Manufacturing companies often realize that the raw material or packing items stay unconsumed for several weeks. Such materials are ordered and inventoried after having borrowed money from banks and other sources, at rates of interest equivalent to 12-15 % per annum. Locked funds and the interest thus accrued due to unused inventories can have a significant impact on the Net Profit Margin.
Apart from the ever-changing demand, other main reasons for locked funds in inventories are:
A. Less than Installed Manufacturing Capacity
Procurement departments assume certain manufacturing capacities as a thumb rule and place an order. Capacity losses due to planned or unplanned maintenance, setup or cleaning downtimes, power, and labor uncertainty are not factored in.
B. The missing component of a set
Manufacturing processes involving integrating several materials into semi-finished and finished products are hampered because of missing components stuck in transit or due to Quality Clearance.
C. Asynchronous ordering
Some of the low lead time items (and with low variability in supply) land at the plant before the others (with higher lead time and higher supply variability) and result in unused inventory. This happens due to the fact that ordering is driven by aggregate consumption plan, i.e. material required in a month or quarter instead of a specific week or day.
D. The long-lasting impact of MOQ
Ordering sizes are bound by contracts and inbound vehicle capacities. For low consumption items, this could mean money stuck in long-lasting inventory. Add to it the shelf life aspects, and such unused inventory often has to be written off.
Better Planning to Unlock Money in Inventory
Advanced Planning Systems of SCMworx can help release cash back into the system while following some simple rules.
Rule 1 Generate a production plan with finite production capabilities while looking at potential lost capacity due to maintenance, labor and power, and other uncertainties. You will notice that no material needs to reach the manufacturing site.
Rule 2 Determine the precise day/week when the material shall be required for consumption. Do this while considering supply lead times of all materials in the Bills of Material and synchronize the ordering such that all materials are planned to reach the manufacturing site with minimal inventory pile up.
Rule 3 Analyse the implications of MOQ based ordering with help of our long term reports as well as flash reports to help the procurement team to track the goods in transit as well as material lying with the Quality Control team.
Use long term reports and flash reports to assess inventory and execution risks to estimate the impact on inventory and production schedule.