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Technology is often used to help manufacturing businesses improve stock control and cash flow as a result. Having sales and inventory information available at the click of a button enables businesses to make faster decisions and be more dynamic in its operations.
Although most organisations already have good technology in place, the key to generating powerful insights that take strategy and decision making to the next level, is integrating systems and optimising processes specifically for your business.
In this article, we will explore some of the causes of overstocking, the issues that can result, and examples of strategies and technology that can solve these issues and prevent them from re-occurring.
One common challenge for manufacturing companies is managing inventory levels to prevent overstocking. This issue can result in additional expenses such as wastage fees, storage costs, and depreciation, which can decrease profitability and strain cash flow. By effectively managing inventory levels, businesses can avoid overstocking and reduce the negative impact on their financial well-being.
Many manufacturing businesses use the Just-In-Case (JIC) strategy which means keeping excess stock on hand ‘just in case’ consumer demand increases. Historically, businesses using this model are doing so as they have difficulty predicting consumer demand.
In recent times, more and more manufacturing businesses have opted for the Just-In-Case strategy due to the supply chain crisis and unpredictable inflation. They are choosing this method of storing inventory to save costs and ensure that they have enough stock on the shelf to meet demand over a longer period of selling, in case of supply chain delays in the future. However, with deeper analysis, it would become clear that this method may actually cost more money than it saves through avoiding minor inflationary increases. Decision makers often fail to account for the costs associated with processing that stock as it’s received, the labour required to move it around and make room for seasonal goods, warehouse costs, pallet costs, spoilage, security, and more.
To weigh the costs of carrying excess inventory (with a “just in case” approach) against the potential costs of stockouts or production delays (with a “just in time” approach). Consider factors such as lost sales, customer dissatisfaction, rush orders, and potential financial impacts. The decision should optimise both customer service levels and operational efficiency while maintaining a healthy cash flow.
Industries with rapidly changing technologies or fashion trends may require a more responsive “just in time” approach to avoid inventory obsolescence. Industries with long product lifecycles or complex production processes may lean towards a more conservative “just in case” approach to ensure continuity and customer satisfaction.
When demand is overestimated or inaccurately projected, manufacturers may produce more goods than consumers actually require. When manufacturers invest money in raw materials, production costs, and storage expenses for the excess goods, their capital becomes immobilised and unavailable for other critical business needs, such as paying suppliers, investing in equipment or technology, or meeting operational expenses. The longer the inventory remains unsold, the greater the strain on cash flow.
This insight data needs to come from somewhere, and it can be a mammoth task to pull it all together when the business doesn’t have good systems in place that capture this data accurately.
Menzies has a number of clients that use Unleashed Software to manage their supply chain and inventory. This software uses operational data such as sales history and lead times to calculate the monthly rate of demand to suggest new minimum and maximum stock levels to reduce risks of both stockouts and overstocking. It also provides notifications of when new stock should be ordered, as well as the performance of suppliers meeting or exceeding their lead days to bring attention to supply chain disruptions.
Even with good marketing strategies and market research, sometimes customer demand falls due to unforeseen circumstances. The pandemic in recent years is a perfect example of that. This can lead to reduced revenue, as well as capital being tied up on the shelf. Regardless of the cause, there are ways to mitigate these issues:
Their Digital Transformation team has years of experience in helping businesses implement efficient and optimised processes and systems that free up their clients to focus on strategy with the right tools to inform decision making.
If this sounds like something you’d like to discuss, please get in touch
