Supply Chain Profitability - Proper Product Mix and Inventory Levels for Increased Profits
Many companies that we encounter are plagued by excess inventory and too many slow moving or dead items on hand. The typical company we visit could own approximately half of the stock they store in the building and be more profitable. Plans are often in place for proper inventory stocking levels (e.g.: 2 month’s sales) but many companies cannot stick to the plan. Often dead items and excess inventory account for 25% to 50% or more of total storage space as well. In our thirty plus years working with such companies we’ve found that almost all of them could be much more profitable by stocking 40 – 50% of their present on hand inventory.
1. Improper Product Mix
Regarding product mix, many companies stock every imaginable item they could possibly sell with a marketing goal of “being everything to everybody.” They will stock oddball sizes, colors and varieties to make sure they have an item available “just in case” somebody wants to purchase it vs. learning what their customers want and stocking only those items. The unwanted items invariably become “dead stock.”
2. Excess Inventory
Excess inventory often results from the purchasing staff stocking up on items when they on sale; to get quantity discounts; and/or are trying to reduce freight costs. Purchasing without proper guidance and rules for unplanned purchases to get discounts will often cost more than the value of the discounts themselves.
3. Manufacturing in Excess
In many instances manufacturing companies operate under the credo, “manufacturing cannot be halted and must go on,” and manufacturing considerations dominate decision making no matter how disastrous the results can be for the rest of the company. An electrical component manufacturer I worked with did not receive a key clip on time so because “manufacturing must go on” they produced an extra 8 month’s sales worth of the clipless version. This extreme amount of excess inventory clogged many parts of the operation and slowed facility throughput and therefore customer service for over a year.
4. Increased Costs
The increased costs resulting from excess products and inventory on hand include costs for space, staff, and material handling equipment in addition to inventory carrying costs. If a storage facility is 400,000 square feet and stocking volumes of inventory are too high by 25%: I am paying for 100,000 square feet that is unnecessary; I must increase my staff by at least 25% to traverse the extra space; I must purchase or lease material handling equipment to accommodate the extra staff, and bear the costs associated with financing the excess inventory. I will also experience a reduction in customer service (the extra time required to traverse the extra space will reduce facility throughput and increase the time to manufacture and/or ship an order).
5. Solutions Regarding Product Mix:
Determine which items your best customers want you to carry and stock everything your best customers want including slower moving items for them only. Slow moving items for marginal customers can be shipped directly from your supplier or be provided to your customer by “special order” but should not be clogging up your facility and requiring additional resources such as office staff, etc. Slower moving manufactured items should only be “made to order.”
6. Solutions Regarding Excess Inventory:
When purchasing items on sale; to get quantity discounts; and/or are trying to reduce freight costs, only buy the vendor’s top selling items. Since you sell more of these items when you purchase the required quantities for the discount you’ll be increasing your inventory by a lower percent over time and ensure not running out of bestselling items. Slower items (which one shouldn’t be stocked to begin with) will invariably become even more excess inventory clogging up the facility.
7. Solutions Regarding Manufacturing in Excess
Many company’s operations are geared to the core profitability of their business so “sales is king” or “manufacturing must go on” was always supported by top management but that philosophy is one with blinders on. Company policy regarding purchasing rules and manufacturing continuity should be determined by a consensus of all members of the company’s management team including those affected most by over-production.