Get on the Cutting Edge of Inventory Control

Posted on Monday, November 12, 2018

It's a rare business owner who doesn't want to lift profits, reduce the cost of holding inventory and boost cash on hand. Two of the smartest, cutting edge ways of managing stock can help you do that -- the "just in time" and "accurate response" systems.

Take Your Cue

Here's how three companies benefited by changing their inventory management:

The Campbell Soup Company reduced working capital $80 million and used the funds to develop new products and buy foreign companies.

The Quaker Oats Company reduced working capital to 7.3 percent from 13 percent of sales, freeing $200 million in cash.

The American Standard Companies cut working capital $525 million, lowering debt and allowing more capital investment.

Just in time management involves planning shipments of material to arrive only when they are required. This saves money in inventory costs and increases production responsiveness and flexibility. In order for this concept to work, though, you've got to have effective lead-time management.

The accurate response approach focuses on forecasting, planning and production. The underlying premise of accurate response focuses on flexible manufacturing and shorter cycle times to better match supply with demand. This speeds up the supply chain process, allowing managers to delay decisions regarding raw materials, obtain more market information and better determine production requirements.

Some of the elements of just in time management include:

Smaller lot sizes. This allows your company to:

Be more flexible and meet changes in market demand.

Decrease inventory holding costs.

Lower your cycle time inventory, reduce lead times and pipeline inventory.

Achieve a consistent workload on the production system (smaller lots are obviously easier to schedule than large lots, which take more time to process).

Tighter set-up times. By reducing set-up times (and associated costs), you can afford to produce smaller lot sizes. Also, if your company is inefficient on set-ups, you'll likely change products less often.

Flexibility. During bottlenecks or unplanned spikes in demand, a flexible work force is able to quickly reassign tasks.

Close supplier relationships. Suppliers must provide frequent, on-time deliveries of high-quality materials, so close ties with them are vital to the just in time system. Long-term relationships with suppliers promote loyalty and improved overall quality.

Humming machines. For companies with a high degree of automation, preventive maintenance is critical to just in time management. Unplanned downtime can be disruptive and costly, so a proactive approach to keeping things running is essential.

Quality control. Just in time systems are designed to control quality at the source, rather than later in the process. For that reason, production workers are responsible for their own work and if a defective unit is discovered, it's returned to the area where the defect occurred. This makes employees accountable and empowers them to produce higher-quality products.

The accurate response method of inventory management incorporates two key elements:

1. Overall performance. Accurate response measures the cost per unit of stock-outs and markdowns. It then factors this information into the overall evaluation of the firm's performance. Let's say your company can't meet demand. The lost sales would be factored into the overall costs, which would then justify increasing production to obtain and maintain customers.

2. Predictable and unpredictable products. By differentiating between the two, you can change your approach to manufacturing both items. Predictable products can be made further in advance to "reserve" capacity during the selling season for unpredictable products. Then, your company wouldn't have to accumulate and pay for large inventories.

Incorporating just in time and accurate response techniques can drastically raise your company's efficiency. Lowering inventory levels cuts operating capital needs and gives you a competitive edge. Reducing the expenditures for warehouses, employees and equipment produces a stronger balance sheet, income statement and improved cash flow.

Posted in Manufacturing/Distribution

Disclaimer: The information contained in Dulin, Ward & DeWald’s blog is provided for general educational purposes only and should not be construed as financial or legal advice on any subject matter. Before taking any action based on this information, we strongly encourage you to consult competent legal, accounting or other professional advice about your specific situation. Questions on blog posts may be submitted to your DWD representative.

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