Dynamic Inventory Management can accelerate profit and growth. Many companies fail to manage older products, parts and other materials, which causes inventory levels to grow over the years, consuming cash and eroding profitability. Simply put: managing inventory maximizes cash.
Inventory is often the number one cost and consumer of cash for companies whether large or small, manufacturer or distributor, global or local. It’s important to closely manage it for four reasons:
Right Product, Right Place, Right Time
Sound inventory management ensures that you have the products and materials you need to keep the promises you’ve made to your customers.
The cash-to-cash cycle measures the time from when you spend a dollar on inventory to the time when you get it back. The equation is Accounts Receivable Days + Inventory Days – Accounts Payable Days = Cash-to-Cash Cycle. While a good number is in the 30 to 60 range, I have seen companies over 100 days and some over 200 days. Not only does that make the bank very nervous, but it impedes growth and diminishes profitability.
Cost of Holding Inventory
This cost haunts many companies. It’s usually in the range of 2 to 3% per month for both manufacturers and distributors, though it can run as high as 4.5%. Lower inventory levels and smaller purchasing batch sizes increase profit and cash flow.
Inventory is one of the “Eight Wastes” of Lean
In the early days of the Toyota Production System, just-in-time (JIT) – as used by grocery stores and Ford Motor Company – became one of the keys to world class performance. Ohno saw JIT as more than just an inventory management method; it was a way to reduce waste.
How do you reduce inventory, improve profitability and free up cash? One essential practice is managing Ramp-up/Ramp-down, which is the process of managing product and materials on both sides of the product life cycle. Many companies, especially the sales team, will tightly control new products during the ramp-up phase. The excitement of new products (and the revenue they generate) fosters a focus on the ramp-up process, but when the product matures and eventually declines, the ramp-down process is overlooked as attention shifts to the latest new products. This can result in large amounts of slow-moving and obsolete inventory. It is important to rigorously manage both sides of the curve.
Closely related to Ramp-up/Ramp-down is SKU rationalization, which is the process of keeping the total number of parts to a minimum. Over time, companies often end up with duplicate part numbers and parts for which there never was decent demand. These tend to proliferate, leaving the company with too much inventory. One of my clients began implementing a supply chain management strategy two years ago with almost 3500 SKUs in inventory. Today they have fewer than 1500. To help prevent SKU proliferation, companies can do three things:
1) Work with suppliers to eliminate duplicate parts
2) Use auto replenishment systems to reduce inventory and make it more visible
3) Manage Ramp-up /Ramp-down
There are many benefits of dynamic inventory management, but the keys are:
1) Free cash flow – every dollar of inventory reduction represents a dollar that can be put to other uses, such as growth. I’ve seen companies cut inventory by more that half over 12 to 24 months.
2) Costs can be cut dramatically, increasing profitability. Companies can reduce materials costs by over 20% of total materials costs and warehouse costs, which goes straight to bottom line profit.
3) People can be more productive across the organization. For example, one client’s service technicians now spend one-third of the time they used to spend waiting for materials at the counter in the morning before they went out on calls. That yielded a 15% increase in productivity and an increase in revenue.
From The Flight Deck
Are you leaving cash and profit on the table or wrapped up in inventory? Are you managing your cash to cash cycles for maximum cash flow? Is Ramp-up/Ramp-down an issue for your company? Are you improving productivity across the company and reducing inventory and warehouse costs through better inventory management? Visit my website to read case studies on this issue.
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