Designing to Reduce Inventory Costs

IMG_4007Inventory control represents one of the highest cost areas in the manufacturing supply chain. Whether you are outsourcing the complete supply chain and manufacturing of your product in a turnkey model or using a consignment model, a number of design considerations can help to reduce the hard costs, overhead, and risk of inventory.

This DFM tip provides some best-design-practices for reducing inventory risk and cost.

Avoid Brokers
When choosing components, designers should consult with the manufacturer’s website and datasheets on the status of parts. Using discontinued parts will likely increase the cost of obtaining the inventory. Obsolete components must usually be obtained from brokers and are therefore more costly. It may also be tempting or necessary to stockpile discontinued parts, leading to high inventory costs, including control and financing.

Include Options
When choosing components, designers should specify alternative parts wherever possible. This is because some components come with large minimum purchase requirements (e.g. 5000 parts on a reel). If only a few of these parts are actually necessary, the residual becomes part of the inventory for which you are responsible. OCM Manufacturing works with its customers to spec alternate parts as part of its DFM services.

Consolidate Line Items
Consolidating BOM line items is a valuable technique for controlling the costs of inventory. As a simple example – if a design calls for a 1.1K resistor and a 1.3K resistor but a 1.2 K resistor will do in both places, it is better to use only the 1.2K part for both applications. Doing otherwise will result in two items in inventory – both of which may have minimum purchase requirements (see above). OCM Manufacturing works with its customers to consolidate line items as part of its DFM services.

Likewise, try to use like components across all of your products. If you are already using a part on another product that will work for the current product, don’t spec another part. This will also reduce inventory items.

Avoid Obsolescence
From an inventory standpoint, it is prudent to avoid making design changes that decommission a component which has already been purchased in large quantities. Whether you are consigning your parts to a manufacturer or opting for turnkey supply chain management, this residual inventory will become a liability on your balance sheet.

Keep Inventory Turning
As a rule of thumb, the more frequent your inventory turns are, the better. However, in low-volume, high-mix manufacturing, you will have to balance order set-up costs with the costs of carrying inventory. OCM Manufacturing works with its customers to perform this analysis and determine the optimal arrangement in each specific case.

One of the benefits of turnkey outsourcing is that the contract manufacturer’s inventory turns will always be more frequent than an individual customer’s. In OCM’s business, our inventory turns are typically twice as frequent as the average customer’s.

Another benefit is that, as long as your program is ongoing at OCM Manufacturing, your business will not see inventory liability on its balance sheet – our cost model covers the financing of the materials during the duration of the project. At project end, however, residual inventory becomes the customer’s responsibility, so it is always in your best interests to keep inventory levels as low as possible, working within the limitations of minimum orders.

Consignment vs. Turnkey Comparison You may find our short paper comparing the cost of a consignment manufacturing model versus a turnkey model of interest. One of the most substantial areas of cost-savings that a turnkey model delivers is Inventory Control and Financing. You can download the PDF paper at the link below.

At OCM Manufacturing, we can work with designers to ensure that their plans and prototypes are manufacturable and therefore marketable. Contact one of our Program Managers for details about how we can help.

See attached PDF.