Insufficient Inventory Can Put You Out of Business (Part 3 of 3)

"What aspects of inventorying and securing textiles pose the biggest challenge? What percentage of losses would you consider to be acceptable if the proper controls were in place? And how could an insufficient inventory impact the rest of my operation?”

Equipment Manufacturing — Joe Gudenburr, G.A. Braun, Syracuse, N.Y.

As an original equipment manufacturer (OEM), our team deals with inventory each and every day, and it touches each and every facet of our business. I would love to say that our organization has never faced challenges when it comes to managing our inventory, but this simply would be a bit disingenuous.

We carry more than 13,000 SKUs (stock keeping units) and a host of core raw materials in order to support our new-equipment manufacturing needs and clients’ parts requirements. With a diverse contingent of components and fabricated materials, and a need to support current-generation equipment along with legacy equipment, we have had to overcome our share of inventory “opportunities.”

Inventory is a necessary evil when it comes to running a business, and mastering it is no easy task. It presents one of the greatest challenges to manufacturers, distributors and processing facilities alike. A failure to properly wrap your arms around inventory management can drain a company of cash and take a significant bite out of earnings. Additionally, inventory inaccuracies can negatively impact service levels. None of these situations is good for the long-term interests of a business!

[NP][/NP]When looking at the health of an organization, inventory is one of the most important measuring sticks. In a healthy business, you will see the following:

• Inventory turn rates that are commensurate with the supply-and-order cycle for that industry. The higher the turn rate, the healthier the business.
• Physical-inventorying and cycle-counting events will yield favorable marks for inventory accuracy from both dollar and SKU-line-item perspectives.
• Order fill rates and shipment accuracy metrics will be impressive, typically exceeding 95%.
• Slow and nonmoving inventory levels will not only be low, but the organization will have an established financial protocol to accrue for material and component obsolescence of such items.
• Operating environment will be measured, structured, disciplined and controlled. Everyone will be focused on strategic pursuits and improving the net operating position.

Obviously, when inventory management is not in a controlled state, these benchmarks will not reflect favorably on the health of the business. Instead, there will be a host of systemic bad practices that manifest before your eyes due to lacking inventory oversight:

• 
  Value of the inventory will be bloated as buyers react to shortages. They will try to increase inventory.
• Operating environment will seem chaotic, and everyone involved in the business process will seem to be solely focused on daily survival as opposed to strategic pursuits.
• Client relations may be strained due to poor service. So will employee morale and retention.
• Labor, utility and equipment-maintenance costs will undoubtedly exceed budgeted amounts due to the effort to fill inventory voids.

So, how do you charm this six-headed snake? In a dynamic environment that is constantly changing or evolving, this task is always present. Following some basic steps can have a significant impact on transforming chaos into a controlled state, and expenses into profits:

• 
  Make certain that all SKUs are clearly defined—they have an identity, a defined supply channel, a controlled inventory location, and specifications that are adhered to.
• Establish an understanding of the demand that exists for each SKU, and the time that it takes to replenish inventory.
• Establish an automated means by which to track your inventory, and ensure that an appropriate cycle-counting and inventory-reconciliation process exists to avoid surprises.
• Establish some minimum stocking quantities based on consumption rates and optimal processing protocols.
• Leverage the supply chain to manage consumable inventories, and be certain to take supplier lead times into account.
• Align your processing environment with your inventory-replenishment needs. Too often, companies expedite the processing of specific low-volume SKUs, creating a great deal of inefficiency within the facility. Instead, run quantities that are sufficient for efficiencies to be realized and for inventory to remain stable.
• Consider simplifying your inventory. Organizations often make it a priority to create custom SKUs in an effort to generate higher averaged sales prices on said items, or to expand sales. Be careful not to mix high-volume processing with niche environments. Sometimes, what looks good on paper does not materialize in reality.
• Establish a financial-reconciliation process to ensure that slow and nonmoving inventories don’t present an obsolescence risk.

Operators in our industry face a daunting challenge. They must not only manage their processing environment and inventory when it is within their four walls, they must manage it as it is shipped to clients and returned as soiled goods for processing.

It is challenging to manage people and organizations that are not directly under your control. This makes the steps I have noted all that more important so that losses are identified in real time, ensuring that end-users are charged appropriately for said losses. Having timely access to data and prompt exchanges with customers will avoid finger pointing and make certain that your interests are looked after.

Textile/Uniform Rental — Kurt Rutkowski, Universal Linen Service, Louisville, Ky.

The greatest challenges when it comes to inventory are based on huge fluctuations in business, last-minute sales, and lack of availability from the supplier.

[NP][/NP]In our area, we have large festivals, events and the Kentucky Derby. Ordering for these events poses a constant challenge. We use historical data, but it never fails that there will be a last-minute color change, size changes, or other customer change. When this happens, we have to depend on our supplier partnerships to take care of the customer.

Inventory is a delicate balance. We never want to be out of product, but we can’t afford to order too much, either. We take inventory each week to ensure that we are aware of everything on hand. For purchasing, we use life servings to estimate the best possible scenario.

Deciding on an acceptable percentage of losses can be tough because a lot is determined by the mix of business. I would consider an acceptable shrinkage/rag-out percentage to be 10-15% in a “flat goods” operation. This number is different for different operations, and there is no magic number that would encompass all of them. The customer mix also plays a huge role in what the true number should be.

Insufficient inventory can be a huge nuisance in our industry. If you do not have adequate inventory, you are constantly playing catch-up.

You wear out the product in service faster because you have to turn it more frequently. It may take more people to process, because you need to sort it right off the route truck, clean it and put it right back on the street. Your staff may take shortcuts, or put out product that would not normally meet your standards, in order to make delivery.

The worst-case scenario is that you are unable to make deliveries because the product has not turned. This leads to more gas and labor to run the product back, and ultimately leaves your customers unhappy. Insufficient inventory can kill an operation.

Click here for Part 2 of this story.
Click here for Part 1 of this story.