Is your Inventory an Asset or a Liability?

Written by Michael Canty

It is estimated that the annual investment companies make in inventory represents between 20% and 40% of invested capital. And although inventory appears in the asset section of a company’s balance sheet it unquestionably acts more like a liability. After all, inventory ties up cash, takes up space, requires handling, deteriorates and is sometimes lost, damaged or even stolen.

Inventory is the result of a number of business activities, decisions and sometimes mistakes. While most companies understand that inventory can become a liability if not properly managed, many inventory strategies and reduction programs fall short of expectations. More often than not this is because the scope of the strategy is too narrowly focused or the reduction program is executed out of sequence.

Right Part, Right Place, Right Time:

In defining the appropriate inventory management strategy, it is important to determine the balance between customer service and inventory investment. The goal is to find ways to reduce inventories without affecting your ability to serve your customer. To do this companies need to assess the entire value chain in a sequence that brings incremental improvement as the program progresses.

Approach:

• Understand Your Customer’s Tolerance Level
• Strengthen Your Supplier Performance Program
• Streamline Your Companies Quote to Order Process
• Improve the Predictability and Execution of Your Production Schedule

Techniques:

• In order to “Understand Your Customer’s Delivery Tolerance Level”, Companies need to conduct non-biased interviews with key sales and operation level employees as well as some of their strategic accounts or customers. Delivery expectations contribute heavily to the segmentation of make-to-stock, make-to-order and adapt-to-order or configured-to-order products. This process also segments and addresses those critically important engineer-to-order products. Companies must also conduct an analysis of existing inventory levels and daily average usage levels, review product and material planning lead times, safety stock levels/replenishment levels and supplier delivery performance from which the team is then capable of developing a realistic approach to inventory reduction and management.

• To help “Strengthen Your Supplier Performance Program” companies need to develop the framework for your Supplier Performance Management Program. This work must cover the key topics of supplier management including; Supplier Qualification, Supplier Assessment, Definition of Supplier Ratings and Levels, Supplier Performance Monitoring, Data Collection for Performance Measurement (Scorecards), and Supplier Certification Criteria. During this phase, it is critical to engage you critical and strategic suppliers in the process.

• BPM (Business Process Mapping) is the recommended approach to assessing existing business processes. This is an interactive, cross-functional activity with process owners and employees to assess your existing business processes. This activity will then help to reveal specific improvement opportunities as well as gaps and/or risks in the current processes. During the workshop the team should also clearly outline the desired future state of each process and the specific short and long term actions needed to achieve this improved state.

• Production scheduling is expected to satisfy two fundamental objectives: prediction and execution. However, often the level of demand or complexity means that the outcome from an execution-led system is not clear or communicated with the speed required. In most cases these “push-systems” create conflict by forcing over-production. This causes bottlenecks, increased WIP, extended lead-times, contributes to material shortages and brings the type of chaos to the shop floor that leads to conflict and late deliveries. Manufacturers today need to both optimize scheduling systems or tools and supplement them with continuous improvement techniques that enable manufacturers to make fast, reliable predictions about capability and capacity. These techniques also help to establish processes that allow for quick response to customer demand.

Summary:

To gain a competitive edge in the market, companies today need to have an efficient and effective inventory management program. Left unattended, inventory can quickly change from a company asset to an unwanted liability.

Companies serious about improving their overall business performance that have the needed resolve to take the necessary action, often seek the assistance of a third-party business improvement partner with expertise in manufacturing operations, Lean enterprise deployment, ERP and other types of business system tools and software. These third-party experts frequently help companies guide the improvement program while providing advice on best practices. Experienced and highly trained third-party companies can also contribute greatly to the all-important change management, a critical component that is often overlooked and frequently the main cause of failed programs.

Synergy can help, contact us to learn more.