Inventory Management in Manufacturing: Keep It Lean to Keep It Strong
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Inventory management in manufacturing is a company-wide issue that affects cash-flow and, if not done properly, can cause chaos.
Accountability is too often delegated to lower levels of management, who may not think holistically about both customer service and inventory levels. While the sales team wants more, plant workers like to see an accumulation of work-in-process inventory to feel secure.
How can you encourage your team to develop one strategy that benefits the larger organization?
Leading the Charge
Of course, inventory management in manufacturing is really a C-level issue, as any paradigm change must stem from the top. Cash is king in every business, and inventory can be a cash trap that inflates cost while causing problems for cash flow.
That can then mean less cash on hand to expand sales teams or invest in technology.
Inventory dollar levels and turns should be one of your top five metrics. Enact the necessary change by ensuring the following three functions’ leaders make their inventory expectations clear.
The finance leader has the best understanding of the numbers. He or she should provide appropriate financial inventory analyses that assist in understanding the inventory’s content and value, in terms of both raw and finished goods.
For example, let’s say “A” items represent the highest unit volumes and inventory value. They’re the items on which the company makes most of its money — and where most of the inventory investment occurs. Let’s say further that “A” items are turning over once per quarter. This means the total lead time for these products is three months long. Finance must determine the carrying cost of these high levels of inventory.
Sales and Marketing
When your organization is developing specific inventory policies, the head of sales and marketing must confirm the level of customer service required.
This leader should OK inventory levels sufficient to reach that service level, and establish the necessary mindset throughout the sales organization.
Operations, on the other hand, must understand the product demand in terms of total lead time, often the number of days between when the order is placed and when it is delivered. The longer the lead time, the more cash is being consumed.
Total lead time is affected by order entry time, raw material lead time, manufacturing lead time, warehousing and more.
Shortening these cycle times will reduce inventory significantly. Unfortunately, these long lead times are often plugged into the ERP system without challenge. But aggressive supplier management can cut inventory levels by two-thirds over time.
The same is true internally. If the internal cycle time is eight weeks, cut it in half. Use value streams and manufacturing cells to smooth and accelerate the flow. Cutting the cycle time in your factories will reduce the work-in-process inventory.
Setting the Right Expectations
What kinds of outcomes should you expect? With cash freed up, you can decide whether to reduce debt or grow your business with new investments.
Plants will operate more smoothly, and improved cash flow may stimulate additional creative thinking to cut cycle time further.
Overall, a holistic approach to inventory is a win for you, your customers and your suppliers alike.