What Is Your Inventory Management Process Telling You?
This is article is part of a series of monthly articles produced by Harbour Results for PMA’s MetalForming Business Edge e-newsletter. Click here to view the full collection of articles.
How is Your Company Managing Inventory?
There have been many lessons learned for manufacturers over the past three years – both good and bad. One area – Inventory Management – continues to be a challenge for many in manufacturing. A key factor in this is murky transparency across the supply chain. It is not uncommon for customers to signal they will need significant products based on their forecast, only to reduce orders based on actual demand. This has made the hard job of demand planning even more difficult.
As interest rates increase, with little indication they will go down any time soon, and the cost of raw materials continuing to fluctuate, companies need to be mindful of their cash. Optimizing your inventory levels can, at the end of the day, improve your cash standing, result in significant savings, or free up cash that can be invested in other areas of the business.
How is your company managing its inventory?
Are you buying at levels based on the previous year's business? Buying based on business forecasts from your customers? Or are you ordering based on revenue projections? Is this working, or do you have too much or too little inventory?
Today, inventory management has become increasingly more important. So, now is the time to take a look at your processes and make any necessary improvements. First, it is critically important to know your data:
Forecast to actual inventory use
Inventory lead times
Inventory turns
Finished good turns
Slow moving materials and obsolescence
Data analysis helps identify trends and can potentially help improve forecasts. So, if you have and continuously monitor data, leaders can use it to make better, faster and more-informed decisions.
It also arms you with information to share with customers to justify your decision-making. For example, if you have a report indicating a three-month historical inventory release, you could compare it to a three-month forecast provided by the customer and determine if it’s accurate or should be adjusted. If the customer requests you have more on hand, you can provide the historical data to push back. We strongly suggest having open conversations with your customers regarding demand planning and inventory requirements, as well as a thorough understanding of your commercial contract and agreements to defend your position. The more information exchanged, the better for both companies.
Another best practice is to measure your inventory turns because this metric is a symptom of other issues. If your inventory turns are low, you should be asking yourself why. Do we have too much inventory on hand? Has demand significantly dropped for some reason? Did something on the shop floor impact production? And, if your inventory and finished good turns are not aligned, it’s a symptom of another issue – having too much raw material on hand or something else. If possible, calculate inventory turns by customer to identify which relationship is most mis-aligned.
Finally, reevaluate and review input material and customer order lead times lead times. Are there trends that can be identified? Are there changes? If so, have we adjusted to accommodate those changes?
Does data show you have significant value of slow-moving or possibly obsolescent inventory? Maybe supply chain challenges caused customers to change to alternate versions or models based on what components they could procure. Or the demand signals may have caused you to produce components that are no longer required or purchase alternate raw materials as a preventative measure. Use your data to identify where you have idle working capital and build the commercial case for addressing the slow-moving or obsolescent inventory.
It all comes back to leading your business. Gathering and frequently reviewing the correct data and proactively taking action to better help position your company for success.
