Break the Cycle
To eliminate inventory stockpiles, manufacturers need to align themselves with marketplace demand
by Anand Sharma
Every day we see new signs of economic growth, and while a full recovery is still months away, optimism is beginning to grow.
Most manufacturers want to make the most of the improving conditions; they want to re-energize their companies and take full advantage of the robust economy they hope is right around the corner. They have a new sense of urgency to make up for lost time.
For many manufacturers, this rediscovered confidence manifests itself in a huge surge in production. Their instincts tell them to stock up to prepare for the onslaught of demand and the rush toward replenishment that follows.
Reaction of fear
Unfortunately, this is not a useful strategy. It is a reaction made out of the fear of not being able to meet a new spike in demand or missing an opportunity while competitors capitalize on the moment. When manufacturers let these ideas prevail, they find themselves trapped in a dangerous cycle: The economy begins to heat up, production rises quickly, the economy soars and production continues to increase. But, inevitably, the market slows down or levels off, and manufacturers are left with depreciating inventory stockpiles that rapidly move toward obsolescence.
Synchronize production with demand
An economic upturn provides a golden opportunity to break the cycle of overstimulating production. Smart manufacturers will not get swept up in this impulsive behavior. Instead, they will use the cycle of change to get aligned with demand. They will have to synchronize production with real demand, not future projections.
A forecast is always a gamble (just think about your local weatherman). At its best, it is an educated guess. The only thing certain about a future projection is that it will not be exactly correct. For manufacturers, this means production structured to match a projected increase in demand is bound to create overstock. This in turn creates excess inventory, which is wasteful and expensive.
Stockpiled inventory represents resources that could have been used elsewhere to help the company grow. Instead, capital is used to purchase raw materials. This investment inevitably depreciates and often becomes totally obsolete before it can be put to use. Capital also becomes tied up in the space required to house the inventory and the personnel needed to maintain it.
Carefully assess current resources
Another aspect of the cycle of overproduction is reflected in a company's workforce. To ramp up production quickly, many companies hire new workers, buy new equipment and expand their facilities. This drains the company's agility because these commitments are made with the assumption revenues will increase in the future based on forecasts of increased demand.
If this demand slows or even fails to manifest itself, the company will become bloated--loaded down with resources it cannot use and cannot support. This means the company will have excess equipment, facilities that are underused or must be sold at a loss and worker layoffs, which lower morale and decrease productivity.
These dangers can be avoided if manufacturers leverage existing resources to meet actual demand by dramatically shortening lead times. Before rushing to expand, companies must carefully assess their current resources.
They should cut any unnecessary processes, adjust the work environment and tools to fit the tasks at hand and focus on continuous improvement. These techniques will increase productivity and eliminate the need for additional capital. By using only existing assets, a company is empowered to meet increased demand without overextending itself.
Above all: maintain agility
A lean operation that matches production to current orders maintains agility. It can respond instantaneously to changes in market pull and move quickly to fill new demand. This results in a better product, greater customer satisfaction and, ultimately, increased market share.
By matching production to demand, not wasting capital inventory or raw materials and leveraging existing assets, manufacturers can take full advantage of the good economic times to come.
ANAND SHARMA is president and CEO of the TBM Consulting Group in Durham, NC. He earned a master's degree in business administration from Boston University.