Industrial Inventory Management – The Uglies!
In this video, Keiran Hogan gives some tips and insights into managing industrial inventory…
“Hello, I’m Keiran Hogan. My background is Logistics and operations management in industrial and agricultural equipment, and I have a especial interest in logistics for what we call the Uglies. Some equipment’s called ugly because of its odd shape and weight, it’s ugly in a transport and a warehousing sense but we found that the same equipment often has some weird and unusual features when it comes to inventory management and that’s what I’ll talk about today. But rather than take a big picture inventory view, we’ll look at some specific aspects of inventory management for industrial products.
Inventory strategies and plans can only be made when you know the inventory carry cost. The inventory carry cost is the incremental cost of holding greater average levels of inventory. Multiplying the ICC or inventory carry cost percentage by average inventory reduction lets you know how much you can save by reducing average inventory. We found that in the industrial sector, sales and marketing people and even the inventory planners usually assume the cost of holding inventory is the cost of borrowing money. Well it would be nice if it was true, but it never is. We see the cost of holding inventory in the industrial good sector is often more than 25 percent and even up to 33 percent, why is it so? Well here you can see behind me the components of the cost:
Components of the cost:
- Cost of Capital
- Storage Space Cost
- Service Costs
- Risk Costs
And you need to look at carefully each of them.
The Capital Costs. You can elect to use the borrowing cost of money or the average weighted cost of capital or the hurdle rate. The hurdle rate is the return the investors could get if they invested elsewhere. Now you’re on the sector with mining, energy or construction and investors in this segment expect and get a very good return usually much better than bank rites. Generally, the owners and the shareholders of the company will want to use the hurdle right and this is often around 15 percent so you can see where this is going.
Think about the Storage Space Costs. These are harder to value and in the industrial sector, we often see quiet high costs more than 10 percent’s come up and for some good reasons. The storage locations are sometimes required to be attached to service and sales location and this can mean there are more locations in higher cost places than you would have if the number on locations of those places was driven purely by supply chain factors. So in a sense, there is a business strategy reason for choosing a storage location that’s actually quiet costly.
Service Costs. The service costs can be more than 2 percent what we see here is that many industrial businesses don’t have the fanciest and the most efficient procurement systems and processes and they don’t have centralized procurement so just placing orders on supplies is relatively expensive.
Think about the Inventory Risk Costs. This bucket of costs can be quite high because obsolescence costs are in here. Three or four percent or more is not unusual at all. In industrial businesses, it’s often to do with design changes super sessions, changes in customer preferences and the like. And these are hard to avoid and can be hard to manage. The bottom line: expect to see inventory carry costs exceed 25 percent. But find out what yours is and communicate that number in the business and then make inventory decisions off that number.
The next thing we often see in industrial businesses is high product complexity caused by very large regional differences in the products that markets require. For example, tyres required in Western Australia are completely different to those in New South Wales and different again in Queensland, but why so? Well, there’s a whole bunch of reasons. Sometimes it’s climate, sometimes it’s the soil or the rocks that those things are working or regional legislation or just predation. Sometimes the product spec is driven by the customer’s engineers and there are different engineers in each region. But whatever the reason, there can be a lot of product complexity that must be managed somehow.
We’ve seen more than a few businesses where less than 10 percent of their product lines are sold in all there state locations and much more half their lines are sold in only one store location. This means that inventory must be regionally managed, one size does not fit all.
The tools and the policies and the processes maybe common across all the regions through the business, but the same tools and policies and process must be capable of accommodating very significant regional differences. It also means that obsolescence risk is increased, you don’t get the benefit of relocating the slow movers to somewhere that those things are selling.
Also, in industrial businesses there’s often a lot of slow movers and these can be a challenge. At least three different types, slow movers can be essential offerings but they may be critical to a customer’s operations so they have to be stopped, or they can be lines that moving frequently but are at a very high value and or at a very high margin, or they can be just SLOBS, slow and not important to your business. The important thing here is to identify which are the fast moving or normal lines, which are the slow but critical, which are the slow but valuable and which are the slobs. If you overlay this with an ABC classification, you can really start to develop inventory strategies that are both commercially sound and customer oriented.
What about the tools to use? If we think about our carry cost and our product complexity and our regional differences and our slow movers, what sort of tools and policies can you use to manage better? Well there are lots of them but let me suggest these three as some of the most powerful.
1. Classify your inventory at a store level using the normal ABC classification as well as by the criticality of the line. Out of that, you can develop good inventory policies concerned with firstly availability, different levels for different lines, concerned with stock levels, the right level to support the availability goal and very importantly, the supply terms. You can make decisions about what’s stocked, what’s indent, what’s manual order only, what’s then the held, what’s direct ship and so on.
2. Actively manage the product complexity and the associated obsolescence rate. There’s a few tools especially relevant to industrial services, for instance consider implementing a program that supports like product substitution and which identifies face in and face out of lines. Also, write down the value of the extreme slow movers, you can write it down dramatically. We’ve seen items which can’t be scrapped but which turn only once in a generation. Their real dollar value might be just a dollar. Work out then the correct levels for critical slow movers and the right technical ways to do that best. And finally most importantly:
3. Share the plan across your supply chain. If you wanna make it work, everyone in the business involved with supply and demand must understand and support the strategies and that includes the sales and marketing, engineering and the product development and the finance folks, as well as the logistics function.
Industrial inventory is different but it’s not ugly at all it’s actually more like fascinating. It’s also a very big cost driver and a significant risk factor as well as your competitive advantage. So have a good look at it, you might be surprised at what you see and also at the opportunities available to you. Thank you! “
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