Maximizing the Asset: Inventory Management in a Sluggish Economy

If you are experiencing shrinking margins, cash flow may become your primary concern. Increased sales will produce increased cash input, but purchases and investments lead to cash outlays, and what about inventory? Inventory sits in the warehouse. Inventory not only freezes cash flow but generates expense by requiring handling and storage space. Unless it is on the way out the door to a customer, inventory contributes nothing of value to an organization.

Inventory management is a tradeoff between the ability to meet customer expectations and the necessity of keeping assets fluid to meet unexpected demands and higher costs. Before investing in more storage space or warehouse management tools, consider using resources in ways to decrease inventory.

1. Time is money
The inventory level needed to achieve a given customer fill rate is roughly related to the square root of the lead time. That means that if all other impacts are the same, inventory levels can decrease by 50% when the lead time shortens from four weeks to one week.

One of the strategies to reduce lead time is to develop the ability to customize products at the final stages of production. This allows for the flexibility needed to respond to changes in customer demand. This not only reduces the lead time, but decreases the risk of producing the wrong products.

2. Forecasts are always wrong
Forecasts, by definition, will always be wrong. If forecasting must be used, avoid using financial projections to plan production. Although finance is a vital function in any organization, financial projections do not capture demand. Understanding demand is the key to having the right products in the right places. If a demand forecasting and deployment system is not in the budget, a simpler spreadsheet model can be used quite effectively. Even better, develop relationships with customers to directly access their needs.

3. Negotiate with vendors
Many vendors will manage inventories. Some will replenish daily, leaving only a small safety stock on the premises.

4. Standardize components
Fewer components needed across product lines mean a lower overall inventory. Examine the bills of material for similar types of components and work with engineering to consolidate wherever possible.

5. Get rid of obsolete products and components
Obsolete parts take up valuable space and require handling. If a component is custom made and may be used in the future to service product, move it to after-market stocks. Otherwise, find a buyer on the internet or simply throw the parts away.

The value of an investment in inventory is measured only by how quickly it disappears. The optimal amount of inventory is no inventory at all. This is not a realistic expectation, so the next best strategy is to minimize it wherever possible.

To conduct an audit of your inventory management process, give us a call.