What is your inventory management process telling you?

There have been many lessons learned for manufacturers over the past three years — both good and bad. One area — inventory management — continues to be a challenge for many in manufacturing.

A key factor in this is murky transparency across the supply chain. It is not uncommon for customers to signal they will need significant products based on their forecast, only to reduce orders based on actual demand. This has made the hard job of demand planning even more difficult. 

As interest rates increase (with little indication they will go down any time soon) and the cost of raw materials continues to fluctuate, companies need to be mindful of their cash. Optimizing your inventory levels can, at the end of the day, improve your cash standing, result in significant savings or free up cash that can be invested in other areas of the business.

How is your company managing its inventory?

Are you buying at levels based on the previous year’s business? Buying based on business forecasts from your customers? Or are you ordering based on revenue projections? Is this working, or do you have too much or too little inventory?

Today, inventory management has become increasingly more important. So, now is the time to take a look at your processes and make any necessary improvements. First, it is critically important to know your data:

• Forecast to actual inventory use
• Inventory lead times
• Inventory turns
• Finished good turns
• Slow-moving materials and obsolescence

Data analysis helps identify trends and can potentially help improve forecasts. So, if you have and continuously monitor data, leaders can use it to make better, faster and more informed decisions.

It also arms you with information to share with customers to justify your decision-making. For example, if you have a report indicating a three-month historical inventory release, you could compare it to a three-month forecast provided by the customer and determine if it’s accurate or should be adjusted. If the customer requests you have more on hand, you can provide the historical data to push back.

Have open conversations with your customers regarding demand planning and inventory requirements and maintain a thorough understanding of your commercial contract and agreements to defend your position. The more information exchanged, the better for both companies.

Another best practice is to measure your inventory turns because this metric is a symptom of other issues. If your inventory turns are low, you should be asking yourself why. Is there too much inventory on hand? Has demand significantly dropped for some reason? Did something on the shop floor impact production?

And, if your inventory and finished good turns are not aligned, it’s a symptom of another issue — having too much raw material on hand or something else. If possible, calculate inventory turns by customer to identify which relationship is most misaligned.

Finally, reevaluate and review input material and customer order lead times. Are there trends that can be identified? Are there changes? If so, have you adjusted to accommodate those changes?

Does data show you have significant value of slow-moving or possibly obsolescent inventory? Maybe supply chain challenges caused customers to change to alternate versions or models based on what components they could procure. Or the demand signals may have caused you to produce components that are no longer required or purchase alternate raw materials as a preventative measure. Use your data to identify where you have idle working capital and build the commercial case for addressing the slow-moving or obsolescent inventory.

How Wipfli can help

Inventory management is essential to the long-term health of your business. Gathering and frequently reviewing the correct data and proactively taking action will help position you for success. Let Wipfli’s strategy and operations professionals help you better understand your data and find actionable insights so you can move forward.

Our team is rooted in the manufacturing industry and has the tools and expertise to identify operational challenges and tailor solutions to your company’s needs. Contact us today to learn more