5 Major Types of Inventory Waste Your Business Needs to Know to Cut Costs

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Inventory waste is considered one of the seven major wastes in lean manufacturing and does not just encompass damaged or obsolete inventory stock. Types of inventory waste can be defined as any production activity that uses resources but does not add any value for the customer. As a consequence, these wastes add to the cost of products, that are either absorbed by the manufacturer, directly affecting profits or passed onto the consumer, inflating the price. Therefore, identifying and eliminating the following kinds of inventory waste presents a great opportunity for businesses to cut costs and improve efficiency.

Finished goods inventory

Finished goods inventory is commonly the most expensive inventory stock as it has labour and associated costs, such as overheads attached. Many businesses will create this type of inventory waste by setting finished goods inventory levels too high. Excess finished goods inventory is especially expensive when it is slow moving or becomes obsolete. This not only from ties up precious cash flow and resources, but also creates opportunity costs.

In order to reduce this type of inventory waste, process improvements as well as a higher accuracy in forecasting customer requirements are required.

Sub-assembly inventory

Sub-assembly inventory, or work-in-process inventory, is a type of inventory that requires further work to become a finished good inventory. This type of inventory can produce similar end items with many different options and the ability to quickly satisfy customer orders. However, just like other types of inventory waste this inventory stock needs to be closely monitored so excess inventory doesn’t result in waste.

A scheduling system to achieve just-in-time manufacturing will help keep sub-assembly inventory levels under control.

Raw component inventory

Raw component inventory can account for the largest type of inventory waste in manufacturing businesses. Businesses carry high levels of inventory stock to ensure they are protected against unforeseen supplier issues or changes in customer demand. In addition, bulk purchases may bring in discounted prices and may seem justified. However, this leads to myriad of extra costs, including material handling costs and warehousing space.

This type of inventory waste can be addressed through improvements to production control, material requirements planning and reduction in component lead times.

Office supplies inventory

Office supplies is a type of inventory waste that can often be overlooked when considering inventory stock because it is not directly related to production. As is the case with finished goods, sub-assembly and raw components, office supplies can result in a waste of inventory. Although it is generally in much smaller volumes than production inventory, it can be surprisingly a worth while cost cutting exercise for some businesses.

This type of inventory should be monitored in a manner similar to production inventory. The less office supply inventory that your business carries, the easier it is to monitor and control and should end up saving your business in the long run.

Maintenance, repair and operations inventory

Maintenance, repair and operations (MRO) inventory are those items needed to facilitate the production process. This
can include materials such as gloves, safety equipment, or even cleaning products.

The cost and control of MRO inventory can be overlooked due to the critical situations that generally call for this type of inventory. It is rarely measured in terms of on-hand availability, is generally not centrally located and often results in the types of inventory waste where stock is misplaced or becomes obsolete, absorbing cash before it is needed.

Although you can not pinpoint exactly when a major line down or machine issue will occur, you can develop a preventative maintenance system that will help prevent them from occurring and other contingencies in place.

These five types of inventory wastes can result in the production of goods that do not sell well, creating a ripple effect further along the supply chain. Manage the flow on effects of these types of inventory waste by monitoring and controlling inventory stock, which can result in worthy cost-saving benefits.

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Melanie - Unleashed Software

Article by Melanie Chan in collaboration with our team of Unleashed Software inventory and business specialists. Melanie has been writing about inventory management for the past three years. When not writing about inventory management, you can find her eating her way through Auckland.

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