Why We Need to Manage Paint Inventory
For cost reduction in paint operations, we tend to look at equipment optimization and labor reduction, and not focus on paint inventory. Inventory is often a necessary cost of servicing the customer, and we don't always know exactly how much paint will be needed to complete an order. Eventually we have a large collection of small volumes of various colors.
Inventory is important: It supports future demand, covers variations in demand and allows for lead time associated with manufacturing and transporting paint materials. Benefits include meeting customer service levels and reducing impacts from imbalance processes within our operations.
These benefits don't come without a cost. Beyond the cost of the paint itself, there's carrying cost in storage and movement, as well as administrative and risk costs for managing, and losses due to obsolescence or deterioration. Those have to be balanced against stock-out costs associated with incomplete schedules and production capacity costs connected with labor and machines.
The key to controlling paint costs is knowing how to manage inventory in a way that balances customer requirements, supplier capability and processing capability. Measurement can be as simple as monitoring inventory levels and tracking inventory turns. Managing inventory is a different challenge, especially if you offer both standard and special colors. Policies for managing these assets will provide a process for controlling costs.
The first step is to understand the demand and usage rate of each color. This basic data is not always easy to get, and the variability assoccated with paint demand is typically high. Variability is dependent on customer base and color palette. However, trends can be tracked from historical records and used for forecasting future trends.
Tracking paint consumption data provides the best understanding. Using a moving monthly average over three to six months provides a reliable baseline. Monitoring the data is critical; both cumulative error and random variation can have an affect. Using traditional material management techniques, you can calculate a "reorder point" and an "order up to level" for each standard material used. Safety stock is used to compensate for differences in process material utilization. Two critical factors in completing these calculations are lead time for manufacturing and delivery, as well as the service level required by the customer. The longer the lead time and the higher the service level, the greater the volume of paint inventory required.
Special paints are another issue. Unlike standard colors, a special color is typically ordered to meet a specific request. Understanding demand is still key. You will have to assume your usage rate based on theoretical calculations and experience with other materials in the same color family. Having a supplier that can produce custom colors in varying volumes that meet demand is critical to minimizing inventory. The ordered quantity should reflect demand plus any utilization factor.
A disposition policy helps control remaining inventory for special colors. This can be as simple as throwing the material away after the order is complete, or warehousing for a time to ensure demand has been eliminated. A policy should be developed based on custom color demand. Whatever the disposition policy, it is critical that it consistently be enforced.
If more than one facility is involved, a centralized order and management system that combines all demand and safety stock requirements allows for batch optimization with the supplier. It also reduces the total inventory significantly through sharing the risk factors over a larger volume.
Inventory is a tool for meeting the customer's expectations of timely product painting and delivery. It provides the best customer service and optimizes process capability while minimizing inventory. After all, the only reason to carry inventory is it's less expensive than not carrying it.
If left unmanaged, it can become a costly asset, which burdens the bottom line. Although there is a cost in managing inventory, it is far less expensive than not. Next time you're out on the floor, look around and think about how many dollars are sitting in paint inventory and if you can do anything to manage it differently.
Bob Meyer is manager, paint supply chain for Steelcase Inc.