For manufacturing businesses, inadequate cash flow can be a huge problem that jeopardises their ability to expand and sometimes even to maintain their operations.
Technology is often used to help manufacturing businesses improve stock control and cash flow as a result. Having sales and inventory information available at the click of a button enables businesses to make faster decisions and be more dynamic in its operations.
Although most organisations already have good technology in place, the key to generating powerful insights that take strategy and decision making to the next level, is integrating systems and optimising processes specifically for your business.
In this article, we will explore some of the causes of overstocking, the issues that can result, and examples of strategies and technology that can solve these issues and prevent them from re-occurring.
Overstocking
One common challenge for manufacturing companies is managing inventory levels to prevent overstocking. This issue can result in additional expenses such as wastage fees, storage costs, and depreciation, which can decrease profitability and strain cash flow. By effectively managing inventory levels, businesses can avoid overstocking and reduce the negative impact on their financial well-being.
‘Just In Case’ can result in ‘Just A Few’ issues
Many manufacturing businesses use the Just-In-Case (JIC) strategy which means keeping excess stock on hand ‘just in case’ consumer demand increases. Historically, businesses using this model are doing so as they have difficulty predicting consumer demand.
In recent times, more and more manufacturing businesses have opted for the Just-In-Case strategy due to the supply chain crisis and unpredictable inflation. They are choosing this method of storing inventory to save costs and ensure that they have enough stock on the shelf to meet demand over a longer period of selling, in case of supply chain delays in the future. However, with deeper analysis, it would become clear that this method may actually cost more money than it saves through avoiding minor inflationary increases. Decision makers often fail to account for the costs associated with processing that stock as it’s received, the labour required to move it around and make room for seasonal goods, warehouse costs, pallet costs, spoilage, security, and more.
What to consider when choosing a strategy:
- The variability and predictability of consumer demand.
- The length of your suppliers’ lead times and whether there could be delays.
- The cost of holding inventory vs the risk of loss of sales due to stockouts.
- Production flexibility – can your production processes allow you to quickly increase operations in response to demand changes.
Conduct a cost-benefit analysis
To weigh the costs of carrying excess inventory (with a “just in case” approach) against the potential costs of stockouts or production delays (with a “just in time” approach). Consider factors such as lost sales, customer dissatisfaction, rush orders, and potential financial impacts. The decision should optimise both customer service levels and operational efficiency while maintaining a healthy cash flow.
Evaluate the characteristics of your industry and products
Industries with rapidly changing technologies or fashion trends may require a more responsive “just in time” approach to avoid inventory obsolescence. Industries with long product lifecycles or complex production processes may lean towards a more conservative “just in case” approach to ensure continuity and customer satisfaction.
Accurate forecasting is critical
When demand is overestimated or inaccurately projected, manufacturers may produce more goods than consumers actually require. When manufacturers invest money in raw materials, production costs, and storage expenses for the excess goods, their capital becomes immobilised and unavailable for other critical business needs, such as paying suppliers, investing in equipment or technology, or meeting operational expenses. The longer the inventory remains unsold, the greater the strain on cash flow.
When demand is accurately forecasted, businesses can purchase the correct number of raw materials required, and produce only what is needed, leading to less overstocking and risk of spoilage. To accurately forecast demand and when goods need to be replenished, there are various factors to consider:
Historical sales data provides insights into sales patterns, seasonal variations, and trends over time. It helps identify demand cycles and establishes a baseline for future forecasting.
Consumer Data – analysing consumer data can provide valuable insights for demand forecasting. This includes information on customer behaviour, purchase history, order patterns, and customer feedback. By segmenting customers based on characteristics like region, industry, or purchasing power, manufacturers can tailor their forecasts to specific customer segments. This is particularly effective for manufacturers producing high value/low volume products.
Collaboration with sales and marketing teams – which can provide valuable information on customer feedback, sales pipeline, and upcoming deals. Marketing teams can share insights on promotional activities, campaigns, and market response.
Data Capture Systems
This insight data needs to come from somewhere, and it can be a mammoth task to pull it all together when the business doesn’t have good systems in place that capture this data accurately.
Menzies has a number of clients that use Unleashed Software to manage their supply chain and inventory. This software uses operational data such as sales history and lead times to calculate the monthly rate of demand to suggest new minimum and maximum stock levels to reduce risks of both stockouts and overstocking. It also provides notifications of when new stock should be ordered, as well as the performance of suppliers meeting or exceeding their lead days to bring attention to supply chain disruptions.
Sometimes Customer Demand is Unpredictable:
Even with good marketing strategies and market research, sometimes customer demand falls due to unforeseen circumstances. The pandemic in recent years is a perfect example of that. This can lead to reduced revenue, as well as capital being tied up on the shelf. Regardless of the cause, there are ways to mitigate these issues:
Create Marketing Promotions: Work with marketing to push specific products and understand seasonality and other patterns/trends. And consider discounting or bundling of products to make sales and turn that cash from tied up in stock to income in the bank account.
Re-consider pricing: Many product businesses have kept the same prices for years as a strategy for their products to be viewed as good value. After years of inflation, this strategy can have the opposite effect, where consumers feel the products must be of a low quality. Is it time for a price increase?
Use a stock aware CRM: such as Prospect to see a breakdown of customers, their loyalty, and the risk of them leaving. This helps to identify opportunities for sales conversations. Prospect, in particular, has some really valuable features such as their Magic Matrix Analysis which identifies cross-selling opportunities based on customers’ awareness and interest in specific products.
Return the stock: if it’s possible and cost effective. Goodwill comes from strong supplier relationships.
Exploring Supply Chain Issues
Delayed or unpredictable deliveries such as transport delays, natural disasters, labour strikes, and mass sickness can result in goods not being received on time, if at all! This of course would lead to a lack of stock. To protect against these risks, many organisations may choose to order more than necessary and stay in a constant state of being overstocked. There are other options to protect against these delays/non-deliveries, such as having a back-up supplier closer in location to the warehouse.
Lack of visibility and coordination: Supply chain disruptions can sometimes create a lack of visibility and coordination among different departments within the supply chain. For example, if manufacturing, distribution, and sales are not well-aligned, each part may independently order additional stock to ensure availability. This lack of synchronization can lead to overstocking at various stages of the supply chain. Implementing integrated solutions across the organisation will improve that communication and co-ordination.
Inefficient manufacturing and fulfilment processes, can mean that goods may not leave the warehouse fast enough, with a backlog of goods assigned to sales orders, taking up valuable shelf space. When warehouse staff are grappling with fulfilling orders to reduce the stock on hand, processes should be reviewed and optimised.
Improving visibility & controls: Whilst inventory management software, such as Unleashed, can be used for tracking sales and assembly with its B2B store and e-Commerce integrations – combining this with a warehouse management system such as Mintsoft provides even greater fulfilment controls, such as picking & packing, quality control, warehouse space optimisation and visibility of all incoming orders either from Unleashed or any other marketplace, such as Argos or OnBuy.
Technology integration & process optimisation: There are many ways in which technology can support manufacturing businesses with both stock control and cash flow. Even B2B manufacturers can now give their customers access to online portals so that they can make purchases easier and more smoothly, thus moving stock and receiving revenue faster.
Having sales and stock information available at the click of a button enables businesses to make faster decisions and be more dynamic in its operations. Most organisations already have good technology in place – for example, CRM systems and eCommerce platforms that track sales and revenue.
However, the key to generating powerful insights that takes strategy and decision making to the next level is integrating systems and optimising processes specifically for your business.
Next Steps:
If you are struggling to grasp control of your stock quantities and cash flow, get in touch with Menzies. Our Digital Transformation team has years of experience in helping businesses implement efficient and optimised processes and systems that free up our clients to focus on strategy with the right tools to inform decision making. If this sounds like something you’d like to discuss, please get in touch below.