Top 3 Strategies to End the Swinging Pendulum between Inventory and Service

The next time your company talks about what it is doing to provide short-term relief to the swinging pendulum, ask them what they are doing to improve the long-term flexibility of the business. By Joe Zito

August 01, 2016

Service levels are low and the sales force “complains” that customers are moving business elsewhere.

Pressure is put on the Supply Chain group to provide some relief, so they work with sales to increase forecasts, adjust inventory planning parameters to hold additional safety stock and expedite open purchase orders.

A number of months pass and service levels rebound, but a new problem surfaces, and this one has the attention of the CFO and the bank.

Inventory is elevated and working capital is strained to the point that vendors are being stretched.

Pressure is once again put on the Supply Chain group to provide some relief, so they adjust inventory planning parameters, cancel open purchase orders and work with sales to find a home for excess inventory, oftentimes at a discount.

The situation described above is commonplace in many middle market manufacturing and distribution companies.

Incorporate this situation into a company from Asia with supplier lead times of 120+ days, and the problem is exacerbated.

While the band aid approach many pursue will provide short term relief, the real solution is to make the business more flexible, and thus improve its ability to react to changes in demand.

Three Strategies for Improving the Flexibility of Your Business

Work with Suppliers to Reduce Lead Times
Far too often companies accept supplier lead times as a given. As a result, inventory planning parameters and processes are adjusted to accommodate these lead times.

When is the last time you actually sought to understand why the lead times are so long? When is the last time you actually worked with the supplier to understand what drives the long lead times, and how you can work together to reduce lead times? In a recent effort, a distributor with 150+ day lead times worked with its partners in Asia to map the key activities that drive the lead time.

After understanding the key components, they worked together to identify specific opportunities to reduce overall lead times and agreed to focus on the top three opportunities, which included:

1. Pre-releasing orders for long lead-time components;
2. Increasing raw material safety stocks at the supplier; and
3. Reducing unnecessary delay/inefficiencies between order receipt and execution.

Reduce Non-Value Add Manufacturing Activities
Similar to opportunities within the front end of the supply chain, improving flexibility within the four walls of your manufacturing facility is also possible.

When doing so, it is important to look at all aspects of the operation, which can be grouped into three buckets: people, processes and equipment.

After exploring opportunities within each bucket and prioritizing those opportunities based on the ability to improve overall flexibility to the business, specific initiatives should be developed and tracked as part of the continuous improvement programs.

Some common opportunities within each grouping that can help improve overall flexibility are:

• People: increasing cross-training of operators to run multiple pieces of equipment, staffing additional shifts to relieve bottleneck operations, etc.
• Processes: improving scheduling to minimize setups, utilizing standard designs to reduce the number of components/sub-assemblies used, etc.
• Equipment: implementing a preventive maintenance program to minimize downtime, adding equipment to eliminate a bottleneck, etc.

Rationalize the Product Line
Everyone knows about the Pareto Principle, and it applies to almost any client. If you put on your financial hat, 80% of profits are driven by 20% of the products; on the other hand, if you put on your operational hat, those 20% of the products cause 80% of the inefficiencies in the plant.

The bottom 20% typically drives a higher number of setups in the plant, make up a large portion of the excess and obsolete inventory, result in labor inefficiencies, and cause scheduling complexities, among many other things.

The key is to take a hard look at the overall product line and make some difficult decisions about what products should remain.

If you ask the sales force, they will likely rationalize all the items that have had no sales in the past twelve months. An alternate, and preferred approach, is to set minimum sales and margin thresholds.

Those that fall under both are officially nominated for rationalization. The sales force can argue them back into the product line offering based on a pre-determined set of reasons that are agreed to up front.

View & Download: All “Inventory” White Papers

Businesses that are flexible are able to react to changes in demand.

In return, those businesses have less excess and obsolete inventory, higher customer satisfaction, increased growth rates and happier employees.

A more flexible business can be accomplished by working with supply chain partners, improving manufacturing efficiencies, and making commercial decisions.

The next time your company talks about what it is doing to provide short-term relief to the swinging pendulum, ask them what they are doing to improve the long-term flexibility of the business.