How good is your Inventory Management?

Everyone in Manufacturing knows that Raw material and other Materials are the most important items on the P&L Statement. That constitutes anything from 55% to 85% of the Sales value depending on which Product you are manufacturing. The Inventories of these Raw Materials and Consumables have to be managed carefully. Inventory not available at the right time will delay your deliveries to your Customers and too much of it will block all your funds.  

Very few Companies are able to manage the Inventories properly. Why is this so? Let us look at some Causes that are very common across the Companies. 

-       Forecasting Customer Demand: There is no company in the world who can predict the demand from the Customers in an accurate manner. Everyone knows this. Yet one of the Root causes that is given by the Materials team is the inaccurate Forecast of Customer Demand by the Sales Team. This can become a reason for higher inventory or Stock out. There are companies who do not even try to forecast the demand and hence they have accepted that the Inventories cannot be managed! 

-       Supplier Capacity Planning: Companies do not manage the capacities at the Supplier end. Communication to the Suppliers is not properly managed. Hence, the Suppliers do not supply on time. This results in stock out of specific materials. Due to the Stock outs the Production does not happen as per plan. Resulting in unexpected inventories. If couple of parts have not arrived for a Capital equipment, the assembly cannot happen. Resultantly the 95% of materials will remain in stock for the sake of 5% of stock outs. 

-       Bad Production Planning: The PPC teams are not able to plan the Production properly as the materials from Suppliers is not arriving on time. Due to this, the teams keep changing the Production plan. Many companies simply produce whatever Products for which material is available. Not necessarily what is needed for the Customer now. This results in more Finished Good stock. When 5% of the materials do not arrive, the Procurement plan of 95% of the parts and relevant suppliers is changed. Disturbing the production of the 95% of the Suppliers. After some time, the Suppliers simply stop following your delivery schedule. They will simply start working based on your SOS. 

-       Imports: As you keep changing the Production planning, the Imports also will start giving trouble. The imports by nature have longer lead time. When you change the Production schedule, the suppliers overseas do not respond quickly. As a result, your materials team will get the material by air spending much more money. The shortages that you may have with some suppliers can play a very destructive role in a company. This will not allow you to stick to any Production plan and it will disturb the Production plan of all your suppliers. 

-       No mechanism to reduce inventories: If a Company wants to reduce Inventories or manage the Inventories, there is no control mechanism. If the problem becomes too big, then the Head of the Company will simply cut down the Inventories forcibly. It will be taken on priority by the whole team and the Suppliers are the ones who will suffer during this blitz to reduce the inventories as schedules are cut without any notice. 

-       No rules for WIP: Usually, the WIP on the Shop floor is controlled by enforcing some rules that needs to be followed on the shop floor. If there are no rules, then it is a free for all and materials will be withdrawn from stores and will be lying around the shopfloor wherever there is place! 

-       Unsteady Manufacturing: As Manufacturing is not delivering on time, the Sales team would like to have more Finished Goods inventory. In companies where the Production is not happening on time, the Sales team cannot meet the Customer demand even with high Finished Goods inventory as whatever is in stock is not what the Customer wants!

Inventory is a result of difference in Demand Planning between your Customer and your planning with your Suppliers and then your own Production planning. This problem has potential to slow down your growth and also to dent your profitability in a big way. 

How to manage the inventories?

Let us look at some Best practices that can help you to manage your inventories more effectively. 

01.  Supplier Capacity management: You need to establish a system for this. You need to work out a Supplier engagement process by which you give them the information about your demand status. This has to be done on Annual / Quarterly / Monthly / Weekly / Daily manner. Annual information is for Capacity planning. Quarterly information is for Raw material planning and Manpower planning by supplier. Monthly information is for Production planning by the Suppliers. Weekly information is to take care of the small changes in the Monthly Production planning. Daily information to deliver what is needed for the Production of the Customer. With all this too, you can have 2-5% of Suppliers who may give you trouble. You need to identify these suppliers before they start giving trouble and then either improve them or find alternatives.  

It is very important to maintain a reliable Supplier base. Non-receipt of one or two materials can throw your Production planning into a disarray. If you are able to manage the Supplier capacity well, then you have won a big part of the war. 

02.  Forecasting Demand of Customer: While you cannot forecast the demand of the Customer accurately, you should not give up trying to do that. Every company needs to develop a model for forecasting the demand. They will never get it right in the first attempt. The Forecasting model has to be fed with the mistakes that are happening and what is coming right. On the basis of this information, the Model should keep learning as to how to give out more and more accurate Forecasting of Demand. Every Industry team will say that their industry is very peculiar, and no forecasting model will work for them. But that can only be a reason to develop a forecasting model not for not even attempting it and giving up on it. 

Here, persistence is very important. 

03.  Production Planning: Once you are managing the Supplier Capacity better and you are also having a way to forecast the demand of the Customer, you can do your Production planning much better. If you are still changing your Production plan, then you need to write a ‘Corrective action and Preventive action’ (CAPA) every time you are changing the Production plan. We need to look at how we can minimize the Production plan. We have to protect the Production from the vagaries of the Demand of the Customer. 

04.  Supply Chain Management: In many companies the above three activities of Supplier capacity management, forecasting customer demand, Production planning are in three different functions with three different HODs. This complicates the situation. It is good to have a ‘Supply chain management’ Function and bring all these activities under one HOD. This will help in eliminating the Communication gaps and the SCM Head can take responsibilities for all the Production planning activities including procurement. His team is the one who will decide how we can respond to customer demand. 

05.  WIP Rules: The Production Head should formulate the rules for WIP. What should be the Manufacturing lead time? How to monitor the Manufacturing lead time? How do we ensure material that Is entering the shop floor is monitored continuously and it will exit the Shop floor as per plan. There should be daily activities on the part of Manufacturing team that will ensure that the WIP is being monitored regularly. The ERP can help in this regard.

06.  Finished good stock: If the Production is becoming more stable, then the Sales team should agree with the Production about the lead time for each Product. The Finished goods stock can be cut down heavily if the Production becomes stable and reliable. It is better to try reducing the Finished Goods stock only after the Production becomes more stable. Otherwise the Sales team may lose some sales. 

07.  Local Warehouses and Local sources: While better Forecasting and Production planning can help manage the Imports also better, it is better to look for influencing the suppliers to have local warehouses to reduce your own inventory as well as manage the supplies better. It is also better to constantly look for local sources and develop local sources as a Strategy. This is a Medium-term initiative. But because it is Medium-term, we cannot leave it without trying it. 

08.  Kanban: A Company should adapt visual Inventory management techniques like Kanban. Kanban principle should be applied to 100% of the parts. Kanban can help you to control the inventory very well. Now enough technology is available to digitalize the Kanban process. This can be a good Inventory control mechanism. 

Metrics

While adapting these strategies for Inventory management, it is important to set up metrics that will have ‘Lead and Lag’ measures. These Metrics should be allotted to the various team members across the Supply Chain Management Team. These Metrics should be closely monitored and managed regularly. Companies should avoid the Intermittent attention to the Inventories. The attention has to be regular and it should be managed by the concerned managers. Not the senior management. 

Senior Management should look at ensuring that the relevant teams are having these Competencies. Many of the SCM Managers may not know the subject as well as they should. 

How is Inventory Management in your Company?