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Inventory Reduction $$$

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  • #42645

    Case250
    Participant

    How are other organizations tracking the dollar amount of savings that result from the use of a Kanban Pull system? My facility is implementing a pull system which will show inventory reductions in a very short time. As the project leader I must track and report the financial savings that this effort yields. I have had a few Six Sigma Dmaic type projects and realizing and counting savings was pretty simple.
     For example lets say that my average monthly inventory is 7 million dollars, through the pull system we are able to consistently reduce that to below 5.5 million. Is the savings the literal dollar amount difference of the baseline inventory vs the improved process inventory? And when do I count it? That is do I take the month end inventory and compare new vs. old?
     
    Thanks
     

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    #134809

    Adam L Bowden
    Participant

    You can show inventory / WIP reduction as a cash flow number – BUT you really need to transform that to a “time value of money” calculation.  Speak to your finance guys – they will provide you with a number varying from base rate, base rate +2% right upto 30% depending if they are taking space allocation expenses into account.
    Need to dig deeper then e-mail me and I give u a call.
    regards,
    Adam  [email protected]

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    #135156

    Scott
    Member

    Good answer from Adam. We typically show a one-time balance sheet reduction of the value of the inventory (Average current aftger the change minus baseline). Some companies will categorize this as “Soft” savings. The hard savings is the annualized savings from the reduction of inventory carrying expense. Typically this is the interest rate on the capital which is usually these days from 4% up to over 12% based on the firm’s situation. Finance is the place to get this validated. SOme companies have so much inventory, they actually get savings from leasing or selling space freed up. This is hard savings. Some also report savings from less material handling (We actually eliminate stock rooms adn a host of costs when we implement continuous flow and pull.)
    Great to see the pull happening fo you.
     
    Rick

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