Thrifty Inventory Management to Save Money and Increase Profits

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In today’s manufacturing arena, the common mantra is to produce more ‘faster, quicker, cheaper’ with the common goal being to instigate more interest through marketing, drive sales up and increase profits. This is all very well, however to achieve this goal, inventory management needs to be a focus. If inventory management is not considered carefully as a business improvement metric, then it can insidiously become a money trap which of course will simply erode any profits to be made. Increasing profits is as much about saving money as it is about spending wisely and increasing sales. This is where efficient, lean and thrifty inventory management comes in.

Shift the blame

When inventory is stockpiling in the warehouse, it is very easy to blame inventory management and march your concerns and frustrations straight to the warehouse manager’s desk. However, the truth is that the out-of-control inventory is the symptom of the problem rather than the cause, and the cause is usually because there are process inefficiencies not being addressed. So, try to seek out the root cause of the problem as usually, that will fix any inventory management issues.

Improve the entire supply chain

Often the lack of or accumulation of stale inventory is the result of supply chain issues and therefore it is important to periodically review the entire supply chain for a product to improve its order-to-delivery cycle. This may come by asking hard questions of your suppliers to push the boundaries and see what they are capable of. It is a common fallacy to build so much buffer into processes to avoid short-ordering and if every step in the supply chain did this, then there will be a lot of redundant product and time not being utilised which, of course, costs valuable dollars and resources.

Focus on the process not the product

Perhaps contrary to common belief, analysing and adapting processes are more effective for controlling a product than focusing on the product itself. This is similar to looking for the root cause and is often underappreciated in inventory management. Inefficient scheduling from shallow or inaccurate knowledge about products, constraints, quality and processing times leads to inaccurate systems analysis and process control. It is this lack of process control that creates bottlenecks in some areas which lead to the accumulation of one product or ingredient and not enough of the other. This will inevitably lead to lost revenue through the accumulation of stale inventory and poorer customer service from insufficient supply to meet demand.

Shorter cycle times

A key part of reducing the build-up of raw ingredients or completed product which represents lost opportunity costs is by manufacturing smaller batches more frequently. In doing so, the company is better placed to adapt to shorter lead times, sudden fluctuations in forecasting and demand has a higher level of control over the process, and reduces stored inventory and all the risks and costs associated with that.

Be flexible

Customers and their demands are fickle, changeable things that sometimes, despite all efforts, cannot be completely predicted. Therefore, it is important to protect yourself from investing too much (time and money) into a product run if it will not all sell. This is where shorter cycle times, reduced batch quantities and flexibility in production are paramount. It means that you will be able to adapt with relatively short notice and still meet new demand without sacrificing too much of your investment into the failed or no-longer-popular product line.

Take home message

Reducing inventory costs to increase profits is certainly in part achieved by looking for alternative, cheaper and more efficient suppliers and considering the raw ingredients themselves and how savings can be made. However, it is also largely due to the process and looking for ways to improve the supply chain, improve forecasting through data acquisition, reduce cycle times and practice adaptability rather than committing to long, rigid product runs. In essence, it is important to think outside the box as sometimes the correct answer is not always plainly visible.

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Melanie - Unleashed Software

Article by Melanie Chan in collaboration with our team of Unleashed Software inventory and business specialists. Melanie has been writing about inventory management for the past three years. When not writing about inventory management, you can find her eating her way through Auckland.

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