How Poor Inventory Management Practices Can Impact Operations, Labor, Equipment, and Efficiencies.
As an OEM we deal with inventory each and every day, and inventory touches each and every facet of our business. In our specific business we carry over 13,000 SKU’s (stock keeping units) and a host of core raw materials in order to support our new equipment manufacturing needs, and client parts order requirements. With a diverse contingent of components, fabricated materials; and a need to support current generation equipment along with legacy equipment… we have had our share of inventory “opportunities” that we have had to overcome.
Inventory is a necessary evil when it comes to running a business and mastering it is no easy task. It presents one of the greatest challenges to manufactures, distributed suppliers, and processing facilities alike. A failure to properly get your arms around the management of inventory can drain a company of cash; and take a significant bite out of its operating earnings. Additionally, inventory inaccuracies can negatively impact service levels for the clients that each of these entities supply. None of these situations is good for the long-term interests of a business!
When looking at the health of an organization, inventory is one of the most important measuring sticks. In a healthy business, you will see the following:
Inventory is a necessary evil when it comes to running a business and mastering it is no easy task. It presents one of the greatest challenges to manufactures, distributed suppliers, and processing facilities alike.
- Inventory turn rates that are commensurate with the supply & order cycle for the industry in question. The higher the turn rate the healthier the business.
- Physical inventory and cycle counting events will yield favorable marks for the accuracy of the inventory from both a dollarized, and SKU line item perspective.
- Order fill rates, and shipment accuracy metrics will be impressive (typically above 95%).
- Slow and non-moving inventory levels will not only be low, but for those items that fall into such a category the organization will have an established financial protocol to accrue for material and component obsolescence.
- The business operating environment will be measured, structured, disciplined, and controlled. Everyone will be focusing on strategic pursuits, and on improving the net operating position of the organization.
Obviously, when inventory management is not in a controlled state these benchmarks will not reflect favorably on the health of the business as noted above. Instead, there will be a host of systemic bad practices that manifest before your eyes due to lacking inventory oversight.
- The value of the inventory will be bloated as buyers react to shortages. They will try to add more inventory into the system.
- The operating environment will seem chaotic, and everyone involved in the business process will seem to be solely focused on daily survival as opposed to strategic pursuits.
- Due to the stressful operating conditions that may exist as a result of the inventory short-comings, client relations may be strained due to poor service, and so will employee morale and retention
- Due to the incremental load that will be placed on the operation to fill inventory voids; labor, utilities, and equipment maintenance costs will undoubtedly exceed budgeted amounts
So how do you get your arms around the six headed snake called inventory?
As noted, this is no easy task. In a dynamic environment that is constantly changing or evolving this task is always present. The following basic steps can have a significant impact in transforming chaos into a controlled state, and expenses into profits:
- First, make certain that all SKU’s are clearly defined (meaning that they have an identity, a defined supply-channel, an inventory control location, and specifications that are adhered to).
- Establish an understanding of the demand that exists for each SKU, and the time that it takes to replenish inventory that is consumed.
- Establish an automated means by which to track your inventory, and ensure that an appropriate cycle counting and inventory reconciliation process exists to avoid surprises.
- Establish minimum stocking quantities for each SKU based on consumption rates and optimal processing protocols.
- Leverage the supply-chain to manage consumable inventories, and be certain to take into account supplier lead times as you establish your minimum stocking quantities.
- Align your processing environment with your inventory replenishment needs. Too often companies expedite the processing of low volume specific SKU’s. In doing so, they create a great deal of inefficiency within the facility. Instead, it is important that run quantities are sufficient for efficiencies to be realized and inventory to remain stable.
- Consider simplifying your inventory. Often organizations make it a priority to create custom SKU’s simply in an effort to generate higher averaged sales prices on said items, or in an effort to expand sales. Be careful not to mix high volume processing with niche environments. Sometimes what looks good on paper does not materialize in reality.
- Establish a financial reconciliation process ensuring that slow and non-moving inventories do not present an obsolescence risk.
There are obviously a number of additional actions that can be taken to aid you in getting your inventory into a controlled state. For the operators in our industry, they face a daunting challenge. They must not only manage their processing environment and inventory when it is within their four walls, but they must manage it as it is shipped to clients and returned as soiled goods for processing. It is very challenging to manage people and organizations that are not directly under your control. This makes the steps noted above all that more important so that losses are identified real time ensuring that end users are appropriately charged for said losses. Having timely access to data, and a prompt exchange with clients, will avoid finger pointing and make certain that your interests are looked after.