Switching gears from making inventory to making money

Jul 04, 2023
Supply chain Supply chain & operations Global strategy

Efficiency is up, utilization is up, productivity is up, but income is – down?

Measuring these operational improvements in isolation can cause inventory to go up, too. With that increased inventory comes extra material, overhead, rent, and tax - all costs. Suddenly, those ups become downs.

Your goal is not to make inventory, it is to make money, so it may be time to consider how operations may be affecting the bottom line and the value of the company.

What to watch for with inventory

  • Low inventory turnover, sales order backlogs, and manufacturing variances: If there are positive manufacturing variances in conjunction with low inventory turnover, we may revisit performance metrics. If a team is producing to increase utilization and reduce costs, they may be hitting their goals in a way that is not benefitting the company. Improperly prioritized production runs can cause sales order backlogs, slow-moving inventory, and lead times to skyrocket.
  • Heavily discounted sales: Fire-sales of slow-moving inventory are eating away at sales margins.
  • Large cycle count variances: Disorganized inventory can lead to inaccurate planning, long lead times, and lost sales opportunities. Stock that outgrows its allotted space can also dramatically affect how well inventory controls are heeded.
  • Reduced cash flow: Expenses are growing from the production of additional inventory, but sales are not. As a result, you need to sell more in order to net the same amount of cash. Operations directly and heavily impacts your cash-to-sales ratio.

Strategic operational solutions

  • Streamlining processes: The key is to ensure that you have enabled tools to serve you best. First, you will need to configure the systems for effective output. By training the workforce on how to leverage these systems as tools, you can encourage a more independent and motivated workforce. Documenting standard processes further enables consistent excellence. In turn, consistency allows for high-level review and strategic decision-making.
  • Calculating optimal inventory levels: This phase reaches all the way from planning and sourcing to manufacturing, warehousing and sales. Steps may include developing preferred stock levels, reviewing product mix margin, or re-analyzing manufacturing lot or batch sizes to match sales.
  • Network optimization and logistics analysis: Reviewing the supply chain holistically creates an opportunity to identify the optimal distribution network and logistics strategy. This can be tailored to reduce cost, decrease lead-time, and best suit overall business strategy.
  • Warehouse redesign: Reconfiguring a warehouse can be an essential inventory management decision. The strategic redesign increases awareness of inventory by creating visual cues for replenishment or slow-moving products. It may also reduce fulfillment time by improving stock accessibility and reduce quality concerns by facilitating FIFO stock rotation.

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To navigate the current environment, middle market companies must be nimble, while at the same time maintaining full transparency through sophisticated data analysis.