Studies show that the typical cost of carrying inventory is 10.6% of the inventory value. The highest performing manufacturers with the most profitability growth potential spend 7.4% while the lowest performers spend double on inventory (up to 14%!) Because there is a 77% correlation between profitability and inventory turns, it’s important for manufacturers to keep inventory levels as low as possible and to sell inventory as quickly as possible.
I’ve learned that most manufacturers have little control over inventory turns and accelerating the cash conversion cycle. More importantly, I’ve seen 3PLs put manufacturer growth at risk because they’re making warehouse, distribution and inventory decisions based on “cost” instead of “growth and profitability.”
There’s a difference between managing inventory levels and managing inventory turns…
I spoke to leadership for one of our CPG manufacturing clients that was taking applying a supermarket concept to value stream mapping. I shared with them a case study on how RGL improved inventory turns by 400%. They were shocked as it was their belief that because “corporate” managed inventory levels, they also managed inventory turns.
In reality, they’re only looking at how much inventory to hold based on rules of thumb or single stage calculations to minimize shortages and financial losses due to out of stock instances. They’re not looking at how the inventory flows specifically where and how to utilize the warehouse to increase turns and growth. As planning frequencies and time-buckets move from monthly/weekly to daily and the number of managed stocking locations go from dozens in distribution centers to hundreds at the point of sale, corporate can not be close enough to the plant to understand how it needs to flow to maximize turns.
While corporate must be focused at the high level strategy space, I’ve seen production, maintenance period and plant changes happen so frequently that corporate cannot keep up. Yesterday, one of the paper machines was down at one of our manufacturing clients so the in-process inventory changed dramatically. Corporate inventory models would not enable fluid planning, staging and supply chain operations during these times of change. You need the people that are close to the operations to make the day-to-day, hour-to-hour and minute-to-minute decisions that impact the manufacturer’s ability to get product to market. It’s the 3PL that has the intimate knowledge of the warehouse layout and configuration.
Corporate inventory models are not granular enough…
I was speaking to the onsite team at one of our manufacturing clients about the ability to move product from one location to another. As we were discussing one bay, Taylor, one of our logistics managers mentioned how you can stack product 3 levels high in this bay while another nearby bay, you can stack product only 2 levels high. She also talked about how product coming off one paper machine can be stacked differently in different areas of the warehouse based on height and width of the paper machine. For one of the paper machines, you can fit more rolls with the same amount of square footage. This is too much information for corporate to build a model on. While the models, can you tell how much inventory to hold, you need the people to tell you how the inventory needs to flow to get to customers on time, in full.
Because, corporate does not control inventory, manufacturers have to look at how their 3PL is managing inventory….
Even though, there’s a 77% correlation between inventory turns and profitability, 3PLs still focus on making decisions based on “cost” versus growth. For example,
- At one of our client’s distribution centers, the 3PL is looking at the layout quarterly as required by our client. But demand and resource changes happen daily (and in many cases hourly). This is why at the plant and warehouse, we look at the layout on a daily basis so we can be proactive in managing product flow to customers without delay or missed shipment.
- One of the top 5 U.S. trucking and warehouse providers made storage and networking suggestions that would increase inventory levels and reduce inventory turns for a consumer products manufacturer by 50%. Also because they were looking backward at historic data vs. future, seasonal promotional data, this provider would have put up to 40% of direct shipments to customers at risk of failed delivery. Their aggregated data which showed a need to increase inventory levels would have cluttered the warehouse and distribution center making it difficult for the manufacturer to move product to customers. The cost savings that would have been achieved with the suggested changes would be far less than the financial repercussions the manufacturer would have received with its inability to meet the on-time, in full threshold.
- One of our manufacturing clients has over 1,000 items (paper roll sizes and diameters). The warehouse under another 3PL used to be sent up with FIFO for all inventory. Rail cars were unloaded and all products were stored together from that car assuming it would be shipped out together. But that is not how the product actually ships. The product comes in and is housed in two inventory accounts: the first is true corporate inventory for future orders. The second is product for pre-purchased customer orders. The prior setup resulted in digging through bays to find product for the pre-purchased orders as it was mingled with the product for storage. This caused truckloads to take 4 hours to unload (inefficiency) and rolls were handled multiple times causing damage as well. In working with other manufacturers, I’ve learned that this leads to pallets and cases being put in inefficient locations, out of stock conditions, delays in both inbound and outbound and weekly production line shutdowns. On top of this cash flow can be restricted. Adding cross docking to the distribution strategy accelerated time to market.
Now, take a look at how your 3PL is managing warehousing and distribution operations. Are they protecting your “growth” or are they so focused on cost savings that they are creating bottlenecks that are impacting profitability? Are they protecting the customer experience and meeting your customers’ increasingly higher expectations and demands?