fusion point research Marketing Research Reports

Marketing to Inventory Management in Manufacturing

Understanding Their Role

Inventory is one of the most important assets of any manufacturing organization, and effectively managing inventory levels is vital for success. Inventory, or stock, include all of the finished goods an organization owns, plus any items that will end up in finished goods such as raw materials and work-in-progress (WIP) items.1 Inventory ties up an organization’s cash and managers are constantly seeking ways to reduce inventory levels without endangering sales results. In addition, items in inventory are susceptible to obsolescence, spoilage and theft. Reducing inventory frees up cash that can be better invested in new machinery, product innovations or used to pay off expensive loans.2 3

 

While manufacturers want to limit inventory to the lowest possible levels, they all must carry some inventory to operate. Reasons to carry inventory include:

 

  • Supply chain pipeline – in order to make and sell products, manufacturers need raw materials, partially built products and finished goods in trucks or ships on the way to customers.
  • Cushion to prevent stock-outs – running out of finished goods might prevent customers from receiving orders, damaging the manufacturer’s credibility. Stock-outs of raw materials or WIP inventory creates costly downtime in production facilities.
  • Unpredictable demand – companies unable forecast demand accurately might need to hold extra inventory in case demand is higher than anticipated.
  • Seasonality – products sold once a year, or infrequently, such as holiday items might need to be produced over several months to meet customer demand, and kept in inventory.
  • Economic order quantities – in order to get better discounts, manufactures might buy raw materials or sub-components in bulk, and hold the excess in inventory.
  • Risk management – manufacturers hold some inventory to protect against rare events, such as suppliers going out of business, natural disasters disrupting part of the supply chain or major swings in the price of raw materials.4 5

 

The goal is to carry just enough inventory to meet customer demand, run the production operation smoothly and protect against risk.6

 

“Raw materials, semiproduced goods, complete cars, even replacement parts. We reduced €1.6 billion (US$1.7 billion) of inventory, with no impact on the business. If you have two plants that are apart by 50 miles, you don’t have to duplicate all your spare parts for the equipment. You can use one and send it to the other plant if they need it… it’s about good sense.”

- Carlos Tavares, Peugeot CEO7

1 Ochse, Gareth. “Inventory, Just in Time.” Finweek, 2013, 47 – 48. EBSCOhost(87046225).

2 Bonney, Joseph. “Companies Seek the Inventory Sweet Spot.” JoC Online, 2013, 1. EBSCOhost(88157152).

3 Roche, Colman. “Supply Chain Management Goes Beyond Inventory.” Material Handling & Logistics 68, no. 11 (2013): 22 – 25. EBSCOhost(92679359).

4 Kilkenny, Anne Marie. “Inventory Management.” Operations Management (1755-1501) 38, no. 4 (2012): 29 – 31. EBSCOhost(78954013).

5 Professionals, Council of Supply Chain Management, and Nada Sanders. THE DEFINITIVE GUIDE TO MANUFACTURING AND SERVICE OPERATIONS . Edited by Jeanne Glasser Levine. 1st ed. Pearson Education LTD., 2013.

6 Ochse, Gareth. “Inventory, Just in Time.”

7 Chow, Jason. “Peugeot CEO Uses Cost Cuts to Turn Corner on Profitability.” The Wall Street Journal. March 2015. Accesses 11/18/15. Available at: www.wsj.com/articles/peugeot-ceo-uses-cost-cuts-to...

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Copyright © 2016 Fusion Point Research, Inc.

Inventory is required to run a manufacturing operation, but it ties up cash and is prone to spoilage and obsolescence. Managers must weigh the benefits versus the costs, and constantly strive to find the right balance between efficiency and meeting customer demands.
fusion point research Marketing Research Reports
Inventory is required to run a manufacturing operation, but it ties up cash and is prone to spoilage and obsolescence. Managers must weigh the benefits versus the costs, and constantly strive to find the right balance between efficiency and meeting customer demands.
  • Supply chain pipeline – in order to make and sell products, manufacturers need raw materials, partially built products and finished goods in trucks or ships on the way to customers.
  • Cushion to prevent stock-outs – running out of finished goods might prevent customers from receiving orders, damaging the manufacturer’s credibility. Stock-outs of raw materials or WIP inventory creates costly downtime in production facilities.
  • Unpredictable demand – companies unable forecast demand accurately might need to hold extra inventory in case demand is higher than anticipated.
  • Seasonality – products sold once a year, or infrequently, such as holiday items might need to be produced over several months to meet customer demand, and kept in inventory.
  • Economic order quantities – in order to get better discounts, manufactures might buy raw materials or sub-components in bulk, and hold the excess in inventory.
  • Risk management – manufacturers hold some inventory to protect against rare events, such as suppliers going out of business, natural disasters disrupting part of the supply chain or major swings in the price of raw materials.