Most manufacturing businesses have too much cash tied up in excess inventory—finished goods, raw materials, and work-in-progress. What’s more, most manufacturing businesses know that they have too much cash tied up in inventory.
What’s much tougher is knowing what to do about that excess inventory—in other words, how manufacturers can improve their inventory management. Many manufacturing businesses give up, or just tinker at the edges.
Don’t join them. Here are seven tried-and-tested actionable ways to improve your inventory management. What’s holding you back?
Improved inventory management #1: the 80-20 rule
In 1906, Italian economist Vilfredo Pareto coined his famous ‘80-20' Pareto Principle, which almost certainly underpins your manufacturing business’s inventory profile.
Simply put, the likelihood is that 80% of your sales will come from 20% of your inventory, and 20% of your sales will come from 80% of your inventory—the basis of the equally famous ‘ABC’ classification.
So focus and prioritise on the 20% of your inventory: these are the items not to run out of, and these are the items where small improvements in inventory turns will have a major impact. In other words, start here.
Improved inventory management #2: demand drivers
Inventory demand isn’t random, even if it sometimes feels like it. Spend time understanding the underlying patterns, and learning exactly what drives demand.
The more a manufacturing business can eliminate seemingly random demand, the more it can forecast and manufacture to meet real, forecast demand.
You’ll still need safety stock, of course. But nowhere near as much of it.
Improved inventory management #3: supplier variability
Raw material inventories often suffer from the reverse problem—instead of erratic sales demand, it’s erratic supplier performance. And often, manufacturers compound the problem through having buying departments that are overly fixated on price, not on-time performance, and which don’t provide enough information regarding changes in demand.
Top tips: monitor individual suppliers’ performance, and identify areas for improvement. Consider switching business to suppliers with a better track record. Invest in understanding suppliers’ true lead times and production constraints: how can you help them to help you?
Improved inventory management #4: Just in Time
Staying with suppliers and raw material inventory, don’t forget active inventory management—initiatives such as Just in Time, ‘pull-based’ kanban scheduling, and consignment stock.
Here, the trick is (once again) the 80-20 Pareto Principle: focus on the major suppliers, and most important components and materials. This is where investments in Just in Time, pull-based scheduling, and consignment stock will pay the greatest dividends.
If you're looking for ways to improve your supply chain, you might find our recent article helpful: 7 strategies for supply chain management success
Improved inventory management #5: cut work-in-progress
Staying with active inventory management and the so-called ‘visible factory’, apply some of the same lessons and techniques to work-in-progress inventory.
Which internal lead times can be cut? Where can pull-based scheduling and kanban work? Can ‘configure-to-order’ replace ‘build-to-order’?
And what can be done to increase the pace of manufacturing output, rather than just the volume of manufacturing output—in other words, where can internal batch sizes and production runs be reduced?
Improved inventory management #6: eliminate complexity
Complexity is the enemy of efficient inventory management. Too many product offerings add additional slow-moving inventory all the way along the manufacturing process—from raw materials, right through to finished goods inventory.
Again, the Pareto Principle can help: 80% of product variant sales will come from just 20% of product variants. That isn’t to say that 80% of product variants can immediately be culled, of course, but it is to say that here’s where to look, and here’s where to start asking tough questions.
Sales and marketing might be reluctant to kill off product variants—but from an inventory management point of view, are they really pulling their weight?
Improved inventory management #7: proper systems
Finally, if all this sounds daunting, don’t forget the merits of investing in an up-to-date manufacturing management system, preferably one fine-tuned for your own individual manufacturing industry.
From MRP logic to ABC stock control, and from batch size calculation through to pull-based scheduling and support for Just in Time, a proper manufacturing ERP system underpins any improved inventory management system.
Not sure about the adequacy of your existing manufacturing management system? Request a brochure to find out K8 Manufacturing can help to grow your business.