continuous improvement know that even age-old problems can be solved with new solutions.
What new strategies have you implemented to manage inventory levels while reducing costs?