Everyone in manufacturing knows that raw material and other materials are the most important items on the P&L statement. It constitutes anything from 55–85% of the sales alue depending on what product one is manufacturing. The inventories of these raw materials and consumables have to be managed carefully. Inventories not being available at the right time will delay deliveries to one’s customers and too much of it will block all of their funds.
Very few companies are able to manage the inventories properly. Why is that so? Let us look at some causes that are very common across the companies.
Forecasting customer demand: There is no company in the world that can predict the demand from customers in an accurate manner. Everyone knows this. Yet one of the root causes that is given by the materials team is the inaccurate forecast of customer demand by the sales team. This can become a reason for higher inventory or stock-out. There are companies who do not even try to forecast the demand, and hence, they have accepted that the inventories cannot be managed.
Supplier capacity planning: Companies do not manage the capacities at the supplier end. Communication to the suppliers is not properly managed. Hence, the suppliers do not supply on time. This results in stock out of specific materials. Due to the stock-outs, the production does not happen as per plan, resulting in unexpected inventories. If a couple of parts have not arrived for capital equipment, the assembly cannot happen. Resultantly, 95% of the materials will remain in stock for the sake of 5% of stock-outs.
Bad production planning: The PPC teams are not able to plan the production properly as the materials from suppliers is not arriving on time. Due to this, the teams keep changing the production plan. Many companies simply produce whatever products for which the material is available. It is not necessarily what is needed for the customer at the moment. This results in more finished good stock. When 5% of the materials do not arrive, the procurement plan of 95% of the parts and relevant suppliers is changed. This ultimately disturbs the production of 95% of the suppliers. After some time, the suppliers simply stop following the delivery schedule and will simply start working based on one’s SOS.
Imports: As one keeps changing production planning, the imports also will start giving trouble. Imports by nature have longer lead time and when one changes the production schedule, the suppliers overseas do not respond quickly. As a result, the materials team will get the material by air spending much more money. The shortages that one may have with some suppliers can play a very destructive role in a company. This will not allow one to stick to any production plan, and it will disturb the production plan of all of one’s associated suppliers.
No mechanism to reduce inventories: If a company wants to reduce inventories or manage the inventories, there is no control mechanism. If the problem becomes too big, then the head of the company will simply cut down inventories forcibly. It will be taken on priority by the whole team and the suppliers are the ones who will suffer during this blitz to reduce the inventories as schedules are cut without any notice.
No rules for WIP: Usually, the WIP on the shop floor are controlled by enforcing some rules that need to be followed on the shop floor. If there are no rules, then it is a free-for-all and materials will be withdrawn from stores and will be lying around the shop floor wherever there is place.
Unsteady manufacturing: As manufacturing is not delivering on time, the sales team would like to have more finished goods inventory. In companies where the production is not happening on time, the sales team cannot meet the customer demand even with high finished goods inventory, as whatever is in stock is not what the customer wants.
Inventory is a result of the difference in demand planning between one’s customer and one’s planning with their suppliers and then their own production planning. This problem has the potential to slow down one’s growth and also to dent profitability in a big way.
How to manage the inventories?
Let us look at some best practices that can help one manage their inventories more effectively.
Supplier capacity management: One needs to establish a system for this. They will need to work out a supplier engagement process by which one gives them information about their demand status. This has to be done on an annual/quarterly/monthly/weekly/daily manner. Annual information is for capacity planning. Quarterly information is for raw material planning and manpower planning by the supplier. Monthly information is for production planning by the suppliers. Weekly information is to take care of the small changes in the monthly production planning. Daily information is to deliver what is needed for the production to meet customer demands. With all this, too, one can have 2-5% of suppliers who may give one trouble. One needs to identify these suppliers before they start giving trouble and then either improve them or find alternatives. It is very important to maintain a reliable supplier base. Non-receipt of one or two materials can throw a company’s production planning into disarray. If one is able to manage the supplier capacity well, then they have won a big part of the war.
Forecasting demand of the customer: While one cannot forecast the demand of the customer accurately, they should not give up trying to do that. Every company needs to develop a model for forecasting demand. They will never get it right in the first attempt. The forecasting model has to be fed with the mistakes that are happening and what is coming right. On the basis of this information, the model should keep learning as to how to give out more and more accurate forecasting of demand. Every industry team will say that their industry is very peculiar, and no forecasting model will work for them, but that can only be a reason to develop a forecasting model not for not even attempting it and giving up on it. Here, persistence is very important.
Production planning: Once one is managing the supplier capacity better and is also having a way to forecast the demand of the customers, one can do their production planning much better. If one is still changing their production plan, then they need to write a ‘Corrective Action and Preventive Action’ (CAPA) every time they change the production plan. We need to look at how we can minimise the production plan. We have to protect the production from the vagaries of demand from the customer.
Supply chain management: In many companies, the above three activities of supplier capacity management, forecasting customer demand and production planning are in three different functions with three different HODs. This complicates the situation. It is good to have a ‘supply chain management’ function and bring all these activities under one HOD. This will help in eliminating the communication gaps and the SCM head can take responsibilities for all the production planning activities including procurement. His team is the one who will decide how we can respond to customer demand.
WIP rules: The production head should formulate the rules for WIP. What should be the manufacturing lead time? How to monitor the manufacturing lead time? How do we ensure material that is entering the shop floor is monitored continuously and will exit the shop floor as per the plan? There should be daily activities on the part of the manufacturing team that will ensure that the WIP is being monitored regularly. ERPs can help in this regard.
Finished good stock: If the production is becoming more stable, then the sales team should agree with the production about the lead time for each product. The finished goods stock can be cut down heavily if the production becomes stable and reliable. It is better to try reducing the finished goods stock only after the production becomes more stable. Otherwise, the sales team may lose some sales.
Local warehouses and local sources: While better forecasting and production planning can help manage the imports better, it is better to look for influencing the suppliers to have local warehouses to reduce one’s own inventory as well as manage the supplies better. It is also better to constantly look for local sources and develop them as a strategy. This is a medium-term initiative, but because it is medium-term, we cannot leave it without trying it.
Kanban: A company should adapt visual inventory management techniques like Kanban. Kanban principle should be applied to 100% of the parts. It can help one control the inventory very well. Enough technologies are now available to digitalise the Kanban process. This can be a good inventory control mechanism.
While adopting these strategies for inventory management, it is important to set up metrics that will have ‘lead and lag’ measures. These metrics should be allotted to various team members across the supply chain management team and be closely monitored & managed regularly. Companies should avoid the intermittent attention to the inventories. The attention has to be regular and it should be managed by the concerned managers and not the senior management. The senior management should look at ensuring that the relevant teams have these competencies. Many of the SCM managers may not know the subject as well as they should.