Managing Inventory Risk in a Manufacturing Environment

Servicing customers is paramount to the success of every manufacturer. A key to great service is delivering the right products in the correct quantities when your customer requires. Understanding and managing your inventory levels is a key component of this process. In a static environment this would be easy, however manufacturing customers are constantly changing requirements. So how much inventory is appropriate? This depends on many factors and requires constant attention and balance. Maintain too much inventory and you run the risk of obsolescence while tying up cash. Conversely, maintain too little inventory and you run the risk of missed orders, stockouts and all associated costs.

Ingredients for Success

To successfully mitigate inventory risk, a company must establish a stable and effective operating system. When describing such operating systems, you often hear or read about demand forecasting and analytics, supplier diversification, machine learning and a multitude of technology solutions, but there are a few key ingredients that are not as commonly discussed.

Though they are extremely important to your success, the following factors go under the radar when thinking of inventory management and risk mitigation.

1. Constantly strive to understand your customer’s needs,
2. Integrate your entire value stream,
3. Shorten lead times to improve responsiveness.

These three tactics may make a significant difference in your inventory management and compared to some of the others, these could be relatively inexpensive. Excelling in these areas, the “soft” areas can really improve your operations and how you manage your inventory.

Understanding Your Customer’s Needs

Enterprise Resource Planning (ERP) systems are a fabulous tool that connect the moving parts of your company, from manufacturing/logistics to accounting to HR to service to sales. They can streamline processes from sales to delivery to invoicing and share the same master data across multiple functions, allowing for efficiencies through automation and elimination of redundant tasks such as inputting customer or product information. Unfortunately, not all companies (i.e. customers) use these systems effectively. Here is an example of a problem that was solved with human intervention at a relatively low cost.

The General Manager of a company that was manufacturing components for a battery producer was frustrated with a key customer’s fluctuating short-term requirements. The frequent short-notice changes forced his team to constantly adjust production resulting in high levels of inventory and cost, including overtime and expedites. He relayed those concerns to the customer who shared that they were struggling with their new ERP system, and he proposed a simple solution. As a result of the conversation, a 15-minute weekly meeting was scheduled to discuss the battery producer’s production plan to understand requirements and plan accordingly. Problem solved. 

Build Integrated Value Streams

Truly understanding your customer’s needs is a great start. Developing your operating system in line with your customer’s needs is imperative. But have you considered including your suppliers in this process?  A highly functioning inventory management and operating system integrates all participants in the value stream; customer, manufacturer and supplier.

Certain manufacturers operate in a high mix, low volume environment. Their customers frequently change requirements and expects their suppliers to adapt. On the other hand, the company allows additional flexibility to their suppliers to produce and ship entire lots. Not having integrated value streams in these situations tend to drive up inventory in parallel with missed shipments and added cost.

Shorten Your Lead Times (And Your Supplier’s Lead Times Too)

Many manufacturing leaders believe there is safety in extending lead times. In practice, that could not be further from the truth. The longer your manufacturing process, the greater the inventory, the greater the risk and the greater the potential for something to breakdown along the value stream.

Companies in various sectors have seen improvements in on-time delivery, reduced overtime and a more than 30% reduction in inventory by eliminating manufacturing steps, material handling and storage, that is, shortening their lead times.

Comparing Highly Efficient and Inefficient Inventory Management Approaches

Highly performing manufacturing and inventory management systems are focused on a constantly improved understanding of customer requirements, building and improving integrated value streams including their suppliers and a focus on continuously shortening lead times. This is all done with the objective of increasing visibility on demand, reducing risk and improving stability.

Conversely, a poorly structured manufacturing and inventory management system does not emphasize these important areas and results in higher inventory, more risk, higher costs and decreased customer satisfaction.

Gaining a Competitive Advantage

Competition is higher than ever across all sectors. Companies need to take every advantage available. Competitive advantage can be identified and leveraged in every single area of operations. Improving your inventory management and mitigating risk will increase efficiency, improve operations, and provide a competitive advantage over those who do not have an integrated inventory management strategy. 

Originally published by Supply & Demand Chain Executive