Get on the Cutting Edge of Inventory Control

It's a rare business owner who doesn't want to improve profits and boost cash flow by reducing the carrying cost of inventory. Here are two cutting-edge ways to help you manage inventory more efficiently.

1. Just-In-Time Method

Just-in-time inventory management involves planning shipments of material to arrive just before they're required. This saves money in inventory costs and increases production responsiveness and flexibility. In order for this concept to work, though, you've got to have effective lead-time management.

Elements of just-in-time management include:

Smaller lot sizes. This allows your company to be more flexible and meet changes in market demand. It can also decrease inventory holding costs, cycle time inventory, lead times and pipeline inventory.

Because lot sizes are smaller, companies that use the just-in-time method can achieve a consistent workload on the production system. (Smaller lots are generally easier to schedule than large lots, which take more time to process).

Tighter set-up times. By reducing set-up times and the associated costs, you can afford to produce smaller lot sizes. Also, if your company is inefficient on machine setups, you'll likely change products less often.

Flexibility. During bottlenecks or unplanned spikes in demand, a flexible work force is able to quickly reassign tasks.

Close supplier relationships. Suppliers must provide frequent, on-time deliveries of high-quality materials. So, close ties with them are vital to the just-in-time system. Long-term relationships with suppliers promote loyalty and improved overall quality.

Humming machines. For companies with a high degree of automation, preventive maintenance is critical to just-in-time management. Unplanned downtime can be disruptive and costly.

Quality control. Just-in-time systems are designed to control quality at the source, rather than later in the process. For that reason, production workers are responsible for their own work, and, if a defective unit is discovered, it's returned to the area where the defect occurred. This makes employees accountable and empowers them to produce higher-quality products.

2. Accurate-Response Method

The accurate-response approach focuses on forecasting, planning and production. The underlying premise of accurate response focuses on flexible manufacturing and shorter cycle times to better match supply with demand. This speeds up the supply chain process, allowing managers to delay decisions regarding raw materials, obtain more market information and better determine production requirements.

This inventory management method incorporates the following key elements:

Overall performance. Accurate response measures the cost per unit of stockouts and markdowns. Then it factors this information into the overall evaluation of the firm's performance. Let's say your company can't meet demand. The lost sales would be factored into the overall costs, which would then justify increasing production to obtain and maintain customers.

Predictable and unpredictable products. By differentiating between the two, you can change your approach to manufacturing both items. Predictable products can be made further in advance to "reserve" capacity during the selling season for unpredictable products. Then, your company wouldn't have to accumulate and pay for large inventories.

Incorporating just-in-time and accurate-response techniques can drastically raise your company's efficiency. Lowering inventory levels cuts operating capital needs and gives you a competitive edge. Reducing the expenditures for warehouses, employees and equipment produces a stronger balance sheet, income statement and improved cash flow.

What's Right for Your Business?

Manufacturers invest significant working capital in raw materials, work-in-progress and finish goods. So, efficient inventory practices can make or break a manufacturing firm. Contact your CPA to discuss which method makes sense for your situation.

Take Your Cue

Here's how three companies benefited by changing their inventory management:

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