Surviving the Downturn - Reducing Order Quantities

Optimising Inventory Is Crucial For Survival
Inventory Must Be At Optimum Levels

Mining companies are looking for ways to endure this current long-lasting economic crisis. Our initial blog suggested that supply chain may offer solutions.  “Surviving The Downturn” discussed procurement techniques. 

We discussed three procurement-related contributions techniques:

1. Removing unnecessary purchases

2. Reducing quantities and ordering only what is economically viable, and

3. World-class negotiation.


Our last blog discussed the first of these and this blog will address the second to help mining companies to remain profitable. 


If we only process orders that are essential, it is also crucial that re-order quantities are accurate.  To reduce quantities as a strategy i.e. by management directive to reduce all order quantities by, say, 20%, is not going to cut it.  This is because inventory replenishment carries the most materials reordering cost in most companies. 


Selecting accurate quantities is algorithmic and dependent upon many factors, as we will see.  We must place orders at the right time and quantities must be accurate. To order more or less or to delay reordering jeopardises production and efficiency.


Strong inventory control is key to optimising asset costs and cash flow. Companies must aim to order calculated quantities at exactly the right time.  This takes skill and experience.  Once we establish effective systems, replenishment becomes routine. Keep it simple.


There are some key basics:

1.    Restrict items held to stock strategically essential for production and smooth operations. Maintain a strict control on the items that are allowed to be held in inventory.  Ensure that Applications for New Stock Items (often called ANSI) are signed off at a senior level.  

2.    Code each item, but keep the coding structure simple. Complicated coding structures require complicated and manpower dependent resources. Simple numbering can be accomplished much easier and cost-effectively.  Some companies function well on unstructured coding. The important thing is for each item to have an ID number of some kind.

3.    Classify your inventory for replenishment purposes

a.     Insurance: this is a special category often insisted upon by your insurer. It covers high value long lead time strategic parts.  Most mining operations have less than 10 of such items.  You may never use them but if the unexpected does happen, their immediate availability minimises production downtime.

b.    Critical: these are items that will stop production immediately and include both consumables – for example, explosives and key wear and spare parts.

c.     Essential: Items that will not stop production immediately but will increasingly affect the company the longer they are unavailable. This covers many wear and spare parts and most consumables. Mining tyres are a good example.

d.    Non-essential: these items will not affect production, e.g. stationery.

e.    Determine Safety Stock values.  Safety stock is the amount that under perfect conditions you would like to have in your warehouse when the next order arrives.  Proximity to source of supply, storage and transportation constraints all affect safety stock evaluation.  Critical items will have a larger safety stock value than essential items and non-essential items may have none at all.


Each category has its own replenishment procedure:

a.     Insurance items are usually one time purchases for long term storage on a simple Max-Min system.  If used, replace the item.  It is important to physically check insurance items with end users every year to avoid deterioration. 

b.    Critical items take replenishment priority.  They are first in the queue for action and finance, especially if cash is short. 

c.     Essential items are next in line

d.    Non-essential items are last in line and replenishment avoided altogether in times of crisis.


Note that reordering too early or too late or reordering too much or too little will have a detrimental effect on either production or finance.


Inventory management is like walking along the top of a picket fence: falling one way affects production; falling the uses up valuable cash resources.  Production would rather you have too much and finance would have you minimise.  Optimisation is thus key.  Get this right and both sides are happy and you keep your balance on top of the fence!


We recommend 3 separate replenishment procedures to cover differing replenishment scenarios.  We will discuss these in a later blog.

In the meantime, if replenishment is a particular problem for your company, please get in touch.