Minimizing Inventory Levels = Maximizing Cash

Working in the supply chain discipline of a business no matter of the size there is always a concern about inventory levels, inventory turns, inventory accuracy and inventory obsolescence. The challenge for the supply chain is how to achieve the lowest levels and maintain accuracy with minimum obsolescence within your company’s business model. Inventory is an opportunity in any business today to generate cash; the lower the inventory the more cash a business will have to invest in other areas of the company including capital goods, infrastructure investments and human resources. As a supply leader, here are several considerations in minimizing raw, in-process and finished goods inventory that will maximize a company’s cash to cash position.

1. Raw Inventory relates to how a company orders components and assemblies from the supplier base.
a. Forecasts – sharing forecasts with a rationalized supply base for high value, critical parts can assist in maintaining inventory levels at lead time or within lead time levels. Some buffer stock should be modeled into the demand plan to accommodate for order swings during higher demand periods.
b. Vendor Managed Inventory- a supply chain strategy that is being used widely with large high tech companies with a supply base from Asia which requires longer transit times for U.S. companies. Using a VMI model allows your company to have only days or could be hours of inventory that is your company is financially responsible for. The supplier will be responsible for holding inventory per agreed inventory levels per the company’s contract with the financial responsibility with a strategic supplier. While a company gains tremendous inventory improvements this will undoubtedly translate into higher commodity costs. The company will then need to weigh the benefits of a VMI cost model for your supply chain.

2. In- Process Inventory – the quantity of inventory is being utilized through the manufacturing process.
a. JIT Manufacturing – in today’s supply chain, most of manufacturing is set up to process orders from start to finish without the any need for having an in process inventory. However, the faster orders are processed through the factory the lower the level of in process inventory. One additional consideration is to be sure that any fallout and rework is repaired as quickly as possible to catch up with the rest of the order. Rework and fallout can increase inventory levels as well as impact delivery times.
b. Order Release Process – the company’s ERP system should only allow scheduling and releasing order to the factory if all the material has been received and available to build the entire order. Attempting to build product without all the product available only results in increasing inventory levels and missing and lost components in completing orders.

3. Finished Goods Inventory-the quantity of inventory that is available built and ready to be sold.
a. The most difficult challenge for the supply chain to influence however there should be agreements and rules that are agreed upon. All Build to Stock orders should only be released to the factory and authorized when approved by Sales, Finance and executive management depending on the financial investment of the build to stock order. The supply chain team in this case needs to provide is the impact of using these components on other Build to Order prior to authorizing Build to Stock orders.

These are some of the critical considerations on how to minimize inventory levels while maximizing cash. The key in inventory measurement analysis is how your company bench marks against other locations or divisions within your company as well as other companies in your industry.