Less is More: Increasing Manufacturer s Efficiency Through Inventory Reduction VAI. By Pete Zimmerman, Manufacturing Segment Manager

Transcription

1 Less is More: Increasing Manufacturer s Efficiency Through Inventory Reduction VAI By Pete Zimmerman, Manufacturing Segment Manager

2 Less is More: Increasing Manufacturer s Efficiency Through Inventory Reduction Overview: As any manufacturer will tell you, and justifiably so, inventory is the lifeblood of a company. It is the basis on which sales are conducted, revenues earned and salaries paid. In fact, according to a 2008 Gartner Inc. survey, results showed 43 percent of supply chain managers based in North America felt inventory forecast accuracy remains a top business challenge 1. As such, it is only natural that manufacturers prefer to obtain a healthy inventory as a secure business plan. While it may be instinctive to overstock inventory to protect future shortages, it requires a shift in mindset to realize inventory reduction is actually a more cost-effective approach for manufacturers. Manufacturers must think critically about their inventory strategy for greater overall business operations. The best way to accomplish complete inventory control is through a fully functioning enterprise resource planning (ERP) software system, which empowers manufacturers to carefully and strategically manage inventory levels for a leaner and more efficient supply chain. With a lean supply chain, companies will minimize costs and maximize profits while meeting customers needs at every step. When Overstocking is a Problem When demand is high, a manufacturer s instinct is to stockpile inventory to prevent future shortages. What manufacturers don t anticipate and prepare for is a low-demand situation in which inventory lies idle while the manufacturer waits for orders to pour in. In other words, when supply is greater than demand, proprietors set themselves up for massive losses as they re left sitting on unnecessary inventory. Key factors that play a critical role in demand reduction include the end of a product s life cycle (customers no longer need your product) or competition (customers want a competing product over yours). By bringing in too much inventory, either due to miscalculations, incorrect sales predictions, or the anticipation of future shortages, manufacturers and distributors are at risk for significant sales losses. If a business continues to stock items while demand decreases, prices must be reduced to attract sales, which will lead to losses over and above the ones being incurred by the wasted inventory 2. While it is natural for many manufacturers to overstock inventory to err on the side of caution, a more strategic approach must be implemented to help manufactures regain control and profitability over their supply chain operations. 1 Computer World, Inventory Optimization Saves Working Capital in Tough Times, August Ibid. 2

3 Enter: The ERP for Greater Inventory Control Imagine how much more control manufacturers could have if they knew precisely the quantities and products to have in stock at any given moment? With this insight, manufacturers could make more informed and accurate stocking decisions and forecast predictions to increase revenue and reduce cash and inventory losses. With an effective ERP in place, all this is possible. Essentially, ERP software can help manufacturers do more with less, saving money and streamlining operations to increase efficiencies. ERP solutions are data-driven. This is arguably the most beneficial technology feature because it alerts users to the specific inventory needs right down to quantities and timing. The right ERP tool can analyze historic and current data such as customer orders, inventory balances, usage/shipment of each product, seasonal trends, etc. and apply these insights to future inventory predictions. For example, an ERP system can recognize when the amount of a product in stock drops below the minimum on a certain date, it can offset that order based on the item s lead time. Then, it will alert the user to either purchase or manufacture the product by a particular date, so that it is in stock in time for orders to process. Armed with this knowledge, manufacturers can make more intelligent decisions regarding how much inventory to keep in stock and how best to respond to customer demand, regardless of seemingly unpredictable fluctuations. This helps ensure investments are being made in the right place and that operations remain efficient. Such a benefit is especially advantageous in times of low liquidity and uncertain demand. Other Benefits of an ERP Solution In challenging economies specifically, resources are tight for most manufacturing businesses. Over the past few years, the art of destocking has become a common, preferred approach to inventory, as manufacturers consciously cut stock levels to accommodate declining demand until they receive sure notifications from their client base and ERP predictions regarding stock. With less time spent on inventory analysis through an ERP, manufacturers are then freed up to use their time more strategically on other business activities. Here are a few of the specific benefits manufactures can expect working with an ERP system: Production side analysis. In each manufacturing facility, there are set standards for labor performance, i.e., the minimum/maximum amount of time and effort that it takes for a worker to perform a certain task. An ERP system can analyze the performance of human resources across the production line and bring any inefficiency to the manufacturer s notice. This will then help the business either rectify the source of the identified weakness, or set more realistic standards/expectations. 3

4 Customer service. The job of an ERP system does not end when goods are shipped out to their final destination. The software not only helps make intelligent decisions on inventory levels, but also enables better customer service by providing distributors/manufacturers with details such as shipping date, status, expected delivery date, matters of redress, and so on. This, in turn, allows them to process customer requests more efficiently. Integration. An ERP system integrates seamlessly across all functions of an enterprise, allowing decision makers to have a holistic view of their operations. Investing in other business functions. Rather than allocating time and money into the replenishment and up-keep of excess inventory, investing in an automated inventory management system gives manufacturers the ability to focus efforts on other, more profitable business areas. These may include purchasing more efficient equipment, investing in e-commerce, CRM and mobile computing. While many businesses are struggling, those that invest in these technologies can obtain a competitive advantage 3, helping them succeed throughout the economic recovery period and beyond. Manufacturers must continuously prepare for volatile shifts in demand. As such, to avoid dramatic swings in inventory levels and possible losses, a strategic investment in an ERP system is essential for achieving business objectives. 3 CTS Guides, 4

5 More Information Contact Us VAI 120 Comac Street Ronkonkoma, NY USA Website: Tel: Fax: Copyright 2010 VAI. All Rights Reserved. VAI logos, and trademarks are registered trademarks of VAI or its subsidiaries in the United States and other countries. Other names and brands may be claimed as the property of others. Information regarding third party products is provided solely for educational purposes. VAI is not responsible for the performance or support of third party products and does not make any representations or warranties whatsoever regarding quality, reliability, functionality, or compatibility of these devices or products. 5