Threatened by a potential credit crunch or not, manufacturers usually have significant opportunities to generate cash by reducing excess inventories, increasing throughput and lowering costs with better customer satisfaction.
According to management consultant R. Michael Donovan, “Most manufacturers utilize ineffective methods to reduce inventories. Truly effective inventory reduction techniques find the irrational conditions that cause inventory excesses to exist so you can permanently eliminate the causes. The payback can be tremendous.”
Management can attack inventory reduction as a standalone objective; however, it is much more beneficial to correct the underlying business process issues that create excess inventory and many other performance problems.
“Many manufacturers should reinvigorate their lean manufacturing initiatives,” says Jack Rink, a consultant with R. Michael Donovan & Company and its lean manufacturing practice director. “Manufacturers who convert to lean manufacturing make-to-demand business models can achieve tremendous business performance improvements with limited investment in inventory. The return-on-investment is outstanding.”
Generating cash from inventory reduction will improve the balance sheet; however, it is just one of the benefits from correctly improving business processes. Many companies can significantly increase customer service and lower costs as a result of improving their business planning, execution and control processes.
Current business conditions are a good reminder to strengthen the balance sheet sooner rather than later. When inventory reduction initiatives are put off to later, when the pressure is more intense, many illogical tactical actions – such as a general freeze on inventory purchases – create negative, reverberating results in lost profits, poor customer service, increased costs and sometime increased inventories.
To learn more on this subject, visit http://www.rmdonovan.com.
