Buried Under Inventory

Buried Under Inventory

The economic downturn of 2009 should change some manufacturers' approach to inventory management.

Since the end of 2008 a trend known as "destocking" has occurred at many manufacturing plants across the country. Simply put, manufacturers have been cutting or halting production while unloading inventory stockpiles that built up because of decreasing demand.

The unloading process signals that much of the manufacturing industry underestimated the severity of this year's recession. One reason why manufacturers may be grappling with excessive inventory levels is their previous focus on reducing transportation expenses during gasoline price spikes rather than total stocking costs, says Tom Speh, associate director of MBA programs at Miami (Ohio) University's Farmer School of Business.

"Everyone wanted to address the fuel issue. People were trying to reduce miles and increase loads, and in many cases shipping full truckloads, which was driving up inventory," he says. "We did have a natural evolution of increasing inventories because everyone was trying to save transportation dollars."

Consequently, when fuel prices came down and demand for their products dropped, many manufacturers were left with warehouses full of inventory that they've been unloading for the past year, says Speh. Some of the inventory glut may have been avoided if manufacturers had implemented accounting systems that measure the "real money cost" of inventory, Speh says. That includes capital expenses tied to storing inventory, borrowing rates, insurance costs and losses incurred from damages and obsolescence.

Contract manufacturer VirTex Assembly Services Inc. offers its customers "nearshoring" sourcing opportunities to help reduce inventory stockpiles created by longer lead times often associated with offshore outsourcing.

Some companies have been successful measuring and managing their total inventory costs by implementing Web-enabled visibility tools, says Joel Sutherland, managing director of Lehigh University's Center for Value Chain Research. Visibility applications can help manufacturers establish more predictability by providing more data about a supplier's or customer's operations.

Major consumer-goods manufacturers, such as Procter & Gamble and Anheuser-Busch InBev, have been leaders in using technology to monitor demand variability, Speh says. For instance, Anheuser-Busch has established a data warehouse that extracts daily sales information each night from all of its retail outlets, so the company can adjust production based on what's selling, according to Speh.

Another strategy more manufacturers are applying to become leaner with their inventory is by rationalizing their production lines, so they're making fewer stock-keeping units (SKU), Sutherland says. "A lot of companies used to make every product imaginable to serve every customer possible, so they had this thing called product proliferation, and now they're saying, We can't maintain inventories in that type of situation,'" he says.

Sutherland's recommendation: "Don't listen to your marketing team or sales team that says we need to provide these products to all these customers where you're adding more and more SKUs, more and more complexity to your production process and supply chain."

Another factor that could add to inventory levels is long lead times associated with offshore outsourcing. Sourcing in far-away locations can lead to cycle-time variability and less predictability, says Sutherland. Austin, Texas-based contract manufacturer VirTex Assembly Services Inc. has helped some of its customers improve cycle time and cut stock levels by bringing production closer to home, says VirTex founder and CEO Brad Heath. The company, which manufactures high-mix, low-volume electrical components, recently built a facility in Juarez, Mexico, the provides its customers with a nearshoring option.

Since oil prices have increased over the years there is more parity between doing business in China and Mexico, Heath says. That, coupled with a decrease in demand, has led many of his customers to consider moving production closer to home.

"They don't want to carry the [inventory] levels and put six-month orders and forecasts out there like they did in the past, so they've been looking for this hybrid solution, which we call rightshoring or smartshoring."

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