No matter if it’s raw materials, work-in-process, or finished goods, how your organization manages inventory can play a critical role in the profitability and success of your business. The pandemic has created unprecedented challenges for many industries and their related supply chains. It is even more critical than ever that organizations wisely manage their inventory in terms of how they procure, protect, and use it efficiently in their business. To help your organization understand how it can better manage its inventory, we’ve listed some best practices that we’ve seen our manufacturing and retail clients employ to ensure maximum efficiencies and associated profits are obtained.
Time to Automate? One thing that the pandemic may have accelerated for some industries was the question of if (and when) automation would make sense for their organization. Major shifts in the labor force and the impact of the so-called “Great Resignation” have created a significant worker shortage across many industries as workers pursue other opportunities or leave the workforce altogether. While there have been numerous attempts to entice workers to come back or re-enter the workforce, a significant gap between current and pre-pandemic employment levels remains for many industries. If your organization was previously exploring the possibility of automation, now may be the time to act as it can ultimately translate into savings in terms of time, labor costs, and accuracy. Of course, the initial CapEx can be costly, and the ROI may take some time, however, with the ongoing labor shortage, the payback period may be significantly shortened.
Develop a Solid Audit Strategy. While the annual inventory count may seem like a necessary evil, it is a critical step in determining the overall profitability of your organization and identifying other potential issues, such as inventory shrink when there is a significant gap between expected and actual inventory levels. Utilizing employees to conduct physical counts is a common practice but may not be the most efficient, popular, or cheapest route to take. Some employees may have already worked a full week and may hastily count just to “get it done”. This method could also require substantial overtime pay and the shutting down of operations. Cycle counts may be a better option to consider as counting your highest value items in more regular intervals than lower value items could help with reducing the overall cost of audits and eliminate the need to shut down operations. In either case, organizations need to find the most efficient method and schedule the requisite time to conduct it.
Conduct Regular Supply Chain Audits. Perhaps another area of exposure that the pandemic brought about was the fragility of an organization’s supply chain and some of the dependencies and inefficiencies that existed within it. As an example, operations that require a lot of assembly most likely have multiple suppliers or manufacturers from which they order products or raw materials. Consider plotting out key areas and audit suppliers by measuring lead times, comparing cost, and identifying any negative trends such as customer returns, defective products, and significant drops in sales velocity within a particular SKU or group of products.
Calculate Economic Order Quantity (EOQ). This concept should never be underestimated as it can be used to prevent many issues from occurring in connection with over and under ordering. Simply put, EOQ is the minimum amount of inventory an organization needs to keep operations flowing smoothly. Ordering too much can lead to financial drain related to added storage and handling costs and tying up cash that could be better spent elsewhere within an organization. Ordering too little can lead to operational issues such as line shutdowns due to the lack of raw materials and unsatisfied customers at the retail level as out-of-stocks begin to occur. While calculating the EOQ requires organizations to do some “homework” to gather information related to fixed costs, unit demand, and carrying costs per unit, the benefits are worth the effort. In addition, calculating the EOQ should be reevaluated at regular intervals as variables such as demand and carrying costs tend to fluctuate.
Accurate Reorder Point is another critical metric that should be used in conjunction with EOQ. Once the EOQ is known, an accurate reorder point tells us when to order it and how much stock we need in order to maintain the pipeline and avoid out-of-stocks at the retail level. As such, the accurate reorder point for raw materials in manufacturing or finished goods for retail equals the lead time on replenishment plus safety stock. We always suggest that our clients identify the top products that their consumers demand and then work backwards to ensure the requisite raw materials and products are always in stock and on hand for delivery. The pandemic and its associated supply chain issues has impacted this calculation for many industries. As such, it’s important that organizations identify their primary SKU’s and critical components and keep them in stock in order to satisfy their customers’ need and demands.
Capital Expenditures and Total Quality Maintenance are critical to the long-term success and optimal performance of any manufacturing entity. Making the necessary investments can help avoid costly breakdowns, accidents, and other performance issues such as foreign object contamination that can negatively impact operations. We recommend manufacturers seek feedback from operations and maintenance staff on when equipment needs maintenance and/or replaced as they are most familiar with its operation. It’s also critical that manufacturers understand predictive maintenance and track historical “wear and tear” on machinery and related components. Also, if your organization has any specialized or unique parts and/or accessories that are complex and hard to replace, consider keeping a safety stock of these items on hand as a lack of these items can contribute to lengthy production line shutdowns. In essence, this exercise involves a continuous review of each piece of equipment on the factory floor and asking, “is there anything that is currently or potentially keeping our factory from hitting its goals?”
Sorting inventory using an “ABC Analysis” can provide many benefits and eliminate much of the “guesswork” when it comes to making business decisions in connection with ordering, carry/not carry, and gauging security. An ABC analysis allows manufacturers and retailers to better understand the actual value that each product brings to their organization and can be sorted as “A’s”, which are those that bring the most value, “B’s” as mid-tiers, and “C’s” as those that bring the least value. The criteria used to sort products can vary but most are based on revenue contribution, cost of goods, or customer demand in most cases.
Inventory management is a continuous challenge for most manufacturers and retailers, however, with proactive planning, a thorough knowledge of your customer, and critical thinking in connection with daily operations, your manufacturing and retail entities can help ensure their success by understanding and embracing the aforementioned concepts throughout your organization. For more information or to discuss how these concepts can impact your business, please contact Tim Reynolds at 828.322.2070 or at firstname.lastname@example.org.