By John Felsenthal III, CFPHS, CFPECS

In this blog article, we will discuss the pros and cons of keeping inventory, how to optimize inventory management, and outsourcing inventory.

Pros and Cons of Keeping Inventory

Inventory has costs and benefits associated with it, and finding the optimal balance is a challenge for any original equipment manufacturer (OEM).

Pros of Keeping Inventory

Keeping inventory can provide several advantages for an OEM, such as:

• Reducing the impact of supply chain disruptions, such as quality issues, transportation delays, labor shortages, or unexpected demand spikes.
• Maintaining production continuity and efficiency, which avoids shutdowns, idle workers, and process changes due to inventory shortages.
• Enhancing customer satisfaction and loyalty by delivering products on time, meeting quality standards, and avoiding backorders or cancellations.
• Increasing sales opportunities by being able to respond quickly to customer orders, offer discounts or incentives, and capture market share.

Having inventory is like having insurance. This insurance can keep your business running like a well-tuned machine and mitigate the much higher costs of not having it.

Cons of Keeping Inventory

Keeping inventory can also have some disadvantages for an OEM, such as:

• Increasing the costs of carrying inventory, which consist of space, the cost of money, insurance, obsolescence, shrinkage, and handling.
• Reducing the cash flow and working capital by tying up money in inventory that could be used for other purposes.
• Increasing the risk of inventory loss or damage due to thefts, fires, natural disasters, or deterioration.
• Increasing the complexity and difficulty of inventory management, which requires accurate forecasting, planning, ordering, tracking, and auditing of inventory.

When evaluating the pros and cons, consider how the risks and costs of inventory can be mitigated in your situation.

How to Optimize Inventory Management

To optimize inventory management, an OEM should:

• Analyze the inventory levels and turnover regularly to adapt to changing demands and manufacturing lead times for each component.
• Implement inventory control systems and techniques, such as barcode scanning, RFID tagging, cycle counting, ABC analysis, and safety stock.
• Use inventory optimization software and tools, such as ERP, MRP, JIT, or EOQ, to automate and streamline the inventory planning and ordering process.
• Collaborate with suppliers and customers to improve the visibility, communication, and coordination of the supply chain.
• Apply lean manufacturing principles and practices, such as value-stream mapping, 5S, kanban, kaizen, and poka-yoke, to eliminate waste, improve quality, and reduce inventory.

Outsourcing Inventory

An alternative to an OEM stocking inventory on-site is to work with a professional stocking distributor. Many of the costs associated with carrying inventory can be reduced by outsourcing this part of the business. A good stocking distributor will have optimized processes to reduce many of the costs associated with inventory, as inventory management is a major part of their business.

Through refined processes and finely tuned ERP software, it is possible to be very efficient at inventory management. In addition, a distributor will see lead time changes from different suppliers quickly and can make the correct changes to all customers’ inventory stocking levels. A good distributor will make those lead time changes, which will alter the stocked quantities to accommodate customers’ requirements. A professional distributor will monitor the usage of the items and make recommendations to change inventory stocked quantities when needed. Demand from production requirements will go up and down over time. These requirements need to be monitored in real time and adjustments need to be made to achieve the full benefits of just-in-case inventory. If you are working with a good distributor, you should expect an on-time performance that is in the high 90s, approaching 100%. Just-in-time inventory management is a great concept in a perfect world. We obviously do not live in a perfect world, as we all experienced painfully in the past few years.

Here are some questions to ask a potential distributor regarding stocking:

• Do you have a documented plan to monitor and maintain my inventory?
• What is the average on-time performance for the items you maintain for customers?
•  Are the inventory programs set up consistently? (This is important for measurement and process improvement.)
• Do you have a program to meet my requirements and that matches my systems?

To explore these options further, we invite you to call us at 847-860-8400 or email us at info@qualityhydraulics.com.