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Inventory Control: How Manufacturers Can Get on the Cutting Edge

Posted by Concannon Miller on Thu, Sep 7, 2017

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Inventory Control: How Manufacturers Can Get on the Cutting EdgeIt'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.

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.

READ MORE: Shorten Your Cash Conversion Cycle to Boost Your Business’s Bottom Line

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.

How does your company’s inventory control measures compare with other businesses in your industry? Click here to get a complimentary industry-specific benchmarking report. Your report will provide you with a wide series of financial metrics so you can see where your company compares with others in your industry.

Looking for more tips on inventory control? Read more here: Improve Your Business Gross Profit Through Inventory Control

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© 2017

Topics: Manufacturing

Concannon Miller’s unique, holistic and intimate approach to financial health sets us apart from smaller CPA firms with more limited resources as well as mega firms where mid-sized clients struggle for attention. Contact us here to talk about improving your business.

This communication is designed to provide accurate and authoritative information in regard to the subject matter covered at the time it was published. However, the general information herein is not intended to be nor should it be treated as tax, legal, or accounting advice. Additional issues could exist that would affect the tax treatment of a specific transaction and, therefore, taxpayers should seek advice from an independent tax advisor based on their particular circumstances before acting on any information presented. This information is not intended to be nor can it be used by any taxpayer for the purposes of avoiding tax penalties.

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