Five Ways to Improve Inventory Management

Yeo & Yeo CPAs & Business Consultants

The latest manufacturing industry statistics are generally encouraging and most observers remain cautiously optimistic as 2016 approaches.

But news coverage usually focuses on output. What about handling inventory in this environment of varying supply and demand? This is a constant concern for manufacturers, and possibly you're among them. By improving inventory management, you may be able to brighten your firm's immediate outlook by maintaining good customer service and trimming costs.

Potential Problem Areas

Naturally, different sorts of problems arise in different markets, whether its pharmaceuticals, packaged goods or some other industry. But there are common indicators. Here are several examples. 

  • Data management: What is especially troubling in this area is that firms often have the means to achieve better results, but managers either take no action or incorrectly analyze information. For instance, inaccurate procurement and manufacturing lead times will often result in poor inventory judgments. End result: The company ends up with overstocked shelves in anticipation of needs that never come up.  
  • Coordination of activities: Many managers emphasize that cutting down the manufacturing cycle time and filling orders faster will provide a competitive advantage. While that is true, individual elements of overall cycle time must be coordinated to meet overall objectives.
  • Lack of communication: Similarly, a lack of communication within the firm or between supply chain partners can create inventory-related problems. Departments must remain in close and frequent contact. Gaps in information can lead to overstocking.

The following five steps can help improve inventory management at your firm:                    

1. Assess business functions and processes. Be sure you understand the current order-to-delivery (OTD) process. Identify any significant gaps or improvement opportunities to accelerate change among cross-functional teams, including sourcing, planning, commercial operations, stockroom and manufacturing. Some of the key elements are:                   

  • Question individuals who perform the same job within each function of the OTD process, hold follow-up meetings with others from each function to clarify their roles and duties and obtain input that can be used to measure current processes and share responsibilities.
  • Use a scoring system encompassing several planning and execution categories to summarize your findings and seek third-party help for a broader and more objective view.
  • Prepare for the transition by gradually migrating toward the new processes.
  • Find ways to make the new processes more palatable to long-term workers, who may resist change and ensure that everyone within the business is informed about pending improvements and how the changes will be integrated.

2. Develop the plan. Ensure that the data being used to create the inventory plan is complete, accurate and up-to-date. Fill in any gaps. Next, establish the operational definitions for effective inventory controls. These definitions are critical for standardization and improvements, especially if your firm has expanded through acquisitions and is using multiple data sources.

The plan may be driven by data relating to on-hand inventory, open orders, lead time, standard or average costs and your bill of materials (BOM). Typically it could feature these steps:      

  • Independent planning for each manufacturing segment,
  • Classifying into raw materials, work-in-process or sub-assembly, and finished goods,
  • Categorizing into stock and non-stock categories,
  • Calculating minimum order quantities by parts to optimize inventory and transaction costs,
  • Identifying initial inventory impact and investment, and
  • Planning for transitional changes to transactional systems.               

3. Execute the plan. Although the plan doesn't have to be etched into stone, management should approve any deviations. This requires discipline from both managers and floor workers. The following steps will help:

Adhere to inventory planning and ordering policies for each segment.

  • Install strict controls to ensure data quality and consistency.
  • Link production schedules with materials.
  • Establish a supplier performance management process that captures effective contract management, provides metrics and reviews performance.
  • Simplify and standardize processes for routine tasks. Delegate authority needed to ensure consistent best practices.

4. Measure the results. It's virtually impossible to improve inventory management without some measurement. To sustain improvements, your firm may establish key performance indicators and metrics for each process during periodic reviews.

Metrics can provide insights into performance for service levels, safety stock investment, ordering costs and total excess inventory value. Grade your firm's suppliers based on delivery, costs, quality, responsiveness and reliability. Search for ways to minimize rework and related wastes. Encourage workers to document and share successes and failures.

5. Keep improving.
If this methodology provides results, continue to seek improvement. Conduct periodic reviews to discuss potential changes, review agreements with key suppliers, minimize ordering quantities and train workers to operate at maximum efficiency.

Optimal Timing

Don't accept the status quo for inventory management. With another new year rapidly approaching, this is an optimal time to consider these five steps. They can lead to a more profitable operation in 2016.

© 2016

Yeo & Yeo CPAs & Business Consultants

Yeo & Yeo CPAs & Business Consultants

Yeo & Yeo CPAs & Business Consultants is a leading Michigan accounting firm. Since 1923, our industry-specialized Michigan accountants and consultants have provided clients with forward-thinking, comprehensive solutions in accounting, audit, tax, technology and business consulting.