Right size your inventory

Grant Millard is a Director and Jon Pacheco is a Managing Consultant at Vendigital. They recently shared their insights with Engineering Capacity.

With supply chain shocks and shortages of some mission-critical products seemingly unending, UK-based manufacturers are homing in on inventory management as a means of releasing pressure on working capital and improving operational resilience.

Whether its fast-moving consumer goods (FMCG) or aerospace and defence (A&D) manufacturing, demand-side pressures have stretched global supply chains to the limit. In some cases, productivity levels have not yet managed to recover to pre-pandemic levels due to combination of supply shortages caused by disrupted shipping routes, geopolitical tension and increased global demand, as well as a lack of skills. In many cases, working capital has been eroded and high interest rates have increased the cost of borrowing, which has constrained capital investment.

To cope with the challenging conditions, UK manufacturers reliant on complex, global supply chains have resorted to increasing buffer stocks beyond levels that would have been considered the norm prior to the pandemic. In many cases, these ‘buffers’ have stuck and are now viewed as an operational necessity. However, by reviewing inventory management across the value chain, there could be an opportunity to right size stock and optimise much-needed working capital.

Analysing inventory turn performance

Analysing inventory turn rates can provide useful insights into how leanly a business is being run and identify opportunities to improve efficiency.

Research conducted by Vendigital with OEMs and Tier One manufacturers in the A&D sector shows that inventory turn rates dipped significantly when the production ramp up got underway following the Covid-19 pandemic. The average inventory turn rate dipped to 3.7 in 2022, down from 4.2 in 2018. As this figure is below the range (between 4 and 6) which is normally considered ‘healthy’, it is symptomatic of just how much businesses in the sector were struggling to keep pace with demand.

To improve inventory turn performance, OEMs and Tier One manufacturers should consider where excess stock is coming from and understand its root causes. Data capture and analytics have a key role to play in unlocking inventory management understanding and helping businesses to make better-informed decisions. 

Is excess inventory ‘intentional’ or ‘unintentional?’

Inventory is a symptom of business processes and decisions, bespoke models built on real-time data allow businesses to differentiate between ‘unintentional’ and ‘intentional’ inventory so they can see where there is room for reduction. For enhanced visibility, these models can draw on data sourced from end-to-end supply chains, combined with cross-functional business and third-party data. As well as spotting opportunities to reduce inventory, these informative tools can help managers to make changes that will deliver the most value in terms of releasing working capital, in the shortest space of time.

Excess inventory is sometimes put down to poor planning, but it’s often a systemic problem. For example, a lack of communication between the sales and scheduling teams or poor information management could be skewing demand data or making it invisible. Getting to the crux of the issue will enable the business to take action to prevent excess or ‘unintentional’ inventory from building up and becoming a problem in the future.

Understanding the root causes

The root causes of excess inventory typically include forecast accuracy, MRP set-up and data integrity, supply chain set-up and performance, SIOP processes and operational excellence. Left unaddressed, they could lead to poor decision-making, eroding profit margin and working capital. While the cost impact of poor decisions can be easy to calculate, it is worth remembering that the erosion of working capital brings an additional cost as it is a lost opportunity to invest in new equipment or transformation initiatives.

In industries where demand has increased and supply chain complexity is an issue, it can be tempting for OEMs and Tier One manufacturers to stockpile ready-to-ship products. However, by placing their trust in reliable, data-based models and focusing on improving inventory turn performance, it should be possible to avoid falling into this costly management trap.