Do manufacturers need a new model of inventory management? Neil Ballinger, head of EMEA at automation parts supplier EU Automation, offers a view:
During the economic boom in the 1980s, just-in-case was the standard approach to inventory management — piling safety stock was the norm and was done in the certainty that, sooner or later, extra supplies would come in handy. Nowadays manufacturing follows a lean production model, which in turn relies on a just-in-time inventory strategy. This business model can reduce costs, but is it really the most efficient in the long run? Here Neil Ballinger, head of EMEA at automation parts supplier EU Automation, discusses the pros and cons of this approach.
Empowered with social networks and digital devices, consumers are increasingly dictating the market — they expect more customised items to be available, and they want to get them quickly and for the best price. To keep up with demand while maximising profits, manufacturing plants have quickly moved to a lean production model. First popularised by automotive giant Toyota, lean manufacturing is all about eliminating waste and maximising profitability per line.
Following this shift in production, inventories have become lean too. Since production is aligned to demand, the standard approach has moved from just-in-case to just-in-time, with suppliers delivering smaller amounts of raw materials more often. Any excess inventory is seen as an enemy of profit, firstly because there is no guarantee that it will be sold, secondly because it increases storage costs. The just-in-time approach requires a fine-tuned mechanism of demand prediction, as well as global supply chains that are synchronised to respond to changes in local demand. However, very few companies can reliably trace their supply chain beyond tier one suppliers. This means that the majority cannot fully understand the risks associated with their extended supply chains.
What if your tier two supplier is over-reliant on a certain geographical area or on a single supplier for raw goods? A disruption of business in one plant could quickly generate a domino effect with costly repercussions across the entire chain. Overzealous inventory management could put companies in a difficult position. Plants might not be able to cope with disruptions along the supply chain or might not manage to produce and deliver an unexpected order.
Adding safety stock can help, but there are further steps that supply chain managers can take. Lean production should be accompanied by a diversification of suppliers and tools to enhance the visibility of your extended supply chain. Manufacturers should not over-rely on one geographical area and might want to add local businesses to their list of approved suppliers. This applies to suppliers of raw materials, but also to companies that provide automation equipment that is essential to production. If a component in a critical application suddenly breaks, do you know who to call?
When demand increases, machines run at full capacity and the risk of breakage increases. Having a well-stocked spare parts inventory, sourced through a trustworthy supplier, can make the difference between fulfilling your orders or disappointing your clients. Manufacturers might also want to put systems in place to guarantee visibility across their extended supply chain network. There are many digital tools on the market that allow companies to trace their supply chain beyond tier one, allowing them to react quickly in a case of disruptions.
Lean manufacturing doesn’t necessarily mean that, in case of sudden demand, inventories will struggle to cope. With the right digital tools in place, businesses can find a healthy balance between minimising waste and keeping customers happy.