Sponsored by
IPA North America
by Wolfe Bagby
For years, American manufacturers have strived for improved inventory management systems. The closer they get to carrying zero inventory – without sacrificing customer demand – the closer they get to reaching that pinnacle of manufacturing efficiency. When the concept of just-in-time inventory management evolved, for example, it brought a fresh new look at the entire manufacturing cycle, and how it could operate without interruption or non-value-added time costs. Such thinking, combined with today’s available technology, has brought inventory management systems to a new level.
Manufacturers can now meet their customers’ demand without incurring the costs and burdens that come from stocking excess inventory. Features such as effective forecasting, vendor management and data management control make it possible for manufacturers to achieve a much higher rate of efficiency. These features enable manufacturers to seek to manage inventory as a financial investment, as well as a method for putting more money in their pockets.
Getting smart about inventory
When a manufacturing firm works to gain greater control over management of its inventory, it
helps to know what this means for a company. For starters, maximizing a manufacturer’s cash
flow and profitability includes keeping a watchful, discerning eye on changes in supply and
demand, which means simultaneously scrutinizing external factors that might affect supply and
demand. For example, when economic progress boosts one industry, it may have the opposite impact
on another. Manufacturing executives must watch the changing status of other industries as closely
as they watch their own. Political, demographic, technological – it doesn’t matter what type of
shift occurs. They all factor into the ever-changing equation that represents the company’s inventory.
It also helps to scrutinize inventory costs. What currently goes into warehousing the different lines? Of the lines being manufactured in-house, what are the inventory management costs? Start this step by diagramming the way operations flow. It’s a good idea to become acquainted with what’s really going on, partly because it initiates so many questions that may not otherwise be asked. Take a drawing of the layout and trace the way parts move to see where they go and how far they travel. Return on investment helps distinguish value-added activities from those that aren’t value-added.
Going from general to more specific, manufacturers take other steps to help achieve that seemingly unreachable level of manufacturing efficiency. A brief look at other cost-management efforts sheds additional light on the versatile role inventory plays in a manufacturer’s ongoing ambition to rise above the competition when meeting customer demands.
Shortening the cash conversion cycle
Much of this can be accomplished when manufacturers update their scheduling systems. Today, that
often means switching to a RT (real time) scheduling system in order to respond quickly to any changes
in the marketplace. The Web-based nature of an inventory management system allows this. Electronic
data interchange of projected demand (that is, customers’ schedules) and vendor requirements (suppliers’
schedules) are transmitted throughout the distribution network. This, in turn, keeps the networks,
production and deliveries in near real-time synchronization with the latest network inventory, forecast
and actual demand information.
Another way to shorten the cash conversion cycle is to have clear channels of communication with vendors. Even with the most efficient inventory management system in place, nothing replaces the ease and convenience of those supply chain relationships. These are the types of bonds that help manufacturers meet the lead times and expectations of their customers. Still, advanced inventory management software is nothing without a strong internal supply chain, especially when loyal employees who want to work on behalf of the company’s goals support it.
Avoiding inventory shortage
Most manufacturers recognize customer and supplier inventories are important dynamics in cost
management. Even though more stock means higher total costs, the alternative is often too
little stock which tends to put the brakes on operations. This means negative impact in more
ways than one. One obvious way to take precautions for avoiding inventory shortage is by using
more than one vendor in particular areas of the supply chain. Yet, this tends to make matters
more complicated for some manufacturers. For example, it increases the need for the many ongoing
costs associated with selecting, developing and maintaining suppliers, (including preliminary
evaluations, quality audits, technical assistance, etc.)
Trimming inventory too close also tends to cause backorder problems, which negatively affect customer service goals because the customer inadvertently becomes the victim. Improvements begin with observing how the manufacturing company is managed from a big picture standpoint. For example, does it have set policies to refer to regarding inventory practices?
Avoid excessive carrying costs for unused inventory
Most companies need to reduce inventory in whatever way seems most reasonable, considering the
variables faced by the manufacturer. This isn’t to say that manufacturing firms will be eliminating
warehousing anytime soon. But, it is important to note that drastic reductions in inventory costs
are available to most any company that wants better control.
Much of this effort deals with building collaborative relationships with suppliers to the point where most inventory-related matters can be worked out. For instance, a return policy can be structured that gives manufacturers better control over knowing the amount of space that must be allocated for returns. Consignment inventory is another way to save inventory costs. Give someone else the responsibility for moving inventory so it doesn’t cost the manufacturer as much to hold onto it – only to ignore it.
Manufacturers can also use excess inventory to produce other products. Whatever needs to be done to make an older item become the same as the current product will depend entirely on the nature of the business in question. For some firms, it requires changing components to bring the product up to current specifications. For others, it involved dyeing or repainting a product to match colors currently being used, or entails machining to change the shape as needed. Bottom line: If a product can be overhauled and sold, new space is opening up.
Improving profitability by decreasing cash conversion
Boosting financial performance is another benefit that comes from better inventory management. In fact,
a large number of manufacturers enjoy significant savings and better performance by choosing the approach
to inventory reduction that works best for them. One vital measurement for determining how effectively a
manufacturer’s inventory management system is operating is referred to as inventory turnover. Essentially,
it measures how efficiently inventory moves through the organization. In fact, manufacturing executives
are told never to underestimate the importance of inventory turns.
Gaining better control over accounts receivables policies is another popularly reported approach for using inventory to improve profitability. Depending upon the nature of business, early or on-time payment discounts can be the incentive for moving inventory faster.
Using inventory management systems to motivate employees
First, involve the management team. Since many functional areas impact inventory, there isn’t one area
that "owns" the inventory process. As such, inventory management system improvements call for
senior management to step in and take charge by remaining highly visible and communicating openly and clearly.
Functional areas in a manufacturing firm include cost accounting, engineering, finance, planning, production, purchasing, sales and marketing. Identify and evaluate each functional area in terms of inventory-related activities. This includes gathering benchmark data for all key processes to compare it against those that are "best in class." If team members familiarize themselves with the processes that affect inventory, they will also be able to see the impact the process has on inventory.
By supplying managers and employees with other relevant information about business operations, these functional area teams should be able to understand the whole operation better and offer advice on areas for potential inventory reductions accordingly. Amazingly, even with impressive technology and ideal vendor relationships, manufacturers still depend largely on the strength of the internal supply chain and a strong staff that is willing to support it on behalf of meeting management’s goals.
Inventory management:
a manufacturer’s best friend
It’s hard to dispute the viability of a new inventory management system when it works to put more
money into the company’s bottom line. Yet, that shouldn’t blind a company to the fact that it may
not need additional infrastructure, just a new attitude about how to use what it has more successfully.
The manufacturer’s ultimate goal is to produce at the lowest possible cost, yet remain competitive and
keep employees happy and motivated. Any inventory management system that works to get a company to this
place – and keeps it there – is worth its weight in gold.
About the Author:
Wolfe Bagby is a Project Manager for IPA and has worked in
manufacturing for 30 years. IPA and its combined family of consulting firms provide comprehensive
business consulting, tax planning and business valuation services to companies in the United States
and Canada. For further information, call (800) 531-7100 or visit www.ipa-c.com.